24082-9781475580792.Pdf

SUMMARY PROCEEDINGS

1986

©International Monetary Fund. Not for Redistribution International Standard Serial Number: ISSN 0074-7025

©International Monetary Fund. Not for Redistribution INTERNATIONAL MONETARY FUND

SUMMARY PROCEEDINGS OF THE FORTY-FIRST ANNUAL MEETING OF THE BOARD OF GOVERNORS

SEPTEMBER 30-OCTOBER 3, 1986

WASHINGTON, D.C.

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©International Monetary Fund. Not for Redistribution CONTENTS PAGE Introductory Note xi Address by the President of the United States of America, Ronald Reagan 1 Opening Address by the Chairman of the Boards of Governors, the Governor of the Fund and the Bank for Colombia, Virgilio Barco 9 Presentation of the Forty-First Annual Report by the Chair- man of the Executive Board and Managing Director of the International Monetary Fund, J. de Larosière 19 Discussion of Fund Policy at Second Joint Session Report by the Chairman of the Interim Committee of the Board of Governors on the International Monetary System, H. O. Ruding 32 Statements by the Governors for Japan—Kiichi Miyazawa 37 United Kingdom—Nigel Lawson 42 China—Wang Bingqian 47 Canada—Michael H. Wilson 50 Korea—In Yong Chung 55 France—Michel Camdessus 58 Malaysia—Daim Zainuddin 62 Italy—Giovanni Goria 64 Philippines—Jaime V. Ongpin 71 Papua New Guinea—Julius Chan 76 Spain—Carlos Solchaga 82 Discussion of Fund Policy at Third Joint Session Report by the Chairman of the Joint Ministerial Committee of the Boards of Governors on the Transfer of Real Resources to Developing Countries (Development Committee), Ghulam Ishaq Khan 86 Statements by the Governors for Germany, Federal Republic of—Gerhard Stoltenberg 92 Zaïre—Loma Okitongono Djamboleka* 96 India—R. N. Malhotra 104

*Speaking on behalf of a group of countries.

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Netherlands—H. O. Ruding 107 Ecuador—Carlos Julio Emanuel* 111 United States—James A. Baker III 118 Indonesia—Radius Prawiro 125 Australia—Paul J. Keating 130 Iran, Islamic Republic of—Mohammad Javad Vahaji 135 Discussion of Fund Policy at Fourth Joint Session Statements by the Governors for South Africa—B. J. du Plessis 141 Peru—Luis Alva Castro 144 Turkey—I. Kaya Erdem 160 Belgium—Mark Eyskens 164 Sweden—Kjell-Olof Feldt* 169 Israel—Michael Bruno 173 Sri Lanka—Ronnie de Mel 177 New Zealand—David F. Caygill 182 Greece—Constantine Simitis 184 Bolivia—Juan L. Cariaga Osorio 189 Discussion of Fund Policy at Fifth Joint Session Statements by the Governors for Nepal—Bharat Bahadur Pradhan 192 Afghanistan—Mohamad Kabir 194 Belize—Manuel Esquivel* 197 Pakistan—Mian Mohammad Yasin Khan Wattoo 200 Yugoslavia—Svetozar Rikanovic 204 Kiribati—Boanereke Boanereke 207 Bangladesh—M. Syeduzzaman 207 Romania—Alecsandru Babe 212 Egypt—Kamal El-Ganzoury 216 Poland—Bazyli Samojlik 220 Western Samoa—Faasootauloa S. P. Saili* 222 Viet Nam—Le Hoang 223 Ireland—John Bruton 226 Arab States, League of—Joint Statement* 229 Austria—Ferdinand Lacina 233 Fiji—Mosese Qionibaravi 236 Lao People's Democratic Republic—Kikham Vongsay 238 Malta—Wistin Abela 241 Paraguay—Cesar Romeo Acosta 245 Thailand—Panas Simasathien 248 United Kingdom—Nigel Lawson* 250

*Speaking on behalf of a group of countries.

©International Monetary Fund. Not for Redistribution CONTENTS vii

Concluding Remarks Statements by The Governor of the Fund and the Bank for Bahrain, Ibrahim Abdul Karim 255 The Chairman of the Executive Board and Managing Direc- tor of the International Monetary Fund, J. de Larosière . 255 The Chairman of the Boards of Governors, the Governor of the Fund and the Bank for Colombia, Cesar Gaviria Trujillo** 260

DOCUMENTS AND RESOLUTIONS OF THE BOARD OF GOVERNORS

Schedule of Meetings 265 Provisions Relating to the Conduct of the Meetings 266 Agenda 267 Reports of the Joint Procedures Committee 268 Report I 268 Annex I Regulations for the Conduct of the 1986 Regular Election of Executive Directors 270 Annex II 277 Attachment 1. Rules and Regulations Amended Since the 1985 Annual Meeting 278 Report III 281 Annex 282 Attachment. Report of the Joint Ministerial Committee of the Boards of Governors of the Bank and the Fund on the Transfer of Real Resources to Developing Countries . 283 Annex A. Members of the Committee 294 Annex B. Observers of the Committee 297 Annex C. IBRD and IMF Resolutions Establishing the Development Committee 297 Annex D. Agendas and Press Communiqués of Meet- ings Held in October 1985 and April 1986 297 Resolutions 41-1 Salary of the Managing Director 304 41-2 Membership for Kiribati 304 41-3 Membership for Poland 306 41-4 1986 Regular Election of Executive Directors 308

**Mr. Trujillo assumed the chairmanship on the second day of the Meetings and presided thereafter.

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41-5 Financial Statements, Report on Audit, and Adminis- trative Budget 309 41-6 Amendments of the Rules and Regulations 309 Interim Committee of the Board of Governors on the Interna- tional Monetary System Press Communiqué (September 29, 1986) 310 Composition (as of September 28-29, 1986) 315 Joint Ministerial Committee of the Boards of Governors of the Bank and the Fund on the Transfer of Real Resources to De- veloping Countries Press Communiqué (September 29, 1986) 316 Composition (as of September 29, 1986) 321 Press Announcement (October 2, 1986) 322 Composition (as of October 2, 1986) 322 Attendance Members of Fund Delegations 323 Executive Directors, Alternates, and Advisors 344 Reference List of Principal Topics Discussed 347 List of Abbreviations Used 355

©International Monetary Fund. Not for Redistribution STATEMENTS BY GOVERNORS Listed in Alphabetical Order by Country

PAGE Afghanistan—Mohamad Kabir 194 Arab States, League of—Joint Statement 229 Australia—Paul J. Keating 130 Austria—Ferdinand Lacina 233 Bangladesh—M. Syeduzzaman 207 Belgium—Mark Eyskens 164 Belize—Manuel Esquivel 197 Bolivia—Juan L. Cariaga Osorio 189 Canada—Michael H. Wilson 50 China—Wang Bingqian 47 Ecuador—Carlos Julio Emanuel Ill Egypt—Kamal El-Ganzoury 216 Fiji—Mosese Qionibaravi 236 France—Michel Camdessus 58 Germany, Federal Republic of—Gerhard Stoltenberg 92 Greece—Constantino Simitis 184 India—R. N. Malhotra 104 Indonesia—Radius Prawiro 125 Iran, Islamic Republic of—Mohammad Javad Vahaji 135 Ireland—John Bruton 226 Israel—Michael Bruno 173 Italy—Giovanni Goria 64 Japan—Kiichi Miyazawa 37 Kiribati—Boanereke Boanereke 207 Korea—In Yong Chung 55 Lao People's Democratic Republic—Kikham Vongsay 238 Malaysia—Daim Zainuddin 62 Malta—Wistin Abela 241 Nepal—Bharat Bahadur Pradhan 192 Netherlands—H. O. Ruding 107 New Zealand—David F. Caygill 182 Pakistan—Mian Mohammad Yasin Khan Wattoo 200 Papua New Guinea—Julius Chan 76 Paraguay—Cesar Romeo Acosta 245 Peru—Luis Alva Castro 144 Philippines—Jaime V. Ongpin 71 Poland—Bazyli Samojlik 220

©International Monetary Fund. Not for Redistribution x STATEMENTS BY GOVERNORS

Romania—Alecsandru Babe 212 South Africa—B. J. du Plessis 141 Spain—Carlos Solchaga 82 Sri Lanka—Ronnie de Mel 177 Sweden—Kjell-Olof Feldt 169 Thailand—Panas Simasathien 248 Turkey— I. Kaya Erdem 160 United Kingdom—Nigel Lawson 42, 250 United States—James A. Baker III 118 Viet Nam—Le Hoang 223 Western Samoa—Faasootauloa S. P. Saili 222 Yugoslavia—Svetozar Rikanovic 204 Zaïre—Loma Okitongono Djamboleka 96

©International Monetary Fund. Not for Redistribution INTRODUCTORY NOTE

The Forty-First Annual Meeting of the Board of Governors of the International Monetary Fund was held in Washington, D.C. from September 30 through October 3, 1986, jointly with the annual Meetings of the Boards of Governors of the International Bank for Reconstruction and Development, the International Finance Corporation, and the Inter- national Development Association. His Excellency, Virgilio Barco, then Governor for Colombia, served as Chairman for the first two sessions. Cesar Gaviria Trujillo, then Governor for Colombia, served as Chairman for the remaining sessions. These Summary Proceedings include statements, or portions of statements, relating to the work of the Fund presented by Governors during the Meetings, resolutions adopted by the Board of Governors of the Fund over the past year, reports, recommendations, or communiqués issued by the Committees of the Board of Governors at the time of the Meetings, and other documents relating to the Meetings. Statements, or portions thereof, relating to the work of the World Bank are omitted from these Summary Proceedings; the insertion of dots (...) within statements indicates where passages have been omitted. Statements not reproduced in these Summary Proceedings may be found in the Summary Proceedings of the Annual Meetings of the Bank and its affiliates, issued separately by the Bank. Statements by the Governors are listed in alphabetical order by country on pages ix and x. A reference list of principal topics discussed in the statements is given on pages 347-53, and a list of abbreviations used in the statements and documents is given on page 355.

LEO VAN HOUTVEN Secretary International Monetary Fund

Washington, D.C. December 31, 1986

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©International Monetary Fund. Not for Redistribution ADDRESS BY THE PRESIDENT OF THE UNITED STATES l

Ronald Reagan

Mr. Chairman, Managing Director de Larosière, President Conable, Governors of the International Monetary Fund and of the World Bank Group, and distinguished guests: Before I begin, I want to share with you an announcement that I made only an hour ago at the White House. Ten days ago, Soviet General Secre- tary Gorbachev proposed to me that we hold a preliminary meeting to make concrete preparations for his coming visit to the United States. And now that Nicholas Daniloff has been released, as we insisted, an important obstacle has been removed, and I have accepted Mr. Gorbachev's proposal. We have agreed to meet in Iceland on October 11 and 12. It will be to prepare the ground for a productive summit covering all the issues on our agenda: arms reductions, human rights, regional conflicts, and bilateral relations. For all the American people, I am pleased to welcome you once more to the United States for your Forty-First Annual Meetings and honored to address you once again. Let me note at the outset that both the IMF and the World Bank are in a year of changes at the helm. At the IMF, Managing Director de Larosière has announced his intention to resign after eight years of service—eight of the most challenging years in the Fund's history, I might add. He has met those challenges with strong leadership, a skillful negotiating style, and complete dedication to the mission of the institution he leads and serves. He has enhanced the prospects of the world economy for all of us. We salute him for his service. At the World Bank, one of this century's most distinguished members of the U.S. House of Representatives, Barber Conable, has taken the tiller. In the United States, President Conable has been known for his extensive grasp of national finance. He had a profound influence on the development of American economic policy in the last decade, and now those same enormous talents will be guiding the Bank. He is also a good friend. Barber, congratulations. If this is a time of changes for the Fund and for the Bank, these are even more dramatic times for the world economy. Throughout the world these

1 Delivered at the Opening Joint Session, September 30, 1986.

©International Monetary Fund. Not for Redistribution 2 SUMMARY PROCEEDINGS, 1986 last five years, we have seen men and women begin to challenge old dog- mas and rediscover timeless truths. We have seen that nations that have embraced the enduring principles of economic growth have become more prosperous and secure. And those that have not, have weakened, faltered, and fallen behind. We have heard many names given to these rediscovered economic in- sights—names describing policies of taxation, regulation, government spending, monetary management, and trade. But all these names—and the many theories with which they are associated—come down in the end to one name, one theory, one word. The word is "freedom," in this case economic freedom. In so many addresses to so many international forums during the past five-and-a-half years, I have repeated America's vision of the future. It rests on that word: a word that means trust in the people more than in governments, trust in what the people can achieve when they are able to reach and climb as far as their natural talents and native abilities will take them. And each time I have spoken about this vision I have said that, as with political freedom, economic freedom is not just a question of abso- lutes—not just a case of an open economy or a totalitarian one—but also of degree. Even in free market economies, high taxes make people less free to work, save, and invest. Excessive regulation makes them less able to exper- iment and innovate. Too much government spending can rob those on the receiving end of a reason to labor and those who must pay of their incentive to strive. And restrictions on trade rob every worker of the opportunity to have the markets for his products grow to reach all mankind and rob every consumer of a better way of life. In the last five-and-a-half years now, we in the United States have done our best to be faithful to this economic creed. When our Administration came into office, we found the American economy on the brink of disaster. A decade of rising inflation and soaring taxes had taken its toll. Our economy was stagnating and threatening to fall, dragging the entire world economy down with it. The sources of our problems weren't hard to find. The noted British historian, Paul Johnson, commented on the various studies of them this way: "The most detailed analysis of this stagnation and decline . . . suggested the causes were . . . failure to control the money supply, excessive tax burdens and above all government intervention and regulation." And so in 1981 America took a new course. We cut all forms of intervention in the economy; we cut the scope of regulation; we brought down tax rates; and we lowered the rate of increase in government spending. By early 1983, we began to see the results as America entered what is now one

©International Monetary Fund. Not for Redistribution ADDRESS BY PRESIDENT OF UNITED STATES 3 of our longest-lived expansions in the postwar era, an expansion that has been accompanied by falling inflation and falling interest rates. Today, a greater percentage of our people are at work than at any time in our history. And in the last four days we have just taken another great step on the road to sustained growth with the passage of historic tax reform legislation. We will never forget that our growth has been and remains important not only to Americans but to people everywhere. Our growth has fueled the growth of the entire world economy. Two years ago, when I last addressed this body, I suggested that the lessons of freedom, the marketplace, and growth were ones that all nations could embrace. I suggested that if the world economy were to grow as all of us hoped it would, we needed to turn away from small-minded calculators in big state bureaus and look instead to large-minded entrepreneurs in small private enterprises—whether industrial, commercial, or agricultural—for these people know secrets more profound than those revealed in all of the charts and analyses produced by all the agencies and bureaus put together. Again, a statistic from our own situation comes to mind. According to the M.I.T. Program on Neighborhood and Regional Change, between 1981 and 1985 businesses that were less than 5 years old and businesses that had fewer than 20 employees created more jobs than America as a whole. If we had had no entrepreneurs, we in America would have lost more than 3 million jobs in that time instead of the large gains we in fact enjoyed. All of us here today can take great satisfaction knowing that this message of economic freedom is at last being heard and acted upon in Europe and Africa, in Asia and Latin America. Only a few years ago in Western Europe, for example, capital markets were, to a large extent, closed to entrepreneurs, in part because steep taxation sapped Europe's risk-takers of any reason to take a chance on a new company or a new idea. And with labor regulations that made it more difficult to lose a job than get di- vorced, entrepreneurial activity was at a low ebb. Now, however, this is changing. As inflation and interest rates have fallen and new policies have been adopted to encourage growth and entrepreneurship, Europe has begun to put behind it a decade in which not one net new job was created, and once more is seeing new growth, new jobs, new companies, new opportunities—new hope. And this progress has not been confined to the industrial world alone. Less developed countries have also caught the spirit of freedom and enterprise. In India we have seen—within just a few harvests—a country that imported agricultural products turn into a food exporter, this after incentives were introduced and controls removed. In China, too, we have heard

©International Monetary Fund. Not for Redistribution 4 SUMMARY PROCEEDINGS, 1986 the same story of incentive and bounty. And in famine-stricken Africa, we have seen some countries free their markets and give their farmers incentives to produce, and those countries did not suffer the devastation of their neighbors. Some in fact exported food to those who were starving around them. As I mentioned in my address to the United Nations of a week ago, we welcome the resolution of the Special Session on Africa that calls for more free market incentives. We in the United States are looking at ways the assistance we provide to African countries can best support development of free markets, especially in agriculture. America hopes other donors will do the same. All in all, we have made great progress toward a stronger world economy since I last addressed you, and yet problems remain. I would like to turn now to some of these problems and to what we can do to solve them. And let me look at them from three vantage points—that of the United States and the industrial world; that of the developing nations; and finally that of international organizations such as the IMF and the World Bank. As President of the United States, I am particularly aware of the tasks we in America have before us. Highest among these is curbing the growth of our Government's spending. No nation can survive if government becomes like the man who in winter began to burn the wall boards of his house to keep warm until he had no house left and froze. We have made progress against those who would condemn future generations of Ameri- cans to lives of pauperdom; the Gramm-Rudman-Hollings legislation is evidence of this. But we can and must do more. I pledge to you that I will do all in my power to stop this fiscal death march. And I believe the Ameri- can people will support me in this effort. We have other items of unfinished business in America—bringing interest rates down even further while keeping inflation under control is one. Reducing our trade imbalances while resisting protectionist pressures at home and abroad is another. We know the role our recovery has played in the world. We know how much rides, not only for ourselves but for much of mankind, in the completion of the work we began five-and-a-half years ago. But while America's expansion is beneficial, other industrial nations must also contribute their fair share to world recovery and adopt more growth-oriented policies. Of course, some dislocations may come in the process, but we must recognize that if we are all to prosper together, then we must all work together toward that end. Every nation must contribute to world economic growth. And we must do more than repeat this high- sounding sentiment; we must take practical steps.

©International Monetary Fund. Not for Redistribution ADDRESS BY PRESIDENT OF UNITED STATES 5

We have come a long way since I last spoke to you. The Plaza agreement, concluded last September among five industrial countries, was a beginning toward correcting the excessive volatility in our exchange rates. Since then, we have also coordinated the reduction of interest rates. And at the economic summit in Tokyo earlier this year we agreed to new mechanisms for closer economic cooperation. All of this helps foster world growth, not only for the major nations of the world, but for everyone.

The industrial countries have more, much more to do. So, too, do the developing countries. Let me take up now the second great vantage point on the question of world economic growth—that of the developing nations. As I said, many of these nations have adopted policies that promote growth. These include lowering taxes, privatizing public enterprises, liberalizing trade and investment policies, and moving in general to more market-oriented economies. All this is important, not just for the developing countries but for all nations and people who will invest in their businesses, buy their products, sell them goods, and work with them to live in peace and brotherhood on our planet.

As Secretary Baker stressed in presenting the "Program for Sustained Growth" in Seoul last year, growth-oriented reforms are particularly important in the debtor countries. History has shown that when nations have rising populations and do not give their people the freedoms that fulfill their aspirations, those nations try to buy peace in their restless and unpro- ductive populations by borrowing themselves into bankruptcy. Either that or they turn to oppression.

So, let us remember that growth is the key to repaying debt while fulfilling the dreams of the people. Several debtor nations have taken long steps up the path to renewed economic strength. Countries like Colombia and Argentina have brought inflation down and opened their markets. Other countries like Senegal and Côte d'Ivoire have made progress in liberalizing their economies. And Mexico and the Philippines both recently agreed to comprehensive, growth-oriented economic programs supported by the IMF and the World Bank. It is important that these programs—as well as the comprehensive programs of other debtor nations—be fully supported by commercial banks.

The IMF, of course, plays a central role in the drama of growth in debtor nations. The United States wants to see that role continue. We welcome the increased emphasis in the IMF on growth-oriented reform packages even while continuing the focus on financial stability. For the same reason, we welcome the recent establishment of the Structural Adjustment Facil- ity. And, we urge the IMF to put even more emphasis on market-oriented structural reforms.

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The World Bank also has a critical role to play in promoting growth in less developed nations, whether troubled debtor nations or not. We welcome an increase in the practice of lending contingent on countries' turning to more market-oriented policies. We also support the early completion of negotiations for re-funding of the International Development Association. And we support the implementation of the convention that establishes the Multilateral Investment Guarantee Agency. The future of world economic growth depends on choices made all over the world—in industrial countries, in developing countries, in the IMF, and the World Bank. The question is: will we turn toward uplands of freedom and growth, or toward the swamp of state control and stagnation? This is the question every nation and every institution must ask itself. The world's growth depends on our answers, and on something else, closely related to those choices. This is the last area of problems I wish to discuss with you. This is the one area that can most easily jeopardize all we have achieved and hope to achieve. It might be said that since the end of the Second World War, we— all of the nations represented here—have lived under an economic constitution. In the two decades before the adoption of that constitution, our peoples suffered the horrifying consequences of a collapse in international trade and monetary flows. Since its adoption, we have had 40 years of a prosperity more widely shared and more generous than the world has ever known. I call the postwar arrangement a constitution, but it has been, in fact, not one constitution but three. I'm speaking of the collection of postwar international economic agreements that created the IMF, the World Bank, and the GATT (the General Agreement on Tariffs and Trade). Today, each of those agreements and institutions has come to a turning point. Each is grappling with new challenges, such as debt restructuring, financial instability, trade in new products and new industries, and the rise of worldwide protectionist pressures. Collectively these turning points represent a culmination of the policies that the nations of the free world established right after the war. Those nations—our nations—saw that the best way to ensure a just and lasting peace was to build an open, growing, and prosperous world economy. The same era that produced the noble proposal of the United Nations also produced the IMF, the World Bank, and the GATT. These institutions gave us a growing and prosperous world economy. But many of the arrangements originally incorporated into them presumed America's singular strength. And for more than a decade now, Europe and Japan combined have had a role equivalent to that of the United States in world trade and an increasingly important role in finance. Many other countries—

©International Monetary Fund. Not for Redistribution ADDRESS BY PRESIDENT OF UNITED STATES 7 those with open markets and low taxes—are growing rapidly, may soon become fully industrialized, and can expect to play more prominent parts, as well. These have been healthy developments—and ones that reflect the success of our postwar vision. But they have led to strains in the postwar agreements; and these strains have given rise to a new round of significant questions about how the world economy should develop from here—questions such as how can we coordinate our policies to restore stability to exchange rates? How can we resist protectionist pressures as our nations become more nearly equal competitors and world trade grows? How can we manage our financial responsibilities without sacrificing growth? And how should we expand our international constitutions so that the hopes and opportunities of the last generation can also be the hopes and opportunities of the next? The recent GATT Ministerial was a good first step toward answering some of these questions. The ministers decided on comprehensive negotiations that would include trade in agriculture, services, investment, and intellectual property. But we need more steps. We need, first of all, to resolve that a further opening of the world economy is a goal worth working for. I know I believe it is. I lived through the Great Depression back in the 1930s. I saw what so-called protectionism brought the world—nothing was protected, everything was destroyed. Today, the stakes are even higher. In my country, for example, up to 10 million jobs are tied to international trade, as is 20 percent of our gross national product, compared to 12 percent in 1929. The choice is simple—we can go forward or backward. I believe that we must move to a more open world economy. This is why I have vetoed protectionist legislation. It's why Tve supported strong and growing roles for the IMF and World Bank. It's why Secretary Baker presented his plan to strengthen our multilateral strategy for dealing with the debt crisis. It's why we've pressed for a new GATT round. It is also why we have moved and will continue to move aggressively against unfair trading practices in other nations. No trading system among equals can survive if some feel they are being discriminated against and if there are enormous imbalances in trade flows. The only ways to resolve the external imbalances between countries are through increased growth abroad, a greater competitiveness for the U.S. dollar or both, coupled with the opening of markets. My friends, I believe that the challenge before us is to develop a truly global economy—one that celebrates the diversity of our nations while it opens us to uninhibited trade and investment among our peoples. We have traveled a vast distance toward such a world in the last 40 years. We have

©International Monetary Fund. Not for Redistribution 8 SUMMARY PROCEEDINGS, 1986 come so far, and now it is time for stock taking, for planning with open minds the next leg of the journey, and for beginning it. Let us look with open minds at ways of promoting stable exchange rates and assuring sound money. Let us approach with open minds the next round of trade talks and push them as far as we can to our goal of eliminating all trade barriers. We are, my friends, on a great journey of exploration. And as on all such journeys, from time to time, we tire. But if we are strong and if we continue onward, I believe we will find that a more bountiful land lies before us. Let us all join together on this great journey. Let us reaffirm our commitment to the institutions that have brought us this far. Let us reaffirm our commitment to strengthening them for the adventure that lies ahead.

©International Monetary Fund. Not for Redistribution OPENING ADDRESS BY THE CHAIRMAN OF THE BOARDS OF GOVERNORS, THE GOVERNOR OF THE FUND AND THE BANK FOR COLOMBIA l

Virgilio Barco I want to welcome you to these Forty-First Annual Meetings of the Inter- national Monetary Fund and the World Bank. I look forward with much interest to our debates, which will help us to progress beyond the achievements made possible by our last Meetings in Seoul. On behalf of all those who are gathered here, allow me to express our thanks to President Reagan and, through him, to the people of the United States, and particularly of the city of Washington, for their hospitality. I take this opportunity to greet the representatives of Poland and Kiri- bati, which have recently joined both institutions. I am also pleased to welcome Mr. Barber Conable, the new President of the World Bank. We are certain that, with his experience and under his leadership, the Bank will be in a position to meet the new challenges that lie ahead. In my capacity as Chairman of the Boards of Governors allow me to assure you, Mr. Conable, of our cooperation and support, and to wish you the best of success in your new position. On the eve of these Meetings we were informed of the decision of Mr. Jacques de Larosière to resign before the end of his second term as Managing Director. Since 1978, when he took office, the international economy has been exposed to the shocks of sharp changes in oil prices, excessive volatility of exchange rates, high interest rates, and the problem of the external debt. In these circumstances, the Fund has provided strong support as the focal center of the international monetary system. On behalf of the Governors, may I express to him our appreciation for his achievements in office and wish him equal success in the months during which he remains at the helm of the Fund and in his subsequent activities. The Fund and the Bank must play a leading role in coping with the difficult situation now confronting the world economy. A substantial part of our deliberations will continue to be devoted to the search for sustained growth of the world economy. By virtue of their responsibility for gathering

1 Delivered at the Opening Joint Session, September 30, 1986.

©International Monetary Fund. Not for Redistribution 10 SUMMARY PROCEEDINGS, 1986 and channeling financial and technical resources, and as providers of such resources, the two institutions have the mission of assisting developing countries, so that they have the support they need to set their economies on the path of sustained growth.

Industrial Countries The crucial importance of the economic performance and of the policies of industrial countries for the developing world was clearly recognized at the last Annual Meetings in Seoul. Unfortunately, developments in the industrial economies have not been overly favorable. The economic recovery set in motion at the end of 1982 showed signs of weakness in 1985, and activity levels in the first half of this year fell far short of expectations. Thus, the real growth of production in developed countries slowed down from approximately 5 percent in 1984 to about 3 percent in 1985. Reduced momentum in the United States was not offset, as would have been desirable, by higher growth in other industrial countries. In Europe, growth remained at the modest levels of 1984. This caused the economies of the developing countries to weaken further between 1984 and 1985. This notwithstanding, it should be stressed that some important industrial countries have achieved encouraging progress in the coordination and direction of their economic policies. A positive step was taken at the meeting of the Group of Five, in September 1985, with the decision that their economic strategies should be aimed at achieving balanced growth, while exchange rates should reflect equilibrium positions. As a follow-up to this initiative, the seven major industrial countries reached further agreement on coordination of their economic policies at the Tokyo summit in May. Many of the measures taken by the industrial countries have begun to exert a favorable impact on the international economic environment. In- flation has slowed to the lowest level since 1967. As a result, inflationary expectations have abated even more, facilitating a decline, which to some extent has been coordinated, in nominal interest rates. Still, the industrial countries have the responsibility of making an even greater effort for creating a favorable and less uncertain external environment that will sustain growth, employment, and political and social stability in the developing countries. In addition, they must provide a dynamic market for exports, allowing free access to their markets and eliminating export subsidies for agricultural products. What is more, the industrial countries must put into practice their good intentions to fight protectionism by deciding not only to resist protectionist

©International Monetary Fund. Not for Redistribution ADDRESS BY CHAIRMAN OF BOARDS OF GOVERNORS 11 pressures but also to eliminate existing barriers to international trade, particularly those that discriminate against the developing countries. Further, within the framework of the GATT, they must ensure the success of the new round of multilateral trade negotiations recently initiated at Punta del Este, giving special consideration to the inclusion of agricultural products. The countries meeting at Punta del Este affirmed the purpose of strengthening the links that should exist between world trade and policies promoting domestic growth in order to improve real flows of financing and investment to the developing countries. A major role in this process has been assigned to multilateral credit institutions, particularly the Interna- tional Monetary Fund and the World Bank. It is to be hoped that the industrial countries will adopt policies consistent with a further reduction in international interest rates, which continue to be high in real terms compared with historical levels. In this respect, the proposal for a more balanced budget in the United States is very important, in that it would contribute to capital formation and economic growth throughout the world. Those industrial countries that have succeeded in controlling inflation and are in a favorable exchange rate situation also have a very special responsibility to adopt economic policies enabling them to make a more positive contribution to world economic growth.

Developing Countries The slower growth of the world economy has had broad negative repercussions in the developing countries, whose export earnings are no longer growing satisfactorily. This explains in part the decrease in the average growth of their aggregate product, which dropped from 4 percent in 1984 to less than 3 percent in 1985. This decline continued in the first half of 1986. Most developing countries confront a wide range of problems, including particularly the following: high and growing external debt service payments, with the concomitant net outward capital transfers; low saving and investment levels; high inflation rates in some countries; high levels of unemployment and underemployment; widespread extreme poverty; and the political and social instability that usually accompanies such situations. The debt problem continues to darken the picture for our economies. As I wrote in a letter to Mr. Alden W. Clausen on the occasion of last year's Meetings in Seoul, this problem must be attacked with a medium- and long-term strategy, a strategy based on the necessity of economic growth and acceptance of the fact that the debt burden must be distributed among all parties, not among the borrowers only. It is important to note that, since that time, the validity of this approach has at last been recognized.

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The governments of the industrial countries are thus beginning to accept this premise. Under the leadership of the United States, and at the initiative of its Secretary of the Treasury, Mr. James Baker, the United States presented in Seoul a proposal which, besides recognizing the necessity of economic growth as a precondition for solving the debt problem, accepts the principle of the shared responsibility of creditors and debtors. Although this represents progress and has aroused interest and expectations in the international community, and particularly in the developing countries, a more decisive contribution by this initiative to a solution of the debt problem is still awaited. The program recently adopted for Mexico, which will require substantial financial support from the Fund, the Bank, commercial banks, and bilateral sources, illustrates how a concrete program can combine the firm, sovereign decisions of a developing country with the ideas contained in the Baker initiative. Obviously, it is necessary to bolster this strategy in order to develop an appropriate, equitable solution to the external debt problem. This will require active collaboration on the part of all the parties involved, in a spirit of compromise and commitment accepted by all. As for the debtor countries, they will need to reaffirm their determination to adopt structural reforms on the home front designed to promote exports, saving, domestic as well as foreign investment, and greater economic efficiency, always striving to improve the living standard of their peoples. Admittedly, there is an element of hope in this gloomy picture, thanks to the strong performance of some countries that export manufactured goods and of most of the Asian countries; they have maintained a good rate of growth, though it was lower in 1985. These developments have yielded substantial progress in the management of the high external debt of some developing countries. It is also clear that these efforts at strengthening their balance of payments position have entailed excessive sacrifices in their investment levels, public as well as private. But the overall picture is that the export earnings of the developing countries have ceased to grow, as a result of a decline of 2 percent in the terms of trade for basic commodities in 1985, combined with a slowdown in the growth of international trade. This is largely due to higher protection in the industrial countries and to the increasingly alarming proliferation of nontariff barriers in markets for specific products. An international scenario is thus emerging in which the competitiveness of the developing countries depends less and less on their

©International Monetary Fund. Not for Redistribution ADDRESS BY CHAIRMAN OF BOARDS OF GOVERNORS 13 own efficiency and more and more on political decisions in the industrial countries. The developing countries, particularly in Latin America, have been implementing drastic economic reform programs. As a result, there has been an important change in the external current account position, particularly for countries that are net importers of capital. The combined deficit fell from about 18 percent of exports in 1982 to less than 4 percent in 1985, though all countries did not share equally in this achievement. But notwithstanding this success, the trade surplus barely covered net interest payments. It would therefore be unrealistic to assume that these countries could restructure their economies without additional financial assistance. Yet the behavior of the international commercial banking community does not square with this fact: it has sought to reduce its exposure despite the improving balance of payments of the developing countries. An appropriate response is required to the need for greater flexibility and for the timely rationalization of the regulatory practices applied to commercial banking. At the same time, the members of the Paris Club, and commercial banks in general, must address themselves more flexibly and appropriately to external debt restructuring and refinancing operations for the developing countries. They should also provide the resources needed to ensure implementation of the program of growth-oriented adjustment proposed at the Seoul Annual Meetings. Africa's sub-Saharan countries need special treatment in view of the severe economic and social problems they confront. The main evidence to that effect is that the lowest-income region in Africa is poorer today than it was in 1960. Though some of these countries instituted courageous changes in economic policy in 1985, more generous external support for them has not been forthcoming. In this context, it is vital that the Eighth Replenishment of Resources of the International Development Association be of sufficient scope to allow for an improvement of the African countries' growth prospects in coming years. For their part, the governments of Africa must maintain the political resolve to ensure that domestic as well as external resources are used as efficiently as possible. Donors and lenders to Africa must act effectively to increase the volume of concessional assistance and so reduce the debt burden of the world's poorest countries. Africa's development crisis is not solely an African problem; it concerns all of mankind. In view of the scope of Africa's internal and external prob-

©International Monetary Fund. Not for Redistribution 14 SUMMARY PROCEEDINGS, 1986 lems, it needs the support of the entire international community without delay.

Colombia Colombia has distinguished itself for some decades by the stable, steady economic growth it has achieved. However, it has not been immune to the problems that have affected the world economy, and particularly Latin America, in the last few years. Although its economy has been beset by difficulties on the external front since the early 1980s, the country, faithful to its historic tradition, has fully respected its debt service commitments and has had no need to restructure its external public debt. As a result, it has been able to maintain its credit standing with foreign commercial banks. These results must be viewed as part of a long tradition of pragmatic economic policies. Instead of being marked by abrupt changes, our policy- making has sought to keep economic, political, and social considerations in balance and to maintain a positive relationship with multilateral agencies.

The Role of the International Monetary Fund The Fund has continued to play a leading role in the international monetary system. In fulfilling its responsibilities, it will be called upon to help formulate programs and policies that are viable in the medium term and promote growth with moderate inflation, high employment, expanding world trade, and, above all, a progressive improvement in social conditions. If stabilization programs are to be effective, apart from taking the special problems of each country into account, they must reflect its specific economic structures and political sensitivities. The programs, in turn, will require determined support from governments and public opinion; to that end, when their conditions are being agreed on, care must be taken that the sacrifices they impose do not fall unnecessarily on the poorest segments of the population. No single policy formula is appropriate for all countries, particularly developing countries. The Fund must always respond flexibly and expeditiously to changing circumstances in the world economic environment. The formulation and implementation of stabilization programs thus require flexible responses that take into account the frequent changes in the markets for commodities. The Fund must continue to play a prominent role both in the effort to encourage commercial bank lending to the developing countries and, just

©International Monetary Fund. Not for Redistribution ADDRESS BY CHAIRMAN OF BOARDS OF GOVERNORS 15 as important, in promoting and shaping appropriate multiannual agreements for the refinancing and rescheduling of debt payments. I ask the Governors to support the continuation of a policy of broader access to the Fund's resources and, when the Ninth General Review of Quotas takes place, to decide on a substantial quota increase. This task must be undertaken without delay. The Fund must play a leading role in improving the coordination of economic policies among industrial countries. Further, the surveillance it regularly exercises under Article IV of its Articles of Agreement can and should be made more effective with regard to the economic policies of industrial countries. In relation to that task, fundamental importance at- taches to the leadership the Fund assumes in the management of international monetary and financial problems, giving due consideration to world trade issues. An allocation of SDKs can provide immediate support to countries facing balance of payments problems. It would be particularly useful given the growing tensions that may well develop in the reserve position of a number of countries in coming years. As a result, I take the liberty of di- recting a special appeal to the Governors to make known their political will to support a prompt allocation of SDRs. There is a broad consensus in the Fund's Executive Board in favor of expanding the use of SDRs and possibilities for transferring them, while improving their distribution as part of members' reserves. As regards the latter, it should be noted that the governments of developing countries would view with particular interest the adoption of distribution guidelines that would accord with the needs of our economies.

The Role of the World Bank The World Bank's role has been the subject of major discussion recently. In my opinion, the intensity of the debate and the attention it has attracted are beneficial and fully justified. The discussion is likely to go on for some time. So far, a relative consensus has been reached on three general areas in which this institution should have broader responsibilities: In the first place, as suggested by the Development Committee at its April meetings, the Bank should enhance its capacity to support initiatives whose central object is to achieve stable economic growth in member countries. Naturally, this should be in the context of medium-term economic programs. The Bank has been improving this capability for some years. It has been making more use of various lending instruments, particularly structural

©International Monetary Fund. Not for Redistribution 16 SUMMARY PROCEEDINGS, 1986 and sectoral adjustment loans. In certain circumstances the Bank has accelerated and increased disbursements to the most heavily indebted countries and, in some cases, it has worked with governments on the design and execution of medium-term stabilization programs.

The lessons learned throughout this experience indicate that if medium- term programs of growth with stability are to be given an effective impetus, they must be realistic, planned around specific objectives and appropriate time horizons, and supplemented with adequate and timely contributions of financial resources and technical assistance. These programs must be characterized by high quality and proper control in the planning, implementation and monitoring of economic policy.

The International Development Association will also have to share in this responsibility. As the major source of concessional funds for the poorest countries, IDA exercises the leadership that befits it in assisting these countries to implement economic programs.

In the second place, the Bank must stress its role as coordinator and mobilizer of private and official resources in accordance with the needs of the developing countries. Here again, it bears stating that the Bank has made progress, having innovated and expanded its use of cofinancing as one of its regular tools while enhancing its contribution in the area of technical assistance. For its part, the International Finance Corporation, having doubled its capital recently, is also playing an innovative role in attracting investment to the private sectors of developing countries.

Finally, a third dimension of the Bank's role, deriving from the other two, has to do with expansion of its program of support lending to meet the challenge arising from the implementation of policies directed toward growth with stability.

The Bank has a lending program of between $40 billion and $50 billion for the fiscal years from 1986 to 1988. In the first of these years the Bank has commitments totaling $13.2 billion, a 16 percent increase over fiscal year 1985 and near the upper limit of the planning range.

However, as pointed out by the Development Committee early this year, after the 1987 fiscal year the demand for loans from the Bank could easily exceed the level that can be met with its existing capital stock. This emphasizes the need for a positive response on the Governors' part to a new proposal for an increase in the Bank's capital. In addition, the Bank must make better use of its gearing ratio in order to enhance its financing capacity.

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It is also important that the Bank carry out an adequate review of the costs of transfers of funds to member countries. Everyone is well aware of the comparatively high level of these costs at the present time. It is essential that the World Bank Group maintain its commitment to progress and to the eradication of absolute poverty in all countries, particularly in those with the lowest incomes. The International Development Association has the responsibility of providing, on a world scale, the funds required to accomplish this purpose. Given the importance of that institution, particularly as regards the poorest countries—special mention should be made of sub-Saharan Africa and some regions of Asia and the Pacific—it is our duty to ensure that the Eighth Replenishment provides IDA with adequate funds.

Conclusions Attainment of economic growth in the developing countries will require a commitment on their part to carry out substantive policy reforms. The industrial countries, on the other hand, must keep their markets open to developing country exports and assure them of an adequate flow of financial and technical resources. The International Monetary Fund, the World Bank, and the Inter-American Development Bank, on a par with other multilateral institutions, will play a crucial role in this process. Above all, close collaboration between the Fund and the World Bank, which has intensified in the past few years, will take on even greater importance in future. Economic stabilization and restructuring must be pursued simultaneously in order to achieve economic growth with stability, a reduction in unemployment, and eradication of absolute poverty in all of the world's countries. In turn, the ever-expanding and more dynamic role that we require of institutions such as the Fund and the Bank is intended to secure a more determined and stable contribution on the part of investment and commercial banks to the development process. Given the guarantees represented by the financial participation of multilateral banks, and thanks to cooperation on the policy and program level with the Fund, the Bank, and the borrowing countries, these banks will have adequate incentive to provide more funds for the developing countries on more favorable financial terms. The assistance provided by the Fund and the Bank, each in the area of its statutory mandate, must be given in a context of close mutual support. The Bretton Woods institutions must be creative and flexible, and must assume the leadership required to ensure that economic policies are de-

©International Monetary Fund. Not for Redistribution 18 SUMMARY PROCEEDINGS, 1986 signed for the achievement of lasting solutions—with a social content—to the problems of the international economy. I must repeat that, if the Fund and the Bank are to meet their obligations successfully, they will need additional financial resources. In addition, their programs must seek the political support of all member countries. Let us renew our commitment to economic and social progress through international cooperation. Let us see to it that the reordering of our economies is reconciled with higher growth and a better distribution of world economic progress to favor the poorest countries and the most needy population groups.

©International Monetary Fund. Not for Redistribution PRESENTATION OF THE FORTY-FIRST ANNUAL REPORT1

BY THE CHAIRMAN OF THE EXECUTIVE BOARD AND MANAGING DIRECTOR OF THE INTERNATIONAL MONETARY FUND

/. de Larosière

Mr. Chairman, it is a great pleasure to join you and the Governor for the United States in welcoming everyone to this year's Annual Meetings. I want to thank the President of Colombia for his thoughtful and statesmanlike remarks, which have made an impression upon us all. We are deeply honored by President Reagan's participation in these meetings and look forward with interest to his address. A special welcome is due to the representatives of our two newest member countries, Kiribati and Poland. May I also add a personal greeting to Barber Conable. He can be assured that the Fund, at all levels, is committed to the further development of the fruitful collaboration between our two institutions. I also want to pay tribute to Chairman Khan, who has shown so much wisdom and leadership in guiding the Development Committee through difficult times. We in the Fund wish him well in his future endeavors. Since we met last year in Seoul, the world economic situation has been profoundly affected by several major developments: the sharp fall in energy prices, the further erosion in the prices of a wide range of primary commodities, the decline in international interest rates, and the substantial shift in currency relationships among the largest economies. Every country has experienced a change in its economic prospects. For some, the net effect has been an improvement in the medium-term outlook for growth and price stability. For others, particularly for the fuel exporting developing countries, the net impact has been adverse. In some cases, the loss of export earnings and of budget revenues has been of such magnitude as to require a major change in adjustment and financing plans. In my remarks today I want to focus on the implications of changes in the international economic environment for three key issues of policy: sustaining noninflationary expansion in the industrial world; restoring growth with financial stability in developing countries; and strengthening the cooperative management of the international economic system.

1 September 30, 1986.

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Before taking up these issues of policy, let me make a general point about economic management. There is always the temptation to respond to unexpected short-term changes with short-term policy adjustments. In some cases, these adjustments are necessary. But we must not forget that the attempt to "fine tune" economic management is fraught with difficulty. As we saw in the 1960s and 1970s, excessive preoccupation with the short term can sometimes undermine stability in the medium term. There will invariably be bumps on the road to sustainable growth. A steady course of policy is necessary to achieve fundamental economic objectives.

I. Strengthening Economic Recovery 1. The past year has seen economic output in the major industrial countries grow at a moderate pace—slightly less than 3 percent. As a result, the growth of world trade has been subdued, adding to the underlying weakness in commodity prices. Earlier in 1986, some expected that declining interest rates would soon stimulate demand, and that falling prices for oil and primary commodities would quickly lead to higher domestic demand in countries benefiting from terms of trade gains. With the aid of hindsight, it is now apparent that such expectations were premature. There are signs that lower oil prices and lower interest rates are beginning to boost economic activity in industrial countries. But the main impact is yet to be felt. In the short run, there are negative effects on spending in countries and regions that are net producers of oil and other primary commodities. Moreover, lower interest rates spread to final expenditure only with a lag. Much of the unexpected weakness of economic activity in early 1986 was attributable to these initial effects. As we move into 1987, the positive stimulus to final demand provided by lower oil prices and lower interest rates should become increasingly evident. It is said by some that an economic downturn in the industrial countries is overdue after three-and-a-half years of expansion. Without underesti- mating the risks associated with the current situation, I believe it would be a mistake to be pessimistic. In the past, downturns have typically occurred because inflationary pressures have built up and provoked a shift to monetary restraint. The present recovery is different in this respect. Expansion has been at a moderate pace, inflation has been kept under control, and monetary policy has been able to accommodate a reasonable growth in nominal demand. There is thus little inherent in the present business cycle to suggest that a downturn is imminent. Our projections indicate that real output should rise by about 3 percent next year in industrial countries. 2. In my view, the broad thrust of the economic strategy of the industrial countries remains appropriate. This strategy has focused on establishing the underlying conditions needed to achieve sustained growth over the medium term. It has involved three main elements: improved price stability

©International Monetary Fund. Not for Redistribution ADDRESS BY MANAGING DIRECTOR 21 through disinflationary monetary policy; limiting the share of real and financial resources absorbed by government spending and deficits; and strengthening market processes so as to enhance the private sector's capacity to use resources productively. A great deal has already been achieved under this strategy. Inflation rates in the industrial world are now lower than at any time in the past 20 years. International interest rates—which are so important for the debt service burdens of the developing countries—have fallen by more than 6 percentage points from their level in 1982. Expectations about inflation, wage costs, and business profitability have been turned around. Finally, for the seven major industrial countries taken together, the steady upward drift of central government fiscal deficits—which so characterized the 1972-80 period—has been checked. But progress has been uneven. After 1982 fiscal deficits in the Federal Republic of Germany and Japan declined, while the deficit in the United States widened substantially—thereby contributing to a sharp divergence in balance of payments positions. By the same token, European countries have had only partial success in removing structural rigidities—and this has made it that much harder for them to achieve a significant reduction in unemployment. In the case of Japan, a large external surplus has been allowed to develop. 3. Now, however, the prospects for more convergent financial policies seem to have improved. The United States has put forward plans for a major fiscal correction. This is a very positive development—not only for the United States but for the world economy as a whole. It is important that this plan be fully translated into action. In conjunction with the exchange rate changes that have already occurred, this would contribute to a more sustainable pattern of payments positions and to a more stable exchange rate environment. Still, unwinding the imbalances that have been allowed to build up in the world economy will not be an easy task. It will require cooperative efforts. As the U.S. fiscal deficit declines, the resources released by reduced government spending will have to be reabsorbed into private expenditure and net exports. For those net exports to materialize, domestic demand growth in countries with large balance of payments surpluses will have to be sustained at an adequate pace. Toward this end, flexibility is, of course, desirable in the implementation of financial policies in those countries where inflation is under control, the private savings rate is high, and private sector demand is relatively weak. In this connection, the recently announced package of increases in public expenditures and related measures to support stronger growth in domestic demand in Japan is a welcome move. Flexibility in the implementation of financial policies must be com-

©International Monetary Fund. Not for Redistribution 22 SUMMARY PROCEEDINGS, 1986 patible with the medium-term objectives of durable growth and financial stability. It should be tailored to the circumstances of each country and should build on the room for maneuver created by earlier successes. The lower level of interest rates that accompanies a sound combination of fiscal and monetary policies will, in turn, help to "crowd in" private sector spending as budget deficits are cut, while the recent fall in the U.S. dollar will help to reduce the worrisome divergence in balance of payments positions among the major economies. With profits having risen in all major industrial countries and with more moderate rates of increase for real wages, the incentives for investment should be improved. Finally, continuing efforts are needed to deal with structural rigidities. Further actions to increase the flexibility of labor markets and to improve vocational training can only aid the absorption of redundant workers into new activities. Capi- tal market deregulation can assist in making financial resources previously absorbed by the government promptly available to the private sector. And deregulation of goods and service markets can promote competition, improve resource allocation, and stimulate investment. In sum, a delicate but decisive transition is under way. It is a transition from stop-go policies and inflationary expansion to a program of monetary and fiscal stability aimed at sustained growth. A good start has been made. But persistence and international cooperation are now required to ensure that the needed growth occurs, while further progress is made in removing imbalances.

II. Growth and Adjustment in Developing Countries 1. It is now four years since we met in Toronto at the outbreak of the debt crisis. The fact that the debt problem is still with us should not obscure the very considerable achievements that have been registered. The indebted countries have scaled back their current account deficits from an average of 18 percent of their exports in 1981-82 to only about 5 percent in 1985- 86. Underpinning this impressive turnaround in the external accounts were firm adjustment measures. Fiscal deficits were cut, exchange rates were managed to secure needed gains in competitiveness, and domestic interest rates were in many cases increased to more realistic levels. Some large debtors who had long been "living with inflation"—Argentina and Brazil are prime examples—took bold corrective actions: they dismantled indexation, initiated currency reforms, and launched wide-ranging programs to fight inflation. Meanwhile, the international banking system has been strengthened, as commercial banks have added to their capital base and made increased provision for loan losses. Yet there have also been disappointments, particularly during the past year. Many indebted countries are still far away from normal access to capital markets. Reflecting the export price declines of the past two years,

©International Monetary Fund. Not for Redistribution ADDRESS BY MANAGING DIRECTOR 23 ratios of debt to exports have tended to rise, and are now higher than in 1982. Some policy slippages—especially in the fiscal area—have taken place during the past year. And as necessary as adjustment was—and still is—to set the stage for sustained growth, we should not overlook the costs involved in the adjustment process itself. Echoing the abrupt decline in the availability of external financing, imports and investment in indebted countries fell sharply and there was a slowdown in their growth rates. It is worrisome that real per capita gross domestic product (GDP) in the developing world, which rose at an average rate of more than 3 percent a year in the 1960s and 1970s, is now virtually no higher than it was in 1980. These aggregate figures of course conceal wide disparities among groups of developing countries. Whereas real per capita GDP in Asia has risen by almost a fifth since 1980, large declines have been pervasive in Africa, in the Middle East, and in Latin America. Similarly, exporters of primary commodities have been harder hit than exporters of manufactures. 2. The challenge we face is clear. It is to bring about a substantial recovery in economic growth in developing countries, while continuing to make progress toward a sustainable external position. For their part, the developing countries can best improve their growth performance and their access to credit markets by their choice of macroeconomic and structural policies. While the substantial differences across developing countries dictate that each country's economic program be designed for its specific needs and circumstances, there are some common prerequisites for success. In the first place, the policy strategy must be grounded in a realistic appraisal of external prospects. Real non-oil commodity prices, after falling by an estimated 17 percent this year, are at a record low for the postwar period. Although these prices are not expected to fall further over the medium term, the outlook for export prices of developing countries is still relatively weak. Similarly, the moderate growth rate projected for industrial countries implies that the major market for developing country exports is likely to be less buoyant than in the past. This subdued growth of export earnings cannot realistically be compensated by large increases in external borrowing. The upshot is that a return to the situation of the 1960s and 1970s, when growth was fueled by borrowing and imports, is not a feasible option for the foreseeable future. Economic growth needs to become more dependent on domestically financed investment and domestically generated improvements in resource allocation. But the weaker prospects for developing country exports in the near term should not be allowed to become an argument for reversing the progress made toward more outward-looking policies. A realistic exchange rate is crucial to make the most of the growth in export markets that does take

©International Monetary Fund. Not for Redistribution 24 SUMMARY PROCEEDINGS, 1986 place, to provide an incentive for the development of new activities in which countries could establish a comparative advantage, and to guide the efficient use of scarce foreign exchange. Efforts to maintain an adequate level of external competitiveness are therefore as essential as ever. A liberalization of trade and exchange restrictions, by providing competitive discipline for domestic producers, can only pay handsome dividends. In addition, foreign direct investment can play an important role in the growth process. We should not lose sight of the lesson that countries that have consistently maintained outward-looking policies and have fostered strong private sectors have grown faster and have adjusted better to external shocks than those that have not. Retreating from excessive foreign borrowing is one thing. Retreating from integration with the world economy—and the gains in efficiency that go with it—would be quite another. This brings me to the second element of a successful policy strategy. If developing countries are to rely more heavily for growth on the efficient mobilization and use of domestic resources, they will need to implement the policies that pave the way for it. This means maintaining real interest rates at levels that encourage private saving; making sure that government deficits do not absorb an unduly high share of private savings; keeping wage movements in line with labor productivity; orienting the tax system to reward work, saving, and investing; streamlining public enterprises; and—perhaps most of all—creating and preserving an environment of overall financial stability. If developing countries consistently pursue these policies, they will find an added benefit: the constraint imposed by external financing will itself become looser. The confidence that makes domestic residents want to save more and invest at home will also contribute to the repatriation of flight capital. Likewise, measures directed toward the development of a strong private sector will make foreign creditors more willing to participate in the conversion of existing debt into equity. A number of indebted countries have already engaged in such conversions with creditors, and some others are actively considering their introduction. The welcome initiative just taken by the International Finance Corporation should give further impetus to this promising avenue. A final remark on a successful policy strategy. It is important that adjustment also pay attention to the health, nutritional, and educational requirements of the most vulnerable groups. President Barco has just made that very strong point. This means that the authorities will have to be concerned not only with the size of the fiscal deficit but also with Aow they reduce it. For example, safeguarding human needs may imply that employment in overstaffed and loss-making public enterprises or defense spending be reduced in preference to cutting an accelerated immunization and health care program for children. The expertise of the Fund and the

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World Bank is available to help members make more informed choices about the growth and income-distribution implications of alternative forms of adjustment. The final choices, however, must rest with the country itself. But policy reform in debtor countries—no matter how well conceived— cannot do the job alone. The reinforced debt strategy has other elements. What is needed is international cooperation conducive to a favorable external environment. Let me now turn to that point.

III. International Cooperation and the Role of the Fund 1. The whole range of issues confronting the international economy can be constructively handled only in the framework of international cooperation. Let me discuss the role that the Fund is playing in promoting international cooperation in four important areas: economic policy coordination, the debt strategy, international liquidity, and trade liberalization. 2. As I noted earlier, changes are taking place in the pattern of resource use within and across countries that call for compatible movements in such variables as exchange rates, interest rates, and fiscal positions. These changes can be facilitated by enhanced coordination of economic policies. The Fund can, I believe, play an essential role in this endeavor. Our reviews of the world economic situation have been adapted to highlight the interactions of economic policies and the potential sources of economic incompatibilities and tensions among countries. We are also working on the formulation of a set of economic indicators. The use of such indicators should help to guide governments' policies into consistent and mutually beneficial directions. But indicators can only be effective if there is the political will to frame domestic policies in light of international considerations. Some may ask: Are these efforts at improving policy coordination and surveillance really necessary? Does not the existence of flexible exchange rates remove the need for deliberate policy coordination? The answer, I think, is to be found in the experience of the past six years when the variability and misalignments of major currency exchange rates created such difficulties for the functioning of the international monetary system. A stable system of exchange rates is simply unobtainable—under either fixed or flexible exchange rates—unless countries, especially the largest ones, adopt sound policies and coordinate them by taking into account the international repercussions of their own actions. 3. I come now to the debt strategy. As I suggested a minute ago, the recent fall in export earnings of indebted countries has, if anything, made the debt problem more pressing. It is one year since Secretary Baker launched his statesmanlike, constructive, and crucial initiative. Where do we stand?

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More than two thirds of the 15 heavily indebted countries mentioned in the U.S. initiative have in place, or are now initiating, policies supported by the Fund, with close World Bank involvement. Genuine progress has been made. Let me just cite a few significant cases. Mexico provided a key test for the strategy. Within a six-month period, it had suffered a sudden fall of more than 60 percent in the price of the one commodity that made up two thirds of its export earnings. After careful deliberation, the Mexi- can authorities decided, in all sovereignty, upon a comprehensive program of macroeconomic and structural policies. The Fund has agreed to assist this courageous effort—and in a way that responds to the especially difficult circumstances of the case. The World Bank is also providing important support for the program, and the Paris Club has just decided to add its help. Official financing is thus in place. But the essential commercial bank component has yet to be agreed upon. I understand that negotiations are still continuing at this very moment. Given what is at stake, given the progress already achieved, and given the constraint of time, I can only expect the positive outcome of these discussions in the coming hours. I am also happy to announce that Nigeria has reached initial agreement with the Fund and the World Bank on a far-reaching set of policy reforms, and discussions on commercial bank financing are now in hand. In the case of the Philippines, the Executive Board of the Fund will shortly review the economic program of the new Government; this, together with a strong World Bank involvement, should help lead to an early agreement on debt restructuring. All told, the Fund is currently supporting the growth- oriented adjustment programs of 25 developing countries. The amounts committed under these arrangements plus Fund credit outstanding total SDR 35 billion; the recently endorsed program of the Mexican authorities will add another SDR 1.4 billion to that figure. Moreover, discussions are currently under way with 20 other countries, with a view toward arranging Fund support of their adjustment policies. If the Fund is to continue to play a central role in the handling of the debt strategy, it must be able to intervene—on a case-by-case basis—with flexibility and as a direct agent of financing where adjustment efforts warrant it. It is in this light that I welcome the initiative announced by the Governor for Japan in the meeting of the Interim Committee to lend SDR 3 billion to the Fund. I also welcome the decision by the Interim Commit- tee to leave unchanged for 1987 the enlarged access limits. This means that in the period ahead the Fund will not only be capable of acting as a financial catalyst, but will also be able, at this critical juncture, to provide significant financial support for the strong adjustment efforts of its members. In this connection, I should emphasize that the Fund continues to be very prudent in its lending activities and in the management of its own financial position. It has acted decisively to deal with arrears on payments to it. While these are relatively small in amount and involve few members, they

©International Monetary Fund. Not for Redistribution ADDRESS BY MANAGING DIRECTOR 27 cannot be accepted by a cooperative monetary institution such as the Fund. Another key element of the debt initiative is the broad and active participation of commercial banks. This has been an area of some disappointment. Although final figures are not yet available, it appears that new net lending to the 15 major debtors in the first part of 1986 will fall substantially short of the amounts implied by the debt initiative. If the strategy of co-responsibility is to work, it is essential that commercial banks resume lending in adequate amounts and on appropriate terms in support of sound macroeconomic policies and growth-oriented structural reforms in debtor countries. No discussion of financing problems would be complete without addressing the special plight of the low-income countries. These countries not only have serious debt and balance of payments problems, they are also less integrated into the world economy than other developing countries. They are more dependent on primary commodities in their exports and are less able to obtain commercial financing to cover their current account deficits. Also, some low-income countries in Africa are still feeling the devastating effects of repeated and severe drought. These countries sorely need concessional assistance. One of the hallmarks of last year's Annual Meet- ings was the agreement reached to establish in the Fund an SDR 2.7 billion Structural Adjustment Facility (SAF). Since the inception of this facility in March of this year, the Fund and the World Bank have been assisting low- income countries to design medium-term, growth-oriented economic programs that will give them access to resources under this facility. SAF loans have already been approved for Burundi, The Gambia, and Mauritania. Several other cases are due for Executive Board consideration after these Annual Meetings. SAF resources committed—and those currently under consideration—amount to nearly a half of the total resources available under the facility. It is regrettable that over the past year flows of official lending to developing countries have actually declined. We face a test of economic cooperation and solidarity. Even in this time of budgetary stringency, the richer countries must adapt their efforts in the field of official development assistance to the pressing needs of recipient countries. In this respect, broad support for a general capital increase and for a strong Eighth Replenish- ment for the International Development Association are crucial to ensure that the increased role for the World Bank in the reinforced debt strategy continues. 4. I turn next to the role of the Fund in providing international liquidity to the system. Here, the international community has at its disposal a useful tool of cooperation, namely, the ability to allocate SDRs when it can be

©International Monetary Fund. Not for Redistribution 28 SUMMARY PROCEEDINGS, 1986 agreed that there exists a long-term global need to supplement reserves. Over the past few years, however, we have seen a strong—and I regret to say—hardening division of views among the membership on this issue. In the interests of supporting the momentum toward greater international cooperation, is it not now time for both sides to take a fresh look at their existing positions? In so doing, attention should be drawn to several salient aspects of the current world economic situation. A large number of developing countries experiencing debt-servicing problems no longer have access to financial markets, and this even while strong adjustment programs are under way. With a weakening of export earnings, there is a risk that these countries will unduly compress imports to obtain the reserves they need, which would have a negative influence on world trade and growth. But we also need to meet the legitimate concern that there has been a strong tendency for some countries to use SDKs before other reserve assets and to continue this use on a permanent basis. This is contrary to the intended monetary character of the SDR. I hope that an open reflection on these issues can facilitate the emergence of a consensus. 5. To this point, I have concentrated on recent advances in international cooperation. But I would be remiss in my duties if I did not speak out against what is probably the single greatest threat to the international economic and financial system. I refer here, of course, to protectionist pressures. The record is clear enough. In industrial countries we have seen over the past few years a proliferation of voluntary export restraints, market-sharing arrangements, quotas, and subsidies. In the meantime, the developing countries have made only limited progress in dismantling their own array of trade restrictions. There is never a good time for protectionism. Still, as I pointed out in my recent statement to the GATT ministerial meeting in Punta del Este, the present state of the world economy is such that the risks posed by protectionism are now particularly serious. At a time when the developing countries are struggling with enormous debt-servicing problems, and when both industrial and developing countries are counting on the private sector to become a mainspring of growth, we simply cannot afford to be compla- cent about the drift toward protectionism. It is for this reason that we in the Fund are most gratified that the recent ministerial meeting of GATT Contracting Parties in Punta del Este agreed on a declaration that launches the Uruguay Round of multilateral trade negotiations. The international consensus that was achieved on such an important undertaking, encompassing such difficult issues as agriculture and services, is very heartening indeed. We especially welcome the standstill and rollback commitment by each participant. As a result of the Punta del Este meeting, an international framework and commitment now exist to pursue trade liberalization in the interest of all countries. Every country

©International Monetary Fund. Not for Redistribution ADDRESS BY MANAGING DIRECTOR 29 has a part to play in the achievement of this objective, and the major trading nations have a special responsibility to lead the way. The Fund has intensified its collaboration with the GATT as well as its own efforts in behalf of maintaining an open trading system. Since 1983, the coverage and analysis of trade policy matters in the Fund's Article IV consultations with members have been expanded. Under Fund-supported adjustment programs, members agree to refrain from imposing new — or intensifying existing — import restrictions for balance of payments purposes. Where member countries are placing undue reliance on trade restrictions, the Fund — working closely with the World Bank — encourages liberalization. In some cases, the results achieved in this field have been most promising.

Allow me to offer some concluding remarks. Significant progress has been made over the past few years. Economic policies are now better at- tuned to economic realities, and inflation — which had been poisoning the financial system for 15 years — has finally been brought under control in the industrial world. But much remains to be done. External payments imbalances among the larger industrial countries are a disturbing source of instability and tensions. The erosion of commodity prices has adversely affected the developing countries at the very time when they more than ever need increased export earnings to grow and to service their debts. In a world that is increasingly interdependent, it is proving more complex than ever to cope with these problems. A satisfactory solution requires not only an understanding of the interaction among national economic policies but also firm adherence to the fundamental principle of monetary stability and strengthened commitment to international cooperation. Economic policy coordination among industrial countries is no longer a matter of theoretical preference. It is instead a prerequisite for growth with stability. Industrial countries must work together to complete the process of disinflation, to maximize the sources of economic growth, and to assure an open international trading system. Yet such a program, as ambitious as it is, is not sufficient. The international economic system will also have to encourage the developing countries to tackle the formidable structural problems that confront them. Let us not forget that foreign aid — if well directed and efficiently used — is — like international cooperation as a whole — in the enlightened self-interest of the world community. The recent massive resource transfer from the Third World to the industrial countries associated with the decline in raw material prices should facilitate the participation of the industrial world in

©International Monetary Fund. Not for Redistribution 30 SUMMARY PROCEEDINGS, 1986 this worthwhile endeavor. It would be in the interest of neither international trade, nor of the health of the international system, nor of peace, to see developing countries — for lack of markets or external support — be obliged to turn inward and curtail their imports, their growth and, ultimately, their hopes. Such a development would be fraught with dangers and political instability. The general interest calls for a revival of sustained growth in these countries through the pursuit of structural reforms which are, in the last analysis, the key to their development. But these reforms will take time and therefore will require understanding, financial support, and cooperation. It is my hope that the community of nations, which had the wisdom to create the Bretton Woods institutions, will face these challenges, which are at least as formidable as those of the immediate postwar period, with renewed dedication and generosity. There is no time to waste.

A final word of a personal nature. As I indicated to the Executive Board ten days ago, this is the last time that I will be attending the Annual Meet- ings as Managing Director of the International Monetary Fund. Indeed, I have decided to leave my position by the end of 1986. You are aware of the reasons for my departure. They are both personal and professional. I wanted indeed to choose a time consistent with the best interests of the Fund. We are on the eve of difficult negotiations to increase Fund quotas — negotiations that by their nature are unavoidably lengthy. I can tell you that with all seriousness. It is also a time when the debt strategy must be adapted to the achievements of the last four years, and when the exercise of multilateral surveillance must be strengthened and refor- mulated in light of the concept of objective indicators. I think the Fund will be better served if the change in management takes place now, rather than in 18 months' time. It is this consideration, together with a wish to keep the period of transition as short as possible, that has led me to announce my decision on the eve of these Annual Meetings. It has been a great honor to serve this institution. The eight years that I have devoted to the Fund have also been uplifting ones. They have been so because the circumstances have been exceptionally challenging; because the Fund, without losing its monetary character or becoming oversized, has demonstrated a truly remarkable vitality and ability to react; and finally, because I have been able to put a lot of myself into it all. I want to take this opportunity to thank you for the confidence you have always placed in me and for the support you have given me, especially at the most decisive moments. The strengthening of the Fund's financial resources, the enlarged access policy, and the cooperative approach to the debt strategy have all received your support. Without your confidence and

©International Monetary Fund. Not for Redistribution ADDRESS BY MANAGING DIRECTOR 31 the wise counsel expressed at the Annual Meetings, at the Interim Com- mittee, and in the Executive Board, these initiatives and adaptations could not have taken place. Yet none of this would have been possible without the unflagging support of what is, to me, the base of the Fund, namely, its staff. I am in a better position than anyone else to measure its devotion, its hard work, its competence, its intelligence, its flexibility, and its selflessness. Let us never forget that an institution ultimately draws its value from the men and women who make it up. Let us find the way to motivate them, to show them our esteem, and to assure them of our commitment to a truly international and high-quality staff. It is to them that I direct my last words: thank you from the bottom of my heart for the loyal, untiring assistance that you have given me throughout my time at the Fund.

©International Monetary Fund. Not for Redistribution DISCUSSION OF FUND POLICY AT SECOND JOINT SESSION l

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

H.O. Ruding

It gives me pleasure to report to you in my capacity as Chairman of the Interim Committee. Since my report to you a year ago in Seoul, the Com- mittee has had two meetings, first on April 9-10, 1986, and then over the last two days on September 28-29, both here in Washington, B.C. The agenda for both meetings had certain common subjects, including the world economic outlook, the debt situation, issues from the Group of Ten and Group of Twenty-Four reports on the international monetary system among which the exchange of views last Sunday on indicators was particularly interesting and promising, and the question of SDR allocations. In addition, in its more recent meeting the Committee also gave consideration to access limits for the use of Fund resources in 1987. As the main conclusions from the Committee's deliberations are summarized in the press communiqués issued at the end of each meeting, I intend to limit myself in this report to a few brief remarks on some of the salient points.

World Economic Outlook In reviewing the world economic outlook at its meeting last Sunday, the Committee noted that the economic developments in recent months have been somewhat mixed. The pace of growth in the industrial countries has been slower than expectations earlier this year, contributing to sluggish world trade and a further decline in already low commodity prices. The international payments imbalances among the major countries remain dis- turbingly large. The developing countries, following vigorous expansion in 1984, experienced a slowdown in 1985, and are now expected to have a further decline in growth in 1986. However, on the positive side, the most recent indications are that economic activity in the industrial countries has begun to pick up, and they will have a stronger economic performance in the second half of 1986 and in 1987. Moreover, their price performance

September 30, 1986.

©International Monetary Fund. Not for Redistribution CHAIRMAN OF INTERIM COMMITTEE 33 has shown a further improvement though unemployment continues to be a cause of great concern. During the last year, the world economy has been subjected to a number of important shifts, including a very substantial realignment of exchange rates for principal currencies, declining interest rates, and a sharp drop in the price of oil. The Committee noted that the lagged expansionary impulse originating from lower interest rates and from terms of trade gains translating into higher private expenditure in real terms should become increasingly evident in 1987. Moreover, the corrective effect of the past year's exchange rate realignments on the current account imbalances among major countries should help place the international economy on a firmer footing. Nevertheless, the Committee considered that the following further actions were needed by industrial countries if the basis for durable growth is to be strengthened: the reduction in the federal fiscal deficit sought by the United States authorities has to be translated into fact; domestic demand growth outside the United States has to be sustained at an adequate pace, especially in those countries whose relatively strong domestic and external positions provide them with room to maneuver; structural impediments to output growth must be dismantled and, in particular, protectionism must not only be resisted but reversed. In this respect, the Committee warmly welcomed the recent Ministerial declaration on the Uruguay Round of multilateral trade negotiations, and urged governments to make every effort to ensure an early and successful conclusion to the new round. Slower growth in world trade and the sharp price declines for oil and other primary commodities have been the dominating influences on developments and prospects in the developing countries; however, there are significant differences to be noted also. The exceptionally difficult economic conditions in low-income countries, especially in Africa, are a matter of particular concern to the Committee. In that connection, the Committee welcomed the establishment of the Structural Adjustment Facility (SAP) last spring and expressed satisfaction with the progress made thus far in operations under it, including strengthened Fund-Bank collaboration in these operations. Committee members urged eligible countries to adopt policies that would qualify for assistance under the SAP; they also urged donor countries to enhance the catalytic role of the SAP and to increase the supply of official development assistance. Though much remains to be done to overcome the serious problems facing many developing countries, the Committee could also discern signs of progress. The pickup of activity in the industrial countries and the decline in interest rates would ease the constraints for many of them. The nonfuel exporting developing countries are projected to achieve real growth of

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4.5 percent in 1986, and the exporters of manufactures among them will do even better. A number of countries have adopted anti-inflationary adjustment policies, and overall, the inflation picture is showing signs of improvement. However, fuel exporting countries are confronted by the need to make major adjustments and their weakened financial position has also had consequences for other developing countries.

Debt Situation The predicament of indebted countries continues to be difficult as reflected in a likely further rise in the debt-export ratio in 1986. The Com- mittee recognized that substantial progress has been made by a number of debtor countries despite difficult circumstances and emphasized that a satisfactory resolution of debt difficulties was dependent upon three basic requirements: first, effective growth-oriented policies in the indebted countries themselves, aimed at mobilization of domestic savings, including a halt and reversal of capital flight, improved allocation of resources, and the maintenance of external competitiveness; second, satisfactory growth in, and access to, export markets; and third, adequate supply of external financing to make adjustment-with-growth feasible. Committee members stressed the importance of a determined implementation of the strengthened debt strategy introduced a year ago in Seoul. The case-by-case approach and the central role of the Fund in promoting growth-oriented adjustment were emphasized, including the provision of assistance to members in the design and financing of appropriate programs for that purpose. It was noted that close collaboration between the Fund and the World Bank has helped to encourage growth-oriented policy reforms in indebted countries, and the stepped-up program of policy-based lending by the Bank has made an important contribution to the debt strategy. Committee members welcomed the package for Mexico as an example of the strengthened debt strategy and hoped that the package can be finalized promptly. Committee members recorded satisfaction at the important contribution to the debt strategy from official reschedulings under the auspices of the Paris Club and flexibility by official export credit agencies in the implementation of their cover policies. It was noted, however, that other sources of finance, particularly commercial bank lending, have declined and need to play a greater role.

Issues in the Group of Ten and Group of Twenty-Four Reports on the International Monetary System As agreed in Seoul, the Committee began at its April meeting substantive consideration of issues raised in the reports on the international monetary system presented to it in October 1985 by the Group of Ten and the

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Group of Twenty-Four. Discussion at the April meeting of the Committee focused on three subjects: functioning of the exchange rate system, the Fund's surveillance and management of international liquidity, and the role of the SDR. Concerning the exchange rate system, the Committee agreed that it was the flexibility in the system that had enabled the world economy to adapt to a number of major disturbances. Nevertheless, both the variability in exchange rates and the longer-term misalignments that had emerged were recognized to be weaknesses; the remedy, it was agreed, was largely to be found in conducting national economic policies in a sound and mutually consistent way while according all due weight to exchange rate considerations.

a. Surveillance and indicators The Committee's discussion on strengthening Fund surveillance led to broadly parallel conclusions. The focus here was on improving the multilateral setting for surveillance, in particular for assessing the international implications of the policies and objectives of the major industrial countries and also for enhancing policy coordination among them. In that connection, the Committee saw merit in exploring the scope for the formulation of a set of quantitative indicators of policy actions and economic performance, to be considered in a medium-term framework. The use of indicators in conducting surveillance was also endorsed at the Tokyo summit in May. Following up on this mandate, the Fund staff in its latest world economic analysis experimented with the explicit use of indicators of economic policies and performance as a means of focusing attention on potential incompatibilities in national economic policies and projections, particularly among the larger countries. The Committee believes that further development of the application of indicators along these lines offers a promising approach to strengthening the Fund's surveillance and has therefore asked the Executive Board to pursue it further.

b. Role of the SDR At its April meeting, the Committee noted that the Executive Board had begun consideration of the role of the SDR in an international reserve system in which borrowed reserves have come to play a prominent part, but are not readily available to many countries. Committee members agreed that the SDR, as an owned-reserve asset, can play a useful role as a component of international reserves and as a unit of account. They recognized the potential use of the SDR as a "safety net" against unexpected contingencies but stressed that in view of its monetary character, the SDR should not be a means of transferring resources. Subsequently, the Executive Board has continued to review various aspects of the SDR system, including proposals relating to post-allocation adjustments of the distribution of SDRs among members and techniques for improving the pattern of SDR hold-

©International Monetary Fund. Not for Redistribution 36 SUMMARY PROCEEDINGS, 1986 ings in relation to other reserve assets. The Committee has requested the Executive Board to continue its examination of ways to enhance the contribution of the SDR to the creation and allocation of international liquidity.

c. Role of the Fund The Committee urged the Executive Board to examine expeditiously the role of the Fund as referred to in the reports of the Group of Ten and the Group of Twenty-Four.

SDR Allocations The Managing Director reported to the Committee at both its meetings on consideration by the Executive Board of the question of SDR allocations. The position has remained essentially unchanged. Although a majority of Executive Directors favor an allocation in the next basic period, 1987-91, the broad support required under the Articles continues to be lacking. In this regard, the Committee welcomed the intention of the Exec- utive Board to study further the long-term global need for reserve supplementation in the context of the currently prevailing international monetary arrangements.

Access Limits to Fund Resources At its recent meeting, the Committee discussed the Fund's policy on enlarged access and the limits on access to the Fund's resources to be applicable in 1987. As Governors are aware, these matters need to be reviewed before the end of 1986. The Committee noted that, in view of the uncertainties that continued to surround the world economy and of the worsening payments difficulties of a number of member countries, there was a need to continue the enlarged access policy. In the circumstances, it was judged that the present access limits, both under the enlarged access policy and under the special facilities, should be retained and that in that connection, the Fund's liquidity position continues to be broadly satisfactory. The Committee welcomed the offer made by Japan to provide the Fund with SDR 3 billion to enhance its ability to support members' adjustment efforts. Before concluding, I would like to place on record the special tribute paid by the Committee to Mr. de Larosière. He has presided over the Inter- national Monetary Fund during a particularly demanding period of its history, and has met the many challenges with wise, imaginative, and courageous leadership. Committee members were unanimous in expressing warm and deep appreciation for his many outstanding accomplishments as Managing Director, and for his invaluable contributions to the work of the

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Interim Committee. We are deeply grateful for his inspiring service to the cause of international monetary cooperation and wish him well in his future endeavors. The next meeting of the Committee will take place on April 9, 1987, in Washington, D.C.

STATEMENT BY THE GOVERNOR OF THE FUND AND THE BANK FOR JAPAN

Kiichi Miyazawa Mr. Chairman, my fellow Governors, distinguished guests, ladies and gentlemen: It is a pleasure to be with you here today and to be able to give my maiden speech as Governor for Japan. Actually, this is not the first session of the IMF-World Bank Meetings that I have attended. Thirty-odd years ago I came to Mexico as personal secretary to the Governor for Japan when Japan was admitted to membership. That was, incidentally, the same year that I left my job with the Ministry of Finance to go into politics. Now I am back—once more with the Ministry of Finance. Before turning to the issues before us, I would like to thank the United States for the excellent arrangements that have been made for these Meet- ings and to extend a very warm welcome to the two new members who are here with us today: Kiribati and Poland. At the same time, I would also like to express my appreciation to Fund Managing Director de Larosière, to the Executive Directors, and to their staffs for the efforts that they have made over the past year in keeping the global economy on track. I had been very much looking forward to working with Mr. de Larosière, and I am sure his wise counsel will be sorely missed in the months and years ahead. While we are all sorry to see Mr. Clausen leave the World Bank, he has a worthy successor in incoming President Barber Conable. Mr. Conable's reputation precedes him, and I am confident that his presidency will be good for the World Bank.

1. The World Economy

1.1 Outlook In formulating our policies for the future, it is important first to have a clear understanding of where we stand today. Many people have expressed

©International Monetary Fund. Not for Redistribution 38 SUMMARY PROCEEDINGS, 1986 concern about the slower rate of growth in production and world trade early this year. But we should not forget the bright spots. After seeming to stagnate in the first half of this year, the world economy is set, according to Fund forecasts, to achieve approximately 3 percent growth in both 1986 and 1987. The outlook is thus for sustained growth, albeit at a slower rate than we might like. Inflation is down, especially in the industrial countries. With sharply lower prices for oil and other primary commodities, the Fund is forecasting inflation in the 3-4 percent range for the industrial countries in 1986. Interest rates are conspicuously lower than they were last year or the year before. Exchange rates for the leading currencies are now sharply different from what they were at this time last year. Although these exchange rate adjustments have not had much visible impact yet on the global balance of payments disequilibria, I am hopeful that they will have a tangible effect soon, together with concurrent measures being taken in other areas. Much of the credit for this promising outlook must go to the efforts being made by our countries individually and in concert.

1.2 Issues However, the world economy is not out of the woods yet, and there are still a number of critical issues that need to be addressed. The first of these issues is the need to roll back protectionism. It is imperative that the protectionist fires be banked and extinguished, and I see the recent declaration of the ministerial conference at Punta del Este and its commitment to a new round of multilateral trade negotiations—the Uruguay Round—as very promising signs here. Determined to work for the preservation and strengthening of the free trade system, Japan will continue to actively promote this new Uruguay Round. Japan will also, it should be noted, continue to take the lead in further opening its markets and facilitating imports. The second issue that needs to be addressed is that of achieving greater stability in foreign exchange markets. I am thus hopeful that the agreement among the leading industrial countries for multilateral surveillance and policy coordination within the Fund framework will prove fruitful, and I am encouraged at the progress being made in studies on the details of implementation. Japan is cooperating and will continue to cooperate as an active participant in this effort to improve the functioning of the international monetary system.

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The third issue is the need to solve the debt and development problems. As mentioned, the combined cooperation of international institutions, the industrial countries, and the commercial banks alike is needed to solve the debt problem. While the developing countries' self-help efforts are obviously indispensable, these countries cannot be expected to cope with their debt and development problems unless they are assured of continued access to export markets and enhanced capital availability. The prerequisite for solving these three issues is the need for the industrial countries to achieve sustained and noninflationary growth while reducing their international balance of payments disparities.

2. Internationally Responsible Economic Management Japan has been a major beneficiary of the IMF-World Bank regime. Soon after becoming a member in 1952, Japan exercised its right to draw $125 million from the Fund and took out its first loan from the World Bank in 1953. At the time, Japan's trade balance was, believe it or not, chronically and massively in the red. Japanese development in the years since then has benefited from financing from the World Bank and a host of other public and private financial institutions. Weathering a number of harsh trials, including the recent oil crises, Japan has grown to account for approximately 10 percent of total world GNP. Ironically, our trade balance is again in heavy disequilibrium, and we seem to be confronting the same problems as three decades ago, this time from the other side of the problem. Japan is determined to do everything that it can to preserve and strengthen the free trade system, to resolve the economic friction with its trading partners, to live up to its international responsibilities, and to be a country that can be counted on to do what is right. Given this situation, I think Japan can take positive action in two areas: The first thing Japan is doing is to pursue internationally responsible policy management to achieve sustained and noninflationary growth while addressing its international imbalances of payments. The attempt to reduce the balance of payments disequilibrium has been a special focus of Japanese efforts, and we have cooperated strongly with currency realignment. As a result, the yen has appreciated more than 50 percent against the dollar over a ten-month period—an unprecedent- edly fast change. Because this foreign exchange realignment has generated sluggishness in Japanese industry, especially in the manufacturing sector, the Govern- ment has moved both to restore business confidence by dispelling uncertainty from the economic outlook and to contribute to the reduction of the

©International Monetary Fund. Not for Redistribution 40 SUMMARY PROCEEDINGS, 1986 balance of payments disequilibrium by strongly stimulating Japanese domestic demand. Illustrative of our efforts is the package of comprehensive economic measures—totaling some ¥ 3.6 trillion, or $23 billion at current exchange rates—that Japan announced on September 19. First, ¥ 3 trillion of this will go to expanding the scale of public works and other investments, including both additional implementation of projects that are especially important for mobilizing private sector activities and enhancement of home financing schemes to promote housing investment. This is the largest such package in Japanese history, and it is, given the current state of Japanese Government finances, the most we can possibly do here. Second, we will continue to ease regulatory restrictions and provide incentives to promote greater private sector involvement in urban redevelop- ment and other public interest projects. Finally, a determined effort will be made to promote personal consumption by seeing that the benefits of yen appreciation and lower oil prices are passed along, to encourage accelerated implementation of private sector capital investment, and to foster continued employment stability. Japanese structural adjustment is another element essential to achieving a more harmonious trade balance, and the Government is making every possible effort to transform the Japanese economic structure into one oriented toward international coordination.

3. Debt and Development Problems The debt and development problems are not simply an issue for the developing countries. They are everybody's concern. Determined not to let a stalemate develop, Japan supports the thrust of Secretary Baker's proposal last year. Assuming that the debtor countries themselves persevere with their self-help efforts, Japan is prepared to do what it can to facilitate the support they need from the leading international institutions, the industrial countries, and commercial banks. This is, I think, the second field where Japan can take positive action for global prosperity, and I would like to outline three specific areas of action here.

3.1 Strengthening the IMF The IMF has contributed importantly to resolving the debt problem, and Japan hopes that it will continue to play a central role in these efforts. IMF stand-by arrangements, for instance, are crucial to promoting economic adjustment and catalyzing the flow of capital from commercial banks. Because it is essential that IMF funding be strengthened to enable it to fill this role, I am proposing that negotiations be started immediately

©International Monetary Fund. Not for Redistribution GOVERNOR FOR JAPAN 41 on the ninth quota increase scheduled for 1988. Japan is prepared to contribute to the ninth quota increase to the extent of its abilities. Considering the uncertain prospects for the world economy, it is not unlikely that some of the developing countries may face increasingly serious balanae of payments difficulties and financing requirements in the period ahead. The Fund, in applying its present policies, may deem financial support beyond the usual recourse warranted in especially severe instances. Japan considers it desirable that the Fund's financial position be strengthened to facilitate a flexible response in such special circumstances. Ac- cordingly, Japan is prepared to offer lending to the Fund in the amount of SDR 3 billion as a temporary measure to support the provision of financing by the Fund in such instances. Japan would welcome the interest of other members in joining such an undertaking. . . .

3.2 Utilization of Japanese Public and Private Financial Resources As noted in Secretary Baker's proposal last year, commercial banks have a key role to play in resolving the problems of debt and development. Commercial financial institutions from Japan and the other industrial countries are already playing a critical role in this field, and we recognize that the combined cooperation of multilateral institutions such as the Fund and the World Bank, the industrial countries, and commercial banks alike will be needed to solve these problems. Japan has, as you know, cooperated positively with efforts to help Mex- ico improve its debt and development positions. We have indicated a willingness, assuming that a framework of international coordination and other financing climate essentials can be arranged, to provide the Export- Import Bank of Japan financing in the amount of $1 billion for three major projects as requested by Mexico. Japan also intends to do what it can to facilitate the flow of public and private financial resources to the middle-income countries through the Export-Import Bank of Japan's untied loan scheme, including cofinancing with the World Bank, within the framework of international financial cooperation. Japan has a high regard for the role that the Paris Club has been playing, in cooperation with the Fund, to solve the debt problems, and we intend to continue these efforts in cooperation with the other industrial countries. Private sector direct investment is important to solving debt and development problems. We expect that MIGA (Multilateral Investment Guar- antee Agency) will make a major contribution in this area.

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4. Conclusion Never before has the need for policy coordination been as great as it is in today's increasingly interdependent international economy. With our in- terlocking ties born of expanded trade and more active capital flows, it would be disastrous for any of our countries to pursue narrow national policy goals in disregard of their international impact. The IMF-World Bank organizations now embrace some 151 countries around the globe. Just as this breadth makes the problem of policy coordination all the more difficult, so does it promise all the greater rewards for success. I am encouraged by the fact that the international system has en- dured and grown for more than four decades despite the many trials that it has been subjected to. I have today tried to express Japan's determination to tackle the great issues facing the world economy and to indicate some of the actions that Japan is taking. While Japan is determined to do its part within the IMF-World Bank organizations and in every other way, these problems cannot be resolved by one or two nations acting alone. They need the cooperation of all of us here today in a coordinated policy effort, and I sincerely hope, for all of our sakes, that these Meetings will serve to reaffirm and strengthen this international cooperation.

STATEMENT BY THE GOVERNOR OF THE FUND FOR THE UNITED KINGDOM

Nigel Lawson

I have the honor of addressing this meeting as President of the European Community, which since the start of the year has for the first time comprised 12 nations, with the welcome inclusion of Spain and Portugal. The Bank and Fund have also acquired two new members—Poland and Kiribati—and I welcome them, too. I shall deposit the full text of my Presidency speech with the Secretariat, but I should like to make some of the main points here, before I turn to my remarks as U.K. Governor. Economic activity in most industrial countries, particularly industrial production, has been somewhat sluggish since the final quarter of 1985. While this is disappointing, it is likely to prove a transitional phase as the world economy adjusts to the major shifts in relative prices which have occurred over the past year or so.

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There is a reasonable expectation that economic activity in industrial countries will pick up as domestic demand responds to lower nominal interest rates and higher real incomes. Indeed, signs of a pickup of activity in a number of European countries are apparent.

But in many countries government deficits need to be reduced further. The United States has a major role to play here because of the size of the federal government deficit and because of the contribution which its correction can make to reducing current account imbalances. It is crucial that Japan—and I listened with great interest to the speech we just heard from Finance Minister Miyazawa—should make its contribution by implementing rapidly the recommendations of the Maekawa Commission designed to reduce the export-oriented nature of the Japanese economy and to increase its openness to imports, thus sustaining a faster rise in domestic demand. The Community countries are also aware of the need to contribute to the correction of existing imbalances and to the maintenance of sustained growth of world demand and trade.

The European Community will enter the forthcoming GATT talks with the objectives of consolidating and further developing the open trading system. The EC welcomes the progress made at the September GATT ministerial meeting in Uruguay.

The Fund continues to have a central role in the adjustment process, and the countries of the Community stand fully behind it in its work. In view of the serious payments difficulties that many Fund members continue to face, the EC member states welcome the decision by the Interim Committee to maintain the policy of enlarged access for another year and to keep the access limits unchanged for 1987. The member states of the Community are prepared to participate constructively in the discussions on the Ninth Quota Review. . . .

Let me now make some additional remarks in my capacity as Governor for the United Kingdom.

At previous Annual Meetings I have had occasion to remark on the encouraging consensus that has grown up through the world on the monetary and fiscal policies necessary to secure sustainable noninflationary economic growth. What is new is that the consensus over macroeconomic policy has been extended into the microeconomic sphere. Governments of all political persuasions throughout the world are increasingly coming to recognize that sound macroeconomic policies need to be accompanied by the liberation of market forces: privatization, deregulation, and tax reduction. All have become part of the new world consensus.

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Free Markets, Trade, and Protectionism Nowhere is the proper functioning of free markets more important than at the international level. We have seen at Punta del Este a real break- through. The world is now committed to a genuine attempt to bring down trade barriers right across the board, in industry and agriculture, goods and services. It is vital that we now carry this through to a successful conclusion. I know that the U.S. Administration is deeply concerned about the strength of bipartisan protectionist pressure in Congress. We all share that concern. But equally, it is right to point out that over the past year alone we have seen three important achievements in the international sphere, each of which will strengthen the open trading system: —Since the Plaza agreement, there has been a major realignment of exchange rates to much more realistic and sustainable parities. —At the Tokyo economic summit in June, we resolved to improve the process by which we work toward greater consistency in our economic policies. —Following the GATT ministerial meeting at Punta del Este earlier this month, we are on the road to a worldwide comprehensive reduction of trade barriers on both goods and services. Armed with these achievements, it is not unreasonable to expect the U.S. Administration to overcome protectionist pressures from within its own shores. One area of the world economy where market forces are still conspicuously cribbed, cabined, and confined is agriculture. As a result, we have perverse agricultural policies throughout the world, which may well present the greatest challenge of the next decade. We encourage production in high-cost OECD countries and discourage it in developing countries that have a comparative advantage. We continue to arrange that the taxpayers of the western world finance food aid to the Soviet Union. Low world prices for agricultural exports, as a result of industrial countries' subsidies, represent a major loss for developing countries and are particularly serious for many debtors. The sums involved are enormous. This year's World Development Report shows that worldwide liberalization—after allowing for losses to producers—could produce overall gains in the region of $20 billion for developing countries and up to $50 billion for OECD countries. Let there be no doubt: the potential gains from better pricing policies and trade liberalization are vast and infinitely larger than any feasible increase in aid. The United Kingdom certainly needs no convincing that ma-

©International Monetary Fund. Not for Redistribution GOVERNOR FOR UNITED KINGDOM 45 jor changes in agricultural policies are needed by industrial and developing countries alike. At this year's summit in Tokyo, the main industrial countries agreed that international cooperation was needed to bring agricultural production into line with demand and to tackle subsidies. What we need is multilateral disarmament among the subsidizers. Clearly, it cannot be achieved overnight. But equally, a start has to be made without delay. I am pleased that the Development Committee has adopted my proposal that this vital issue should be discussed at its next meeting.

The U.K. Economy Finally, let me say something about the experience of my own country this year. In general, developments in the United Kingdom have mirrored the pattern of the industrial world as a whole. Domestic demand has been as buoyant as I suggested at the time of the budget in March. But in line with the sluggishness of world trade generally and as a result of weaknesses in a number of markets (particularly those affected by the sharp fall of the oil price), exports have been flatter than I expected then. As a result, overall output growth this year will be less than I envisaged in March. This slowdown comes after four years of steady growth of about 3 percent a year, the longest period of growth we have known for a considerable time. The important question is whether it represents the beginning of the end of the cyclical upswing that started in the United Kingdom in 1981, or whether it is merely a short pause in that upswing. Some months ago I ventured the view that what we were experiencing was merely a short pause before the beneficial effects of lower oil prices on world and U.K. activity came through. I see no reason to change that judgment. Indeed, there are already signs of a pickup of exports, and with continued strength of domestic demand there is every prospect of faster growth next year. But within this overall economic growth, there have been profound changes in the pattern of the economy, associated with changes in the pattern of world supply and demand, and the need for British industry to restructure itself to meet those changes. In particular, there has been a long- established trend for services and oil to grow faster than manufacturing. But even within manufacturing—which overall accounts for roughly a quarter of GDP—performance has been far from uniform. In some industries—mostly the metal-using industries, textiles, and clothing—output is still below the prerecession peak of 1979. But in other

©International Monetary Fund. Not for Redistribution 46 SUMMARY PROCEEDINGS, 1986 important manufacturing industries—such as chemicals, food, and engi- neering—output is well above the prerecession level.

At the same time, inflation has fallen rapidly. The underlying rate may now be around 3V4 percent. I do not expect to see much change in that figure over the coming months.

In common with other countries, we have to accept that the sharp fall in the oil price and most other commodity prices means that the underlying rate of inflation is not quite as low as that recorded in the latest figures. But given the continued pursuit of policies of sound money, inflation can be kept at a low rate and eventually eliminated altogether. As the fifth largest oil producing nation in the world—even though oil is only some 5 percent of our GDP—the U.K. economy has been affected more than most by the collapse of the oil price. This is reflected most notably in the current account of the balance of payments, where the sizable contribution of North Sea oil to our export earnings has been halved. As a result, non-oil exports, both visible and invisible, will have to rise to make good the drop in oil exports.

The need for this rise in non-oil exports—although not of course its im- minence—was always foreseen. As I explained in a speech I made at Cam- bridge some three years ago, a lower real exchange rate would be part of the mechanism that would lead to the necessary improvement in the non- oil balance. Since the oil price halved, we have duly experienced a substantial but on the whole orderly fall in the exchange rate. Inevitably, it will take time to have its full effect on the current account. Moreover, we have deliberately followed a prudent policy with regard to North Sea oil, and a high proportion of the revenue has been invested abroad to give a permanent inflow of foreign currency income. The United Kingdom's net overseas assets have risen from £12 billion, or under 7 percent of GDP, in 1979 to some £80 billion, or 23 percent of GDP, by the end of 1985. Our net overseas assets are now second only to those of Japan. The income from these assets will provide a useful offset to a lower contribution from the North Sea.

In the early stages following the fall in oil prices, the United Kingdom was often encouraged to join in a program to restrict oil output and raise prices. We have always had the freest oil province in the world, in which it is up to companies, not government, to decide how much to produce. I have never believed it would be in the interests of the United Kingdom or the world for us to depart from that policy. And I am glad to say that since the spring Interim Committee meeting, our position has been more widely understood and accepted.

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A bigger worry is unemployment, which not only remains far too high but has risen further over the past year—although in recent months there has been a welcome improvement in the trend. And the composition of unemployment in the United Kingdom is changing. Youth unemployment is lower than in most of the European Community, and falling. We have tackled this serious social problem by a substantial expansion of youth training and through policies aimed at pricing youngsters back into jobs. By contrast, our most difficult problem has been the growth of long- term unemployment. Accordingly, we have now devised a package of measures carefully designed to help the long-term unemployed in their search for work. There is increasing evidence that this will prove successful. In conclusion, let me pay a brief tribute to the Managing Director of the Fund, Jacques de Larosière, who has sadly announced his impending retirement. During his eight years as Managing Director he has had to tackle tasks tougher and more intractable than those faced by any of his predecessors. He has done so in a manner that has earned the admiration and respect of the entire world. We are fortunate indeed to have been served by so dedicated and sure a guide, and we are inspired by his example as we resolve to tackle the problems that still lie before us.

STATEMENT BY THE GOVERNOR OF THE BANK FOR CHINA

Wang Bingqian

Please allow me to extend my warmest congratulations to Poland and Kiribati on their joining the International Monetary Fund and the World Bank, and to Mr. Conable on his assuming the Presidency of the World Bank. The developments of the world economy since our last Annual Meetings have been disappointing in many aspects; the economic growth of the major industrial countries has undergone continued deceleration, and the developing economies remain in grave difficulties. Despite the many changes during this period—the fall in nominal interest rates and oil prices, the significant correction of the serious exchange rate distortions among the major currencies, and the reduction of inflation to the lowest level in the past 20 years—the major industrial countries continue to have lackluster economic performance, with their trade and fiscal imbalances largely in- tact. What is particularly disturbing, however, is the fact that the external economic environment facing the developing countries has deteriorated further. The prices of primary commodities and petroleum have plunged

©International Monetary Fund. Not for Redistribution 48 SUMMARY PROCEEDINGS, 1986 while those of manufactured goods have risen, resulting in worsened terms of trade for the developing countries, which, combined with the proliferation of protectionism, especially of a nontariff nature, has caused a sharp reduction in their export earnings. At the same time, there has been little increase in capital flows to developing countries. For some of them, reversed transfers have taken place for several years running. In consequence, quite a number of developing countries have registered a negative rate of economic growth. With the world economy increasingly interdependent today, it is hardly imaginable that global economic prosperity and political stability can be sustained in an environment in which the developing countries are confronted with a deepening development crisis and economic difficulties. I would now like to turn to some of the major topics on the agenda of this year's Annual Meetings.

1. International Debt Over the past nine months, the debt problem has been getting worse, renewing concern over the possibility that the debt crisis may recur. Close to $1 trillion in magnitude, the indebtedness not only imposes a heavy burden on the developing countries in their economic development, but also constitutes a major factor of instability in the world economy. The greatest attention of the international community is warranted by the seriousness of the problem. In striving for a solution to the debt problem, developing countries have made enormous efforts and paid a dear price therein. Simi- lar efforts are now required of the developed countries and the creditor banks which should adopt effective measures to help the indebted countries revitalize their economies, including, for instance, reducing real interest rates, extending loan maturities, and liberalizing repayment terms. In addition, the major industrial countries must effectively curb protectionism to foster conditions that would permit expansion of developing countries' exports. We urge all parties—debtor countries, creditor countries, commercial banks, and international financial institutions—to join in the concerted efforts to tackle the debt problem.

2. Sub-Saharan Africa The countries of sub-Saharan Africa are still plagued with grave economic difficulties. We note that the World Bank, in helping to bring about economic recovery in that part of the world, has done much substantive work, such as establishing and implementing the Special Facility for Sub- Saharan Africa and playing an augmented role in aid coordination. The International Monetary Fund, for its part, has set up the Structural Ad- justment Facility and commenced providing sub-Saharan Africa with financial support for its structural adjustment. Industrial countries, too,

©International Monetary Fund. Not for Redistribution GOVERNOR FOR CHINA 49 have made a positive contribution in this regard. It is our hope, however, that developed countries will redouble their efforts to expand their assistance, especially concessional assistance, to sub-Saharan Africa, so as to help expedite the recovery and growth of the region's economies. . . .

3. Allocation of SDRs The prevailing stagnation of exports by developing countries has resulted in the decline of their reserve holdings. An early and substantial allocation of SDRs would have a positive effect on the replenishment of member countries' reserve assets, thus promoting the expansion of international trade. This is in conformity not only with the interests of the developing countries, but also with those of the industrial countries. We hope that the preparation necessary for the allocation of SDRs in the fifth basic period will be initiated as early as possible. . . .

4. Enlarged Access Policy of the Fund At the present time when developing countries are suffering serious imbalances in their balance of payments, it is essential that the International Monetary Fund continue to provide financing support to the developing countries. Therefore, we reiterate that the enlarged access policy be maintained in 1987 and that the annual, triennial, and cumulative access limits under this policy not be lower than those set at the Eighth General Review of Quotas.

5. Multilateral Surveillance In today's economically interdependent world, the economic policies and performance of the developed countries have an enormous bearing on the state of the entire global economy and that of the developing economies in particular. A mechanism of effective multilateral surveillance over the economic policies of the industrial countries, if established, would certainly be conducive to the stable development of the world economy. We consider it necessary to formulate specific indicators for the purpose. The focus of this analytical framework should be on assessing the sustainability of the balance of payments of the major industrial countries in the medium term and the appropriateness of the exchange rates among the major currencies. The existence of multilateral surveillance should help to correct in a timely manner the inappropriateness of the economic policies of the major industrial countries, as would be suggested by the indicators, so that damage to the world economy can be minimized. China is presently engaging in the comprehensive reform of her economic management system as well as large-scale economic construction. We have made considerable headway and are proceeding as envisaged. It is our conviction that the development of China's economy cannot be

©International Monetary Fund. Not for Redistribution 50 SUMMARY PROCEEDINGS, 1986 achieved without the advancement of the world economy. China is, therefore, committed to full cooperation with other member countries to play a positive role in the World Bank and the International Monetary Fund, with a view to creating a better international environment. We profoundly regret that Mr. de Larosière will leave the office of the Managing Director of the International Monetary Fund. During a period when the international financial situation was characterized by changes and fluctuations, Mr. de Larosière through his efforts made significant contributions to the stabilization of the global financial situation and to the search for solutions to the debt problem. I wish you all the best in your future endeavors, Mr. de Larosière.

STATEMENT BY THE GOVERNOR OF THE FUND AND THE BANK FOR CANADA

Michael H. Wilson

It is a great honor to take part once again in these important Meetings. I join in the welcome to Poland and Kiribati as new members of the Inter- national Monetary Fund and the World Bank. I salute Mr. de Larosière for his outstanding leadership of the Fund, and I warmly welcome Mr. Conable as the new President of the World Bank. His appointment will do much to ensure the continuity and reaffirmation of the vision underlying the creation of the Fund and the Bank four decades ago. I believe it is incumbent on all of us to join his commitment to the fight against global poverty. There are two themes that I want to stress in my remarks today. One is the responsibility industrial countries have to pursue policies which ensure that economic growth strengthens and that healthy growth will be sustained. But I also want to deal realistically with the challenges developing countries must meet in order to ease the adjustment problems they currently face and to lay the groundwork for the eventual attainment of economic prosperity. I attended the meeting of the Commonwealth finance ministers last week. I was encouraged by the strong statements of some ministers that developing countries can be in charge of their own destiny to a far greater extent if they implement policies that improve their opportunities for growth. This should be done, not simply because the Fund or the Bank prescribes them, but because they are in the self-interest of the country and because they are the best way to ensure higher living standards and greater job opportunities for their people.

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The goals we seek together are worthy of our continuing and consistent pursuit. But achieving them requires determined, and often difficult, decisions by both developed and developing countries. None of us should suc- cumb to the illusion that any grand design or quick fix will improve our ability to realize them.

What is required to ensure healthy world growth is a continued commitment to our strategy for reducing government deficits, for holding inflation in check, and for reducing current account imbalances through better international balance in domestic demand growth. To assist and complement this strategy, we also need to implement measures to promote a dynamic private sector and to lower unemployment.

This has proved to be a less robust year than expected at the time of the meetings of the Interim and Development Committees last April. It is not surprising, therefore, that questions have arisen about the present course of our policies. We have reviewed these policies carefully over the past few days. I believe we should not change direction despite the disappointments, for the prospects are encouraging.

Let us consider a number of positive factors.

—World growth is continuing. Growth rates are picking up and are forecast to strengthen in the remainder of 1986 and in 1987.

—Although oil price declines have hit a number of countries very hard—including regions within my own country—we are now starting to see the offsetting benefits to the world economy.

—Major exchange rate realignments have taken place among the industrial countries. Although it may take some time, this will contribute powerfully to better current account balances.

—The outlook for inflation is very encouraging. Most periods of economic expansion have been choked off after a few years by the resurgence of inflation. This time, prudent monetary policies are keeping inflation in check.

—In the industrial countries, progress is being made in reducing fiscal imbalances. Budget deficits as a proportion of GDP are declining in most countries.

—As a result of better inflation prospects and improved fiscal positions, interest rates have fallen sharply.

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—The new round of trade negotiations has been well launched.

—There is growing recognition that tax reforms, market liberalization, and the reduction of subsidies increase the growth potential of our economies.

—Finally, there is continued determination among the major industrial countries to pursue more compatible policies in order to sustain noninflationary world growth.

If there is any single message that needs stressing, it is that temporary setbacks must not deter us from persisting in policies that will serve us well, not just in the next six months, but over the coming years. We must be patient in pursuit of our medium-term goals. Experience has demonstrated the pitfalls of macroeconomic "fine tuning" and of trying to avoid rather than adjust to market shocks. In persevering with the policies we are pursuing, all of us have important roles to play. Industrial countries must accept the great responsibility of proceeding with policies that will promote a stable and vigorous economic environment in which a dynamic private sector plays a leading role. This is essential, not only to ensure better conditions for our own people, but also to create an international environment that will permit the adjustment efforts of the developing countries to bear fruit. Our monetary and fiscal policies must continue to be guided by the need to maintain financial stability and to ease the burden of public sector indebtedness. Important though they are, however, we need more than sound macroeconomic policies to ensure a bright economic future. Mone- tary and fiscal policies must be backed up by determined measures to remove the structural rigidities that constrain private sector investment and job creation. More than lip service must be paid to the dismantling of interventionist and protectionist policies in both developed and developing countries. This year's World Development Report shows what harm has been done by the pursuit of such policies in the field of agriculture in both developed and developing countries. Canadian farmers know too well the effects of beggar-thy-neighbor trade policies. I shall say a word here about our recent experience in Canada. I believe it offers a good example of the benefits of sticking to a sound medium-term strategy. Since our Government took office two years ago, we have followed a determined policy to reduce our deficit, to streamline and lighten regula-

©International Monetary Fund. Not for Redistribution GOVERNOR FOR CANADA 53 tions, to privatize state-owned commercial enterprises, and to remove other obstacles to private sector vitality and growth. We are reforming our tax system to ensure that it rewards success and promotes investment. We have re-established Canada's traditional welcoming approach to foreign investment, and we are actively pursuing trade liberalization, both in the new GATT round and in bilateral negotiations with the United States. These policies are working. The budget deficit has declined from 7.4 percent of GDP when we took office to 6 percent last year. It will decline further this year. Far from hurting our recovery, these policies have contributed to one of the highest growth rates among industrial countries and a robust expansion of employment. Nor have we compromised our social or international responsibilities. We have maintained, and in some areas have strengthened, our social support programs, and we have kept our official development assistance close to 0.5 percent of GNP. In recent years, Canada went through a period when our attitude toward foreign investment was considered ambivalent at best, and inhospitable by many of our trading partners. This resulted, through the 1970s and early 1980s, in an erosion of our competitive position and some loss of investment capital. When our Government took office, we dismantled the major impediments to foreign investment in Canada. More important, we set about, through our overall economic policies, to create a climate in which investors, Canadian and foreign alike, can feel more comfortable about doing business in Canada. In the past year we have experienced a welcome increase in the inflow of foreign equity capital. This will help make our economy more productive and competitive and will reduce our reliance on debt financing. I have spoken about the responsibilities of the industrial countries. Let me now turn to the challenges faced by the developing countries. Improving economic growth in developing countries demands tough decisions, political courage, realistic expectations, and an unglamorous commitment to the ongoing discipline required to carry out necessary policy changes. I was encouraged last week by the statements of some Common- wealth Finance Ministers that developing countries can be more in charge of their own destiny if they implement policies which improve their opportunities for growth. There is no simple recipe to meet this challenge. The most productive approach lies in a cooperative and comprehensive effort to deal with structural problems and to create the conditions for resumed growth. That is the basic strategy we adopted last year in Seoul. That initiative was not a master plan. It was a framework within which developed and developing countries could work together with commercial banks, the Fund, and multilateral development banks to lay the foundation for greater economic

©International Monetary Fund. Not for Redistribution 54 SUMMARY PROCEEDINGS, 1986 prosperity in debtor countries. We welcomed it then because it embraced a philosophy that we had been working toward for several years. We continue to believe it is the right strategy.

Developing countries clearly face a difficult situation. External debt loads carried by many of them are too high and are constraining their economies. Economic growth rates are picking up in a number of countries, but overall performance is being affected by weak commodity prices and barriers to their exports. Net financial inflows to the developing countries are barely positive.

In the face of these difficult circumstances, the developing countries must continue to pursue appropriate macroeconomic policies. These policies must be bolstered, if growth is to increase, by structural adjustments designed to strengthen the private sector and to create a better climate for investment. Equity capital is an essential element in achieving this growth, not only to reduce debt burdens but also to increase access to technology, to promote exports, and to expand the capacity to support debt.

How can equity capital be attracted? Measures are needed to reduce or eliminate foreign investment restrictions, to develop freer markets, to reduce price controls and subsidies, and to ensure realistic and flexible exchange rates.

Serious consideration should be given to the role of state-owned enterprises. Privatizing them or making them more market oriented can often result in greater efficiency and can help the creation of a dynamic private sector. These are all ways to increase equity investment in developing countries.

As I noted at the beginning of my address, industrial and developing countries today face important responsibilities and challenges/These responsibilities and challenges come together in our multilateral institutions. It is in these important forums that we pursue measures to encourage greater international cooperation. We must ensure that these institutions continue to be effective and capable of providing even greater support to their members. There are a number of ways in which this can be done.

First, we must persist in our efforts to strengthen multilateral surveillance to ensure a stable international monetary system and a vigorous economic environment.

Second, the Fund must continue its policy of enlarged access. In the face of current external indebtedness problems, now is not the right time to end or to lower the temporary expansion of borrowing limits.

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Third, the Fund and Bank must intensify and make more explicit their cooperation in supporting and developing joint stabilization and adjustment programs in both middle-income and poorer countries. Fourth, the increased cooperation between the Fund and the Bank must be backed up by greater coordination with the regional development banks and bilateral donors. Regional development banks must give greater emphasis in promoting policy reforms. . . . I have spoken today of the responsibilities and challenges we must meet together. I continue to believe that our strategy is the right one. With a shared commitment to this strategy, we can make progress toward improving the living standards of all our citizens.

STATEMENT BY THE GOVERNOR OF THE FUND AND THE BANK FOR KOREA

In Yong Chung

May I begin, on this auspicious occasion, by saying how deeply honored the Korean Government was by the opportunity of hosting the Joint An- nual Meetings last year in Seoul. The wholehearted cooperation of member governments and the excellent preparation of the staffs of the Fund and the Bank were indispensable to our own endeavors toward making those Joint Meetings successful. This year marks the Forty-First Anniversary of the Fund and the Bank. With the addition of Kiribati and Poland, the membership has grown to 151 members. In the name of my Government, I wish to extend to them a warm welcome. These are the first Annual Meetings for Mr. Conable in his capacity as President of the World Bank. We congratulate him and look forward to his resolute and sagacious stewardship in the coming years. And these are the last Annual Meetings for Mr. de Larosière as Managing Director of the Fund. I would like to join my fellow Governors in expressing my heartfelt gratitude for his contribution and dedication to the prosperity of the world economy. We will greatly miss him. Since our last Meetings in Seoul, the world economy seems to have made only slight progress. In spite of the substantial decline in energy prices and generally lower interest rates, real growth has been less than expected. Economies of industrial countries remained sluggish through the end of 1985, although they have shown some signs of improvement this year. In the developing countries as a whole, growth in output and employment did not pick up, except for a few small economies. Demand management by

©International Monetary Fund. Not for Redistribution 56 SUMMARY PROCEEDINGS, 1986 industrial countries, the downturn in commodity prices, and restricted access to markets abroad for manufactured goods from developing countries significantly dampened their economic activities.

This year, world trade volume is projected to rise by 3.5 percent, with unit value declining by about 9.5 percent. As a consequence, trade is gen- erating little growth momentum in most developing countries. To make things worse, trade-restrictive policies in major markets have not been eased, but, in many cases, have even been strengthened against manufactured products, mostly through unilateral means.

The substantial realignment of major currencies that began last year has not so far had a major impact on the current accounts of the large industrial economies. This is strong evidence of the rigidity of the structure of the world trading system. Nonmarket forces appear to have overwhelmed potential trade flows. In this global economic climate, we believe that there is ample room for noninflationary growth. We therefore urge member countries to seize this opportunity to pursue growth-oriented policies and provide greater trade opportunities for developing countries.

At the same time, we welcome the agreement at the GATT ministerial meeting in Punta del Este to launch the new round of multilateral trade negotiations. We hope this round will be successful.

I am pleased to report that Korea's real growth in the first half of 1986 was significantly improved. This recovery has been accompanied by continued price stability and by a shift in the external current account from deficit to surplus, reflecting the continued rise in the domestic savings and favorable external factors, particularly the decline in oil prices. The new economic environment has provided an opportunity for Korea to slow down the increase in its external indebtedness and rationalize its debt structure, while still providing for adequate increases in international reserves.

I would now like to turn to issues relating to the International Monetary Fund. Given the key role of the Fund in the international monetary system, my Government supports the improvement of its multilateral surveillance procedures as a means of assessing the international consequences of national economic policies and of enhancing coordination between those policies. In the conduct of such surveillance, the use of indicators related to economic policies and performance has been proposed. To determine the workability and desirability of this approach, it may well be prudent to apply it to developed countries initially. With respect to surveillance of exchange rate policies in particular, we believe that this is a multilateral concern more appropriately addressed under the aegis of the Fund than in

©International Monetary Fund. Not for Redistribution GOVERNOR FOR KOREA 57 bilateral or limited forums. We would therefore support strengthening the Fund's specific procedures in this regard. My Government regrets that no SDR allocation was agreed on in the fourth basic period, particularly in the light of the inadequacy of developing countries' reserves. We hope that member countries will agree on an allocation in the fifth basic period, perhaps as early as 1987, and that its distribution will reflect the needs of developing member countries. Moreover, as a means to enhance the role of the SDR as an international reserve asset, we would urge measures to increase its remunerability and transferability. The establishment of the Structural Adjustment Facility is a welcome addition to the Fund's instruments. Though limited to low-income countries, the size of the facility is small relative to the needs being addressed. As more and more countries avail themselves of this facility, we would urge member countries to closely monitor the adequacy of its size and the appropriateness of the conditions of access. As for other facilities in the Fund, we would support the continuation of the enlarged access policy through 1987 and the maintenance of access limits in present Fund facilities. The international debt situation requires multifaceted solutions. Robust growth in the developed economies, the abatement of protectionism, lower international interest rates, and the recovery of commodity prices would all have beneficial effects on the debt situation of developing countries generally. For individual developing countries whose debt service obligations are inconsistent with sustainable growth objectives, new capital inflows as well as debt rescheduling within the context of sound medium-term economic programs may be required. In the formulation of such programs in the light of individual circumstances, the national authorities, the international financial institutions, and the banking community all have complementary roles to play. . . . For 40 long years, we have together changed a large part of the world, changed it for the better. Many sacrificed their resources for others so that the others might become like them some day, at least in the physical sense. Many in the developing world who have not even heard of our organizations were able to cross the bridge arching between misery and dignity in life. We happen to know how one feels on that bridge, because we were there not too long ago.

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STATEMENT BY THE GOVERNOR OF THE FUND FOR FRANCE

Michel Camdessus

The Annual Meetings of the Fund and World Bank are a high point in international cooperation. They provide the opportunity for drawing up a balance of the past year's monetary and financial developments, identifying both the advances and the failures of our cooperation, and outlining prospects for the future. I would like to begin our analysis of the world economic outlook with some remarks about the French economy. I will stress three developments which are striking in relation not only to the recent past, but also to a long tradition. —First, the retreat—if not to say the disappearance—of inflationary expectations and the slowdown of wage increases have placed our country, according to the Fund itself, in a good position as regards disinflation and controlling production costs. —Second, there is an increasingly widespread perception that the Gov- ernment cannot do everything and must leave more room for private initiative. The privatization of a large number of public enterprises and the reduction of taxes and of the weight of government expenditures have been undertaken and will be pursued in 1987, showing our determination in this regard. —Third, the unequivocal acceptance of market discipline in such areas as employment, prices, exchange rates, monetary issues, and the financing of the economy. I am convinced that this broadening of economic freedoms will in time lead to positive effects in the areas where there are weaknesses we refuse to condone. I would like to stress three of them. —Unemployment, despite improved job creation. —Developments in the current account balance. Though favorable as a result of falling oil prices, they mask a persistent weakness in the productive system, caused by too many years of insufficient investment. —Interest rates. In spite of the marked decline in interest rates over the last year, real rates remain too high. But we cannot act alone in this area. All in all, growth is still insufficient in France as in other countries, despite the recent recovery that is expected to continue in 1987. However, we are certain that the course we have chosen is the correct one, but more time

©International Monetary Fund. Not for Redistribution GOVERNOR FOR FRANCE 59 is needed to reap its beneficial effects; continuity is needed as well to guarantee lasting progress. It seems to me that many of the points just made concerning France also apply to an analysis of current international problems. We are suffering from a still inadequate growth, given the capacities of the world economy. Our economies also face external imbalances which are clearly unsustainable in the medium term. To achieve lasting growth, we must rediscover the path of equilibrium. But how? First, let us discard the false remedies. In my view, no true solution will be found in further exchange rate adjustments: a further decline of the dollar would not be a suitable answer to the imbalances that still exist. At this point, that would be trying to correct one imbalance by another. We are all equally convinced that protectionism is not the way out: by isolating ourselves from each other we would be condemning all of us. I therefore hail the wisdom that prevailed at Punta del Este in strengthening our free trade system under the GATT. Therefore, there is no choice but to seek a more balanced world pattern of growth rates, with deficit countries maintaining in particular the strictest possible control over their public demand, and surplus countries consolidating the current recovery of their domestic demand. We must hence seek to improve the way the adjustment burden is shared. The United States must deal resolutely with the primary source of its external imbalance, the budget deficit. On the other hand, in countries where domestic saving exceeds financing needs, it may become necessary to adopt more flexible monetary policies or to stimulate domestic demand through tax measures. The monetary components of this improved adjustment deserve particular attention. Allow me a few words on this matter. The high level of real interest rates remains harmful to the developing countries and to investment, a decisive component of growth-based strategy. Instability of exchange rates can also be harmful to growth. A year ago, signature of the Plaza agreement marked a significant step forward toward creating the conditions for improved exchange rate equilibrium in our trade. The events of this summer have given us cause for concern. We welcome the joint effort of analysis and cooperation that is now developing. The initial results of this effort have been truly encouraging. We must ensure that they continue to be borne out and that the parities of the major currencies are stablilized at their present level, which, all things considered, is satisfactory. France is ready to play its part in this effort.

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Our country, as you know, has contributed without reservation to strengthening international cooperation, has actively sought and implemented concerted moves to lower interest rates, and has given its support to the introduction of a set of indicators. But we must not lose sight of the fact that beyond this exercise, we obviously also need to rebuild an international monetary system. Mere clever conjecture, even if based on the sound work of experts, cannot satisfy this need. In my view, what is at stake is quite simple: on the one hand, genuine financial freedom and freedom of trade; on the other, the legitimate desire of governments to retain auton- omy in their economic choices. We must reconcile the two. This means that we must define actual procedures including automatic mechanisms, constraints, and a referee. We should focus our attention on the variables through which international influences are directly transmitted, namely balance of payments, interest rates, and above all exchange rates. France has for several years been making serious proposals to its partners with a view to the adoption of a system of reference zones for exchange rates. It seems to me that the time has come to think seriously about this. Regarding the situation of developing countries and the international debt, the experience of recent months has confirmed that the path chosen by the international community for dealing with the debt problem is a sound one: a case-by-case, concerted, and pragmatic approach. This approach stems from the shared understanding that debt is not solely a financial phenomenon but reveals deeper imbalances related to the very nature and direction of the development process. No lasting solution can be found by treating the effects without attacking the causes, or by dealing with it as if it were the problem of the debtor countries alone. This is why the search for a more sustained and lasting world growth must be the central objective of our cooperation. It is this search which must guide the actions of each partner, whether public or private, and each must be ready to play its part fully these days. Indeed, the outlook for such world growth, however desirable, remains uncertain. The continuing deterioration of the debt ratios shows that the interest rate decline has not offset the impact of the continued worsening in the developing countries' terms of trade. The latest statistics reflect the growing reluctance of commercial banks to increase their exposure in developing countries. This conjunction of negative developments entails a risk of deflationary slippage that must not be underestimated. In this context, it is incumbent upon the World Bank and the Fund to take leading roles in the strategy defined in Seoul. These institutions have demonstrated over the last few months that they are capable of responding to the mandate given to them at that time by their shareholders. The World Bank has done so notably by increasing its commitments to in-

©International Monetary Fund. Not for Redistribution GOVERNOR FOR FRANCE 61 debted countries in the form of nonproject financing in cooperation with the Fund. Recovery programs have been designed that take into account both the constraints of adjustment and the needs of development, as in the case of Mexico. My sincere hope is that these recovery programs be implemented promptly, supported by one and all, and fully successful. Thus, it is necessary to provide these two institutions with the means they need to carry out their actions. It is essential to maintain the enlarged limits on access to the Fund's resources in the difficult period which developing countries are presently going through; renewed SDR allocations would also be one way—and one which I believe involves no real danger— to attenuate the difficulties experienced by nearly all these countries in rebuilding their reserves to a minimum level. . . . At the same time, we must bolster the support given to the poorest developing countries, and especially to the countries of sub-Saharan Africa. The report submitted by the World Bank to the spring meeting of the De- velopment Committee on the financing needs of sub-Saharan Africa was highly enlightening. It demonstrated in particular the priority of mobilizing additional financial resources to support the structural policies upon which lasting development is based. Despite its strict policy of cutting back public expenditure, France is striving to contribute actively to this end: its contribution to development assistance, in addition to its efforts in favor of its overseas departments and territories, is expected to amount to 0.54 percent of gross domestic product in 1987, of which nearly two thirds is intended for sub-Saharan Africa. This ratio was 0.36 percent in 1980. The .Special Session of the United Nations made clear the full magnitude of this challenge. The French Government has noted with satisfaction that the conclusions of that meeting are largely in agreement with our own views of a year ago, as regards the objectives and means of development in Africa, the role of the various international institutions, and the nature of the pressing actions required of us. The creation of the special facility for sub- Saharan Africa and, later, of the Structural Adjustment Facility, have charted the proper course of action. . . . You have here then my country's principal thoughts on the matters which concern us. Having shared them with you, I cannot fail to add that it is with great regret, though fully understanding the reasons why, that France has learned of Mr. de Larosière's intention to resign as Managing Director of the IMF. He has served the international community admirably in that position, and we wish at this time to thank him most heartily.

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STATEMENT BY THE GOVERNOR OF THE FUND AND THE BANK FOR MALAYSIA

Daim Zainuddin

I would like to begin by extending my warmest congratulations to Mr. Conable on his appointment as President of the World Bank. I am confident that Mr. Conable will bring with him new perspectives and fresh ideas which will invigorate the Bank in the years ahead. At the same time, let me also say how sorry we are that Mr. de Larosière will soon be leaving the Fund. He has steered the Fund through a difficult period with vision and incisive leadership, and we would like to thank him sincerely for his contributions and wish him well in his future undertakings. When the Interim and Development Committees met in the spring, expectations were high for a strong global economic revival following the decline in world oil prices and interest rates. We were also encouraged by the progress made on several fronts—namely, historically low inflation rates, a better alignment of exchange rates, and an apparent convergence of economic policies in the major industrial countries. However, this optimism proved short lived, as the world economy continues to be plagued by mounting problems. Trade imbalances remain large; protectionist pressures have intensified; fiscal consolidation in industrial countries has not had much impact; and the terms of trade and real incomes in developing countries continue to deteriorate. With these uncertainties, the medium-term growth of 3 percent a year projected in the World Economic Outlook looks unlikely to be achieved, so that a world recession cannot be ruled out. Of equal concern, a sustained recovery in commodity prices and exports by developing countries remains doubtful. The situation calls for stronger efforts at reflation, especially by countries which can afford to do so, and greater commitment toward policy coordination among the industrial countries to strengthen world growth and trade. Without such concerted measures, the developing countries will face an even more inhospitable international environment and dimmer prospects for resolving their debt problems. Falling commodity prices, deteriorating terms of trade, and declining real incomes underscore the importance of strengthening the global economic recovery and reviving the expansion of world trade. The new GATT round must aim for this. Debtor countries cannot be expected to resolve their current problems of indebtedness if the markets of industrial countries continue to be protected. Resolution of the global debt problem will hinge critically on freer trade and a revival in world economic growth.

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We have seen over the last few years a marked contraction in financial flows to developing countries. This is most disheartening. In strengthening the global debt strategy, a critical element is the availability of sufficient external financing to support the adjustment efforts. The Fund and the World Bank must play a more important role by strengthening their financial support, while also acting as a catalyst for increased lending from commercial sources. It is in this context that I urge for early implementation of the near universal agreement on an allocation of SDKs, an adequate replenishment for IDA-8, and a substantial general capital increase for the Bank. These are not new issues. I will not therefore elaborate on them further beyond expressing my hope that the obstacle which has stood in the way of their implementation will soon be removed. The case is clear and well established. It is only the political will that is lacking. Given the uncertain international economic environment, the Fund and Bank must work closely together in ensuring progress and development in the world, especially in the developing countries. ... As regards the Fund, an important role which it must play is to ensure an effective coordination of policies in the industrial countries that have a major impact on the world economy and global trade. For too long, the developing countries have been left out in the cold, while the fate of their economies is decided in the major countries without sufficient consideration of the adverse impact of these decisions on the rest of the world. I refer, in particular, to the Group of Five accord, which in the span of one year caused volatile exchange rate changes, leading to a substantial increase in the external debt of developing countries denominated in yen and deutsche mark. Policy coordination to promote such exchange rate adjustment over a longer time span would have avoided much of its disruptive effects. Such coordination would also have prevented the prolonged appreciation of the U.S. dollar until early 1985, thereby stemming the significant increase in protectionism that had occurred. In this regard, the study by the Fund on the use of economic indicators will prove useful, but the consultation must be on a wider scale than has been the case. Surely, the developing countries have a right to contribute ideas on how policy coordination for adjustment should be undertaken with minimal adverse effects on them.

In conclusion, I urge a greater sense of urgency to tackle the problems of slow growth, decline in commodity prices, stagnant world trade, and the inequity in the process of decision making. These problems are intercon- nected and they need to be tackled in a concerted and coordinated manner. For the developing countries, in particular, the outlook is increasingly more serious and grim. No one owes us a living; but by any standard, most of us have made and are making politically difficult decisions to bring about the necessary adjustments. A supportive external environment can make the difference between success and failure. It is my hope that the

©International Monetary Fund. Not for Redistribution 64 SUMMARY PROCEEDINGS, 1986 decisions taken during these Annual Meetings will consolidate and strengthen such an environment, which is after all in the interest of all of us in an interdependent world.

STATEMENT BY THE GOVERNOR OF THE FUND FOR ITALY

Giovanni Goria We should like first of all to extend our warmest greetings to Poland on its reaccession to membership and also to the youngest of the newly formed nations, Kiribati. The World Bank has a new President, in the person of a distinguished official who possesses great political experience and remarkable negotiating ability. We wish to assure him of our firm support in the performance of his demanding task and to offer him our very best wishes for success in his new work. These arrivals coincide with the departures of the Chairman of the De- velopment Committee, Mr. Ishaq Khan, from whose wisdom we have all benefited, and in particular, of the Managing Director of the International Monetary Fund. The contribution made by Mr. de Larosière in an international monetary situation over which debt problems have cast sometimes threatening clouds has earned him a permanent place in the history of the Interna- tional Monetary Fund, which he has directed with so much competence and wisdom and with such a sure touch. We extend to him our sincere thanks, together with our heartfelt good wishes for his future success.

The International Economy Despite the decline in the prices of oil and raw materials and the successes achieved in the fight against inflation, economic developments in the first few months of the current year have been disappointing in relation to the general improvement of the world economy that was expected. Nevertheless, we share the more optimistic view of recent studies, which hold out hopes of more sustained growth in the end of the current year and in 1987. Still, the general climate is worrisome in several respects. First, external account disequilibria are still pushing both the external debt of the United States and that of the developing countries toward an intolerable position. In this connection there do not appear to be sufficient grounds to expect substantial changes in the short term: the underlying deficit of the United

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States' current account still exceeds $100 billion, and the terms of trade for the developing countries have deteriorated considerably. Moreover, we must bear in mind the way in which the world economy has reacted to the fall in international prices. The contraction of domestic demand in countries that show a deficit or for which the terms of trade have deteriorated has been much more rapid than the expansion of domestic demand in countries that are in the opposite situation. In view of the present phase of the economic cycles and the medium- term prospects, it seems unrealistic to us to believe that a fundamental improvement in the international economic situation will be sufficient to expand world demand. Rather, the best possible use should be made of the interaction of major countries' economic policies so as to bring about a more rapid reaction to the stimuli already given. In particular, we feel that the United States should take full advantage of the leeway it has available to restore equilibrium in the federal budget, so as to facilitate the adjustment of its external accounts. It would be desirable, however, for the restoration of U.S. budgetary equilibrium to be counterbalanced by more dynamic policies in other countries. I am thinking not only of the possible contribution of countries that have already largely balanced their budgets, but also of a substantial effort by all industrial countries. The offsetting action, which is essential to reduce the still high unemployment rates, should also involve monetary policy. To be sure, it is illu- sory and dangerous to believe that interest rates can be lowered much further, but we do feel that care should be taken not to apply an overly stringent monetary policy that could hinder the reduction of real rates. Inability to resolve these problems might well translate into abrupt adjustment measures; I am thinking in particular of the exchange policy conducted thus far by the United States, which, if it were to persist, would have considerable and hardly tolerable consequences for the relationships among major currencies. Moreover, if no solution is found for the problems of the international trade and payments system, trade difficulties and the dangers of protectionist pressures, in the United States in particular, might well intensify. While at the recent GATT meeting in Punta del Este the participants arrived—with difficulty—at an understanding on certain points, basically in the areas of policy and procedure, one should not conclude that the differences in views on the major topics of the negotiations have been overcome. Should the negotiations bog down, the resulting impasse would leave a clear field to the champions of protectionism, and consequently to an increase in recessionary forces.

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We must resist the temptation to use unilateral shortcuts; they procure a brief respite, but also provoke a chain reaction of retaliatory measures. Low growth rates and protectionism would have particularly tragic effects on the economies of the indebted developing countries. Although interest rates are declining and some developing countries have benefited from the decrease in oil prices, developments in the current year and the prospects for 1987 add up to a very critical situation. Only a high level of growth in the OECD countries, accompanied by a greater openness to exports from the developing countries and by continuation of the present adjustment/financing process, will make it possible to change this reality to any substantial extent. Moreover, the debt situation has taken a different turn for different groups of countries, and this phenomenon calls for action adapted to the specific requirements of those countries. There is no valid alternative to a strategy that bases economic rehabilitation on both financial efforts and structural reforms. The recent financial negotiations between Mexico and the International Monetary Fund have demonstrated, however, the need also to take account of the difficulties caused by the fall in oil prices. It appears necessary, therefore, to update the framework for action presented at last year's Meetings, so as to take account of this new reality and of the additional difficulties of countries to which the Baker Plan did not originally refer. We are obliged to note in particular that one year later, the financial commitment of the international banking system has proved to be insufficient and below the initial forecasts. Failing closer coordination of the major countries' economic policies, it would appear, unfortunately, that the concerns we expressed at the In- terim Committee meeting last spring, regarding the possibility of an economic downturn and the risks posed to the world economy by a reduction of the United States' fiscal and external deficits, are being confirmed. The progress of coordination of national economic policies is laborious; more in-depth discussion is needed to bring about agreements on policy, technical, and procedural matters. Clearly, the IMF's studies on economic indicators are an important contribution to the work on multilateral surveillance of the economic policies of key countries. In this connection, the choice of indicators is important, as is the value that the major countries would be willing to assign to changes in these indicators. We feel that the exercise of surveillance in all its aspects should be given a more operational and more constraining character; we think it necessary, therefore, to concentrate on economic policy. To complete the analytical framework, it would be well to take into account the experience gained with economic policy coordination in the EMS.

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We think that effective coordination of economic policies can find a preferred, but not exclusive, forum in the IMF; we wish to say sincerely, however, that we greatly appreciate the contribution the IMF has made, both through the improvement of instruments for providing data and through the preparation of a special chapter on the interaction of economic policies, as was done in the recent World Economic Outlook analysis.

The Italian Economy The process of combating inflation, in which we have been engaged for some time, is being assisted today by the fall in energy costs and by continued low raw materials prices—two factors that have helped to bring inflation down to levels close to the European average (the average rate will be less than 6 percent in 1986 and 4 percent in 1987), and to restore equilibrium in the external accounts. For this year, a significant current account surplus is forecast for the first time since 1979. The improvement in the terms of trade is due to a marked drop in import prices, which is itself linked to the dollar decline. Export price developments have been characterized by a moderate increase. The growth of import volume, which has certainly been stronger than that of export volume, will nevertheless not be large enough to cancel out the gains in terms of prices. In the medium term, however, there is no lack of causes for concern. In particular, unemployment, though it has stabilized, is still at a level that is hardly tolerable from the political and social points of view. Our aim is to speed up, through demand expansion, the decline in the unemployment rate—still about 11 percent today—which will result from demographic factors. In 1987, assuming the international environment is favorable, the growth of GDP should be about 3 percent and the growth of demand around 4 percent, which would make it possible to increase employment while still maintaining a surplus on the balance of current transactions. Beyond world economic growth prospects, the possibility of consolidating the improvement in Italy's economic situation depends primarily on our ability to increase the efficiency of our productive apparatus. Produc- tion facilities have already been improved to some extent by massive investments. Moreover, the effort made in recent years to contain the increase in labor costs through a balanced incomes policy has been substantial. These two actions have been of appreciable help in improving the profitability of enterprises and their competitiveness. In this connection, the agreement concluded with the trade unions, involving a reform of the wage-indexing system, is particularly significant. Thus, the conditions have been created for expansion of the productive base and, consequently, the creation of skilled jobs, particularly in sectors where Italy has a greater comparative advantage, has been encouraged.

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The rehabilitation of the public finances is proceeding today along the same lines. In addition to the possible medium-term limitation of the public sector deficit, which will decline from 16.1 percent of GDP in 1985 to 14.3 percent this year and 12 percent next year, a number of structural reforms are being implemented to ward off the dangers of an automatic increase in public expenditure. In particular, the reform of the social security system and that of the local finances, both intended to establish a closer link between contributions and benefits, are under way. The reduction of public sector financing requirements should produce positive results not only as regards inflation, but likewise as regards the formation of savings, which should also be better utilized. It should be borne in mind, however, that these prospects are closely linked to developments in the world economy, and the state of the world economy, while improving, presents considerable uncertainties, as we have seen.

Fund Policies One year after the Governors last reviewed Fund policies, the IMF still has a central role in the surveillance of the functioning of the international monetary system and in supporting adjustment programs. The problem of international liquidity, however, is still a subject of concern to us. A more balanced and more stable composition of members' reserves might help relieve existing tensions. The SDR is certainly one of the instruments best suited to appropriate international reserves management and should be called upon to play a bigger role in meeting the needs of countries that have limited access to the international capital market. Indeed, unless there is a new allocation, these countries will be obliged to enlarge their reserves by continually achieving a surplus on current account or by bearing the particularly high costs of borrowing in the financial markets. The technical characteristics of the SDR should be improved also, in order to strengthen its role. In this connection it would be particularly desirable to revise the mechanisms for transferring SDRs. In our view, the International Monetary Fund performs an essential task in providing adequate financial support to members which undertake economic adjustment programs to resolve their internal difficulties and their external payments problems. In these circumstances, the enlarged access policy is still a useful instrument in that it helps countries to progress toward external adjustment in the framework of economic programs approved by the Fund. This is why

©International Monetary Fund. Not for Redistribution GOVERNOR FOR ITALY 69 this policy should be continued during the year to come, and, in view of the present phase of the economic cycle, the access limits should not be modified. Thus, while reaffirming our support for the action taken thus far, it seems to us appropriate to stress the new factors that have characterized it and have made it possible to better adapt Fund assistance to a country's particular situation. This, clearly, is what the Structural Adjustment Fa- cility, recently created to deal with the protracted balance of payments difficulties encountered by the poorest countries, makes possible. The Fund's liquidity position is satisfactory at present, but the fact remains that the possibilities of extending assistance are still determined by the amount of financial resources available. It is basically through a quota increase that the resource level will have to be adapted to the financing needs. However, we welcome the recent initiative of Japan, aimed at providing supplementary bilateral resources. The monetary character of the Fund should be preserved. We are therefore in full agreement with the procedures adopted to deal with the phenomenon of delays in loan repayments. . . .

Conclusions In an extremely delicate international situation, a situation that could usher in a new cycle of durable and sustained development or could degenerate into a new recession, many of us have come to these Meetings with a definite conviction and a clear purpose. Our conviction concerns concepts that are wrongly regarded as self- evident, i.e., that the problems of some countries are also the problems of others and that the success of some is also the success of others. Our purpose is just as clear: to reaffirm that discussion and collaboration make more sense than conflict and discord. In the case of those questions that concern the functioning of our institutions, our success in the area of discussion and collaboration has been total. Never have our discussions been so convergent and our conclusions so unanimous as they have been this year. We have succeeded, in particular, in reaching agreement on: —maintenance of the limits on enlarged access to the resources of the Fund at their present level instead of lowering them, as was in principle expected; —replenishment of the resources of the International Development As- sociation which, taking voluntary contributions into account, will come close to $12 billion. This will enable the Eighth Replenishment of resources of IDA to enter into effect in July 1987;

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—the necessity to pursue without delay the work already begun with a view to obtaining a general increase in the capital of the World Bank to enable it to continue and step up its lending programs. On the other hand, less progress appears to have been achieved than was expected on questions relating to the international monetary system. In my view the disappointment with the amount of agreement on these topics is only partially justified. The fact is that there are no substantial differences of opinion among us concerning the necessity to pursue a medium-term economic policy geared to stable and balanced growth. The basic objective that we have set for ourselves is to strengthen international cooperation. While this undoubtedly presupposes the existence of instruments such as indicators, it is not limited to that. Such cooperation is necessary both to create a more stable economic and, in particular, financial environment and to help the affected countries to escape from the scourges of underdevelopment and excessive indebtedness. Similarly, the short-term problems are by no means being neglected, as is shown very clearly by the exchange market developments of the last few days. It is indeed essential that the short-term component be restored to economic policy, if only because the financial and exchange markets react more quickly than the commodities markets. The phenomena of "overshooting" and "undershooting" can affect not only monetary equilibria and output levels but also the utilization of savings and resources in general and therefore, in the last analysis, development. But it is true that the impression we risk giving to markets and observers is that our agreements are relatively fragile, an impression that does not favor stability and progress. Moreover, the threat of protectionism is stirring in the most highly developed country. If the free trade system succumbs to this threat, the last pillar of the Bretton Woods system will collapse, in spite of the conferences and of the effort to extend to other fields the discipline that has until now governed trade relations in the Western world. It is up to us, or rather to those among us who have greater responsibilities, to do everything we can to avert this risk and all the uncertainties to which it gives rise. To that end it appears essential to reaffirm a number of specific points on which we could take a common position. First of all, no one can regard the problem of the U.S. external deficit as one that concerns only that country, just as the enormous surpluses posted by some countries must be a matter for concern to all. Second, no one can regard the economic adjustment problems of the developing countries and, for some of them, their external debt as anything but problems that we all share.

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Third, no one can in good conscience agree to tackle these problems through the instrument of deflation, thereby rendering all the solutions socially more difficult and less tolerable. Fourth, no one should imagine that market freedom, the expression and foundation of so many other freedoms, can be limited with impunity. While the above factors are not open to dispute, we nevertheless need to show consistency. Maximizing growth cannot fail to become the goal of the countries that post enormous or even only significant surpluses, the sole absolute obligation being to preserve a noninflationary environment. This is the objective of the policies carried out by Italy; an objective that is all the more significant in that it is geared also to a fundamental necessity for most of us: the combating of unemployment, especially among the young. That having been said, we all know that this maximized growth will be achieved only if the enhanced capacity of markets to react is accompanied by a firm and at the same time prudent package of economic policy measures that accords priority attention to the goals of unemployment reduction and price stability. By showing that we understand the problems and are capable of devising the most suitable courses of action to resolve them, we shall greatly enhance our sense of responsibility to make the choices that these solutions entail. By resolutely confirming, all of us, that we feel this sense of responsibility, we shall be able, I am convinced, to effectively allay the deep-seated anxieties of our peoples. That is what Italy, for its part, proposes to do, and we earnestly look forward to playing a not inconsiderable role in a common program of action.

STATEMENT BY THE GOVERNOR OF THE BANK FOR THE PHILIPPINES

Jaime V. Ongpin

Mr. Chairman, please accept my personal congratulations and those of the Government of the Philippines on your election as Chairman of this assembly. The long association of the Philippines and Colombia in the World Bank gives us full confidence that your stewardship of these Meet- ings augurs well for their successful outcome. I would also like to take this opportunity to welcome Mr. Conable formally on his assumption of the World Bank presidency. Already we have

©International Monetary Fund. Not for Redistribution 72 SUMMARY PROCEEDINGS, 1986 come to appreciate the exceptional qualities of his leadership, combining, as he does, pragmatism and human understanding. These are qualities which can only have a positive influence on the Bank's operations and its relations with member countries. This has to be the occasion too for bidding Mr. de Larosière farewell. His initiative, which has often led to the creation of Fund mechanisms responsive to member country needs, has always reflected a management stance deeply sensitive to the moods and impulses of the global economic environment. We are deeply grateful to him and would assure him that our best wishes go with him for continued success. Allow me, finally, to extend a warm welcome to the two new member countries of these institutions, Kiribati and Poland, whose points of view, I know, will enrich Bank/Fund deliberations.

Such small island economies of the Pacific as Kiribati have their own specific development needs which, we believe, ought to receive meaningful World Bank attention.

If today we were to take a poll among those who have journeyed here on the occasion of these Meetings, I daresay that everyone would readily state that the mood of the moment is one of urgency; urgency over the world economic outlook; urgency over developments in the implementation of the debt strategy; urgency over the lags that have emerged in international capital markets; and, indeed, urgency over the roles that the World Bank and the Fund must play. These are crucial roles which, as Governors of both institutions, we have the power—but so far, I must remark in all can- dor, have not had the political will—to perform. The world has seen many changes since our last Annual Meeting. Our expectations had been buoyed then by Mr. Baker's initiative on a growth- oriented debt strategy. Needless to say, we regret that developments since then have generally turned for the worse. Prognoses for the world economy give no further grounds for optimism. Growth projections for industrial countries in 1986 have been revised downward to 2 3/4 percent, and growth in world trade is forecast to decline in value terms by 9 l/2 percent. Financial prospects for developing countries, particularly those which are heavily indebted, have become bleak. A renewed buildup in arrears is now forecast, and a steep rise in amounts of debt to be rescheduled is anticipated. The pace of official lending is seen as somewhat subdued and that of private lending as continuing its sharp downward trend. We are concerned, moreover, that the level of cohesiveness among various sectors engaged in international lending seems to be declining and, consequently, concerted lending, which has played a major role in the debt strategy, is

©International Monetary Fund. Not for Redistribution GOVERNOR FOR PHILIPPINES 73 becoming more and more difficult to arrange—this, at a time when financing needs are rising substantially among countries with no normal access to the credit markets.

When the Baker initiative was launched from this very forum last year, all who remarked on its promise stressed that its success depended on the exercise of co-responsibility by creditors, debtors, and trading partners. The trends in the world economy in general and in the capital markets in particular have to date not been auspicious for this initiative. To be sure, developing countries have subjected themselves, and continue to subject themselves, to severe adjustment. To date, since the beginning of the 1980s, the Fund has arranged stand-by and extended arrangements for over 40 percent of its membership, including 12 from among the 15 most heavily indebted countries. That, lately, adjustment has at last been recognized as necessitating accompanying growth packages is a welcome development. It should mitigate the severity of reforms in demand management with the expectations of growth that supply measures evoke.

Speaking on behalf of the Philippines' new Government, I am pleased to report that we have recently come to full agreement with the Fund on a new stand-by arrangement which significantly improves on the adjustment program the country has had since 1984 by following a design that is as growth oriented as it is consistent with prudent demand management. We have broadened our tax base even as we have improved the system's progressive character and elasticity. We have adopted measures that would improve the efficiency of our financial institutions and have rendered our agricultural sector more responsive to market influences. We have continued to maintain a market-determined exchange rate, halted the flow of capital flight, and nearly doubled our foreign exchange reserves. We have virtually eliminated inflation and have substantially liberalized our trade system. We have, in sum, sought to foster an economic recovery grounded in a revived private sector within an environment of price and balance of payments stability.

I should quickly add that our efforts to adjust have received some support from the international community, both official and commercial. In- deed, it has been recognized, after all, that international support is necessary if any debt strategy is to succeed. For this reason, we commend the Japanese Government for having committed a loan of $3.5 billion toward buttressing the Fund's resource base.

It is clear that the developing countries are doing their part, not without sacrifice and pain. They are doing so, moreover, not without expectations of some matching manifestation of co-responsibility on the part of creditors, commercial as well as official, and meaningful support from the in-

©International Monetary Fund. Not for Redistribution 74 SUMMARY PROCEEDINGS, 1986 ternational financial institutions. If, at this point, however, many begin to exhibit symptoms of adjustment fatigue, it cannot be for lack of perseverance or determination. It is rather because their perception of international response—from the commercial banking community and from the leadership of those countries who dominate the economic and financial systems of the world as well as the decision centers of multilateral institutions—is that the response has been, at best minimal, and at worst, insen- sitive to the exigencies of the debt strategy. For how else are they to interpret the continuing substantial decline in commercial bank lending to developing countries and the refusal to open doors to compromises on debt service and interest payment levels? How else to fathom the phenomenon of negative transfers from many indebted countries to the multilateral financial institutions? How else to explain the suspension of SDR allocations during the fourth basic period, and now again at the beginning of the fifth—in spite of strong positive recommendations from the Fund staff and a significant majority of Executive Directors from countries at all levels of development? How else to grasp the significance of the reluctance to initiate the reviews that would lead to the increase of quotas in the Fund and of capital in the World Bank? How else to justify the rise of protectionism, the heavy subsidies for agriculture on the European and American conti- nents, and the renewal of a more broadly restrictive Multifiber Arrange- ment? Indeed, how else are they to understand the half-hearted commitments to policy coordination for global growth?

It is fitting and, indeed, proper that the urgency we all feel should find full expression in this forum. The special role, after all, for which the Bank and Fund have been designed, is that of catalyst, that of evoking fully and effectively the potential of every major agent in the debt workout process. Though the recent intensification of Bank/Fund cooperation and coordination is not without its pitfalls—the danger, for example, of succumbing to the temptation of cross-conditionality in all its forms—we believe that, with appropriate safeguards and vigilance on the part of Executive Direc- tors, both institutions are now better able to complement each other's operations in the catalytic process. It may be useful, nevertheless, to clarify their relative roles on a case-by-case basis, of course, according to their specific competences and expertise. It remains for us, as Governors, to ensure the adequacy of Fund/Bank resources to the level required if both institutions are to become truly effective catalysts in country financial programs.

We must, therefore, resolve to accelerate the completion of increases in Bank capital and Fund quotas. We must resolve to support approval of SDR allocations through the fifth basic period that would at least restore the ratio of SDRs to non-gold reserves to its 1972 level. This, we are con-

©International Monetary Fund. Not for Redistribution GOVERNOR FOR PHILIPPINES 75 vinced, accompanied by continued adjustment on the part of developing countries, is the necessary condition for relieving pressures on the international reserve system and for providing room for maneuvering in developing country-commercial bank relations. We must, moreover, resolve to maintain extraordinary access to the use of Fund resources as long as quotas remain inadequate for the needs of the present crisis. By so strengthening both institutions and filling the managerial void the Baker initiative has to date suffered from, we should be able to rescue it from its faltering first stages and move it forward to the benefit of all.

We do recognize at the same time that we must take positive measures that would encourage the flow of direct investment into developing countries. In this connection, beyond the reforms I have described above which have liberalized our investment and trade systems, we have made our commitments to support international initiatives that would create an international climate conducive to equity capital flows, particularly into the highly indebted developing countries. We know that, in the last analysis, we must depend largely on our own initiatives if we are to brighten our growth prospects. It is also a truism, however, that this is possible only so long as exports from developing countries are allowed to flow freely into their proper markets. We therefore look with hope to the efforts begun in Punta del Este to seek liberalization of the international trade system under the GATT.

The figure of Sisyphus is a tragic one in ancient classical myth. It reflects a vision of human life which is at once as full of anguish as it is absurd. Winging my way across the skies between Manila and Washington, D.C., and pondering the present predicament of the developing world, I could not help but note the analogy emerging between the fate of Sisyphus and that of the most heavily indebted countries. The same laborious struggle is there, and the same absurd odds; so too the same irrational law of adher- ing to pre-ordained terms in spite of new circumstances and more practical exigencies; the same frustration, therefore, and the same sense of always arriving no place in the end. I submit that the story of development in our time cannot be that of Sisyphus—not, indeed, when only a few decades ago human wisdom saw fit to create these twin institutions in Bretton Woods which, to this moment, have served international commerce so well. The urgency of the moment lies, indeed, in this: that developing countries remain convinced that economic well-being is not a pipe dream but a credible option for all.

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STATEMENT BY THE GOVERNOR OF THE BANK FOR PAPUA NEW GUINEA

Julius Chan Ten years ago, I spoke for the first time as Governor, representing a newly independent Papua New Guinea, at the Annual Meetings of the World Bank and the International Monetary Fund in Manila. I fondly remember the warm reception we received. Now it is our turn to welcome new members, and I join others before me in welcoming Poland and a neighbor and Pacific friend, Kiribati, as the newest members of the World Bank and the International Monetary Fund. I would also like to express my cordial greetings to the new President of the World Bank, Mr. Conable, and to thank the host country for the excellent arrangements they have made for our meeting. Much has happened in Papua New Guinea over the past decade, but essentially it has been a period of construction and consolidation since our attainment of independence in 1975. As is the case for all members of the international trading community, our economic progress has been determined in large part by external forces. Because we are a very small and open economy, this outside influence is particularly important to us. A healthy world economy injects vigor and life into all its members. The reverse is also true. It is crucial that recent efforts at international dialogue on the world economy be sustained. Better policy coordination of the wealthy countries is crucial. The world enjoyed a long period of rapid and sustained growth after the Second World War. But then, the period of the 1970s saw the average GDP growth rate for the industrial countries fall to 2.8 percent a year. This industrial world slowdown was due in part to rising world oil prices. The industrial economies have themselves only recently clambered out of the 1980-82 recession. This recovery shows signs of faltering. It is vital for all of us that this faltering be forestalled. The industrial countries must continue to intensify their current efforts to invigorate their own economies. This is especially so of the large surplus countries such as Japan and the Federal Republic of Germany. The developing countries have also felt the pain as world aggregate demand dropped and world commodity and metals prices plummeted. Most developing countries have experienced very poor growth performances in recent years.

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In many areas we are still feeling the pinch. For example, the price of copper, a very important export for Papua New Guinea and for many other developing countries, has never recovered to the peak levels of the late 1960s. Nor does it seem likely to do so in the immediate future. * Times are tough now" is a sentiment echoed in many of the speeches I have been listening to. Papua New Guinea is no exception to that generalization. We too have fallen prey to volatile commodity and metals prices. If there is one message that I wish to share with the other developing countries, it is simply that we should not expect a recovery by the industrial countries to bring demand for all traditional products back to those levels previously experienced. The demand functions of the industrial countries are continually changing as new goods and substitute products enter the marketplace. Developing countries need to be able to quickly adapt to changing technology and world circumstances, if they are to progress. Optical fibers and other innovations have cut the industrial demand for copper, and growing supplies of vegetable oils—particularly soya bean and palm oils—have limited the recovery of coconut product prices. Many other products have suffered a similar fate for similar reasons. This "substitution factor" is important because its impact is permanent. Cyclical upswings are unlikely to compensate entirely for these permanent falls in world demand for particular products. This is a reality that many developing nations must come quickly to grips with. The only viable long-term response to the substitution problem is to develop new products and markets. The new activities will help to compensate for reduced demand for traditional products—the diversification inherent in developing new products will reduce the risks in future. In Papua New Guinea we have been diversifying our export base and exploring ave- nues for the introduction of new industries. During the late 1970s and early 1980s some developing countries responded to declining demand for their products by adopting the easy option—borrowing to fill the growing income gap rather than cutting back on imports and generally restraining expenditure. A large pool of readily accessible funds, largely the product of OPEC oil revenues, and contemporary economic thinking facilitated these countries' rush toward growing indebtedness. It was believed that, if enough money and capital were pumped in, then these economies would magically "take off" on a path of self-sustaining growth. Now, the repercussions of those overly optimistic days are clearly evident in the debt service ratios of various member developing countries. The world as a whole must live with the consequences as developing countries face the unenviable task of lifting themselves out of their trough

©International Monetary Fund. Not for Redistribution 78 SUMMARY PROCEEDINGS, 1986 of indebtedness and, in many cases, of persistently low growth rates. Re- sponsibility for the success of these efforts lies with all members of the world economy. The benefits of any industrial growth continue to be diminished by the onset of the "new protectionism" since the early 1970s. The record of the 1980s continues to be poor, with growing levels of protection evident, especially through nontariff barriers and increased recourse to bilateral sector- specific arrangements. There are many areas of ongoing controversy. Agricultural assistance schemes applying in the EC, Japan, and the United States are prominent, as are the Multif iber Arrangement and a host of other restrictions in critical areas such as clothing, footwear, automobiles, and other manufactured goods. Our own position is to support the general liberalization of trade. While it is true that a range of preferential trade schemes exist for many developing countries, we see these as being very much second-best options, often leading only to changes in the direction of trade rather than to increased volumes—and certainly not to increasing competition. We would prefer to compete in a freer system rather than rely on preferential schemes—provided meaningful trade reform can be achieved. Of course, until real changes occur in world trading patterns the question of market access remains important, especially for newly independent states. In this regard, the recent GATT talks and the role of the international organizations are very important. The proposed new GATT round is crucial for several reasons. First, the talks must call to answer those industrial countries that have failed to honor their obligations under the Tokyo Round with regard to freeing up trade in manufactured goods. Second, the talks must continue the process of reducing the restrictions on agricultural trade. Finally, the talks must make some progress on freeing up trade in services. We are heartened by the apparent progress made in Punta del Este. However, our optimism is tempered by a realization that much of the developed world has yet failed to implement promises made in the Tokyo Round. We are also frustrated that a four-year time period has been allowed for the proposed talks to drag on. Let me now turn to questions of aid and resource flows. I would like to take this opportunity to observe that there appears to be a growing reluctance on the part of many donors to fulfill the old goal of contributing 0.7 percent of their GNP to the developing world. This goal seems to have been foresaken, even though it is still written into the political manifestos of many of the political parties currently in government around the world.

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Increasing resource flows to the developing world, including aid flows, remains of crucial importance. Disappointment at the lack of progress has produced a general malaise in the developing countries, and aid fatigue in the developed ones. Some of those who do not want to provide aid for their own domestic reasons are now trying to justify this by inappropriate reference to theoretical concepts, along the lines of the "Dutch aid syndrome." This argument claims that it is possible to have too much capital clustered in an oversized public sector, leading to excessive wages and overvalued exchange rates among other distortions, thus crowding out the private sector. Independence from the need for aid is to be preferred. In any case, we certainly favor providing the private sector as much scope as possible to operate. In our view, it is the private sector that ultimately will provide the growth that will alleviate our difficulties. We therefore must avoid any possible adverse effects of aid, implausible though that might seem to developing countries. Those of us who deal daily with massive problems of illiteracy, poor health, inadequate transport systems, and so on, have considerable reservations about the bland application of such all- encompassing theory to our economies. There are real constraints on our ability to pursue an effective restructuring and growth program. Even our traditional and generous neighbor Australia is going through difficult economic times. As a result, the Australians have recently decided to cut back substantially on a signed international aid agreement between our two countries. The creation of such uncertainty by wealthy nations has been attacked for years in forums such as this, because of the difficulties implied for good planning in the developing world. We live in a turbulent world in which we are frequently buffeted by the ebbs and flows of world trade, capital markets, and the policies of industrial countries. This volatility feeds instability and uncertainty into the system. Investors are hesitant and afraid to take risks. Government budgets and business plans are formulated on tentative forecasts of expected export receipts and domestic demand. Amid this muddle of uncertainties, it is important that other sources of income assistance, such as aid flows, be kept as stable and predictable as possible. There is no argument for tying aid flows to the vagaries of trade cycles in the developed countries. Direct aid is not the only concern. The institutions also have an obligation and an important role to play. We are concerned at the trend toward decreased resource flows between the developed and developing worlds. We view with alarm forecasts that suggest major institutions such as the

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Bank and the Fund may shortly reach the stage where they drain more resources from the developing world than they send to it. We face a very dangerous and conflicting future if this trend is not reversed.

The institutions must be provided with adequate resources and their policies must be realigned to allow speedy and productive use of these resources in order to cushion the huge impact of economic and human catastrophe. . . .

We support the Baker proposals put forward last year to increase resource flows to indebted developing countries, in a growth-oriented framework. However, we are dismayed at the slowness in implementing the proposals. We would also like to see more general application to the developing world.

The problems I have outlined in relation to growth, trade, commodity prices, aid, and resource flows are of significant concern to the developing world. However, as the 1986 World Development Report noted, the next five years provide hope for a period of "hesitant recovery" in the world economy, the speed of which will depend on the policies we all pursue.

Lower oil prices, lower inflation, declining interest rates, and currency realignments still provide a potential base for sustainable growth, the prospects for which would be helped by some modest reflation in surplus countries such as Japan and the Federal Republic of Germany. Good budget management and sensible economic policies, combined with the continued generous support and assistance from the Bank and others, will see us through the present period of austerity, to reap fully the benefits of the hoped-for "hesitant recovery/1

We have all experienced the many lessons of history not to make ourselves overly dependent on the whims of the industrial economies—they have their own interests to look after and will often adopt narrow policies to promote these interests. The resurgence of protectionist tendencies throughout the world is a case in point.

International financial relationships constitute something of a partner- ship in growth between countries. The economically powerful industrial economies are inevitably the leaders in these partnerships. But that is no excuse for timidity or passivity on the part of the developing economies. Good policies, strong economic management, and innovative investments on the part of the developing countries can play a significant role in invigo- rating the world economy and in turning a hesitant recovery into a dynamic one. We have very little choice and cannot continue to pray for money or hope for generosity from the giants.

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Let me now turn briefly to discuss the role of the Bank and the Fund, in the current world climate, and especially their role in my own region of the world. While we have valued the services of the Bank and the Fund in our establishment phase, the policies of both organizations have not always been conducive to our needs as a small Pacific state. The international organizations and those highly privileged and paid individuals who work for them must develop greater conviction and vision in formulating and implementing development strategies. The capacity for complex theorizing on global, regional, and sectoral issues must be converted into greater understanding of the realities of underdevelopment at the level of nations and individuals. Specifically with regard to the Fund, many in our region are disappointed that technical assistance previously being provided to central banks seems to be being phased back, apparently because of short-sighted budgetary approaches within the Fund. For many countries which take a prudent approach to managing their balance of payments, the provision of technical personnel has been one of the few contributions the Fund has been able to make to our development. Now that contribution seems to be in doubt. In Papua New Guinea we have been waiting in vain for some years to fill several key positions in our Central Bank. There are many more Fund issues of general concern to the developing world. These include better surveillance and coordination of the rich, more positive approaches to conditionality and cross-conditionality, and increased resource flows to the developing world, combined with better access to concessional facilities for the smaller states. . . . Let me conclude with a philosophical but factual testimony of the world all of us aspire to mold. It seems a regrettable fact of life that, in spite of all good intentions, we cannot ever achieve total equality. It appears there will always be rich and poor, at the level of both individuals and countries. Our vision must be set at considerably improving the living standards of the poorest groups, moving them to a higher plane of existence. The fortunes of the rich and the poor are heavily interrelated. If the poor are not kept too poor to prevent them from wanting and consuming the products of the rich, we have the potential to coexist happily together on this planet, despite our natural and obvious differences. It is time to strive toward improved equity and recognition that the abundance of the earth's resources must be shared. The alternative is bleak.

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STATEMENT BY THE GOVERNOR OF THE BANK FOR SPAIN

Carlos Solchaga As has become the pattern in recent years, we come to these Annual Meetings disappointed by economic developments since our last Meetings. The optimism that prevailed a few months ago has tended to diminish considerably. It was thought that the fall in oil prices, the downturn in prices of foodstuffs and raw materials, and the depreciation of the dollar would lead, outside the United States, to a rapid strengthening of domestic demand; we were hoping for a fall in inflation rates, more rapid growth of output and employment, and a reduction in the serious external accounts imbalance in the industrial countries; and we were confident that the stronger expansion in the industrial countries would, through increased trade, give the developing countries the relief that many of them so badly and urgently need in the difficult situation they find themselves in. Yet the summer is over and most of these favorable expectations remain unfulfilled. The Fund, in its excellent World Economic Outlook report, has found itself obliged to revise downward the moderately optimistic forecasts it made in April on real growth over the year in the industrial and the developing countries, and to draw attention to the extreme slowness of the adjustment taking place in international payments. The report points to a combination of special factors that had an adverse impact on the various industrial countries in the early months of the year. It emphasizes that, in a complex situation in which economies have been reacting to major changes in important variables, the factors with negative effects have tended to make themselves felt before those other factors which, it is hoped, will have positive effects. This is certainly true, and it is thus also true that recent trends in economic indicators cannot be taken as reliable guides to future prospects. It is certainly to be hoped that the effects of the favorable elements will start to become more noticeable in the coming months and that the industrial countries will improve their performance during the second part of this year and throughout 1987. Nevertheless, only a modest improvement is expected, and it will not be enough to bring about a rapid correction of balance of payments disequilibria in the industrial countries or to provide sufficient external stimulus to growth in the developing countries. Moreover, as the Fund report itself points out, the prospects for improvement are threatened by a number of significant uncertainties and stresses. The major industrial countries that have completed their basic adjustments are not taking advantage of the opportunity offered by favorable world economic developments to stimulate their recovery and growth.

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Their positive experiences are the best proof of the desirability of maintaining policies to strengthen their economies, reduce inflation, and increase the flexibility of their economies. Nevertheless, the ground they themselves have gained appears to offer those countries sufficient leeway to adopt stimulative measures without deviating from the basic line of those policies or jeopardizing what the policies have achieved. What is needed is a correction of the United States budget deficit and a strengthening of domestic demand in countries with stable prices, swollen current account surpluses, and currencies under pressure to revalue, so as to speed up a reduction in international payments disequilibria, allay the uncertainties that are discouraging investment and growth, and increase the pace of world economic progress. We are faced with a problem of coordinating national economic policies so as to take into account their interaction and their international consequences. We can agree on the need for surveillance to facilitate this coordination; we can select a group of indicators to help detect and analyze the problems; and we can design a framework and rules for discussing them. But ultimately, coordination will be possible only if we have the political will to achieve it. My country's view is that the desire for coordination is particularly important today and that its expression in a concrete strategy would be beneficial, primarily to the countries implementing it, but also to the industrial world as a whole and to the developing countries, whose growth crisis constitutes, as the Fund has rightly pointed out, the real crisis of the middle of this decade. We can and we must insist that the developing countries strive to overcome their grave problems by means of policies to rehabilitate and increase the flexibility of their economies, so as to eliminate disruptive distortions, and by means of strategies to encourage export-oriented growth based on the criterion of comparative advantage. But these recommendations will lose much of their purpose if, at the same time, the industrial countries do not facilitate more vigorous growth of world trade by making use of their own leeway for expansion, or if they allow their protectionist policies to hinder the export strategies they are urging on the countries that are being stifled by external accounts difficulties. This year's magnificent World De- velopment Report prepared by the World Bank, examining the situation and outlook for economic growth in the world, presents a discouraging picture of the advance of protectionism, especially in the sphere of agricultural commodities, and offers an assessment—which we would be well advised to heed—of the major benefits of reducing protectionism in this field, not only for the developing countries but also, and especially, for the industrial countries. It is to be hoped that the new round of the GATT negotiations will be inspired by the desire of the participating countries to check

©International Monetary Fund. Not for Redistribution 84 SUMMARY PROCEEDINGS, 1986 the spread of this grave evil, which is increasingly burdening the world economy. The fact of the matter is, however, that the adoption of a coordinated short- and medium-term economic policy strategy by the major industrial countries is a somewhat unlikely prospect for the immediate future, and that at best it will be some time before the drive toward greater liberalization of trade bears fruit. In these circumstances, we should use the instruments that are available to us to prevent the world economy from sinking into a deflationary course and to spare the developing countries, burdened by their lack of financial resources, from having to impose drastic reductions in their imports, consumption, and standards of living even when they are willing to implement correct adjustment and growth policies. Spain thus favors, in the first place, a resumption of SDR allocations in the fifth basic period. At present the world is not experiencing an excess of international reserves and is not threatened by a rise in inflation; on the contrary, the dangers are contraction and deflation, inadequate reserves, and the instability of a system of borrowed reserves. Consequently, we do not share other countries' resistance to the creation of SDRs. On the contrary, we would support a resumption of allocations during the fifth basic period leading to a modestly higher ratio of SDRs to nonmetal reserves and bringing the ratio in 1991 to a level slightly above that of 1972. We would thereby be fulfilling the mandate of our Articles of Agreement that SDRs be made the principal reserve asset of the system. For the same reasons, my country feels that in 1987 the present limita- tions on access to Fund resources should at least be maintained, both under the policy on enlarged access and under the special facilities. The Fund's present liquidity position is comfortable, and current projections indicate that it will continue to be so in 1987. This confirms us in our opposition to any reduction in the current access limits, which would hamper the Fund's capacity to play its proper role in the difficult conditions now besetting the world economy. . . . We take a positive view of the cooperation that has been initiated between the International Monetary Fund and the International Develop- ment Association for purposes of carrying out structural and sectoral adjustment programs in the sub-Saharan countries. We are thus pleased that the Structural Adjustment Facility has begun operations with funds from the IMF Special Disbursement Account. We hope that, after the Eighth Replenishment, the Association will rapidly be able to play its proper role in this joint task. To sum up, Spain wants our two institutions—by virtue of their approaches, their resources, and the criteria and rules for use of those resources—to be in a position to play the important role that is incumbent on

©International Monetary Fund. Not for Redistribution GOVERNOR FOR SPAIN 85 them in today's difficult conditions. It is conceivable that some of the problems we are encountering today would be less serious if an attempt had not been made to reduce this role in the past. But, in the final analysis—and this brings me back to the first part of my statement—action by our institutions can never substitute for the impulse toward growth stemming from a concerted strategy of the major industrial countries that makes for an external environment conducive to healthy economic policies in the developing countries. Mr. Chairman, allow me to conclude by conveying to Mr. de Larosière our deep gratitude to him for the excellent work he has carried out over the last eight years and for his fine leadership at a time of very serious threat to the international monetary system. Thank you very much.

©International Monetary Fund. Not for Redistribution DISCUSSION OF FUND POLICY AT THIRD JOINT SESSION l

REPORT TO THE BOARDS OF GOVERNORS OF THE FUND AND THE BANK BY THE CHAIRMAN OF THE JOINT MINISTERIAL COMMITTEE OF THE BOARDS OF GOVERNORS ON THE TRANSFER OF REAL RESOURCES TO DEVELOPING COUNTRIES (DEVELOPMENT COMMITTEE)

Ghulam Ishaq Khan

I have the honor to present the 1986 Annual Report of the Development Committee. The meeting held on Monday of this week was my last as the Committee's Chairman, and I wish to reiterate my profound appreciation and gratitude to all members of the Committee for the support I consistently received from them in the exercise of my duties. Working together, we have transformed the Committee into an effective forum for a meaningful discussion of global issues.

Recent Developments in the Global Economy In my statement this morning I shall be covering the two most recent meetings of the Committee, the first held in Washington, D.C. on April 10-11, 1986, and the second concluded on September 29. During this time a number of developments in the global economy have given rise to renewed concern. The period has been marked by sluggish growth in major OECD economies, despite the terms of trade advantage resulting from the sharp drop in oil and commodity prices. The decline in growth in the OECD economies is adversely affecting the implementation of adjustment programs and growth of the developing countries. The World Bank's most recent estimate for per capita growth in developing countries taken as a group is only about 1.2 percent for 1986. There has also been a deterioration in the trade picture. The volume of developing countries' exports to all major industrial countries—with the exception of the United States—has either remained stagnant or fallen. Moreover, U.S. exports to developing country markets have been declining in volume as a consequence mainly of the renewed contraction in their economies. These adverse trends in world trade affecting the developing countries have not been compensated by an enhanced flow of capital to them. On the

1 October 1, 1986.

©International Monetary Fund. Not for Redistribution CHAIRMAN OF DEVELOPMENT COMMITTEE 87 contrary, there has been a further reduction in the total net inflow of financial resources to developing countries. For the highly indebted countries these flows have actually turned negative. Moreover, flows of official development assistance (ODA), on which the low-income countries are so greatly reliant, have stagnated since 1980.

Issues Facing the Committee It was against this background that the Committee considered the major issues facing it. These issues included: —developments in the highly indebted, middle-income countries and the strategy unveiled by U.S. Treasury Secretary Baker in October 1985 for dealing with the problems of their external indebtedness; —the economic prospects of both the low-income countries and those middle-income countries which have been able to avoid excessive levels of debt; —the role of the World Bank and its lending program and resource requirements; —the role of concessional flows in the restoration of growth and alleviation of poverty in low-income countries; —the role of the International Development Association (IDA) and the progress of negotiations for its Eighth Replenishment; —the special problems and needs of sub-Saharan Africa; —the role of trade in development.

The Highly Indebted, Middle-Income Countries and the Baker Initiative In its April meeting the Committee reviewed the progress that had been made in addressing the problems of the highly indebted, middle-income countries in the period following the announcement of Secretary Baker's initiative. The Committee reviewed the background paper on this subject prepared at its request by the World Bank and endorsed the general approach set out in it for achieving sustained growth in these countries. The essence of the approach was that viable debt workout programs were only feasible in the context of growth. Joint actions are required by all major parties concerned, namely, the indebted countries themselves, industrial countries, commercial banks, and international financial and development institutions. In our meeting of this week the Committee reiterated the essential elements of the debt workout strategy and again emphasized the crucial relationships between adjustment supported by an adequate flow of financial resources; access to markets; the servicing of debt; and growth. However,

©International Monetary Fund. Not for Redistribution 88 SUMMARY PROCEEDINGS, 1986 it also called attention to a number of difficulties that have marked the implementation of the strategy, such as the serious slowdown in the expansion of developing country exports and the failure of commercial banks to assume their intended role. This, of course, does not take into account the Herculean efforts since made by the major partners, which culminated last evening in the very welcome conclusion of the Mexican accord. The view was expressed that, while the central approach in the initiative remains valid, the strategy that was originally evolved to implement it may need to be re-evaluated. The Committee invited all concerned parties to redouble their energies in undertaking concerted actions, stressed the necessity of an increase in net flows from commercial banks, and emphasized the even greater role which the World Bank would have to play.

Other Countries: The Need for a Rededication to Development While much of the Committee's recent attention was of necessity focused on the problems of the highly indebted, middle-income countries, it also addressed the requirements of other developing countries. A rededication to the task of promoting development and alleviating poverty was required, as emphasized by the World Bank's President in his annual address to these meetings. In this context the Committee stressed the Bank's traditional role as a provider of development finance for investment projects, a role of heightened importance in the light of current global economic conditions.

The World Bank's Role In recognizing the enhanced role that the Bank must play in debt workout programs while continuing to perform its more traditional functions in all its member countries, the Committee noted that this would entail a qualitatively and quantitatively different Bank. There needs to be more assertive and innovative Bank involvement in debt workout programs. The Bank should also assume an increased responsibility, in close collaboration with the Fund, to line up external finance from other sources, including the commercial banks, once developing countries have embarked on adjustment programs. The Bank needs to do more in ways that might not directly entail the provision of its own financial resources; it needs to increase its catalytic role. At the same time, there was a general recognition that such a qualitatively different Bank, to command credibility, would have to be larger in size. Accordingly, the Committee in its April meeting reaffirmed its strong support for a substantial expansion of the Bank's lending program and reiterated the understanding reached in the Seoul meeting that the Bank should at no time be constrained by lack of capital or borrowing authority in meeting future demand.

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In our meeting of this week, members noted that the size of the Bank's anticipated lending program for FY1987 might bring it up to the sustainable lending level of approximately $14.5 billion or even in excess of it. Therefore, given the need to maintain the momentum of the reform efforts undertaken by developing countries with the help of the Bank and to permit the growth in Bank lending deemed essential for the period through FY1990, the Committee agreed that a substantial general capital increase would be required. It urged the Bank's Executive Directors to conclude their discussions on the issues concerning a general capital increase as soon as possible to permit agreement on a proposal for such an increase in time to ensure that the Bank's lending program is not constrained by the availability of capital. Members of the Committee recognized that should quality lending materialize as projected, the program for FY1988 might exceed the sustainable lending limit on a temporary basis.

Concessional Flows in the Low-Income Countries Following up on the report of its Task Force on Concessional Flows, which was presented to the Committee and endorsed by it at its meeting in Seoul in October 1985, the Committee has concentrated much of its attention in its two most recent meetings on the subject of concessional assistance, particularly as it relates to the needs of the low-income countries. The Committee recognized the importance of official development assistance flows for the improved economic performance and sustained growth of these countries. It expressed its concern, however, that prospects for total ODA flows suggest a low level of future growth, inadequate to meet the pressing needs of low-income recipients. In the face of a prospective imbalance between the aid needs of recipients and aid supplies from donors, the Committee urged its donor-country members to make maximum efforts to increase their ODA budgets, especially to help meet the needs of the poor countries. In this connection the Committee also emphasized the value of a strong multilateral concessional assistance system, especially since multilateral aid has a particular focus on the poorest countries.

The Role and Resource Requirements of the International Development Association (IDA) The Committee has given considerable attention to the replenishment status of the International Development Association (IDA). In April Min- isters emphasized the special importance of IDA to the success of development programs in poor countries throughout the world, and virtually all Ministers expressed the strong hope that an ID A-VIII Replenishment of $12 billion would be achieved. They urged donors to exert maximum efforts to reach a consensus on outstanding issues related to the Eighth Re- plenishment, including fair burden-sharing and an equitable allocation of resources. At our meeting this week Ministers welcomed the progress

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achieved in the negotiations while noting those issues that have prevented their conclusion. The Committee urged all parties contributing to IDA to conclude the negotiations at the next meeting of IDA Deputies scheduled in November 1986 and to replenish IDA at a level of $12 billion or more. It also urged additional voluntary contributions from all donors in a position to make them.

Developments in Sub-Saharan Africa

The severe difficulties of sub-Saharan Africa have occupied the attention of the Committee for a considerable time. At its April meeting members reviewed the World Bank's most recent report on the region and agreed that concerted action is urgently needed to address the region's problems. The Committee noted with satisfaction the growing commitment of African governments to policy reform, but it stressed that success of medium-term, growth-oriented adjustment programs requires increased external capital flows, particularly in view of continued weakness in commodity prices and heavy debt service obligations. Members noted the Bank's estimate of $2.5 billion in additional concessional flows that would be needed annually, over the next five years, to help meet low- income sub-Saharan Africa's needs. Members called upon industrial countries to exert their best efforts to close this gap by providing additional official development assistance, through both bilateral and multilateral channels, to countries in the region undertaking significant reform programs. Ministers also agreed on the need to enhance further the effectiveness of aid flows to sub-Saharan Africa and noted World Bank suggestions for strengthening donor aid coordination, while reaffirming that the central responsibility for aid coordination lies with each recipient government.

In our meeting this week, the Committee again reviewed recent developments concerning sub-Saharan Africa, including the constructive outcome of the UN Special Session, which endorsed Africa's Priority Program for Economic Recovery from 1986 to 1990. Members noted that 1986 offered some welcome, albeit modest, relief from difficult economic conditions for many of the poorest African countries but recognized that these improvements did not indicate a significant break in the long-term declining trend in the region's economic and social indicators. While African governments continue to make progress in policy reforms, resource availability continues to be a major constraint. The Committee this week reiterated its conclusion in April that industrial countries should exert their best efforts to close the estimated $2.5 billion annual gap in concessional flows identified by the World Bank.

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Role of Trade in Development The Committee has focused its attention on outstanding trade issues, as these affect the prospects of the developing countries. In April the Com- mittee called upon all governments to resist protectionism and encouraged them to launch a new trade round under GATT auspices at an early date, with the view to opening markets further and strengthening the trading system. In our meeting of this week, members again expressed concern about growing problems in world trade, which are having an adverse impact on the growth prospects of developing countries, including increased protectionism and the spread of subsidies or other incentives to production and export of agricultural commodities. The Committee welcomed the Punta del Este decision to initiate a comprehensive new round of multilateral trade negotiations. The Committee has recognized that long-term improvement in world trade prospects will require a considerable amount of economic restructuring in both developed and developing countries; urging developing countries to reform their trade regimes has meaning only if the countries can continue to gain access to industrial country markets.

Future Work Program of the Committee The issues I have discussed point to a number of areas to which the Com- mittee needs to devote further attention in its future work program. First, the Committee will need to review the World Bank's resource situation so as to ensure that the Bank can carry out the roles which the Committee has identified for it. In this context the Committee will need to keep under review the timing and size of a general capital increase for the Bank. Sec- ond, the Committee will need to analyze periodically the capital flows situation and its relationship to the external resource requirements of the developing countries. Third, the Committee has agreed to look into issues of agricultural and commodities trade. This will require a special study on the subject, which will, among other things, explore the effects that agricultural subsidies have on developing countries' economic prospects. Fourth, in the matter of concessional flows, the Committee will want to ensure progress in aid coordination. The Committee will also continue with its follow-up work stemming from the report of the Task Force on Concessional Flows, reporting periodically on developments in the areas of aid volume, aid effectiveness, and the support for aid.

Conclusion It is readily apparent that the issues that have occupied the Committee's attention this year are of crucial importance for the global economy. We are living through a time of great change and uncertainty affecting developed and developing countries alike. The recent deliberations of the Com- mittee have helped to clarify many of these issues. I am confident that the

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Committee's future work under a new Chairman will continue to make a significant contribution to our understanding of the changing international economy and will offer suggestions for policy initiatives that will improve economic relations between nations in our increasingly interdependent world.

STATEMENT BY THE ALTERNATE GOVERNOR OF THE FUND FOR THE FEDERAL REPUBLIC OF GERMANY

Gerhard Stoltenberg

These Meetings provide an important opportunity to review the challenges we face in the management of our economies, to learn to better understand each other's problems, and to demonstrate the will to address these problems in a cooperative manner and with a sense of mutual obligation. Fundamentally, our countries have the same task to fulfill. This is to enable each nation to develop, free of outside interference, in accordance with its traditions and values. The aim is to secure freedom and lasting prosperity for our citizens. There are hardly any other international organizations that have accomplished as much for their member countries as the Fund and the World Bank in fostering economic and social progress and, thus, working for a more stable and peaceful world. The need for an active role of the Fund and the World Bank is beyond doubt. In cooperation with the Fund and the World Bank, developing countries have implemented bold reforms to make their economies more efficient, outward looking, and competitive. In the industrial countries, we can point to significant progress in removing obstacles to growth and restoring the underlying vitality of the economies. Low inflation and lower interest rates have enhanced the prospect that the recovery will last. The positive effects of the adjustments in the exchange rates of major currencies will increasingly come through in the period ahead. The international dimension of national policies and the benefits to be gained from a common, concerted approach have become more clearly recognized. This is manifested by the initiatives to strengthen the debt strategy, by the improved policy coordination among major industrial countries, and, in a broader context, by our intensified cooperation in the Fund and the World Bank. The agreement on the launching of a new round of multilateral trade negotiations has presented us with the opportunity of achieving a real break-

©International Monetary Fund. Not for Redistribution ALTERNATE GOVERNOR FOR FEDERAL REPUBLIC OF GERMANY 93 through in liberalizing and expanding world trade to the benefit of all our countries. The risks and unfinished tasks are obvious. Serious imbalances persist, which may take longer to unwind than expected. A constructive solution to the international debt problems will require a high degree of international cooperation for years to come; Germany will remain a reliable partner in this cooperative effort. No one can ignore the very real social and political problems created for some developing countries by the decline of commodity prices, the contraction of imports, and the slowing of growth. The persistence of poverty and hardship in parts of the developing world is a continuing challenge. None of us can be satisfied with a situation in which, despite important gains in employment, large segments of the labor force remain unemployed in the industrial countries. I want to assure you that Germany is playing its part. Our economic policy is aimed at achieving the maximum rate of steady, noninflationary economic expansion. Promoting the creation of jobs and bringing down unemployment remains a priority objective and, thus, no one should believe that the German Government could be satisfied with anything less than an optimum utilization of our resources. In fact, the German economy is now set again on a path of solid growth. As confirmed by the most recent indicators, the growth pause of last winter is now definitely a matter of the past. Gross national product (GNP) is expanding at an underlying rate of 3 percent. The internal sources of demand—buoyant investment and growing consumption—have become the mainstay of the recovery. Real domestic demand is expected to grow by 4V2 percent in 1986, and imports, in volume terms, are rising about three times as fast as exports. The progress made in lowering the share of public sector expenditure in GNP and the reduction of the fiscal deficit in Germany have provided the basis for a series of substantial tax reductions put into effect since 1983. In the next legislative period beginning in early 1987, my Government will reinforce the process of tax reform and reduction to strengthen further the basis for rising investment, expanding employment, and stable growth. We believe that credibility, predictability, and a clearly defined medium-term orientation are necessary qualities of a successful growth strategy. While we all have to follow the situation closely, it is essential to avoid drifting back to short-term economic fine tuning. Germany has always supported effective measures to strengthen the international coordination of economic policies. Fund surveillance—the process of policy dialogue and peer pressure—can play a key role in this regard. However, surveillance will be effective only if we muster the political will. In this respect, a more systematic use of economic indicators can play a useful role. Competent economic analysis, based on relevant indicators,

©International Monetary Fund. Not for Redistribution 94 SUMMARY PROCEEDINGS, 1986 will improve our understanding of how national economies interact, help to identify possible points of tension, and encourage consistent and mutually supportive policies. However, the role of indicators can only be an aux- iliary one. Indicators cannot serve as mechanistic triggers for policy actions. The most recent World Economic Outlook provides a constructive response to our deliberations in April, and it shows the direction in which we should move. Let me stress the following points. First, the essential task is to enhance the current world economic recovery and, thus, to provide a more favorable environment for the efforts of the developing countries at achieving a more satisfactory path of development. Sound, credible financial policies and a more efficient functioning of markets have to provide the basis for growth that can and must be sustained. Artificial stimulation of demand would set the stage for the next stabilization crisis. The developing countries would be the hardest hit. Second, where fiscal deficits are unsustainably large, the benefits of corrective action are beyond doubt. If part of a credible strategy, the positive effects of a reduction of budget deficits, notably lower interest rates and a fresh stimulus to private productive investment, are likely to come about quickly. Third, our countries have benefited immensely from the postwar system of liberal, multilateral trade. We will all be the losers unless we resist the detrimental forces of protectionism and eliminate effectively existing barriers to trade. Both the industrial and the developing countries have a high stake in the timely, successful completion of the new round of multilateral trade negotiations in the GATT. The efforts of the administration of the United States to restrain the pressures for protectionism deserve the strong support of its partners in the European Communities and elsewhere. Fourth, the adjustments that have taken place in the exchange rates of major currencies will foster the emergence of a more balanced external payments position among the industrial countries. The task is now to consolidate the progress achieved. Exchange rate adjustments cannot dis- pense with the required improvements in the underlying financial policies. In Germany, a significant reduction in the real trade surplus is under way, reflecting the strong rise in domestic demand as well as the responsiveness of the German economy to the exchange rate changes which have taken place. As a result, the surplus on current account, in 1987, will show a significant decline also in nominal terms. Promoting sustainable growth remains our priority objective and the key to solving many of the problems with which the developing countries are faced. The Fund and the World Bank should continue to make every effort to encourage the macroeconomic and structural reforms necessary to achieve this all-important goal. The experience of indebted countries

©International Monetary Fund. Not for Redistribution ALTERNATE GOVERNOR FOR FEDERAL REPUBLIC OF GERMANY 95 which have preserved their access to financial markets, although they, too, had to cope with a difficult external environment, demonstrates the difference that domestic policies can make. The Fund and the Bank should work with these countries to increase domestic savings, to make new growth less dependent on debt-creating external financing, and to foster the repatriation of flight capital. And they should promote policies designed to encourage a diversification of exports which will reduce the vul- nerability to fluctuations of commodity prices and encourage efficient import substitution. The removal of price distortions, the liberalization of the trade and payments regime, and a shift away from state interventionism in the economy toward greater reliance on market forces will foster the mobilization and more efficient use of domestic and external financial resources. The situation of the indebted countries has become more differentiated and the need to work out solutions case by case has become more compelling. The deterioration in the economic indicators of the developing countries reflects to no small extent the particularly difficult problems of commodity-exporting countries. Within the framework of the enhanced debt strategy, their problems can be effectively dealt with if all the parties concerned, including the commercial banks, play their part, and if we are mindful of the very real social and political constraints which these countries face. The positive results of the negotiations of the Mexican Govern- ment with the private banks, I think, are an encouraging example of possible progress. The Fund and the World Bank should continue to remind the industrial countries of their co-responsibility and of their self-interest in contributing to the restoration of growth and financial stability in the debtor countries. Fund surveillance provides the Fund with the opportunity to press for policies in the industrial countries conducive to enduring growth, price stability, low interest rates, and, thus, to the better functioning of the international monetary system. Through their own lending and through their roles as catalysts of private and official financing, the Fund and the World Bank can importantly contribute to providing the necessary financial backing of well-conceived adjustment programs. The continuation of the enlarged access to the resources of the Fund in 1987 will ensure the necessary flexibility of the Fund to support adjustment through financing in excess of the normal lending limits in case of special need. However, financing does not provide an easy way out of the debt problems. Foreign borrowing will not serve its purpose unless it helps to strengthen the external position so that the debt service can be financed from additional export or import savings. Without adjustment, the debt

©International Monetary Fund. Not for Redistribution 96 SUMMARY PROCEEDINGS, 1986 burden would grow, the medium-term outlook could worsen, and the situation could become unmanageable. As far as the creditor countries are concerned, the provision of financing to the debtors cannot substitute for the removal of protectionist barriers to imports from the developing countries. . . . Mr. Conable, we are fortunate to have you at the helm of the World Bank. You have taken over from your predecessors a well-functioning organization. Thus, you can build on new concepts and on past achievements in enhancing the role of the Bank as the partner in economic development of the developing countries. Mr. de Larosière, since you are about to relinquish your position as Managing Director of the Fund, I wish to express—as many of my colleagues did—my sincere appreciation for the skill and dedication with which you have guided the Fund. We all owe a great deal to your personal effort and commitment. The Fund and the World Bank are faced with demanding and growing tasks. Both institutions remain the centerpiece of our efforts to sustain, to enhance and spread the recovery, and to restore stability to the international financial system. These objectives can be attained. Our problems are man-made, and constructive solutions are well within our ability to achieve. We have made progress on which we can build. Let us seize the opportunities with which we are now presented. Let us come up to the great challenges of our time.

STATEMENT BY THE GOVERNOR OF THE BANK FOR ZAÏRE

Loma Okitongono Djamboleka

First of all, on behalf of the African Governors of the Fund and the Bank and myself, I should like to wish Mr. Barber Conable, President of the World Bank, every success in his new duties. It is our hope that the close relationship that evolved between the World Bank and its member countries, particularly the African countries, during the tenure of Mr. A.W. Clausen will be maintained and strengthened, and we wish to assure him that we are fully prepared to work with him in enhancing the contribution of the World Bank to the social and economic development of the African continent. Let me also take this occasion to welcome Kiribati and Poland as new members of the Fund and the Bank. I would like also to seize this opportunity to express the regret of African Governors about the forthcoming departure of Mr. Jacques de Larosière as Managing Director of the

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Fund and the Chairman of its Board of Executive Directors. Mr. de Laro- sière has guided in a master craftsman-like fashion the Fund over years during which many member countries have experienced serious economic and financial problems. The African Governors would like particularly to pay him homage for his attempts to reconcile the divergent views, positions, and interests of member countries. We wish him very well in his future endeavors. In reviewing the developments in the world economy in 1985, it appears clearly that economic activity has slowed down considerably in industrial countries. Indeed, from a healthy rate of almost 5 percent achieved in 1984, economic growth is estimated to have fallen to 3 percent last year. The sharpest slowdown among the major industrial countries took place in the United States, where the rate of economic expansion fell by more than half. Despite the efforts of some of these countries, fiscal imbalances remain large. Trade flows also slackened considerably. The volume growth of both exports and imports of industrial countries has fallen by more than half in 1985. On the whole, the current account balance of industrial countries has again registered a large deficit. This generalization, however, conceals significant disparities, with countries like Japan, and to a lesser extent the Federal Republic of Germany, continuing to record increasing surpluses, while, despite the significant fall in oil and non-oil commodity prices, the current account gap of other countries like the United States widened. One of the very few bright spots in an otherwise generally poor picture is the continuing decrease in inflation. The overall picture of economic and financial development is no better in 1986. There are strong indications that economic growth might remain weak in industrial countries at less than 3 percent, that the fiscal deficit of the major industrial countries taken together might also remain large, and that export growth may weaken further. Even after more than a year of almost uninterrupted depreciation of the U.S. dollar and decreasing oil prices, the U.S. external current account deficit has widened. However, owing to sharply higher surpluses than might be recorded by Japan and Germany, the current account of the industrial countries taken together might be near equilibrium in 1986. Altogether, the much heralded economic recovery has not only been narrow based, but has also been ephem- eral, as we had feared. The apparent cohesion of the large industrial countries that led to the depreciation of the U.S. dollar since September 1985 appears to have weakened or is waning. The persistence of large fiscal and trade imbalances continues to create uncertainties and instability in the international monetary system and to weaken prospects for strong and broad-based economic growth. Prospects for 1987 are not bright, with economic growth in industrial countries likely to stagnate, with relatively marginal progress being anticipated on the fiscal front, and with a marginal

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Since all countries are economically interdependent, the adverse developments in industrial countries have been hard felt in developing countries, where, under the influence of a retrenchment of capital inflows and falling prices of primary commodities and weak oil prices, economic growth has slowed down considerably in 1985, and short- and medium- term prospects are less than bright. The African Governors are very concerned about these unfavorable developments and the uncertain outlook. They are even more concerned about the situation and prospects of the sub-Saharan group of African countries. On average, growth in GDP per capita continues to be negative, especially in sub-Saharan Africa, and the export prices of our commodities continue their unrelenting decrease, with the sharpest fall yet recorded over the past several years being projected for 1986. Furthermore, the prices of our imports, which have fluctuated over these years, are projected to jump significantly in 1986. As a result, the sharpest decrease in the terms of trade of African countries is projected to occur in 1986. Confronted with such a deterioration in our terms of trade, with inadequate capital inflows, and with mounting debt service obligations, the African countries had little choice but to curtail imports to reduce their external imbalances. Strenuous efforts were also made to reduce the fiscal imbalances. Despite these multifaceted efforts, the medium- term prospects of our economies remain generally very clouded and bleak in several respects. On balance, the economic growth of African countries, which is forecast to be minimal in 1986, could fall further in 1987, with dire consequences on the already low living standards of the populations of the continent. The prices of our main export products are likely to fall further, while those of our imports are expected to rise, thereby perpetuat- ing the downward trend of our terms of trade. Consequently, despite the efforts undertaken, the fiscal and external imbalances of our countries are forecast to remain large.

The African Governors are worried about this gloomy picture of developments and the outlook for their economies. As I stated during our meeting in Seoul in 1985, the economies of all our Bank/Fund members, in particular those of the African countries, are interdependent, and it is our collective responsibility to search and find realistic and durable solutions to the problems that confront us. Industrial countries, developing countries, multilateral institutions, and commercial banks must work actively and cooperatively to find and implement appropriate solutions. In the past, the African countries have shouldered their share of responsibility and taken wide-ranging, socially and politically painful actions to adjust their economies. As a result, in many instances, internal and external imbalances have been reduced. Looking ahead, our governments intend to

©International Monetary Fund. Not for Redistribution GOVERNOR FOR ZAÏRE 99 build on the progress made thus far. However, given the international transmission mechanism of growth through trade, the economic expansion of developing countries, and more particularly of African countries, depends to a large extent on the volume and price of their exports. Therefore, it is of paramount importance that industrial countries take decisive actions to establish an international environment that, among others, is conducive to: (1) a sustained and noninflationary economic growth, (2) a durable reversal of the declining trend of the export prices of primary commodities, (3) freer trade, (4) less volatility in interest and foreign exchange rates, and (5) net positive transfers of financial resources to developing countries, especially to African countries. The role of multilateral institutions in achieving these objectives of economic growth, enhanced trade, and stability in financial markets cannot be overstated. The African countries have made progress in reducing their economic and financial imbalances and in improving the efficiency of their economy. However, considerable difficulties persist and need to be addressed with some urgency. As evidence of their intention to take steps toward achieving these objectives, the African governments have adopted a five-year economic program known as the Priority Program for Economic Recovery. The main thrust of this program was submitted in May 1986 to a Special Session of the United Nations General Assembly, which in turn adopted and called for the implementation of the United Nations Program of Action for African Economic Recovery and Development. To demonstrate their determination for increased self-reliance, the African countries intend to provide two thirds of the financial requirements of the program (totaling $128 billion), with the balance being met from external sources. The African Governors would like to call on the international financial community to meet this challenge. We would like to assure this community here gathered of our resolute commitment to undertake the policy reforms necessary to achieve the rehabilitation of the agricultural sector and, more generally, to enhance the performance of our economies. One of the burning issues in Africa today—and also a crippling obstacle to the development of our continent—is that of external indebtedness. Let me mention just a few figures to illustrate the magnitude of the problem. In 1980, on average, African countries were devoting less than 14 percent of their export earnings to the payment of their external debt service obligations. This ratio has risen steadily to some 27 percent five years later and is forecast to approach 34 percent in 1986. Implicit in these statistics is also a steady increase in the share of those export receipts applied to the payment of interest alone. This share is projected to virtually triple by the end of this year, amounting to more than 15 percent. As our countries are implementing austere fiscal measures, closing down public enterprises, and cutting down on critical imports, the debt service burden, instead of get-

©International Monetary Fund. Not for Redistribution 100 SUMMARY PROCEEDINGS, 1986 ting lighter, is worsening. Simply put, the stronger our adjustment efforts, the more we have to adjust. More generally, in connection with the debt problem, the representatives of African countries have supported the Baker initiative in different forums. We must stress, however, that we deplore the fact that this initiative ignores the debt problems of low-income countries, the category to which the great majority of African countries belong. Although our debt problem is acute, the international community has not given it all the attention that it deserves. As we have stressed on various occasions, the problem of Africa's debt does not lie in its size in absolute terms, but rather in Africa's limited ability at this time to cope with the fast-growing service of its debt. For this reason, we firmly believe that the specific nature of the African debt problem calls for the adoption of an equally specific approach which measures up to the problem. Consequently, I would like to reiterate the appeal made to donors by the Twenty-First Summit of Heads of State and Governments of the Organization of African Unity on the need to hold an international conference on Africa's external debt and also to request the support of the World Bank and the International Monetary Fund for this conference. In the meantime, we request from the international community effective debt relief and better financing packages, because the rate of increase of our debt service obligations is such that they cannot be honored from our meager resources. In this connection, steps should be taken to improve the framework for commercial and official debt renegoti- ations. Specific features should include the conversion of official debt obligations into grants, consolidation of nonofficially guaranteed debt due from 1986 to 1990 into long-term loans, and the conversion of loans granted on commercial terms into concessional loans. After these observations on topics of a general nature, I should like to address other no less important issues, which pertain more specifically to the activities of the International Monetary Fund. The African Governors wish to pay homage to the Fund's management and to the Executive Directors for their manifold efforts over the years to improve the effectiveness of the surveillance policy. We encourage the Fund to continue the work currently under way on defining indicators for closer monitoring of developments in the economies of the main industrial countries and for enhancing the effectiveness of its surveillance over them, given that surveillance as exercised presently remains asymmetrical and oriented toward countries using Fund resources. The position recently expressed in the Tokyo declaration by the industrial countries, which calls for the collective review of their economic objectives and for the use of certain quantitative indicators of economic policy and performance and reaf- firms an intention to cooperate with the International Monetary Fund to strengthen multilateral surveillance, is a positive sign.

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Although we appreciate the Fund's financial support of our adjustment efforts, we cannot help but note that it has been far from meeting our financing needs. The meagerness of this assistance gives the impression that the severity of the adjustment efforts being made is not fully recognized. The African Governors believe that the International Monetary Fund and the World Bank should play a greater role in assisting Africa to implement the United Nations-supported Priority Program to which I referred earlier. In this context, the Fund should maintain a positive net flow of financial resources to African countries that are implementing adjustment programs which it supports during the Priority Program. Furthermore, the Fund should consider providing financial assistance to member countries over a longer period of time. We understand that some preliminary work is under way in the Fund concerning the general review of quotas. We continue to believe that this work should be accelerated so that the Ninth General Review of Quotas can enter into force in the not too distant future. We have noted the creation of the Structural Adjustment Facility to promote structural adjustment, which is focused on economic growth in the poorest developing countries. As this new facility is implemented, the Afri- can Governors cannot overemphasize the need to adopt the most flexible procedures for the use of resources under this facility. Great care must be exercised in order to avoid the development of cross-conditionality in the course of the Bank/Fund cooperation that it involves, however useful that cooperation might be. Although the resources of the Structural Adjust- ment Facility will undeniably help in our adjustment efforts, we must note that, in view of the limited amount available under the facility, these efforts are not likely to succeed if the facility is not supplemented by additional resources. The debt service obligations of our countries to the Fund have grown rapidly over the past few years, from the equivalent of 0.5 percent of our export earnings in 1981 to 1.9 percent in 1985. It is projected that this ratio might rise considerably further to reach 3.7 percent in 1986 and 4 percent next year. On the basis of these forecasts, the debt service obligations owed to the Fund by Africa exceed in relative terms those of Asia, Europe, and the non-oil Middle East combined. These statistics, however succinct, re- veal the magnitude of the financial obligations of our countries vis-à-vis the institutions which we, like others, would like to maintain financially. To this end, each and every African country that was financially obligated to the Fund had made efforts to discharge its obligations. However, despite our strong willingness, we have not always reached the cherished objective of remaining current vis-à-vis the Fund. The African Governors, like many others, would like to reiterate their concern about the adverse implications on the revolving character of Fund resources of increasing overdue obliga-

©International Monetary Fund. Not for Redistribution 102 SUMMARY PROCEEDINGS, 1986 tions. We would like to stress, nevertheless, that the failure to make timely payments does not reflect the weakening of our resolve or commitment to keep the Fund financially sound, but rather the acute shortage of resources that several African countries are experiencing. Consequently, I would like to repeat the call of the African Governors that the Fund grant to countries in need the benefit of the provisions of Section 7(g) and S(e) of Article V of the Fund's Articles of Agreement. Regarding the policy on enlarged access and access limits, the African Governors support the extension of this policy and an enhancement of these limits because, despite strenuous adjustment efforts carried out over several years, several Fund members continue to experience substantial balance of payments deficits. Thus, the need for substantial Fund assistance remains. Concerning the access ratios applicable to the special facilities, it is our view that they should also be enhanced to give the Fund the flexibility that it needs to provide timely and appropriate assistance. Fur- thermore, the requirements for access to the compensatory financing facility should be flexibly interpreted. We regret the continuing opposition of some major industrial countries to the resumption of SDR allocation. We reiterate the hope that these countries will evince a spirit of cooperation, enabling us to move forward on this important matter. We have been kept abreast of the Executive Board discussions on the role that the SDR could play in the international monetary system and affirm our solid support for any endeavor to achieve the aims of Article XXII of the Fund's Articles of Agreement, which is to make the SDR the principal reserve asset in the international monetary system. As regards the reform of the international monetary system, the African Governors are of the opinion that such a reform is necessary to deal with the shortcomings in the functioning of the existing system. There is a need to reach an early consensus on this point so as to undertake the preparatory work for such a reform as soon as possible. In this vein, the African Governors support the proposals of the Group of Twenty-Four for an international conference and the creation of a ministerial committee comprising representatives of developed as well as developing countries to plan for the conference. . . . It is clear that, given the resource needs of the developing countries, the Fund has to play a complementary role [with the Bank] in the mobilization of resources for the developing world. In this regard, we note that there has been a pilot program of intensive collaboration between the Bank and the Fund in eight developing countries. African Governors have always welcomed the collaboration between these institutions when it is necessary. These institutions remain, however, bound by their distinct mandates. We

©International Monetary Fund. Not for Redistribution GOVERNOR FOR ZAÏRE 103 again would caution against attempts to enforce cross-conditionality and unanimity of views and of prescriptions between the two institutions. A healthy debate and diversity of views may serve the countries better than artificial unanimity on actions to be implemented. A sensitive, flexible, and highly pragmatic modus operandi will have to be evolved if the new Structural Adjustment Facility recently constituted in the Fund will live up to its promise. Both the Bank and the Fund will need to ensure that no implicit or explicit cross-conditionalities emerge as a result of their collaboration. Furthermore, the African governments believe that such collaboration between the two institutions should not cause any delay in countries' access to the facility. We also look forward to clear and equitable operational guidelines on how countries will gain access to these resources. In offering assistance at the technical level, the Bank and the Fund are called upon to confine themselves to designing flexible policy frameworks, to avoid prescribing detailed fiscal and credit targets, and to show greater sensitivity to the established systems of member countries. African Governors consider that the mobilization of resources from all sources including the private sector is vital for the resumption of growth and development to take place in their countries. . . . Before I conclude, let me make some comments on a situation that is still quite critical in a number of our countries. I refer to the drought and famine. As is well known, among the factors that have been responsible for the serious situation in Africa, especially in the sub-Saharan countries, is the drought that has ravaged the region over the past few years. In some regions even today, the drought has not been broken and famine persists. The situation has been further worsened by the invasion of locusts. In the declaration at the UN Special Session, the international community is expected to commit itself to increasing its support to the countries affected by drought and desertification, with special attention being given to their technical and financial requirements. There are also programs that have been outlined at the national, subregional, and regional level for action by all concerned. The Bank has itself initiated lending programs related to drought and agricultural recovery and has also initiated the Special Pro- gram for African Agricultural Research, which should help harmonize planned research in all these areas. I have attempted to describe the seriousness of Africa's economic crisis—one worsened by drought, famine, and the increasing burden of external debt service. Considering the gravity of the situation, and given the adoption of Africa's Priority Program for Economic Recovery by the Spe- cial Session of the United Nations, we urge the World Bank, the Interna- tional Monetary Fund, and the international community to lend us their support in the search for a solution to this crisis.

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STATEMENT BY THE ALTERNATE GOVERNOR OF THE FUND FOR INDIA

R.N. Malhotra

Mr. Chairman, we congratulate you on your election as Chairman of these Annual Meetings. I would like to join my fellow Governors in welcoming Kiribati and Poland as new members of the International Monetary Fund and the World Bank. I would also like to take this opportunity to record our appreciation of the valuable services of Mr. Ghulam Ishaq Khan, who is completing his extended term as Chairman of the Development Committee. We are also happy to welcome Mr. Conable to his first Annual Meetings as President of the World Bank. He brings with him a rich and varied experience of public service, which we are sure will enable him to provide effective leadership to the Bank to achieve the objectives emphasized by him in his address yesterday. We would like to associate ourselves with the warm appreciation expressed by other Governors for the outstanding services rendered by Mr. de Larosière to the Fund and the international financial system. It was indeed fortunate that at a most difficult time for the world economy, we had a man of his caliber, imagination, and perseverance to lead the Fund. We wish him all the best in his future endeavors. Fellow Governors, the world economy is beset with serious problems, many of which are structural in nature. After the recession of 1980-82 and during the short-lived and uneven recovery of 1984, some believed that the widespread application of monetarist remedies had restored the world economy to a path of sustained growth with price stability. It is true that inflation in industrial countries has declined substantially in recent years, nominal interest rates have fallen, and there has been a reduction in misalignment of exchange rates of key currencies. Despite these developments and the large gains that have accrued to industrial countries due to the sharp reduction in the prices of primary commodities, especially that of oil, their real output growth has been sluggish in the first half of this year. Indeed, the projections of growth in developed and developing countries have had to be brought down, and the prospects for growth, in the near and medium term, are uncertain. The deterioration in the international environment has had severe consequences for developing countries. Their terms of trade have greatly deteriorated. The flow of official development assistance to low-income countries has declined, and the serious weakness in private lending continues to persist. Indeed, there is a large net transfer of resources from several highly indebted countries. It is particularly dis-

©International Monetary Fund. Not for Redistribution ALTERNATE GOVERNOR FOR INDIA 105 turbing that during 1980-85 there was stagnation or decline in per capita GDP of as many as 70 developing countries. We welcome recent moves toward better coordination of industrial countries' policies. However, to achieve the universally shared goal of growth and development, we must adopt far-reaching initiatives to harmonize international policies in order to change the current environment of deflation and flagging economic activity, reverse the declining flow of capital to developing countries, and roll back the growing protectionist barriers to their exports. The 1980s have witnessed a sharp increase in protectionist sentiment and measures in industrial countries. This protectionism has been characterized by proliferation of nontariff barriers (NTBs), deployed in a dis- criminatory manner. It is ironic that this wave of protectionism continues unabated, despite the high cost it entails, not only for exporting developing nations but also for importing industrial countries. Against this background, we are happy that an agreement has been reached to launch a new round of multilateral trade negotiations. It is particularly gratifying that at Punta del Este, through a spirit of cooperation and accommodation, we were able to arrive at an agreement which protects the interests of developing countries. We hope that matters that are outstanding from the last round of trade negotiations will be quickly and effectively addressed. The debt problem continues to bedevil the world economy. It is now widely appreciated that the problem cannot be resolved by prolonged sup- pression of demand and output in debtor countries. There has been a welcome recognition of the importance of growth in fashioning adjustment programs as indicated by the Mexican case. We would hope that the application of these new ideas would become the norm rather than the exception. Meanwhile, it would appear that, while several highly indebted countries have adopted strong adjustment programs, substantial results by way of increased new lending by commercial banks and restoration of access to capital markets have yet to emerge. The resolution of the debt problem of both middle-income and low-income developing countries would require concerted and bold action on several fronts: trade and commodities, a further decline in real interest rates, a halt to the large net outflow of resources from indebted countries, and more imaginative restructuring of debt. Serious consideration should also be given to ameliorating the debt problem of low-income countries with a heavy burden of official repayments. It is a matter of some satisfaction that the Interim Committee has decided to maintain the present access limits under the enlarged access policy and special facilities during 1987. We believe that the enlarged access policy should continue at least until the next increase in the Fund quotas. As

©International Monetary Fund. Not for Redistribution 106 SUMMARY PROCEEDINGS, 1986 for the compensatory financing facility (CFF), the existing access limit could prove a constraint, in view of the substantial decline in export earnings of developing countries. There is, therefore, a strong case for increasing the limit on the CFF to at least 100 percent of quota. The tightening of conditionality attached to the CFF needs to be urgently reversed. We are deeply concerned at suggestions aimed at reducing the role of this facility and its quick-disbursing character. In our view, considering the decline in commodity prices and exports of developing countries, what is called for is a major liberalization of the CFF. Let me here raise a concern about the newly instituted Structural Ad- justment Facility (SAP). The adjustment programs designed for low- income developing countries under the SAP have, in our view, become highly conditional, unlike the earlier Trust Fund loans. There is also a growing element of cross-conditionality. This will naturally retard both the conclusion of these arrangements and the disbursements thereunder; that would be unfortunate. In the new strategy for growth-oriented adjustment, a crucial role has been assigned to the Fund. There has, however, been a reduction in the use of Fund credit since 1984, and net drawings by developing countries are expected to become negative by 1987. It would be most unfortunate if, at a time when the flow of resources to developing countries is severely strained, the role of Fund financing undergoes such a steep decline. A more liberal approach in Fund financing is essential if growth-oriented adjustment is to become a reality. Steps should be taken expeditiously for initiation and completion of the Ninth Quota Review. It is regrettable that, despite the weight of expert opinion, the support of most members of the Fund Executive Board, and the serious liquidity problems of a large number of Fund member countries, no allocation of SDRs has materialized in the fourth basic period. We believe that the emergence of a multi-reserve currency system has in no way diminished the role of the SDR as envisaged in the Fund Articles and would urge that a consensus for a substantial allocation of SDRs be developed by the next spring meeting of the Interim Committee. Over the past year, the Fund Executive Board has had the opportunity to examine the reports of the Group of Ten and the Group of Twenty-Four on the reform of the international monetary system. The events of the past year, viewed in their historical perspective, have cast serious doubts on the assessment of the Group of Ten that the present system is workable with relatively minor adjustments. The Group of Twenty-Four, however, concludes that systemic changes are necessary in the areas of exchange rates, creation of liquidity through SDRs, increased flow of finance to developing countries, external debt,

©International Monetary Fund. Not for Redistribution GOVERNOR FOR NETHERLANDS 107 and protectionism to overcome the world economic malaise. The progress of discussion on various aspects of the reports has been slow so far and needs to be expedited so as to reach a consensus on possible solutions. . . . Before concluding, we would like to thank the Government and the people of the United States for their warm welcome and hospitality.

STATEMENT BY THE GOVERNOR OF THE BANK FOR THE NETHERLANDS

H.O. Ruding

World Economic Outlook In the past several quarters, economic growth in a number of industrial countries has been slower than expected. Nevertheless, this slowdown appears to be transitory. For many countries the decline of oil prices and interest rates has improved prospects for economic growth over the medium term. Given this fact and the unpredictable impact of short-term discretionary policies, considerations of demand management should not be allowed to prevail over longer-term structural efforts to promote sustainable and noninflationary growth. We should all work toward reducing budget deficits wherever these are still too large and toward containing them where they are already low, for in many countries, including my own, budget deficits and public debt-service obligations are still far from being under control. Monetary policy in nations with high inflation rates should be directed toward reducing price increases, while nations with low inflation should choose money growth objectives high enough to permit sufficient real economic growth, but not so high as to give rise to new inflation. Only such a sound mix of fiscal and monetary policies will create conditions for sustainable low interest rate levels, increased business investment, and reduced unemployment, which is still much too high in many countries, including my own. Furthermore, countries should continue and, if necessary, intensify policies aimed at structural adjustment and overcoming supply-side rigidities.

International Policy Coordination The world economy continues to be plagued by the effects of the last decade's dramatic shifts in current account positions, sharp turns in international capital movements, and wide swings in exchange rates. In recent years we have observed that it is possible for highly competitive economies

©International Monetary Fund. Not for Redistribution 108 SUMMARY PROCEEDINGS, 1986 rapidly to become high-cost producers and vice versa, as a result of swings in real exchange rates. Protracted delays in adjustment may not be the rule, but neither are they the exception. The temptation to pass the buck, to attack symptoms instead of causes, and to politicize economic issues is not always resisted. With regard to capital movements, we have seen that countries that were flush with recycled petrodollars not so long ago are now struggling to restore their creditworthiness. Predictable, noninflationary, and growth-oriented policies are necessary but not sufficient conditions for a more stable, sustainable development of both exchange rates and balance of payments positions. We clearly need concerted international efforts, especially among the major industrial countries, to counter these threats to stable growth of the world economy. These efforts should take place within the framework of the existing multilateral financial and economic institutions. Only through increased international cooperation and coordination, based on objective analysis of economic facts and policies, can we achieve our goals of correcting balance of payments imbalances, fostering exchange rate stability, rolling back protectionism, and solving the international debt problem. Only in this way can balanced, worldwide economic growth be put on a firm footing. The depreciation of the U.S. dollar against the yen and the deutsche mark since the Plaza agreement improved prospects of a return to more balanced current account positions in the medium term, but if I may quote the World Economic Outlook: "exchange rate changes are not a substitute for required policy changes." In particular, a reduction of the federal deficit in the United States is indispensable for achievement of a sustainable pattern. On the other hand, surplus countries with appreciating currencies must pay attention to an adequate level of output and growth, in particular where the domestic economic situation permits them to do so. The measures announced by Japan are to be welcomed for this reason. Based on the individual interests of all countries concerned, policy coordination should focus on the mutually consistent development of all economies in order to achieve a sustainable pattern of balances of payments. International surveillance activities should aim at identifying the conditions for such a medium-term pattern and at monitoring the compatibility of short-term economic policies of individual countries with this pattern. In this context, I welcome the first attempt at the use of objective indicators in multilateral Fund surveillance in the recent World Economic Out- look exercise. Based on this experience, we should work at improving the analytical framework and the procedures for the use of indicators as a means of strengthening multilateral surveillance. International cooperation is also needed to roll back trade protection. The present tendency toward increasing protectionism and bilateralism in

©International Monetary Fund. Not for Redistribution GOVERNOR FOR NETHERLANDS 109 foreign trade, as well as more frequent recourse to countertrade practices, is in blatant contradiction to our declared orientation toward open markets and to efficiency and fairness. It adds to the urgency of stronger international action in a multilateral context toward restoration of free trade. In this respect, the new round of trade negotiations within GATT is very important and we should join forces to ensure its success.

Debt Strategy The debt problems of many developing countries continue to require our full attention. Developments since last year, especially the precipitous fall in oil prices, underline the aptness of the case-by-case approach. I fully support the current debt strategy, as reinforced and supplemented by the ideas put forward by Secretary Baker a year ago. Progress has been made in implementing some elements of this strategy. Both the IMF and the World Bank are now actively involved in supporting growth-oriented adjustment programs in various major debtor countries. It is gratifying to note that such programs in many instances are in place, and in others are about to be implemented.

Current adjustment efforts by debtor countries should be continued, and in some cases intensified, in order to improve growth prospects and debt-servicing capacity. Such adjustment is also indispensable to diminish capital flight and should lead to a repatriation of flight capital. Only under such conditions can creditor confidence be restored. However, the current debt strategy requires that all the parties involved assume their share of common responsibility. The commercial banks should follow up their support of the current debt strategy by jointly increasing their net lending to those debtor countries that have adopted comprehensive adjustment programs. Adjustment programs can only succeed when supported by sufficient financing. In addition, both industrial and developing countries should intensify efforts to roll back trade protectionism, which forms a major obstacle to a satisfactory solution of the debt problem. Finally, the industrial countries have a special responsibility in reducing real interest rates by following sound fiscal policies.

It is of crucial importance that the IMF and the World Bank continue to play a prominent part in solving country debt problems, and that they should be enabled to do so. Taking into account the current magnitude of the problems of a number of these countries, especially those that are heavily dependent upon oil for their export earnings, access to Fund credit should remain unchanged in 1987. However, I continue to view the policy of enlarged access as being of a temporary nature, to be normalized by the time of the Ninth Quota Review.

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The SDR The SDR is sometimes discussed as a possible source of development finance. Although countries with limited access to the financial markets have a clear need for development assistance, the SDR mechanism should not be used for this purpose. The SDR is an owned reserve asset and its monetary character should be preserved and possibly reinforced. The oc- casional suggestions for large SDR allocations and the tendency to regard the SDR as a means of financing deficits, rather than as a reserve asset, may well have contributed to the reluctance of some members to agree to new allocations. In order to maintain the SDR's role as a safety net should there be a sudden urgent global need for liquidity, I favor annual allocations of SDRs in moderate amounts, commensurate with the long-term global need to supplement existing reserves. At the same time, I welcome further studies of possible improvements of the monetary characteristics of the SDR. In response to an Interim Committee request, the Executive Board has already made a major effort in this respect. It is my conviction that in an atmosphere of positive cooperation, we ought to overcome present objections against renewed SDR allocations. Possibly this could be advanced if resumption of allocations were accompanied by re-establishing mechanisms aimed at limiting prolonged use of SDRs, such as a reconstitution requirement. . . .

Low-Income Countries Turning to the needs of the low-income developing countries I think there are a few important points to make: —Many low-income countries, especially in sub-Saharan Africa, have— with the assistance of the World Bank—embarked on far-reaching economic reform programs; the programs are essential for the reactivation of productive capacity and the resumption of economic growth over the longer term; success, however, also depends heavily on the availability of additional financial resources. . . . —The structural problems of many low-income countries, especially those in sub-Saharan Africa, call for close cooperation and coordination between the Fund and the Bank; I am pleased to note that the staffs of both the Fund and the Bank, in close consultation with the borrowers, have drawn up the first joint policy framework papers; the Fund has already committed the first concessional loans under the Structural Adjustment Facility within the context of such a joint policy framework; in the future, IDA's nonproject lending will also be allocated, to the extent feasible, in conjunction with the resources of the Structural Adjustment Facility; not only the Fund and the Bank, but also other donors should so direct their programs that they support and complement to the maximum extent the implementation of a

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joint policy framework; such coordination should preferably take place within the existing mechanisms of consultative groups or UNDP round tables; at the local level the establishment of joint monitoring committees should be intensified. —Some problems are beyond the operational scope of the Bank, which nevertheless deserve serious attention; in particular, I am thinking of the deteriorating terms of trade of many sub-Saharan countries and their impoverishing effects as well as the alarming population growth rates; both deserve proper attention in the competent forums. . . . I want to extend a word of welcome to Mr. Conable; we look forward to working with him. I also join other Governors in paying tribute to Mr. de Larosière. His leadership and comprehension of the issues are outstanding, and we shall miss him.

STATEMENT BY THE GOVERNOR OF THE FUND FOR ECUADOR

Carlos Julio Emanuel

It is an honor, a pleasure, and at the same time a great responsibility for me to address this Meeting as spokesman for Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Guyana, Haiti, Honduras, Mexico, Nicaragua, Panama, Par- aguay, Peru, the Philippines, Spain, Suriname, Trinidad and Tobago, Uruguay, Venezuela, and my own country, Ecuador. At a time when the international economic and financial system is experiencing growing disequilibrium and serious difficulties, it is an enormous responsibility to speak on behalf of a diverse group of countries, whose common denominator is uncertainty and discouragement in the face of a crisis that is becoming endemic. It is a very difficult proposition to give uniform utterance to the different viewpoints and approaches to the crisis in the countries I represent, not only because of the differences in their economic and social structures, but also because of the variety of means they use to deal with the problems facing them. I shall therefore be making special reference to certain opinions voiced by the Ministers of the Group of Twenty-Four at their meeting in Washington on September 27, 1986. There is widespread opinion that the continued slow growth of the world economy is the result of the deflationary economic policy being adopted by the industrial countries, which is seriously affecting our countries'

©International Monetary Fund. Not for Redistribution 112 SUMMARY PROCEEDINGS, 1986 growth and export potential and complicating the problem of the external debt, whose solution requires appropriate economic policies not only in our countries but also in the industrial nations. For if there is no economic growth in our countries, how can we possibly meet our debt service obligations? This already serious situation is complicated by the constant proliferation of restrictions on free trade, by unjustified protectionism in the industrial countries, which, combined with the slow growth of the world economy, has weakened trade and led to sharp declines in the prices of raw materials and primary commodities, such as oil, cocoa, rice, soybean, wheat, cotton, meat, tin, and copper, which are the mainstay of many of the developing economies, especially in Latin America. Nor would there be any point in stepping up economic growth in industrial countries if steps are not taken to check the march of protectionism, whose impact on our economies, for example through the subsidization of agricultural exports in the European Community and Japan, and now also in the United States, is truly devastating. Although nominal interest rates have come down, real rates are still higher than our export growth rates, which gives an indication of the magnitude of the transfer of resources from our countries to the industrial countries. The potential saving of $15 billion in debt service resulting from the reduction in the nominal interest rate represents barely 40 percent of the loss of over $37 billion resulting from the deterioration in the terms of trade and the consequent reduction in export earnings projected for 1986. The present economic crisis—a crisis without precedent in the history of our countries—does have certain cyclical aspects, but certain of its effects point to a structural and long-term phenomenon. The debt burden is so heavy that an extremely large part of domestic savings, of public revenues, and of foreign exchange derived from exports is used—and will continue to be used—solely to pay the interest on the debt, instead of meeting the economic development needs of our countries. And this situation is further aggravated by the negative net flow of resources to our countries both from the commercial banking system and from the international financial institutions, including the Fund and the World Bank. It is truly surprising to realize that at a time of sharply falling commodity prices, resulting in a sudden drop in export earnings for nearly all the countries I represent, there has been not only a shortage of liquidity owing to the insufficiency of commercial bank flows—which has been the trend since 1982—but also, and this is more serious, a negative net transfer of resources to our countries from the international financial institutions, which are called upon precisely to offset these shortages of liquidity. Thus the Fund's projections in the World Economic Outlook of September 1986

©International Monetary Fund. Not for Redistribution GOVERNOR FOR ECUADOR 113 estimate net capital payments to the Fund in both 1986 and 1987, and in the year ended April 1986 repurchases from the Fund exceeded loans from that institution by over $400 million. . . . This situation, which involves a massive transfer of resources to the industrial countries, has seriously heightened our debt-servicing problems, and is therefore having a negative impact on the adjustment processes and economic growth prospects in our countries, while causing living standards to deteriorate. In these circumstances, our countries cannot be optimistic regarding the possibility of a quick exit out of the crisis affecting us, which was thought to be feasible when the Baker plan was announced at our meeting last year. Most of our countries have been carrying out serious, costly, and prolonged economic adjustment programs to correct our internal and external imbalances, thereby demonstrating that we in the developing countries have not been standing still in the face of crisis; that we are not indulging in economic existentialism; that we have acted in spite of the fact that the measures adopted by our countries have a high social and political cost that is already reaching virtually intolerable limits. For this reason, it is difficult to contemplate greater adjustments, given the present situation and the discouraging prospects for the world economy. The situation I have just described shows that despite the sacrifice inherent in the adjustment programs, it will be difficult, if not impossible, to achieve any level of economic growth, expand our export capacity, or meet our external obligations, unless there is a change of attitude internationally. This means, basically, that it is necessary to improve the external economic environment in which we, the debtor countries, have to operate, or, in other words, the world financial and development situation. Such improvement will involve the adoption of policies favoring economic growth and market accessibility, and recognition of the joint responsibility of debtors and creditors in both the creation and the solution of the debt problem. For this to come about, it is essential that the commercial banks make a serious effort to become effectively involved in solving the debt problem, for which they are jointly responsible, not only by making the debt restructuring process more flexible, but also by re-establishing voluntary flows of resources and agreeing to more suitable lending terms—such as lower real interest rates and margins—to facilitate payment of the debt and contribute to economic growth.

Role of the IMF I should like to give a brief analysis of the policies of the International Monetary Fund in its basic role, a role in which it provides support for the

©International Monetary Fund. Not for Redistribution 114 SUMMARY PROCEEDINGS, 1986 economic adjustment programs of its member countries, contributing its own resources and acting as catalyst and coordinator of other sources of financing, in particular the commercial banks, in the debt strategy. At the present time, unfortunately, the available financing is inadequate and adjustment needs are excessive. IMF funding as a percentage of the total financing requirements of its member countries has fallen 50 percent over the past two years. And we have already mentioned how the Fund's current policies have resulted in a negative resource transfer to many of the developing countries, a sign that those policies appear to ignore the serious liquidity difficulties facing our countries. The countries I represent believe that the periods of the adjustment programs are generally too short; that the amount contributed is inadequate; and, above all, that the programs do not pay attention to economic growth, income distribution, or short-term inflationary after-effects. It is thought that the programs demanded are often inadequate, since they pay excessive attention to the restriction of demand, and very little attention to the structural effects related to development. Nevertheless, it should be pointed out that recent negotiations may have signaled an important policy change on the part of the Fund, with the need for financing linked to a desirable minimum rate of economic growth. The Fund needs to make its conditionality more flexible, and, in particular, as regards the special facilities, it should return to the original situation in which the resources provided by those mechanisms were granted without any conditionality at all. It is considered advisable to reverse the recent trend of reducing access to Fund resources, and to push for greater use of the extended Fund facility. What is needed instead is enlarged access to the Fund's resources, to enable the organization to fully perform its role on the world economic scene and to maintain a reasonable ratio between drawings and the scale of world trade and the world economy, and in particular to enable it to promote growth-oriented adjustment. Although the countries I represent accept the principle that the Fund's resources must be put to use and must revolve, it is argued that at times like the present, when they are facing a very serious crisis, the Fund— which at the end of 1986 will have undisbursed resources of approximately SDR 30 billion—should adopt greater flexibility in its lending policy, increasing its disbursement of financial resources and extending maturities, to help them cope with structural adjustment problems, and adapt weak economies to unforeseen external circumstances, such as the drastic fall in the prices of oil and other primary commodities. In this context, mention should be made of the Japanese Government's offer to contribute SDR 3 billion as a means of temporarily boosting the Fund's liquidity.

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As already stated, since neither the amount nor the term of the Fund's loans is adequate at present, the countries I represent believe that it would be both prudent and timely to introduce greater flexibility into the sanc- tions mechanism provided for in the Fund's Articles of Agreement for countries that are unable to effect repurchases within the specified time limit. In this connection, two of the countries I represent have unfortunately been penalized recently by the Fund through findings of ineligibility, which has given cause for concern to the rest of the countries in the area, and has led to repeated demonstrations of solidarity in various Latin American forums and agencies. If uncorrected, this situation could give rise to a clash of opinions, not just from one isolated country, but from a whole group of countries, which would affect the relations that an international agency like the Fund needs to maintain with its members. This is why we welcome the earlier pronouncements of the Group of Twenty-Four to the effect that it is essential for the Fund to be more flexible in applying the relevant section of Article V, which provides for post- ponement of the date of discharge of a repurchase obligation when discharge on the due date would result in exceptional hardship for the member. There is widespread opinion that the Fund should have sufficient resources to satisfactorily perform its basic function of supporting adjustment programs, and that this should normally occur through an appropriate increase in quotas. The only point of dissension concerns the actual amount of such an increase. In this connection, the countries I represent believe that the present level of quotas is totally inadequate and limited, and they have once again voiced their disagreement with the slight increase obtained at the Eighth General Review of Quotas, in contrast to the much more widely held opinion of countries that favored at least a doubling of quotas. Consequently, we believe it is essential not only to correct this situation at the time of the Ninth General Review of Quotas, but also to bring this Review forward; in future, we should like to see the normal interval between reviews reduced from five to three years. With respect to the increase itself, a larger percentage should go to the developing countries. Despite the fact that the Fund and the World Bank have different functions and responsibilities, it is nonetheless true that these institutions have common objectives that oblige them to participate in interrelated activities in support of the developing countries; it is therefore essential to ensure ongoing coordination at an appropriate level between these two important organizations, without either one losing its identity or the goal for which it was created.

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Unfortunately, the countries I represent have seen with some misgivings how these aims have been distorted, the proposed coordination being viewed and applied as cross-conditionality rather than as a formula for channeling more resources to the developing countries on improved terms. Furthermore, they regard it as neither appropriate nor reasonable that the World Bank's loans should increasingly demand conditionality in terms of economic policy, with characteristics similar to those of the Fund's conditionality. In analyzing the present exchange system at the international level, the countries I represent are of the opinion that results to date have been negative, since the exchange rates of the leading reserve currencies have maintained, over the short term, a high degree of volatility and persistent misalignment, which has bred uncertain future exchange rates and adversely affected trade development, investment, and the allocation of resources. On this point, we also endorse the proposal of the Group of Twenty-Four regarding the need to achieve adequate exchange stability through the establishment of "target zones" for the major currencies, with a view to improving economic policy coordination among the industrial countries. These countries, in turn, should adopt and maintain stable economic policies, giving greater significance to the international aspects, and particularly to the effects of application of those policies on the economies of the developing countries. In general, our countries support stricter supervision of the exchange policies of the industrial countries. They also find it necessary that international liquidity be supervised. Recently it has been restricted, with the SDR being prevented from playing a major role in the international financial system through lack of allocations, in violation of the basic tenet of the First Amendment to the Fund's Articles of Agreement creating the SDR, and requiring that it be made the principal reserve asset of the system. New and substantial allocations of SDRs, which should start immediately, would not only contribute to this aim, but would also help correct the persistent defects in the present international monetary system and the shortage of liquidity. These new allocations should also make it possible to set up a concessional fund to finance the excess of real interest rates over historical levels, which the debtor countries are obliged to pay on their debt to foreign commercial banks.

Adjustment Policy in Ecuador To illustrate the domestic effort being made in our countries to solve the crisis, I shall outline the adjustment measures recently adopted by the Ecuadoran Government to cope with the crisis after it worsened with the fall in oil prices beginning in January 1986, causing our exports to lose one third of their value and our government revenue to decline by a fourth. The

©International Monetary Fund. Not for Redistribution GOVERNOR FOR ECUADOR 117 reorganization of the nation's economy is based on twin foundations designed to rein vigórate the weakened external sector. One is the promotion of non-oil exports and the more efficient use of our scarce foreign exchange; the other is the encouragement of greater financial savings to reduce dependency on foreign savings.

The new foreign exchange system, in which the market sets the exchange rate for the economy, is designed to make the private sector self-sufficient. The foreign exchange proceeds from the private sector's exports may be freely sold on the market to finance its imports and enable it to make other payments abroad, while the now reduced resources derived from oil will be used to cover public sector imports and pay the debt service. The philosophy behind this approach is that the nation cannot go on ad infinitum incurring new external debt to make good the entire foreign exchange shortfall from its exports and must instead seek a new economic reality for itself. This measure constitutes a dramatic shift in the direction of our country's foreign exchange policy from that which had prevailed for over half a century. It is also making us sellers rather than buyers, created not just to consume but especially to produce. The measures also involve the further liberalization of our interest rate policy, designed to continue promoting financial savings and to provide higher earnings for lower-income Ecuadorans.

With Ecuador's economic policy being managed in this way, the Fund and World Bank understand that we are making considerable effort and sacrifice to overcome the serious financial crisis besetting us, without pressures or conditions from any organization inside or outside Ecuador. The Government conducting the affairs of Ecuador has not accepted and does not accept conditions. On the contrary, it has been applying its own economic program from the outset and has shown its ability to establish an objective, realistic economic policy that enables the nation to solve its major problems.

But it is important to emphasize at the same time that our Government refuses to sacrifice our country's economic and social development to payment of the external debt. Ecuador has stated more than once that it will service its debt to the extent permitted by its true ability to pay, not that it will pay its debts at any cost. The new plan now in effect, under which the debt is to be paid out of oil income, clearly reveals this policy objective.

Returning to those I represent, if there are no changes in the growth strategies and policies of the industrial countries or in international cooperation, so as to achieve a genuine opening of markets, the hopes of our countries for economic recovery will be vain, and this will aggravate the social tensions that already exist, perhaps leading not only to greater dis-

©International Monetary Fund. Not for Redistribution 118 SUMMARY PROCEEDINGS, 1986 equilibrium in the world economic system, but also to isolated, unilateral decisions out of desperation and mistrust, with undesirable consequences. In conclusion, on behalf of the countries I represent, may I express our appreciation to the people and Government of the United States for the warm hospitality they have extended to us, and wish the greatest success to this important international meeting. We hope in particular that its results will help light the path to progress for our peoples, for that is the only way to lay the foundations for the peace to which we all aspire, in this year dedicated by the United Nations to peace. I would not wish to conclude without expressing, on behalf of those I represent, and of Ecuador in particular, our deep appreciation and gratitude to Mr. de Larosière, who has announced that he is leaving the Fund, for his superb management of that institution. May he enjoy the greatest success in his future activities.

STATEMENT BY THE GOVERNOR OF THE FUND AND THE BANK FOR THE UNITED STATES

James A. Baker III

We meet at a promising yet trying time. Our nations are constructing, piece by piece, a strengthened framework for cooperation on economic issues. This framework builds on the foundation of established institutions and agreements—the International Mone- tary Fund, the World Bank, and the GATT—while enhancing their roles. This framework also includes new features, such as the improved multilateral surveillance system called for at the Tokyo economic summit. The problems we seek to address through this evolving system are difficult, complex—and at times the cause of discord. This dissonance is to be expected. Indeed, it is a sign of any pluralistic governing process. The key point is that we now regularly review the effects of our individual actions on matters of common concern. In doing so, we each periodically expect to promote, discuss, and defend our actions within agreed forums. The process itself creates a discipline, even when we may disagree. Our political processes must, however, result in substantive progress on the critical economic issues of our times. As I see it, these issues are three: restoring balance to our trading system; relieving the burden of developing nation debt; and sustaining noninflationary global growth. My remarks today will focus on the first two. (Sustained global growth is of course inex- tricably linked to both of them.)

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Before moving to these issues, we might reflect that the success of nations, institutions, and the processes that bind them depend importantly on the leadership of individuals. Today we mark the departure of a special leader, Jacques de Larosière, and the new stewardship of another, Barber Conable. During the past eight years of stress and change, Jacques de Larosière has played a vital role in strengthening the Fund and the international financial system. His many accomplishments will affect the destiny of nations for years to come. The progress that we have made in the areas of debt policy and economic coordination is, in no small part, due to his effective leadership. His dedication to greater harmony and prosperity in the world economy has been an inspiration to us all, and we have deeply appreciated his wise counsel. Jacques, I wish you and your family all the best as you return to France. We warmly welcome Barber Conable as the new President of the World Bank. His record commands our respect; his vision warrants our support. We can only move forward if we continue to inspire the commitment of individuals like these two extraordinary public servants.

The Imbalances of Trade Today's trade imbalances, particularly among industrial nations, are no secret to any of us. They affect all of us, large and small nations alike. Our challenge is to rectify these imbalances in a manner that supports a growing world economy and helps those nations coping with large debt burdens. If we do not, I would fear for the future in view of the haunting spec- tres of protectionism and isolationism. There are many factors that contribute to these imbalances of trade. None of us now doubts that the exchange rate relationship of last Septem- ber needed to adjust to fundamental underlying economic conditions. Since our Plaza agreement, the dollar has depreciated substantially. The dollar has reversed the appreciation against the yen that took place earlier in the 1980s and turned around much of its rise against the deutsche mark. While there may be disagreements about degrees of further adjustment, I think that we allconcur that the changes in exchange rates of key currencies that have already taken place should facilitate more balanced trading patterns. Exchange rates should not, of course, be the sole instrument of adjustment. We must examine the effect of industrial nations' growth prospects on their major trading partners and on developing countries as well. Growth in the United States has helped sustain world economic growth in recent years. Real output in the United States has risen at an annual rate of 4.3 percent since our current economic expansion began at the end of

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1982. We created 11 million jobs and reduced our unemployment rate from 10.6 percent to 6.7 percent. In the process, from 1982 to 1985, the U.S. market absorbed almost 60 percent of the increase in non-oil developing nation exports. As the U.S. economic expansion has slowed to a more sustainable pace, we have urged the other industrial nations to grow more quickly. Surplus nations, in particular, must spur domestic demand to grow faster than GNP. Some of these countries appear to be taking steps to enhance growth, although not as rapidly as the trade imbalances may necessitate. Moreover, troubling forecasts suggest that some nations' growth may slow over the course of the next year and that average growth rates abroad may slip below that of U.S. expansion. Our coordination efforts have focused attention on the connection between national growth and trade balances. The Tokyo summit agreed to a collective review of economic objectives and forecasts, relying on a range of indicators, with a view toward examining their mutual compatibility and the need for remedial measures. This weekend we completed the first of these reviews. Of course it would be fortunate if such reviews could result in immediate agreement. But often they won't. Indeed, the fact that we are forthrightly discussing some of our most sensitive economic policies almost ensures that at times we will differ. After all, we are engaged here in a process of trying to solve significant problems. The process can and will work. It produces both improved understanding and further incentive to coordinate policies. What matters most, however, is whether good intentions are carried out. As the President of the United States told us yesterday, the only way to resolve the external imbalances among countries is through increased growth abroad, a greater competitiveness for the U.S. dollar, or both. The President also pointed out that open world markets are essential for adjustment of trade imbalances. And open markets provide debtor nations the outlet for exports that are essential if they are to service their debt. Therefore, we are encouraged by the ministerial agreement at Punta del Este to launch a new trade round under the GATT. This declaration is an excellent example of how previous arrangements for international economic cooperation can evolve to meet changing demands. The rules of the open trading system must now encompass agriculture, services, investment, and intellectual property rights—or else the principle of comparative advantage upon which the system is founded will be overpowered by protectionism. The spirit of cooperation among a large number of diverse developed and developing nations at Punta del Este augurs well for the long, difficult negotiations ahead.

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Our commitment to free but fair international trade should not be underestimated, but neither should the forces of protectionism. President Reagan has taken unyielding and sometimes unpopular stands against protectionism at home—vetoing textile, copper, and shoe quota legislation; opposing a dangerous trade bill passed by our House of Representa- tives; and leading liberalizing initiatives both multilaterally and bilaterally. The President has also acted against protectionism abroad. He is the first President to initiate action against such practices under his retaliatory authority. While resisting protectionism at home, the United States must deal firmly with unfair trade practices overseas to maintain domestic support for the open trading system. I recognize that it is also incumbent upon the United States to do its part to reduce the trade imbalances and encourage noninflationary growth. First, we are reducing our budget deficit. At this moment, our Congress is working on legislation to meet the Gramm-Rudman-Hollings budget deficit target for fiscal year 1987. Between calendar years 1986 and 1987, our federal deficit as a percentage of projected GNP should fall from 4.7 percent to about 2.9 percent. Among the five major nations, only the Federal Republic of Germany would have a budget deficit/GNP ratio substantially below ours. Second, we are lowering federal outlays as a percent of GNP. We now project them to be at 21.9 percent of GNP for this fiscal year, down from 23.9 percent in fiscal year 1986. Third, we have cut our interest rates, a major determinant of the well- being of the international community. In 1980 the prime lending rate in the United States rose to 21.5 percent; it is now down to 7.5 percent. The rate fell by 2 percent this year alone. Fourth, while lowering interest rates and nurturing world economic growth, we have brought inflation under control, and kept it that way. Our 3-4 percent inflation of recent years is a far cry from the double-digit increases early in this decade. Our current inflation rate is even lower because of the reduction in crude oil prices. Perhaps more important for the future, the pressure for inflationary wage increases has dissipated. Fifth, our Congress has just enacted an historic revenue-neutral reform of our tax system. This legislation broadens our tax base in order to lower rates, thereby increasing incentives for truly productive economic activity. We cut the top statutory individual income tax rate from 50 percent to 28 percent, our lowest top rate in over half a century and less than half of the 70 percent top rate that constrained Americans in 1981. We hope and expect that such base broadening and rate reduction will prove to be a model for other nations.

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The United States will not rest on these laurels. We know that we must take more steps to improve our international competitiveness. We must enhance productivity, boost private savings, and orient our business culture more toward exports. But these improvements will take time and great effort to achieve. Moreover, they will not right the trade imbalance unless our major trading partners also adjust their economies and attitudes. We must act in concert over time. My final point on trade imbalances is their relation to the debt problems of developing nations. The developing nations are critical partners in our interdependent economic system. Our growth fuels their economies and their economic energy drives much of our trade and investment.

The Program for Sustained Growth One year ago we proposed an initiative by debtor nations, international institutions, and private banks to help nations cope with their debt burdens and get on the track of sustained growth. In doing so, we stressed that this program was a long-term effort. The debt problem took years to un- fold and each nation's challenge is unique. So we must expect that they will progress at different paces, and that the overall solution will be neither quickly nor easily attained. To recognize our substantial success to date, we must focus on specific actions by various nations and the building of new institutional capabilities that will further the next steps. The sum of these particulars is encouraging. Considerable progress has been achieved, not by command, but through the interaction of all parties pursuing mutual interests. Virtually all the major debtor nations have emphasized the need for greater economic freedom through the adoption of more open, market- oriented economies. First, many nations are implementing monetary and fiscal reform programs to establish the vital prerequisites for growth and stability. In large part, these programs concentrate on eliminating inflation and reversing capital flight. Major reforms in Bolivia and Argentina have cut inflation rates enormously, and most other major debtors continue to make steady progress. Second, several key debtor nations have recognized the heavy structural burden of inefficient or highly subsidized public enterprises. These operations siphon off crucial national savings and sharply increase external indebtedness. Several countries have moved to transfer government-owned industries to private ownership and management. Mexico, for example, has made a good beginning in this area.

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Third, debtor economies are placing greater reliance on markets to allocate resources. More leaders have recognized that efficient markets can improve growth prospects and the well-being of their people. Colombia has reduced government interference in its import, export, and foreign exchange system, and implemented more market-sensitive agricultural policies. Turkey has lowered trade barriers and deregulated its domestic economy. Ecuador is opening up its investment regime and is encouraging foreign investment. Mexico's recent steps to liberalize free trade, which have received both IMF and World Bank support, provide a sound basis for its accession to the GATT. The earliest returns for the debtor nations are encouraging. We expect real GNP growth for 137 non-OPEC developing nations to average about 3.5 percent in 1986 and more than 4.0 percent in 1987, a threefold increase above the rate of growth in 1983. Moreover, the 40 percent reduction in interest rates since 1985 has sharply reduced the burden of debt service. We must acknowledge, however, that some oil exporters are facing a special challenge. The international lending institutions are the second major force behind this growth program. They have been working more closely with debtor nations, and with one another, to promote adjustment policies, achieve market-oriented structural change, and build vital institutional capabilities for the subsequent stages. The Fund has established stand-by or enhanced surveillance programs for 11 of the 15 major debtors and discussions are under way with 2 more. The Fund should continue to stress the importance of sound short-term fiscal and monetary policies to create a financial environment conducive to development. Nevertheless, the Fund must also emphasize, as it has begun to do, the long-term structural policy changes necessary for sustained growth. . . . The Fund, the Bank, and the nations they serve have made a good start. But more can and should be done to strengthen the private sector, reform tax policies, improve domestic capital markets, liberalize trade, and reduce capital flight. The Fund should give more attention to these matters when it designs its programs. Both institutions should lend greater encouragement to foreign direct investment. The developing nations must welcome and draw more equity investment if they wish their citizens to enjoy flourishing, productive economies. We are also strengthening our ability to help the developing nations by forging new tools for specific problems. The Structural Adjustment Facil- ity can help us promote growth policies for poorer nations with protracted

©International Monetary Fund. Not for Redistribution 124 SUMMARY PROCEEDINGS, 1986 balance of payments problems. The Multilateral Investment Guarantee Agency could encourage badly needed investment. The third mutually reinforcing element of our program for sustained growth is increased private bank lending to support comprehensive adjustment programs. While most banks have pledged their commitment to this effort, we should not score this as a success until the financing to support the adjustment programs is in place and the bank loans are made. The Mexican discussions are providing the first test of the banks' willingness to provide a major new money package. As we now all know, just yesterday, Mexico and the banks reached an agreement in principle on a substantial loan package. This is an important, concrete example of the banks' willingness to support the strengthened debt strategy. We look to the prompt completion of this agreement so that Mexico will be assured of the financing to implement its growth program. And as important as the Mexican loan package is, we should not lose sight of some significant early efforts: banks have already provided new loans to Uruguay and Côte dTvoire, and an oil facility loan for Ecuador is nearing completion. In addition, new multiyear reschedulings have been completed with Yugoslavia and Côte d'Ivoire, while negotiations are now under way with Bolivia, Morocco, Nigeria, and Uruguay. In light of all of these developments, then, I think we can look forward to the increased private financial flows called for by the strengthened debt strategy.

Conclusion My comments today have focused on the two critical issues of trade imbalances and the debt problem in developing nations. With the decline of inflation, interest rates, and oil prices, there is a signal opportunity for industrial nations in surplus to help on both these fronts by boosting their growth. I urge these countries to seize the moment. My remarks also have addressed a third topic, albeit more obliquely. We all sometimes feel the frustrations of our labor on the most demanding international economic problems of our era. This is natural, for our aims are great. Once we acknowledge the scope of our ambition, we can also observe that something exciting is occurring. Our nations are fashioning new practical means to work in concert toward vital ends. Sometimes this evolving framework will produce grand accords. Other times we will be airing differences in the process of constructing responses to new problems. Most of the time we will be working together to make persistent progress on the world's principal economic challenges. Such is the nature of a resilient political process. Its effective operation necessitates tenacity, patience, and a continuing genius for compromise.

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International economic policy coordination is difficult but possible. It has been a long time since we have coordinated as well as we have over the past year as a whole. Much more is possible if we persevere. Drawing from recent experience in the United States, many people said we would not achieve fundamental tax reform; they claimed the political system would not permit it. Yet we maintained a steady course and in the end accomplished what we set out to do. With what is at stake for the well-being and economic freedom of people around the globe, there is no reason we cannot complete this quest as well. In a sense, our nations are working on a puzzle—an intricate, difficult, but solvable puzzle. We're sorting out a number of pieces. With ingenuity, time, and testing, we will find the perfect fit for each piece. We keep going because we know that there will be a solution and that the pieces will form a whole. Unlike the players in a puzzle game, our search is a serious one. With persistence and vision we can complete this important design for the future. One of my predecessors at the Treasury, Henry Morgenthau, opened the Bretton Woods Conference 42 years ago by telling the delegates that the problems in the international economy were "beyond the capacity of any one country, or any two or three countries." They were, he said, multilateral problems that required multilateral cooperation. After three weeks of intensive work the delegates concluded their mission successfully. Amid this great achievement, Morgenthau added a caution: "We are at a crossroads, and we must go one way or the other. The Conference has erected a signpost—a signpost pointing down a highway broad enough for all men to walk in step, and side by side. If they set out together, there is nothing on earth that need stop them." Our predecessors chose the right path, and we all have gained through their wisdom. Now it is our turn. Let us face our common challenge as well as they did theirs, so that future generations from all nations will have the best opportunity to pursue their aspirations together.

STATEMENT BY THE GOVERNOR OF THE FUND FOR INDONESIA

Radius Prawiro Each year at this time, as the Governors of the International Monetary Fund and the World Bank converge for the joint Annual Meetings of the Fund and the Bank, we find ourselves looking out at an altered world— different both from the one we knew a year earlier and different also from

©International Monetary Fund. Not for Redistribution 126 SUMMARY PROCEEDINGS, 1986 the one predicted to emerge, in spite of our best efforts as some of the world's foremost economists and policymakers, to set a clear agenda for economic development. With reflection on the nature of economic change and on the role we play in influencing its direction, two observations come to mind. The first is a comment made by Guido Carli, Governor of the Bank of Italy, during the early 1970s. The course of economic affairs, he observed, is "like a constant explosion, a powerful, relentless cataclysm, with each new development, as it occurs, captured, for an instant in time, in slow motion." The second is an observation taken not from the textbooks of economics, but rather from the laws of physics, known as Newton's Third Law. This law establishes the principle that "for every action, there is an equal and opposite reaction." What relevance have these remarks to us as we survey the altered economic landscape of 1986? They speak to me of two things: first, that we must make it our goal to do more than merely respond, from one year to the next, to what Carli describes as those moments captured in "slow motion"—as such moments, of course, represent symptoms, not causes. Sec- ond, that achieving this goal will require a more acute sensitivity to the root causes of economic change and, in the manner suggested by Newton's Law, greater foresight in projecting the consequences of our actions. The economic landscape of 1986 presents us once again with the usual intriguing shifts and realignments in global economic difficulties and challenges. A number of issues that were of paramount concern a year ago have since been "resolved"—only to give rise to new dynamics, which in turn have created, within the overall world economic order, a different configu- ration of stresses and imbalances. It is almost like the slow, gradual rota- tion of a giant global kaleidoscope. Let me cite two of the most obvious examples. First, the realignment in the world's major currencies—specifically, the decline in the value of the dollar—following the 1985 Plaza accord was hailed last year as an important spur to export-led expansion within the U.S. economy, and hence toward broadly based world economic growth. While this hope has been partially vindicated, the impact of currency realignment has certainly been far less salubrious than anticipated. More relevant, however—because the extent of the dollar's fall could not be foreseen—what was not contemplated was the "indirect" negative impact this was to have on many developing countries, such as my own. The unintended effect has been a dramatic plunge in our export earnings—which are pegged largely to the falling dollar—and a corresponding surge in debt obligations in non-dollar- denominated currencies.

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The other obvious example, of course, is the cataclysmic change in energy pricing. I need hardly dwell on the evident short-term benefits accru- ing to the oil importing nations—largely the industrial countries—nor the serious economic strains this places on the oil exporters. What is more important to us at these meetings is the disruptive and uncertain impact this unforeseen development is having on overall economic stability and on the orderly policy planning of our members. Currency and energy pricing shifts represent the unforeseen elements in global trends during the past year. But what about the concern we already knew about—the problems that dominated discussion and cried out for remedial action during our last round of meetings in Seoul, Republic of Korea, and in previous years? In some cases the news is good. We can observe with some considerable satisfaction, for example, that two long-standing and apparently intractable problems—inflation and high interest rates—hardly figure on this year's agenda. Through the combined impact of decisive policy shifts by pace-setting economies, together with responsible economic management across a broad range of individual national economies, these two ills are no longer dangerously clogging the arteries of economic growth in most—if not all—of our members' individual national economies. Unfortunately, in the case of other perennial problems, we have been less successful in making progress. World trade remains depressed; problems of debtor nations, if anything, have become worse; commodity prices have deteriorated further; and currency alignments—in addition to the dimensions that I cited a moment ago—remain a major destabilizing force in the future direction of worldwide economic development. Most acutely, these prevailing forces have taken their greatest toll during the past year on the world's developing nations, including my own. In aggregate, the decline in the overall rate of growth of industrial economies, the slowdown in the expansion of world trade, the persistence of protectionism, and the continuing slump in commodity prices have had the harmful effect of largely smothering any hoped-for improvements in growth and development among the majority of countries in the developing world. Worse, in the countries where it has been most acutely felt, this reduced growth has also brought about serious overall financial deterioration. Loss of liquidity, drains on foreign reserves, crises in debt-servicing capacity, and severe budgetary restraints have swelled the ranks at the economic infirmary, ranging from nations suffering from mere anemia to those with life-threatening economic illnesses. Every year at this important round of meetings, we have the opportunity to make progress on three critical fronts. On the national level, we can help to instill an awareness of enlightened policies and practices within the in-

©International Monetary Fund. Not for Redistribution 128 SUMMARY PROCEEDINGS, 1986 ternal economies of every member nation. On the bilateral level, we can encourage the pursuit of constructive synergistic actions brought about through increased cooperation and joint efforts. And on the multilateral level, we can endow our two leading organizations—the Fund and the Bank—with a mandate to pursue specific surveillance. With an eye to the economic landscape of 1986, let us look briefly at each of these levels to see where we go from here. At the national level, most policies and priorities cannot be generalized, but there are several key exceptions. We are all generally in agreement that certain principles of policy management apply to countries across the board at the present time. It is probably sufficient to cite three. First is the need for continued prudent fiscal and monetary management—balancing the importance of stimulating growth against the burdens of excessive indebtedness. Second is the need for sustained improvements in economic efficiency, administrative reform, and all other measures necessary to achieve comparative levels of competitiveness. Third is openness to trade and international cooperation—or, put another way, the rejection of protectionism. If we move beyond generalities to examine specific nations, we can identify policies in a more explicit and focused manner. In fact, each of our member countries has a clear list of priorities and remedial measures that it should be pursuing to maximize effectiveness and bolster its economic strength. My own country, for example, has a number of unequivocal priorities that we must pursue in order to improve our economic performance. In regard to bilateral priorities, there are again myriad policy adjustments that are needed to enhance economic development on a sectoral and regional basis throughout the world. In this area, I will restrict my comments to two key issues. These are, first, currency fluctuations and, second, financial flows from industrial to developing countries. In the case of world currency alignments, there is little doubt that we are presently poised at the brink of major structural changes. Already, the "floating rate" system has been altered by the Plaza accord to which I al- luded earlier. This in itself is good news in view of the tremendous hardships and uncertainties experienced by many member countries during the past several years of debilitating currency fluctuations. The next moves are far from clear. A number of constructive—and hotly contested—possible scenarios are currently under review. What is clear is that the future system of world currency valuation is now a matter of bilateral concern. An early settlement of this matter among the members of the Group of Seven—in consultation with all other appropriate bilateral and multilateral parties—is a matter of utmost importance.

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On the second issue, the matter of financial flows from industrial to developing countries, important first steps have also been set in motion. I am referring to such proposals as the plan by U.S. Treasury Secretary Baker— announced at our meeting one year ago—and more recently to an even more ambitious funding proposal advanced during the past summer by U.S. Senator Bradley at an independent monetary conference in Zurich. In addressing this issue, what is of paramount importance is that the flow of funds from the industrial to the developing world—through whatever means—be increased. Flows are especially needed in the form of direct foreign investment in developing countries, and, in the case of debtor nations, through increased access to loans. It has been stated before, by those more eloquent than I, that the issue here is not the "bailing out" of the world's poorer nations—but rather the sustained health and vigor of the entire world economic order. Finally, we come now to the issues of a multilateral dimension—specifically, to the role played by the two organizations on whose behalf we are all gathered here in Washington for these important meetings. I remain convinced that, in all our efforts, both at the national and bilateral levels, the Fund and the Bank are best equipped to serve as the primary catalysts and orchestrators of all we undertake. In this spirit, let me comment briefly on two broad areas affecting the future performance of these two institutions: first, on the resources they have at their disposal and, second, on the role they have to play through the policies they pursue at this juncture in world affairs. On the matter of resources, it is my view that if the Fund and the Bank are to be able to carry out their central role in providing member countries with needed financial and technical assistance, they cannot be effective if constrained either through inadequate resources or diminished authority. In this regard, I am pleased with the consensus we have reached on the need for substantial expansion of the Bank's lending program. . . . Fellow Governors, ladies, and gentlemen, we are not the sole players on the stage of world economic growth and prosperity. Many of the men and women who generate the wealth of our nations are entrepreneurs and in- dustrialists who scoff at the very regulations and controls that serve as our mechanisms for action. Such is the vast complexity of the world's economy—that constant ongoing explosion. Yet, it is the smooth and orderly functioning of that economic system, and the equitable distribution of the world's resources, in which all nations have the right to share, that is uniquely in our hands. Within both the International Monetary Fund and the World Bank, let us always uphold these principles—and let us never lose sight of the responsibility we all share for the consequences of our actions.

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May I conclude by heralding the arrival of two new member nations within the family of the Fund and the Bank—Poland and Kiribati. Allow me also to echo the sentiments expressed by my fellow Governors in welcoming the new leadership provided to the Bank under Mr. Conable. On the other hand, we heard with regret of Mr. de Larosière's decision to step down before the end of his second term and would like to place on record our deep appreciation for the great contribution made by Mr. de Larosière during his tenure with the Fund.

STATEMENT BY THE GOVERNOR OF THE FUND AND THE BANK FOR AUSTRALIA

PaulJ. Keating I take this opportunity to welcome Poland and Kiribati to membership in the Fund and Bank. Notwithstanding criticism of these two institutions from time to time, I notice that membership continues to grow. Countries prefer to be inside rather than outside. The Fund and Bank cannot be doing too badly after all. I take this opportunity of welcoming Mr. Conable as the new President of the Bank. I also wish to express Australia's appreciation of the work done by Jacques de Larosière as Managing Director of the Fund. He has displayed great patience and stamina in dealing with what at times seems to me to have been most difficult problems reflecting in part the particular peculiarities of the countries involved. He leaves a strong institution behind him and he goes with our best wishes for the future. I would like to break a little with tradition in this plenary statement. Usually we try to cover the waterfront with a statement of our position on the numerous aspects of the work of the Fund and Bank. That seems to me to be something of a waste of time. Our views are well known to members of the institutions, either from what has been said through the year in the two Boards, or from what has been said in meetings of the Interim Com- mittee or the Development Committee. Today I am going to concentrate on talking about the world economic situation, viewed from our rather special position in the South Pacific. I will however make one exception to that. I refer to the problems of the Pacific Island countries. While the Pacific Islands do not face the poverty of sub-Saharan Africa, and they do not have the debt problems of Latin America, they do face very special and very real development constraints. Illiteracy, lack of a resource base, and geographic isolation all work to compound their development

©International Monetary Fund. Not for Redistribution GOVERNOR FOR AUSTRALIA 131 problems. Kiribati, for example, our newest member, consists of 33 coral atolls, with a land area of 800 square kilometers, spread over 3.6 million square kilometers of sea. Such countries present the Bank in particular with special problems in terms of development assistance. But I hope that the Bank will find a way to help such countries even though the scale of operations will necessarily be below those which the Bank normally undertakes. . . . I move now to the main story. As we see it, these Annual Meetings are taking place at a particularly important time. To us, the world economy seems to be balanced on a knife edge. On the one hand, we have all those forces at work which give us hope for the future: —inflation in industrial countries is running at low levels; —action is being taken in many countries to improve fiscal discipline; —interest rates are lower in nominal terms; and —there are some signs that exchange rate realignment may be nearing a more stable and sustainable pattern. On the other hand, we have opposite forces at work which throw doubt on the strength of the recovery: —some important surplus countries are hesitant lest increased economic activity lead to a resurgence of inflation; —an adequate return to fiscal discipline in the United States is not assured; —interest rates may be low in nominal terms but they are still high in real terms—investment is not strong; and —the exchange rate realignment is slow in working its way through to the current account balances. The net result of all this is that, at the moment, the world economy is hang- ing In the balance. It has lost its forward momentum. There has, in fact, been a slowdown of economic activity in the industrial countries: in 1984 the rate of growth in the industrial countries almost reached 5 percent; in 1986 this rate seems likely to fall to under 3 percent. There has been a slowdown in world trade: in 1984 world trade grew at a rate of 8V2 percent; in 1986 it seems more likely to grow at a rate of 3V2 percent. There has been no perceptible improvement in unemployment in the industrial countries: in 1984 unemployment rates stood at about 8 percent; in 1986 the figure is likely to remain at about 8 percent. Meanwhile, balance of payments disequilibrium widens. The U.S. current account deficit continues at well over $100 billion a year. The current

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account surplus of Japan and the Federal Republic of Germany, taken together, is running at over $100 billion a year. We are aware of the kinds of reasons why the industrial countries take the view that the present situation is but a temporary setback pending further advance. It was a very bad winter in Europe; there was a rundown in inventories in the United States; the first effects of the fall in oil prices have been negative for industrial growth; and the upward slope of the exchange rate J-curve takes time to materialize. But we can be forgiven for not being entirely reassured by such rationalizations. For countries outside the major industrial group (and there are well over one hundred Fund members in that category) what happens to industrial growth is probably the single most important factor determining their ability to pay their own way, to avoid adding to debt, and to service existing debt. It has been estimated that (other things being equal) a rate of growth in the industrial countries of at least 3 percent is needed to keep commodity prices stable in real terms. The rate of growth of industrial countries is below that modest figure at this time. And what is more, other things have not remained equal, as will be explained later. In fact, there has been a sharp fall in commodity prices in recent years: oil prices have fallen 50 percent in two years, and non-oil prices have also fallen, though not so sharply, in the last two years. Non-oil prices, however, have been declining for some time and have fallen more over the past ten years than oil prices. Associated with that decline in commodity prices, there has been a downturn in the fortunes of the developing countries. There has been a slowdown in the rate of growth of both oil exporters and non-oil exporters over the past few years, and the current account deficits of these countries have widened again. In 1985 their current account deficit was down to around $19 billion; in 1986 this is likely to increase to over $50 billion. It follows from these trends that the debt of the developing countries is likely to continue to grow. In 1985 their debt is estimated to have reached over $900 billion; in 1986 it is forecast to grow to over $950 billion; and by 1987 it is likely to exceed $1,000 billion. It is a sobering thought that, given the slowdown in the rate of growth of developing countries in 1985 and 1986, and assuming a population growth of about 3 percent a year, it is quite likely that standards of living are actually falling at the present time in many, if not most, developing countries. At the center of the decline in the fortunes of the non-industrial world has been the commodity price fall. This trend continues. Non-oil commodity prices are expected to fall by 18V2 percent in real terms in 1986. Given

©International Monetary Fund. Not for Redistribution GOVERNOR FOR AUSTRALIA 133 the continued firmness of industrial goods prices, there has been a sharp worsening in the terms of trade of the non-industrial world. Equally, it has meant a sharp improvement in the terms of trade of the industrial world. What is happening before our very eyes today is a massive transfer of income from the developing world to the developed world because of changing terms of trade. The $50 billion improvement in the current account of the industrial countries expected in 1986 is more than accounted for by the improvement in their terms of trade. This $50 billion is a large figure by any standard. It is a measure of the contribution developing countries are making to developed countries largely because of falling commodity prices. It is in fact almost as large as the expected current account deficit of $58 billion for developing countries as a whole in 1986. But the story gets worse. As I suggested earlier, other things are not always equal in this imperfect world of ours. If this decline in commodity prices were not due to the slowdown in economic activity in industrial countries, and if the worsening in the terms of trade of developing countries were due to the natural forces of supply and demand, there would be no grounds for complaint. The slowdown in economic activity in the industrial countries, however, is only one factor, though a major one, leading to the weakening of commodity prices and the worsening of the terms of trade of the non-industrial world. The other major factor is protection, and this particularly applies to agricultural protection. Let me put before you a few little items of agricultural protection graffiti. Do you know that the European Community (EC) spent $23 billion in agricultural subsidies in 1984? And do you know that 70 percent of EC expenditure is incurred in respect of agriculture? What all primary producers know is that EC "self-sufficiency" in a number of primary products has increased to the point where they have become massive stockholders and major exporters of subsidized products to the outside world: wheat, sugar, dairy products, and beef are cases which come readily to mind. I mention the EC partly because their case is the most glaring—and partly because I can do so without mentioning individual countries. But other industrial countries, outside the EC, are spending equally vast sums on agricultural subsidies. And the phenomenon, I have to admit, is not confined to the industrial world. There are exponents of agricultural protection in the developing world as well. We have reached the position where some of the major industrial countries are fighting a war of subsidies with one another over export markets. What should be clear is that, in an economic sense, no one gains from these war games in agriculture. The less efficient producers have to grap- ple with budget problems and taxation. The more efficient producers have

©International Monetary Fund. Not for Redistribution 134 SUMMARY PROCEEDINGS, 1986 to cope with falling prices and losses of markets. The economic gain from world production and world trade is the less because, frankly speaking, many of us are simply in the wrong business. What conclusions are to be drawn from all this? I believe there are two. First, we must ask whether the surplus industrial countries are really doing all they can to maintain the rate of growth which they can afford in terms of sustainable noninflationary expansion. The United States clearly cannot go on running a current account deficit of over $100 billion a year. The correction of that situation should be at the expense of the surplus countries. The Federal Republic of Germany and Japan, taken together, are running a current account surplus of over $100 billion a year. The correction of the U.S. current account deficit should not be at the expense of increased deficits for the non-industrial world. Second, the countries protecting agriculture by means of tariffs, nontariff barriers, and subsidies must begin taking action to reduce that protection. The case for this is based not only on a need to reverse an injustice to the developing world. It is also based on the argument of self-interest, properly conceived. Investment, production, employment, and trade all stand to benefit from a better and more efficient allocation of resources. The trick is going to be to persuade all countries, industrial and non- industrial alike, to recognize those relationships—and where our true interests lie. In all this we would be wise to reflect on the strong interrelations in an economic sense between the industrial and the developing worlds. As developing countries prosper, so does their trade with the industrial countries; and vice versa. Already the exports of the industrial countries have begun to slow in 1986. Import compression in the developing countries has played an important part in this. In the five years to 1981, the value of imports of developing countries increased by 7!/2 percent a year. In the five years since 1981, the value of imports of developing countries has fallen by 2 percent a year. This import compression in developing countries stems primarily from a weakening in their terms of trade. It is estimated that exports of industrial countries have grown by 2l/2 percent a year less than would have been the case if this recent import compression for developing countries had not taken place. In 1980 industrial country exports to the developing world were rising at the rate of 24 percent a year. The trend then changed (coincident with a decline in commodity prices) and by 1985 they were declining at a rate of 1V2 percent a year; that is, from a rise of 24 percent a year to a decline of 1V2 percent a year. I think the obvious, perhaps compelling, moral of all of this is that we all are in this together and that, therefore, the policies of the developed coun-

©International Monetary Fund. Not for Redistribution GOVERNOR FOR ISLAMIC REPUBLIC OF IRAN 135 tries in terms of protectionism, growth, and all the other factors which generate the capacity of the developing countries to compete in markets, to earn foreign exchange, to pay their debts is something which is now perhaps more interrelated than ever. And we certainly commend these thoughts to developed and developing countries alike.

STATEMENT BY THE GOVERNOR OF THE FUND FOR THE ISLAMIC REPUBLIC OF IRAN

Mohammad Javad Vahaji

In the Name of Allah "If the people of the towns had but believed and feared God, We should indeed have opened out to them [all kinds of] blessings from heaven and earth; but they rejected [the truth], and We brought them to book for their misdeeds." Holy Quran, 8:96 I am deeply honored to address this distinguished gathering. I also wish to join the other speakers to express our appreciation of the efforts by Mr. de Larosière in his position as Managing Director of the Fund and wish him success in his future career. Let me also take this opportunity to welcome the two new members of the International Monetary Fund and the World Bank. Since our gathering in Seoul, we have witnessed a marked slowdown in the economic performance of nearly all countries, contrary to the pervasive expectations. In the case of developing countries, mainly as a result of a sharp decline in their export earnings, the growth rates are expected to decline to levels which will, surely, not be sufficient to preclude their already low standard of living from dropping even further. What we see is another prelude to a new round of protracted low growth rates, liquidity shortages, mounting balance of payments deficits, and crippling accumulation of foreign debts. In my country, we have also been affected by these unfortunate developments but we have tried hard to mitigate their inimical impact. Therefore, in spite of the fall in oil prices and the sharp reduction in the volume of our oil exports, our external current account during the last Iranian calendar year (ended March 20, 1986) showed a surplus of more than $1.5 billion. This favorable balance was achieved through pursuing strong adjustment policies despite the hardships that they have entailed. In our economic policies, the main emphasis throughout has been on careful management of the country's foreign exchange resources on the basis of changing the pat-

©International Monetary Fund. Not for Redistribution 136 SUMMARY PROCEEDINGS, 1986 tern of consumption toward encouraging frugality, and discouraging the consumption of luxury and nonessential commodities. Moreover, despite the fact that the imposed war (and its inevitable burden on our foreign exchange reserves) has entered into its seventh year, we have managed to meet our import needs without recourse to foreign borrowing. While our Government does not have any intention to change this policy as far as official borrowing by the Government is concerned, we shall continue hon- oring all the repayment obligations made by individual Iranian entities in their cash and also credit purchases from abroad. The effective management of our reserves has been made possible with recourse to the mechanism of foreign exchange allocation as it is embodied in the parliament-approved foreign exchange budget. Every year during the last three years, a foreign exchange budget is submitted, alongside the conventional rial budget, to the Parliament for approval. This budget sets an overall ceiling for the total foreign exchange expenditures of the country. Within the framework of that budget, the "Foreign Exchange Alloca- tion Committee" comprising responsible authorities then decides on the allocation of foreign exchange for current and development needs of each sector and subsector. Through the same mechanism, the foreign exchange cash flow of the country is closely watched and monitored in order to ensure not only the most efficient use of foreign exchange reserves of the country, but also to curtail the overall foreign exchange spending while providing for the essential needs of the economy. We continue to follow these policies to make sure that we would not face any problem in meeting all and every foreign exchange payment commitment made by our country. On the other hand, a profound effort is under way in Iran by both private and public sectors to shift the production pattern away from industries with high foreign exchange dependency. This task had not been made easier by what was once, before our Islamic revolution, an import- substitution policy aimed at an economy with supposedly less foreign dependency. That policy had actually led to the establishment of industries producing nonessential products with meager domestic added value unable to survive the slightest interruption in a huge flow of imports. There is a crusade under way not only to dismantle this wasteful machinery but to create a new industrial base capable of developing a sectorally balanced growth for our economy aimed at less reliance on foreign supply for our basic needs and led by expansion of non-oil exports. This year alone we expect a rise in our non-oil exports of ab.out 80 percent. This undeniably started from a small base, but all the necessary incentives and policy guidelines have been provided for our exporters to ensure the continuation of this rapid growth. In agriculture, which has achieved a position of prominence and priority in our new economic blueprint, serious steps are being taken aimed at eventual food self-sufficiency. The agricultural sector,

©International Monetary Fund. Not for Redistribution GOVERNOR FOR ISLAMIC REPUBLIC OF IRAN 137 through the supply of exportable food items, is actively participating in our new export expansion drive. The Government of Iran looks at the recent developments in our economy as a blessing in disguise. It is true that owing to foreign exchange restrictions, we have had to postpone a number of our development projects with consequences for the overall rate of growth of output, but our expectation is that the economy as a whole will be moving on a healthier path. The future, as we envisage it in light of the recent continued and persistent efforts by our productive sectors, will undoubtedly be the one in which our society has freed itself from the boundaries of a monoculture economy. The potential of our country for such overhaul is abundant, and the determination, manifested in our Government's "New Economic Pro- gram," is there to engage all our human and natural resources in all-out effort to achieve this goal. The Islamic Republic of Iran is now in its third year of Islamic banking operation inside the country, conforming to the principles of the Islamic Sharia. In fact, instead of embarking on a piecemeal and gradual approach to the Islamization of banking procedures, a process that could well have compromised some of the most basic injunctions of Islamic banking, we decided to change our domestic financial operations in conformity with Islam, in one single comprehensive and all-embracing step. I am now happy to announce that the favorable results achieved after two-and-a-half years of operation have greatly surpassed our earlier expectations. Our depositors have responded enthusiastically to the new interest-free financial system. Total private sector deposits, which had grown by 5.7 percent during the year ended March 20, 1985, which was the first full year of the operation of the new system, rose by a further 15.3 percent in the second year, which ended on March 20, 1986. All signs at present point to a further considerable rise in the third year. New banking facilities and credits granted to the private sector, which amounted to Rls 671 billion at the end of the first year of interest-free banking operations, rose to two-and-a-half times this amount, after the second year, as investors became more familiar with the new banking techniques. These results point not only to the feasibility and desirability of the new system, but also to its acceptance by both depositors and investors. Along with the operation of Islamic banking in our country, the training of bank personnel has continued through the use of seminars and on-the-job programs; so far, more than 70 percent of eligible bank personnel have received intensive training in the implementation of the new banking techniques. At the international level, we at the Central Bank organized for the first time an international Islamic banking seminar in Tehran in June 1986,

©International Monetary Fund. Not for Redistribution 138 SUMMARY PROCEEDINGS, 1986 during which we presented our progress report and our experiences to international experts and invited their comments. This seminar was very useful, as we were able to share our experience with other countries and gain insight into areas that needed further elaboration and clarification. Our Islamic beliefs coupled with our recent experience indicate that in addition to being practical and adaptable, Islamic banking allows monetary policy to accommodate the real economic development needs of the country. We believe that Islamic banking, with the elimination of the concept of a predetermined fixed and guaranteed return to capital funds and with due emphasis on the performance of the real sectors of the economy, is better equipped than the interest-based system to ensure economic growth and stability. Fortunately, various research, scientific, and theoretical deliberations expounded in the many international seminars and conferences on the subject point to similar conclusions. I take this opportunity to thank the International Monetary Fund for organizing a seminar on Islamic banking, which was held in July 1986. This was the first seminar of its kind in the Fund, and we urge the Fund to continue its research efforts on other aspects of Islamic economics and finance. We also invite other international financial and development institutions to follow suit and explore the various aspects of Islamic economics more akin to their lines of activity. Paying due attention to a new system that is of great interest to many Islamic nations comprising more than one billion people and almost one third of the membership of international financial and development institutions is the least that can be expected of these institutions. We hope that in the endeavor to find appropriate solutions to the complex economic problems of our time, a new outlook toward far-reaching and fundamental frontiers would be formed that would bring the divine concepts closer to access. The outcome for developing countries of the recent sharp fall in oil prices, apart from some very short-term and limited gains, is that developing countries as a group will lose, as we always lose when the price of any other primary commodity falls. It should be noted that less than one fourth of developing countries' exports of oil are to each other and the rest is to the industrial countries. Among the developing countries, while the 24 net oil exporters' loss this year as a result of the price decline approaches $70 billion, the more than 100 net importers will have a meager gain of less than $20 billion. Even this small reduction in their import bill will, according to all predictions, be wiped out as a result of increased payments for their high-cost imports from industrial countries and servicing their huge foreign debts. This is why the combined current account deficit of developing countries this year is expected to jump by an almost unprecedented percentage to the level of $66 billion with huge increases in the deficits of nearly all subgroups in the category of developing countries. Never before,

©International Monetary Fund. Not for Redistribution GOVERNOR FOR ISLAMIC REPUBLIC OF IRAN 139 even when the price of oil had increased, have we witnessed such a colossal increase of almost 200 percent in developing countries' current account deficit. So the cause of the problem should be looked for elsewhere and mostly, and above all, in the developing countries' ill-conceived dependency on economic policies and developments of major industrial countries. It is a fact that the existing rigidities in the economy of the developing countries and their external dependency make them pay even when the prices of their exportable commodities rise. This is evident from historical calculation of the real value of exportable primary commodities deflated by the index of prices of imports from industrial countries. This, together with the resultant uncertainties, makes any sharp fluctuation of commodity prices undesirable for all of us. It is more so when it comes to a strategi- cally important commodity like oil, which is a major variable in the world economy. Therefore, in our view, the recent unjustified decline in the oil prices will, through creation of a totally distorted price structure, lead to even more violent price changes, with a harmful impact on the development of the world economy, and especially the economies of more vulnerable countries among us. The decline of oil prices will also have a severe negative impact on developing countries' ability to develop their own sources of energy. This, in the longer run, will undoubtedly make them more dependent on foreign energy supplies, and, as is the case of the majority of resource- poor countries, they will certainly become a helpless client for technologies exported by the rich countries, with undeniably dire political consequences. The persistent decline in the prices of the major commodities, amounting to an average of 8 percent during the last five years, was not the only factor which has contributed to the harrowing deterioration of the external position of developing countries. The picture has been made even worse as a result of the gyrations in the exchange rates, which helped to push up the unit value of manufactured goods exported by industrial countries, and this, in the face of declining prices of commodities, led to further deterioration in the terms of trade of developing countries. Never in the last 20 years have we witnessed a worsening of developing countries' terms of trade of such magnitude as we are expecting this year. It is therefore evident that the developments in the foreign exchange markets during the last five years have turned these markets into a monstrous engine of universal financial instability. The explosive increase in the volume of daily transactions in these markets has taken place at a time of relative stagnation in the volume of world trade. This, together with a huge share of interbank transactions, clearly

©International Monetary Fund. Not for Redistribution 140 SUMMARY PROCEEDINGS, 1986 reveals the fundamentally speculative nature of foreign exchange transactions with a dissolutely inimical impact on the external position of developing countries. This is a direct product of the existing international monetary system under which no effective counter-speculative mechanism is available to the monetary authorities of the countries. And what was started on September 22 of last year and was heralded as a concerted effort to limit these speculative activities is an exclusive club of major industrial countries formed in the most undemocratic manner, basically to safeguard the interest of its powerful members.

On the other hand, the existing international monetary arrangements, contrary to the premises of a floating exchange rate regime, obligate the rest of the countries in the world to align their financial position with the level of interest rates in one major country at the cost of mounting unemployment and stagnation. The system also allows the largest member of the club to continue financing its huge current account deficit in its own currency—a privileged position enjoyed partially by only a handful of other major countries.

In the face of such deficiencies, we have yet to design a monetary system under which such disparities cease to exist, and at least the process of liquidity creation would not depend on the domestic policies of a few industrial countries. Unfortunately, even absolutely meager measures in this regard, such as allocation of a modest amount of SDKs, have met with severe and irrational resistance from the industrial countries that are benefiting from the present highly unequitable monetary system.

The assessments made by the Fund and other international organizations point to a disappointing economic performance of industrial countries and severe worsening of developing countries' situation during the first six months of this year, and contrary to some optimistic predictions, there is no strong evidence to expect any improvement in the months ahead. Even if we witness a mild recovery for industrial countries, it is hardly imaginable that in the face of existing rigidities and the protective walls erected around the major markets, the developing countries could have the opportunity to benefit from such an economic turnaround. There- fore, what is needed is adoption of some quick measures to alleviate the short- and medium-term problems of developing countries through support programs for compensation of fluctuations in commodity prices, establishment of unconditional facilities to lessen the burden of their external deficit, and cooperation by surplus countries for more access to their markets for exports of developing countries. Without these minimal measures, we shall definitely be witnessing more suffering in the oppressed areas of the world conducive to a gloomy future in which the very dignity of human societies will be in danger.

©International Monetary Fund. Not for Redistribution DISCUSSION OF FUND POLICY AT FOURTH JOINT SESSION l

STATEMENT BY THE GOVERNOR OF THE FUND FOR SOUTH AFRICA

B.J. du Plessis

In the face of the volatile and unpredictable trends within the global economic environment, the Fund and the Bank once again succeeded during the past year in promoting international financial cooperation in an increasingly interdependent world. For this they deserve our appreciation. We wish to join other Governors in recording our appreciation for the service Mr. de Larosière has rendered to the international financial community and to wish him well in his future activities. We also join other Governors in welcoming Mr. Conable as the new President of the World Bank and also Poland and Kiribati as new members. The Annual Reports of the Fund and the Bank make it clear that while inflation receded further during the past year, the economic slowdown in the industrial countries was sharper than expected. And while the depreciation of the previously overvalued U.S. dollar in terms of other major currencies has resulted in an improved pattern of exchange rates, the beneficial effects of this on the United States will only be felt with the usual time lag. For many developing countries the situation remains parlous. The reduction in growth rates in the industrial countries has led to a deceleration in the expansion of international trade and to a decline in real primary product prices. These developments, in turn, have adversely affected export earnings and living standards in developing countries. Rising unemployment, coupled with a high rate of population growth, therefore remains a major challenge for these countries. The strenuous efforts of many developing countries to solve their external debt problems were further frustrated by the reluctance of the banks of the world to spontaneously extend new loans to them. According to the Fund's Annual Report, net new lending by banks to these countries declined from $51 billion in 1982 to $14 billion in 1984 and a meager $3 billion in 1985. To exacerbate the situation, protectionist pressures for trade restrictions continued unabated over the past year.

October 1, 1986.

141

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In analyzing capital flows to and from developing countries, it is relevant to note that South Africa has experienced an abnormally large withdrawal of foreign capital and credits during the past two years. This left it no option but to impose a partial debt standstill in September 1985 and to reintroduce exchange control on nonresident equity investments through the financial rand system. It remains a basic principle of debt rescheduling arrangements that debtor countries should treat all creditors on a fair and equal basis. This principle, however, does not always apply to the treatment given to the debtor countries by creditors. In the case of South Africa, we received no support from foreign governments or from any specialized international institutions engaged in this field such as the Fund and the Bank. On the contrary, we continued punctually to meet all capital redemption and interest commitments on outstanding loans to such creditors from our own domestic resources. Moreover, more than 40 percent of our outstanding foreign debt, representing mainly loans due to governments and international institutions, remained free of any repayment restrictions. Compul- sory repayments on outstanding drawings from the Fund are indeed absorbing a substantial part of the scarce domestic savings of the country at a time when there is a great need for increased domestic expenditure on social, economic, and political reform programs. In addition to repayments on maturity of the "unaffected" debt, South Africa also came to an interim debt arrangement with its other creditors during the past year in terms of which 5 percent of all maturing "affected" debt would be redeemed, and 95 percent would automatically be extended until June 30, 1987. Provision was also made for the payment of a higher interest rate margin on the affected debt. South Africa succeeded in reducing the amount of its outstanding foreign debt by $2.3 billion, that is from $23.7 billion at the end of August 1985 to $21.4 billion at the end of June 1986, valued at the exchange rates of August 30, 1985. This achievement placed a heavy burden on the domestic adjustment process and could only be achieved through an unsustainably low level of domestic absorption. In line with the traditional approach of the Fund and the guidelines for adjustment as reiterated by the Managing Director in his address to these Meetings, South Africa has had to cope with its difficulties the hard way, that is, by applying monetary and fiscal discipline, by belt tightening, by producing large surpluses on the current account of its balance of payments in adverse world conditions, and by transferring real resources to the rest of the world. The fact that the country has already repaid about $3 billion of foreign debt since the end of 1984 bears testimony to the results produced by this approach. A substantial part of this net repay-

©International Monetary Fund. Not for Redistribution GOVERNOR FOR SOUTH AFRICA 143 ment accrued to the banks of the world. Is is noteworthy that the total amount of the net redemption of debt by South Africa over this period equals the net increase in 1985 in the total amount of new loans extended by the international banks to all the developing countries of the world together. The debt and other economic problems of sub-Saharan African countries are no less serious than those of other developing countries. Both the Fund and the Bank have done much to assist these countries in coping with their difficulties. Moreover, it is evident from the statements made by Mr. Conable, Mr. de Larosière, and others at these Meetings that the need to promote economic development in sub-Saharan Africa remains high on the list of priorities of the world's financial leaders. South Africa is singularly aware of the magnitude and complexity of the economic challenges currently facing this region. We are part of Africa, and we understand the challenges of Africa since we also face them. We therefore fully support all efforts to combat the poverty still prevailing in some areas, and to raise the standard of living and the quality of life in the sub-Saharan region as a whole. The development potential of sub-Saharan Africa is large. In this part of the developing world, the basic requirements for sound and rapid economic growth are basically fulfilled. Many countries in the region have rich mineral resources; they have the potential for increased food production and a growing availability of trained manpower. Southern Africa also has a well-developed infrastructure, a sophisticated financial system, and special skills and techniques for dealing with the conditions unique to Africa. This region is a part of the developing world where abject poverty can be reduced if not eliminated, and where the average standard of living can be raised substantially. To realize this development potential, further transfers of real resources from the developed countries to this region will be necessary. Since this is not likely in the first place to take the form of increased commercial bank lending mobilized in terms of the Baker plan, but rather of concessionary lending, the Eighth Replenishment of IDA deserves the fullest support from an African point of view. In addition to its moderate direct contribution to this end, South Africa has every intention to continue playing a constructive role in the development of the Southern African region through its wide-ranging economic and financial interaction with other countries in the region. By providing markets for the labor and produce from neighboring countries, by continuing to make its well-developed transport facilities and other infrastructure available to them, by offering the available know-how of its private sector and public sector institutions, and by transferring financial and

©International Monetary Fund. Not for Redistribution 144 SUMMARY PROCEEDINGS, 1986 technical assistance through the Development Bank of Southern Africa and other channels, South Africa can and is prepared to contribute meaningfully to the viability of development projects in other countries in South- ern Africa, some of which are at present under consideration by the World Bank. In this connection, South Africa fully endorses the approach to development in sub-Saharan Africa adopted in recent World Bank reports. The emphasis in those reports on more market-oriented policies, on the streamlining of public sector institutions, on agricultural development, and on the better utilization of existing, as against the creation of new, infrastructure deserves endorsement. We also subscribe to the guidance given by the Fund and the Bank in regard to privatization and the deregulation of small businesses and the informal sector. We, in fact, have already made substantial progress in these areas and stand ready to share our experience with other countries, and also to learn from their experience.

STATEMENT BY THE GOVERNOR OF THE BANK FOR PERU

Luis AI va Castro

At the last joint Annual Meetings of the International Monetary Fund and the World Bank, we referred to the urgent need to draw up a kind of all-out program of action in the monetary and financial field. We therefore urged that a United Nations Conference on Currency and Finance be con- vened in order to lay the bases for a new international monetary and financial order. In doing this, we did not seek solely to stress the great monetary and financial goals that the international community needed to achieve during the following period. We wished also to indicate the path we needed to follow and the steps we needed to take to achieve those goals. We therefore spoke not only of the great tasks that lay before us but also of the smaller actions, the more urgent changes, required because the real world cannot wait for us to finish our discussions on, much less to complete, the negotiations that necessarily have to be conducted. Today, a year later, we have to say that while we have continued to move forward in the field of analysis and discussion, with the formation of an increasingly clear consensus among the countries of the South, we have made very little progress in the North-South dialogue. Yet that progress is absolutely essential to the formation of the required consensus in order to

©International Monetary Fund. Not for Redistribution GOVERNOR FOR PERU 145 implement the reform of the international monetary system and resolve the pressing debt problem of the Third World. Similarly, we have to say that we have done little to introduce changes— even small changes—into the rules and procedures of the International Monetary Fund and the World Bank, two basic agencies of the system that we wish to reform or, if that is preferred, to adapt to the needs of the present-day world. Peru, like other countries, is today ineligible for access to the resources of the Fund. Yet it is obvious in the present circumstances that support from a financial agency like the International Monetary Fund is most greatly needed. Let us not forget that the Fund's basic function according to its Articles of Agreement is to promote the development of production and employment. We have been declared ineligible, in strict application of the Articles of Agreement of the International Monetary Fund, because we did not repurchase promptly the amount we undertook to repurchase under the agreements signed in 1979, 1982, and 1983. We are only able to pay the International Monetary Fund a fraction of the sums falling due; given their magnitude, the repurchases of our currency had to be limited. Between August 1985 and July 1986—i.e., during our first year in office as government—our repurchase obligations amounted to $250 million. This means that the International Monetary Fund alone would have absorbed foreign exchange resources equal to 7 percent of our goods and services export receipts during the past year. Allow me to offer a few comments on this point.

Limitation of Debt Service When we assumed responsibility for the Government of Peru we decided, and we so notified the international financial community, to limit transfers of resources abroad. We said, precisely, that public external debt service would be limited to a maximum of 10 percent of the value of our goods and services exports. That decision followed upon a serious and realistic analysis of our own situation and, of course, of the trend of international finance. For us, as for other developing countries, the time had come to limit service of the debt. The inflow of new loan funds from all sources had begun to decline rapidly and the commercial banks had already ceased to grant new medium- and long-term loans. Moreover, the fall in Peru's export receipts and the extremely high interest rates had seriously eroded our international purchasing capacity. As a consequence precisely of this reduction in our purchasing capacity, and at

©International Monetary Fund. Not for Redistribution 146 SUMMARY PROCEEDINGS, 1986 the same time in our payment capacity, the banks had cut off the flow of credit to Peru. They were trying to recover the loans they had made in the past, focusing their attention on collecting interest in view of the difficulty of obtaining repayments of principal. It should be remembered that in 1985 Peru was in the position of having virtually ceased to make repayments. The government that preceded us had ceased to meet its debt service obligations regularly but had not set any precise limit or offered any official explanation of its action. The policy to be adopted by the new Government could not be any other than the one to meet an extremely serious situation. We could not allow the economic, social, and political fabric to continue deteriorating. We consequently proposed to put our house in order by reorganizing the changes necessary to enable the Peruvian economy to move along the path of development. We, therefore, proposed progressively to raise our income, domestic demand, and consequently national production and employment, and on this basis to implement a virtuous circle that would enable us to increase income, demand, investments, and, once again, production. In other words, we proposed to go through a radically different path from the path the country had gone through in previous years. I would like to tell you that the results of the implementation of the new economic policy have been positive. Limiting external debt service payments was for us the only realistic course, the only one that did not lead us either to declare a general morato- rium or to repudiate the debt. I want you to know that we have devoted the greater part of the resources allocated to debt service to repaying the loans made to us by the World Bank and the Inter-American Development Bank. Those two institutions have received approximately 50 percent of the resources we allocated to public external debt service during the period August 1985 to July 1986. Even so, we have experienced difficulty in keeping up to date with the payments and thereby avoiding the halting of disbursement in the case of some loans. As you all know, the Articles of Agreement of both institutions require that a country be up to date if it is to continue to receive disbursements against loans already made. Relatively small payment delays result in the immediate halting of disbursement and thereby alter the execution time- tables of the investment projects. Let us pause a moment at this point. Lending by the World Bank and the regional banks has been far from adequate to meet our countries' needs. It has generally been tied to the purchase of equipment and the contracting of consultancy services in the

©International Monetary Fund. Not for Redistribution GOVERNOR FOR PERU 147 industrial countries. We have been compelled to import goods and services beyond what we strictly needed; in many cases these loans have constituted a sort of export credit on the part of the industrial countries. That circumstance demanded that we look closely at this type of loan, intensify the investment structuring process we have already initiated, and pay scrupulous attention to the actual flow of resources. We have ascer- tained that a significant proportion of loan resources goes to finance imports that are not really essential, while the debt is serviced in foreign exchange obtained at considerable effort. The resulting careful program- ming of imports and of foreign exchange utilization in general compels us to change our policy radically with respect to new loans and even to those in process of disbursement. It also compels us to ask for changes in the rules, already inherently complicated by the conditionality imposed by those institutions themselves. I should like to say a few more words on the limitation of payments before passing to the subject of conditionality. The limiting of payments was more than a necessity imposed by the drastic fall in our export receipts. It was a dramatic necessity to enable us to reorient economic policy by assigning more or less clearly defined pa- rameters to it. Thus, the effect of limiting our external debt payments was to quantify the outflow of foreign exchange for that purpose and thereby to clear up a basic unknown factor in our external accounts. Previously, the uncertainty with respect to refinancing operations and the actual debt burden in a given period sharply depressed the quotation of the Peruvian currency. But this depreciation was never sufficient because the volume of foreign exchange required to service the debt exceeded the volume of disbursements against existing loans. Another effect of limiting debt service payments was to quantify the proportion of fiscal resources to be applied to that purpose and, therefore, the actual volume of current expenditure. The uncertainty that prevailed until then compelled us to apply, as it were, a permanent austerity program, which generated distortions of every kind. It was known that interest and amortization payments were rising rapidly as a consequence of devaluation and that debt service volume was rising continuously. This constant increase in debt service payments compelled us to reduce current expenditure, particularly civil service pay. Since it is not possible to reduce nominal incomes at the present time, inflation was the only way to reduce real incomes. It is pointed out that the monetary devaluation, the method used to reduce the demand for imported goods and services, helped to fuel inflation for two reasons: first, it raised the actual cost of all imported goods and

©International Monetary Fund. Not for Redistribution 148 SUMMARY PROCEEDINGS, 1986 services; second, it generated inflationary expectations which were built into all prices. For its part, inflation brought with it a real fall in income in all categories. First of all, it reduced wage-earners' incomes, though unequally, for serious distortions appeared in the wages and salaries structure. Sec- ond, it reduced the incomes of self-employed persons, both urban and rural, in various types of businesses. Third, it reduced enterprise profits, whose share in total national income increased but which also developed unequally. This reduction in income in turn led to a contraction of demand for goods and services. This contraction was also unequal, since it affected most those most badly hit by inflation. For that reason the prices of foodstuffs—particuarly scarce products—and of wage goods rose more slowly than other prices. It should be noted that, in the first instance, the fall in demand, by affecting imports, boosts the country's foreign exchange payment capacity. For its part, the reduction in public expenditure and the increase (in some degree) in tariffs boosts the government's payment capacity (again initially). However, the decline in output for the domestic market, in circumstances in which export activity is also contracting, leads to deterioration of the country's production structure and therefore of the government's payment capacity. In the medium term it affects the growth possibilities of the export sector itself, which not even the more important devaluations can help to develop. In fact, in the second stage, the contraction of output affects the income of the government, which is not in a position to generate the necessary surplus to finance even a more or less significant portion of external debt service. The surplus foreign exchange tends rather to be used by local and foreign entrepreneurs who, seeing their local investment possibilities curtailed, decide to take money out of the country. This flight of capital naturally impairs the country's investment capacity and, therefore, the very possibilities for development of production and, of course, of the export industry.

IMF Conditionality The International Monetary Fund's letters of intent require the countries that sign them to follow a course that may make some sense in a different world economic environment, but in no way does so in the present environment. It can even be said that in most cases the application of policies of this kind does not by itself produce results; balance of payments crises have been overcome when a change occurred in the market situation. For exam-

©International Monetary Fund. Not for Redistribution GOVERNOR FOR PERU 149 pie, our balance of payments crisis of 1958 was resolved thanks to a rise in export earnings and consequently in fiscal revenue. Export income in turn rose as a consequence of the increase in the volume of copper and fish meal exports. The development of these activities had nothing to do with the policies adopted in 1959; they were started in the mid-1950s. Our 1967 crisis was resolved essentially through a fall in demand, particularly of the public sector, which had sought to expand and make up for the shortfall in private investment. The presence of the public sector in the economy expanded very substantially in the 1960s. The greater part of public investment was in infrastructure. Lending by the international agencies played a central role. It will be recalled that the world economic situation was completely different and that Peru's difficulties did not extend to other countries. In neither this nor the previous case was debt service a sufficiently important factor to enforce a strong contraction of demand and output. It was in fact a case of momentarily slowing the growth of production and national income rather than reducing them for a long period. The policies contained in the letters of intent are, curiously, recommendations for all times and all places. Not even in the past, when the world economy was undergoing expansion, were they valid for all cases. The policies that the IMF recommends today are totally unsuitable for resolving the present problems. Their application widens instead of narrowing internal disequilibria, although the external imbalances do contract, briefly, to some degree. However, the partial elimination of external disequilibria has adverse effects on output, investment, and the very functioning of the economy. After a time, it being impossible to generate new external receipts, the domestic disequilibria (depressed wages and salaries, reduced employment, run-down social services) block the development of the economy. The demand today is that the entire productive apparatus be geared to satisfying not the basic needs of the population but the country's debt service needs. But to be able to service the external debt it is not enough to reduce imports, since the surpluses obtained suffice only to pay a fraction of the interest falling due in the period.

The Situation of Peru The lack of viability of the IMF's policies is clearly evident in the case of Peru but also in that of other countries. Nor are the consequences of applying these policies more serious in our country than in others. They are probably the same. Nevertheless, the overall pattern of evolution of Peru- vian society places it at a particularly difficult and complex juncture.

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I should like therefore to refer in greater detail to the situation of Peru so as to clarify where we stand and what are our current objectives.

First of all, I should point out that the most far-reaching changes in Peruvian society—after the conquest and Spanish colonization—occurred following the end of the Second World War. Previously, the Peruvian social order and economy had achieved a sort of equilibrium—of poverty it is true—but in the final analysis, an equilibrium. Spanish colonization destroyed the old Inca civilization and succeeded in constructing a new social and economic order. The advent of the Republic did not alter the preceding social and economic order to any substantial degree. Other powers came to replace Spain at the end of the war of independence. Yet the old economic and social organization did not undergo major changes. The export activities that were developed during the nineteenth and twentieth centuries also operated in the form of enclaves. They gave rise to other activities but did not alter the traditional life of Andean Peru in any way. According to the 1940 census, Peru's population was two thirds rural and one third urban. The regional distribution was as follows: 66 percent in the Sierra, where Peru's population had traditionally been concentrated; 28 percent in the Costa, whose population had been increasing since the middle of the nineteenth century; and 6 percent in the Selva. Metropolitan Lima, with just over 600,000 inhabitants, contained 10 percent of the population. The 1981 census reported that two thirds of the population was urban and one third rural. The regional distribution was Costa, 50 percent; Sierra, 40 percent; and Selva, 10 percent. Nearly 30 percent of the population is now concentrated in metropolitan Lima. Peru thus underwent a change of physiognomy following the Second World War. It changed from a predominantly rural into an urban country, with an increased population density; and from a Sierra country, as during the Incan era, to a Costa country. Lima, already relatively important, turned into a metropolis capable of absorbing every imaginable resource. On the other hand, to the traditional export activities was added a predominantly industrial activity controlled by multinational enterprises and based not on the expansion of surplus farm production but on the foreign exchange earnings of the traditional export sector. The period was marked also by the development of a whole range of infrastructures: electricity and water for the towns and industry; and ports, airports, and highways to improve communication with the interior of the country. It should be borne in mind that the lack of access roads to the interior brought about not only the settlement of the population but also the development of important local productive activities. The development of communications between

©International Monetary Fund. Not for Redistribution GOVERNOR FOR PERU 151 and along the Costa and Sierra regions played a decisive role in the development of a domestic market. The changes that took place were not unconnected with the changes that occurred in the world economy. The emergence of a new economic and financial order was decisive, particularly the demand for raw materials and the new supply of products from the industrial countries. Peru's mineral resources made it a favored area of development of mining production; but it also became a purchaser of surplus farm produce and an expansion market for the industry of the developed countries. We thus participated in the long process of postwar expansion as exporters of mining products and shared in the fruits of this development. At the same time we participated as importers of cheap foodstuffs, so that agriculture suffered the consequences of the importation of cheap farm surpluses. Imports of grain (especially wheat) and meat (especially beef) symbolized the new situation. Farming and stockraising oriented to the domestic market did not develop adequately, apart from some development of fruit and vegetable growing. But the most important factor was the closing off of possibilities for the small farmers of the Sierra to produce grain and meat. For its part, industry, which uses very little labor, developed using basically imported machinery and inputs. This was true even of the agrofood industry, which was based on the importation of grain, edible oil, and milk. The transnational companies, whose development belongs to the postwar period, were particularly active in the process of expansion of the Peruvian economy. The activity of Peru's government sector expanded rapidly, for two reasons: first, it assumed responsibility for providing employment for the growing labor force concentrated in the cities, especially Lima; and second, it progressively took up the task of developing the infrastructure needed by the country. It was also through public sector activity that electricity, water, and other services could be progressively brought to all the cities of Peru. Because fiscal revenue was traditionally based on export and import activities, the fluctuations in the external sector strongly affected the budget. And the fact is that in the postwar period expenditure requirements were much more rigid than in the prewar years. It has been pointed out that external loans financed a large part of the public investment that was required under the new scheme of things; the disequilibria that arose were covered by additional loans (and minor adjustments). The end of the long postwar growth cycle and the crisis in the industrial countries finds Peru with an export sector in stagnation, cities experienc-

©International Monetary Fund. Not for Redistribution 152 SUMMARY PROCEEDINGS, 1986 ing chaotic growth, an industry excessively dependent on imported inputs, and a growing external debt.

Clearly, the solution for Peru was not to increase its debts, particularly if these were increasingly tied to goods and services imports. It has to be borne in mind that the new indebtedness dates from the 1970s, i.e., from the years that mark the end of the long cycle of expansion of the world economy.

But a rapid increase in the developing countries' external debt was a necessity for the industrial country banks. They gave the developing countries, including Peru, larger and larger loans.

It was clear for several years that there was no way out of the debt problem and that it could not therefore be resolved by traditional methods. The course we had to follow—including from the 1970s—was to absorb this internal disequilibrium, which is reflected also in external maladjustment. This meant that efforts had to focus on the development of agriculture, through which it would also be possible to contain the urbanization process and drastically reduce the country's foreign exchange and unemployment problems. It was also sought to promote import substitution and new export lines; the latter signifies much more than manipulating the exchange rate and granting direct and indirect subsidies. Finally, it was sought to adapt all infrastructure investment projects to local possibilities and under no circumstances to promote "turnkey" projects. What was required, then, was a true production revolution and not simple corrective adjustments of the kind suggested in the letters of intent.

The evolution of the crisis, especially what is happening in the 1980s, has sharpened the existing problems. Export activities have been severely affected by the fall in oil and mineral prices. The debt service burden has increased substantially, owing to the rise in interest rates. The flow of medium- and long-term credit has dried up since 1983.

As a result, requirements have increased in the last few years, making the application of a policy for the restoration of domestic equilibrium even more urgent. Nevertheless, the policies recommended by the International Monetary Fund continued to be applied—with or without letters of intent.

In 1985 when we took up the reins of government, the situation was particularly critical: galloping inflation, deepening recession, growing unemployment, increasing dollarization for the economy and exodus of capital, ever-increasing public and private investment needs, and fiscal chaos. La- bor demands had brought a large part of economic activity to a standstill. The government apparatus was in disarray.

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The Emergency Program The policy approach of the new government had to correspond to an extremely serious situation; we could not allow the economic, social, and political fabric to continue to deteriorate. We therefore proposed to set matters right again, so that later it would be possible to make the changes required to enable the Peruvian economy to take the path of development. Our aim, therefore, was gradually to increase revenue, domestic demand, and as a consequence, domestic production and employment, and on this basis to set in motion a beneficial cyclical process that would make possible further increases in revenue, demand, investment, and production. In a word, we proposed to follow a path that differed radically from the one taken by the country in previous years. The key to this approach was the limitation of external public debt payments to 10 percent of the value of goods and services exports. This decision was essential for initiating the process of reactivating demand and domestic production, and would increase the possibility of more resources being spent within Peru. The reduction in debt service beginning in the second half of 1985 made it possible to reduce interest outlays, in turn facilitating an increase in civil service compensation which was particularly low in July 1985. It also allowed for an improvement in investment expenditure, the level of which had dropped off significantly in the middle of last year, although the reduction in the sales tax was also an important factor affecting income transfers. This development in the government budget has naturally had an impact on production and employment trends. As the Government desired, the state began to be a lever promoting reactivation rather than recession. The idea was to transfer to the economy the resources saved by reducing debt payments. The revitalization of production should quite properly result in an increase in imports. In theory, it would be expected that the foreign exchange savings would be used to import what was needed for the country's productive plant. Assuming a growth rate of 6 percent and an elasticity of imports with respect to production of 1.5, there would have been an increase of approximately $180 million in imports. Even with such an increase, however, the import level would be scarcely half that of 1981 in terms of value. This means that it would be possible to revitalize the Peruvian economy without any difficulty whatever by limiting external debt service. Assuming the same level of export proceeds as in 1985, when they were a third lower

©International Monetary Fund. Not for Redistribution 154 SUMMARY PROCEEDINGS, 1986 than in 1980, economic revitalization would be possible without any loss of reserves or further borrowing. This is so despite the fact that the Govern- ment placed no limits on private debt service, which continued normally, or on the remittance of profits, depreciation, or royalties of foreign firms. There was also the possibility of continuing to increase production and imports by showing some favoritism to domestic industry in government procurement. It is important to note that the Government adopted a number of complementary measures, with a view to reducing inflation, of which the primary and fundamental one, of course, was the aforementioned limitation on external debt payments. Indeed, the ceiling on debt-related transfers abroad was intended not only to have a positive impact on the pattern of reserve holdings. It was intended as well to be a factor promoting order and stability to the rate quoted for the sol, a key component in the inflationary process. i To put it as clearly as possible, central government transfers to the various economic transactors were to be financed largely by the savings achieved by limiting external debt service payments. In no case was it assumed that the Central Reserve Bank would be called upon to finance a massive government deficit. It was also hoped that the revitalization of the economy would enable us to collect greater and greater amounts of tax revenues. We thought it would be proper to freeze prices temporarily, with the exception of those for perishable agricultural products and for internationally traded raw materials. This measure was designed to make it possible to control inflation driven by expectations, the effects of which are extremely difficult to eliminate even in cases in which the true problem is being met head on. The Government also decided to increase wages and salaries, so that they would improve in real terms. These increases were offset by a reduction of interest rates in the first months of the program's implementation, easing the financial burden on businesses and thereby promoting cost reductions at the same time as the expansion of productive activities. Obvi- ously, this is a measure with a clear impact over the long term, and it is of fundamental importance to the promotion of production.

Results Implementation of the policy and the measures briefly described above has had exceptionally clear results. Production, which had been declining in the second and third quarters of 1985, began to increase in the fourth quarter, and has risen sharply in the first few months of 1986. It is estimated that it could reach 6 percent,

©International Monetary Fund. Not for Redistribution GOVERNOR FOR PERU 155 which would still be below the production level of 1982, much less the historically high per capita output of 1976. To achieve the GDP level of 1982 would require approximately 3 percent growth in 1987, but reaching the same level of per capita output as in 1976 would necessitate annual growth of 6 percent until 1990. The inflation rate for the August 1985-July 1986 period was 67.6 percent, compared to 183.6 percent in the preceding 12 months and an annualized 250 percent for the first 7 months of 1985. It is estimated that prices will increase by about 65 percent in 1986. The results in this field could have been even better, given the real evolution of the basic costs in the economy. However, we encountered two major problems: on the one hand, the prices of perishable agricultural products increased more than was expected; on the other hand, there was an acute and unforeseen deterioration in the external sector. The price increases for perishable agricultural products were reflected in the prices of a vast range of services, even affecting the prices and rate schedules for labor-intensive informal activities. The latter were strongly influenced by the increase in the minimum wage, which is used as a reference point for determining compensation. It is noteworthy that the increase in the wages of low-income workers stimulated increased demand for foodstuffs. Owing to the fact that supply did not increase at the same pace and considering the lack of organization of the agricultural markets, there were strong upward pressures on these prices. I should now like to make a few remarks on the development of the external sector and of government finance. First, export proceeds declined sharply, down almost $600 million in 1986 from the already depressed level of 1985. This represents a drop of approximately 20 percent in the value of exports, only 60 percent of the value exported in 1980. The decline in export proceeds stemmed largely from the price declines for petroleum (two thirds of the total) and minerals. It would be no over- statement to assert that no one was in a position to predict, and no one did predict, a drop of such magnitude, especially in oil prices. Second, imports rose in value by $300 million, an increase of 17 percent over the 1985 level. In addition to the increased demand for inputs and capital goods stemming from the reactivation of production, there was a substantial increase in imports of agricultural products. In fact, these account for over 50 percent of the increase.

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This is a circumstance that is inconsistent with the priority that we have accorded to the development of the agricultural sector. As it happened, the improved level of domestic food consumption could not be met by the growth of agricultural production. In these circumstances, it was necessary to increase imports in order to meet the most urgent needs of the people. Of course, domestic production will not be affected by competition from these imports. The Central Government guarantees remunerative prices as part of a process of transferring resources to agriculture, the country's most depressed sector. Consequently, the trade balance would be only $200 million in surplus, $900 million below the level of 1985. If to this we add the drop in agreed loan disbursements from $650 million in 1985 to $325 million in 1986, it becomes easy to understand the magnitude of the deterioration of the balance of payments and the need to take additional measures. In any case, it is important to note that the deterioration in the external accounts is not explained by the policy to reactivate production. As noted earlier, the expansion of production and revenue could basically have been financed by the savings resulting from the limitation on external debt payments. It was the unforeseen decline in export receipts and the reduction in capital flows that complicated matters, explaining why the Government had to adopt additional measures last July as regards payment of the private debt and the repatriation of profits. Even so, reserves are expected to decline by about $250 million in 1986. However, I must mention that the decline in oil prices and other primary products and the protectionism of industrial countries has had and continues to have adverse effects on the evolution of the Peruvian economy. In 1986 our export revenue will be lower by almost 20 percent over 1985. I must tell you that this trend has seriously affected our ability to pay in the near future. The drop in petroleum and mineral prices also had an impact on the development of government finance, in particular as regards the incomes of public enterprises in the petroleum and mining sectors. At the same time, however, there were no additional inflationary pressures and no dis- proportionate increase in the money supply. These developments were firmly managed by the Government and produced no distortions of any kind, but they were noted with concern by economic transactors. Inflationary expectations resulted in relatively sizable price increases. It would appear that short-term expectations are all that can have an impact on decisions in such unstable economies. In any case, what is most important is what such developments represent for the future.

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It is estimated that 1987 export revenues will be the same as in 1986, assuming some recovery of oil and mineral prices and declines in coffee prices and the export volume of crude. On the other hand, it is estimated that imports will increase by about $150 million, assuming some reduction in agricultural and livestock imports and a rational evolution of imports of inputs and capital goods. Consequently, the country's 1987 trade surplus would be on the order of $50 million. If we subtract from this amount the balance of nonfinancial services, we have a negative balance of slightly more than $100 million. This could be covered by grants, which have traditionally amounted to about $100 million. Thus, the country's payment capacity would be virtually nil. All that could be paid would be an amount equivalent to inflows in the form of disbursements from new loans if it is desired to avoid the loss of reserves. This is the basis for our present and future negotiations, for it is obvious that the country cannot devote the scarce reserves at its disposal to payment of the debt. As this situation is not likely to change significantly in the years to come, it is essential to move beyond the limitation on external debt service, which was obviously an emergency measure. This was done to establish the foundations for long-term expansion of the country's production, which is the only way to prevent the economic, social, and political collapse of Peru. It is also, I might add, the only way we will be able to pay the debt in the future, as it is unquestionable that only growth can permit real payment of the debt. Paying it with the hunger of our people is not only unacceptable from a moral standpoint, it is absolutely impossible given the degree of deterioration in their standard of living. Along these lines, I am convinced that the agricultural sector requires priority attention. Beginning this year we are implementing a program in support of agricultural production. Through it we have established guaranteed prices and a fund for the purchase of part of production. There have also been cost adjustments for the purpose of promoting the use of certain agricultural inputs and increasing productivity in the field. Nevertheless, we deem it essential to proceed further with such actions and, above all, to do what is necessary to ensure that the producer receives what the consumer pays. The lack of job opportunities has excessively lengthened the distribution chain for agricultural products, especially at the retail level. The intermediaries therefore strive to absorb a dispropor- tionate share of the realized price of goods, making them genuine parasites on farmers. The development of agriculture, which above all requires organization, should fulfill various basic functions: first, increased production must

©International Monetary Fund. Not for Redistribution 158 SUMMARY PROCEEDINGS, 1986 make possible a continuous improvement in the food consumption level of the country, without recourse to additional imports, and it should be possible to replace imports by domestic products; second, agriculture must become a continually expanding market for industry, the development of which must be supported by growth in the domestic market; third, agriculture and agroindustry located where the raw materials are grown must provide jobs for the present and future rural population, and even make it possible to absorb some of the current population of some cities; and fourth, agriculture and agroindustry can earn foreign exchange. The development of agroindustry has the greatest potential, in particular the textile industry, which in Peru could produce garments of pima cotton and alpaca wool, both fibers of exceptional quality. On the other hand, industry oriented toward the domestic market must be revamped so as to minimize imports and guarantee future growth. A third line of priority action is the restructuring of existing investment projects, especially in the public sector. Most projects have been developed without regard to the country's true needs and possibilities. The World Bank and the IDE have been participating in projects by partly financing the external component. In this sense they share responsibility for the excessive size of projects, which we are beginning to correct. They also share the responsibility for supporting projects that are not profitable or that fail to generate foreign exchange, but which do incorporate high proportions of imported equipment and services. In this regard, I wish to note that this is not a recrimination, but only an observation regarding the shared responsibility of debtors and creditors. Along these lines, we consider it of fundamental importance that the international financial agencies support investment projects that do not stimulate imports and unnecessary borrowing. It makes no sense, for example, to advocate exchange rates that do not stimulate imports when import operations are carried out directly through credits extended by the international organizations.

Conclusion The difficulties of the world economy have put all the developing countries at a crossroads. Peru, as we have stressed, cannot use the traditional path out. In reality, it is not a viable option for any country in the Third World. Only by adopting a policy distinct from that proposed thus far will we be able to move forward. But I wish to make it clear also that Peru has no intention of isolating itself. It simply happens that its current capacity to pay is virtually zero, if not to say negative. Austerity for the sake of paying a few million dollars more makes no sense whatever for a country as poor as our own. On the

©International Monetary Fund. Not for Redistribution GOVERNOR FOR PERU 159 contrary, a further decrease in the standard of living of the population could prove counterproductive. In truth, there is nowhere to put the belt to tighten it.

The only possible path is a profound transformation of the Peruvian economy and society, and here neither the traditional recommendations of the International Monetary Fund nor those of the World Bank are useful.

Accordingly, I seek the understanding of the international community and ask that it not shove our country into a blind alley.

"Debt or democracy," stated President Garcia at the United Nations General Assembly in 1985. "Debt or life," he said to the Non-aligned Sum- mit in 1986. And these are truly the alternatives before Peru today.

If Peru is not paying more it is because it is not possible. To do so would be extremely irresponsible of us. Is there anyone who argues that we should reduce our population's consumption even more and further feed the despair which exists today?

I urge the International Monetary Fund to welcome the proposals of the Group of Twenty-Four and make it possible to reschedule countries' repurchases. I further request that it allow us to continue on the path we have shown and not let this stand as an obstacle to our active participation in the life of the organization. We would like the World Bank to know that we are making great efforts to meet our commitments and hope that the credit flow to our country will encounter no unexpected setbacks. We wish to live in peaceful coexistence with all nations. We recognize the external debt and seek to continue paying to the extent we are able to do so and as an expression of our good faith. We have done and will continue to do so with the commercial banks, with which we met in New York just a few days ago. We have done and will continue to do so with the government-financing agencies, with which we are in constant contact.

It should be noted, however, that in the future these payments will be much more modest than in 1985 and 1986, as our capacity to pay has become smaller. In the years ahead, when production grows at a sustained rate and the Peruvian economy recovers, we shall be able to commit ourselves to making larger payments.

I wish to repeat to you, then, our original proposal. The debt problem can only be effectively resolved within a framework of global solutions and as part of a reform of the international monetary system. But for us, the time of waiting is over; we have for quite some time now been taking action.

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The representatives of many governments are gathered here. To all of them I wish to say that Peru seeks to maintain cooperative relations on the basis of equity and mutual respect. This is the message, these are the words we wished to convey.

STATEMENT BY THE GOVERNOR OF THE FUND FOR TURKEY

/. Kaya Erdem

It is indeed a great honor and pleasure for me to address this distinguished gathering. First of all, I would like to express my sincere gratitude to Mr. Clausen, who as President steered the World Bank safely through the rocks and shoals of an extremely difficult economic environment over the last five years. I would also like to convey my best wishes to Mr. Conable on his accession to the Presidency of the World Bank, and to congratulate Mr. de Larosière for his success in carrying out his extremely delicate and difficult tasks. And finally, I would like to welcome Kiribati and Poland, the newest members of our institutions, to their first Annual Meetings. Although the international economic situation has improved markedly since the emergence of widespread difficulties in the early 1980s, considerable strains and uncertainties still remain. Policies oriented toward establishing demand and supply equilibria have enabled the industrial countries to realize noninflationary growth in the medium term, and the developing countries to pursue adjustment with a certain degree of success. However, during the first half of 1986, despite lower oil prices and lower interest rates, a number of key economic indicators have performed poorly. This has given rise to concern over the sustainability of the recovery. Short- and medium-term prospects seem cloudy as the weakness of economic activity in the industrial countries continues and as commodity prices remain low. Also, declining export earnings in the developing countries and depressed world trade have affected projections. Many non-oil developing countries will face serious domestic and external problems for years to come, and the situation of a number of oil exporting debtor countries will remain critical. The continued success of the developing countries' growth-oriented adjustment policies is threatened by the continuing movement toward protectionism, restricted access to the international capital markets, and depressed real export earnings. There is increasing concern over the sustainability of the adjustment process being followed by the developing countries.

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In the face of their efforts to regenerate the necessary external resources and to restore domestic growth to adequate levels, we welcome Secretary Baker's initiative proposed last year at Seoul. I believe it is an important step toward a new and bold approach to the dilemma of the indebted developing countries. In my view, the ultimate success of growth-oriented adjustment efforts will depend not only on the volume of financial flows toward the indebted countries but also and even more decisively on exoge- nous factors, such as economic, commercial, and monetary events within the OECD countries. The policies of the developing countries should be carefully oriented to eliminate economic imbalances and accomplish a transition to a more sustainable fiscal and balance of payments position. This should be done without adverse short-term effects on the growth of output. On the other hand, the industrial countries should assume a fair share of the responsibility for sustaining the world recovery and for dismantling protectionism. Protectionism is generally accepted as a major threat to the world economic recovery. Pressure for protectionist measures has been increasing steadily for some years now. In the recent past, most liberalization efforts have been offset by the introduction or intensification of trade restrictions. These restraints have destroyed the credibility of accepted trade norms, distorted the allocation of resources, and damaged trade-related investment. The matter is one of serious concern because sustained world economic growth and progress toward the solution of the debt problem depend crucially on the smooth expansion of international trade. The call for a new round of trade negotiations is a positive development, but does not lessen the urgency of more immediate action. Now I would like to touch briefly on the Turkish experience. Faced in the late 1970s with the most severe economic crisis in the history of the Turkish Republic, the authorities realized the need for fundamental reform and launched a major reorientation of the Turkish economy in Janu- ary 1980. Mustering the political determination needed to implement a painful adjustment program, the authorities undertook a comprehensive and internally consistent package of radical measures aimed at achieving sustainable growth and balance of payments viability in the medium term. Despite the unfavorable international environment of this period, this program has been extremely successful. Internal and external imbalances were corrected, and the structural reforms exceed expectations. In carrying out this program, I might say that we began to implement the Baker initiative in advance of its formulation. The first step was realizing the need for a comprehensive economic reform program combined with structural reforms aimed at an outward-looking reorientation of the economy and a greater play of market forces. Privatization of the state economic enterprises is another issue of particular structural significance.

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In fact, this is one of the principal ingredients of the industrial development strategy adopted by the new Turkish Government within the concep- tual framework of a liberal economy. Flexible exchange rate and realistic interest rate policies, a greater reliance on market forces, and much reduced government subsidies and intervention helped improve resource allocation. The liberalization of imports and the removal of certain exchange restrictions also enabled more efficient use of resources. Second, the support of the IMF, the World Bank, and the OECD made it possible to implement a growth-oriented strategy. And third, although it took a long time for the Turkish "success story" to persuade the commercial banks and the official insurance agencies of the creditor countries to resume medium-term lending, the conditions for access to the international capital markets have gradually been re-established in parallel with Turkey's increasing creditworthiness. I feel that the results achieved so far are impressive. In 1984 and 1985, real GNP increased by 5.9 percent and 5.1 percent, respectively. The first preliminary estimate for GNP growth in 1986 based on the results of the first two quarters is 7.8 percent. These growth rates are among the world's highest during the same period. Thanks to a pursuit of export-led growth strategies, the balance of payments position has been substantially improved, with the current account deficit having been narrowed to a level that is sustainable in the medium term. In fact, the share of exports in GNP has increased from about 5 percent in 1980 to around 15 percent in 1985. The gains in competitive environment and the trend toward reliance on free market principles are continuing. But we are also determined not to let these encouraging developments lead to a relaxation of our efforts. The achievement of sustainable and outward-looking development is a process requiring continuing determination and timely implementation of appropriate measures. With respect to international monetary affairs, I am very pleased with the contructive discussion of the issues raised by the Group of Ten and Group of Twenty-Four reports. The coordinated actions taken by the major industrial countries to safeguard the orderly functioning of the international monetary system are also encouraging. The Plaza meeting a year ago was a promising beginning toward the elimination of excessive short-term exchange rate fluctuations and long-term misalignments between major currencies. This year's efforts to intensify the coordination of economic policies have demonstrated their usefulness not only for the countries directly involved but for the world economy as a whole. The willingness of the major industrial countries to establish a set of indicators related to policy actions and economic performance is also a healthy step toward the strengthening of international surveillance. Effec- tive multilateral surveillance using such indicators and performed in con-

©International Monetary Fund. Not for Redistribution GOVERNOR FOR TURKEY 163 nection with the World Economic Outlook exercise would be beneficial in assessing members' domestic policies for their international consistency and compatibility with the stability of the exchange rate system. However, I am also of the view that a sound international monetary system needs to be supported by a stable reserve system that would allow countries to offset temporary disturbances arising from the exchange and financial markets. The limited access of the developing countries to the international capital markets, despite their strong adjustment efforts, necessitates this support. I therefore feel there is a need to supplement the existing sources of reserves in order to aid the smooth expansion of world trade, improve the composition of members' reserve assets, and increase the stability of the reserve system. Furthermore, strengthening the SDK's role in the present system would enable it to be more than a safety net.

With respect to the roles of the Fund and the World Bank in the adjustment process, through which the international community can support the adjustment and development efforts of member countries, I believe it is time to pay greater attention to development as the inevitable accompani- ment to adjustment. It is now more important than ever to increase the support coming from these two institutions. Since the world recession of the early 1980s, many developing countries have been left with insufficient external resources and, in addition, with an unsustainable balance of payments position and poor growth prospects. The stubborn disequilibria of the developing countries are often structural in nature, and those countries cannot correct them by their own unaided efforts, but must obtain a substantial increase in the resources at their disposal. The conditions and criteria attached to such assistance must be realistically and flexibly designed and applied.

I would also like to express to the Fund and the Bank our appreciation for their increased and very fruitful collaboration in the area of structural adjustment and indebtedness. We feel that this collaboration merits special commendation. The recent joint initiatives of the Bank and Fund have greatly raised our hopes for easing the problems of the developing world. I also welcome the ingenuity of these two institutions, which have found ways of implementing mutually supportive and complementary actions without sacrificing the independence of either one. . . .

In conclusion, I would say that a stable and more supportive international economic environment would ease many current problems and would permit many countries to resume development. Intensified efforts by the industrial countries to harmonize and coordinate their economic policies, to lessen the threat of protectionism, and to further stabilize the international monetary system would do much to improve the health of the world economy.

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STATEMENT BY THE GOVERNOR OF THE BANK FOR BELGIUM

Mark Eyskens

First and foremost, allow me to pay tribute to Mr. Jacques de Larosière, a true statesman at the international community level who has set about serving this community with courage, with devotion, and with great effectiveness. As to Mr. Conable, whose generous eloquence was deeply appreciated by us, we extend our best wishes for success in meeting the many challenges that will face him. At the last Annual Meetings of our institutions held a year ago in Seoul, some important conclusions were drawn and directions indicated. Since that time, the international community, as represented at the In- ternational Monetary Fund and the World Bank, has been engaged in devising a constructive approach to the world debt crisis: constructive in the sense that it insists on the necessity of avoiding a slump in international trade. It is within this context that the Baker initiative has come into its own. The Fund, under the leadership of its Managing Director, Mr. de Larosière, has set up structural adjustment programs, thereby creating an environment favorable to debt rescheduling. The international financial community will always be grateful to Mr. de Larosière for the decisive role he has led the Fund to play in the debt strategy. . . . The major industrial countries making up the Group of Five have shown a keen sense of their global responsibility, enhancing the coordination of their policies, particularly in the monetary arena. We hope the spirit of the Plaza meeting will remain alive and unquenched. The international community certainly needs it. Analysis of the world economic situation also reveals great progress in a number of essential areas: inflation has largely been mastered, especially in the industrial countries; industrial modernization is proceeding apace; investments are on the rise; and in the petroleum importing countries, the drop in oil prices is beginning to be reflected usefully in demand. In a number of developing countries, difficult and courageous efforts toward structural adjustment have been launched. The majority of the industrial countries, except the United States, have considerably reduced their budget deficits. The disequilibrium in the public finances of the world's largest power is a serious cause of international destabilization, not so much because of its relative size expressed as a percentage of the U.S. gross national product, but rather because of its magnitude in absolute numbers, because of the need to finance it, because of its distortion of capital flows, and because of its perverse effect on real interest rates. This deficit, which

©International Monetary Fund. Not for Redistribution GOVERNOR FOR BELGIUM 165 is definitely structural in origin, reflects the basic inadequacy of U.S. savings.

Thus, there are still numerous causes of dissatisfaction and concern. In many countries economic growth has not come up to expectations. The basic balance of payments disequilibria among the major industrial countries and between North and South are in many cases still at unsustainable levels. The resumption of international trade leaves much to be desired. Protectionist tendencies are surfacing once more. Real interest rates are still too high. Many countries are still running high public deficits, and unemployment is still a frightening evil which strikes indiscriminately at most of the countries in the international community.

The abandonment of the monetary discipline imposed by the Bretton Woods agreement, and the lack of any type of operating standards in the present international monetary system, permits the major industrial countries to set their own priorities and pursue their own political and economic objectives without paying much attention to one another, though it is precisely this inattention that prevents them from realizing the objectives that they have set for themselves. This represents a divisive force in the international community. The member countries of the EC, by establishing and reinforcing the European Monetary System, are pioneering in this area and represent, I am deeply convinced, an example to be emulated by or extended to more countries or groups of countries. Convergence of policies among industrial countries of comparable levels of activity is of paramount importance not only for those countries themselves but also for the rest of the world. Its realization will require political willingness to coordinate. It is the lack of convergence stemming from a lack of coordination which threatens to bring a deflationary crisis upon the world economy.

How should we meet the challenges of today, which in one form or another will also be the challenges of tomorrow and the day after?

As to the tormenting problem of the indebtedness of most of the Third World, we must find a way out of the dilemma which would now force us to choose between imposing on the indebted countries either an effort so impossible that it will plunge them all into deflation with grave damage to world trade, or virtual default, which would incurably cripple the confidence of financial circles, provoke a serious financial crisis, and confront the creditor countries with a situation out of control. This is why Belgium supports the Baker plan. It must be said that it has been slow to implement. This is doubtless not only because it requires the debtor countries to take appropriate measures, but also because of the inherent difficulty of coordinating the necessary actions on the part of all the concerned parties. It is therefore essential for the International Monetary Fund to continue

©International Monetary Fund. Not for Redistribution 166 SUMMARY PROCEEDINGS, 1986 strengthening its role as a prime mover and coordinator in implementing the plan.

The debt situation has led a number of countries to incur payments arrears to the Fund. It is in the interest of the indebted countries to avoid cutting themselves off from Fund financing, or from the support the Fund can give them in accomplishing their necessary structural adjustment. . . .

My Government has authorized me to announce that Belgium supports the Eighth Replenishment of resources of the International Development Association (IDA). This replenishment will enable IDA to continue, to the end of the decade, its support for programs of adjustment and development in its poorest member countries, as well as to take part in the activities of the Structural Adjustment Facility of the International Monetary Fund. . . .

The events of the last decade—oil shock, dollar shock, oil countershock, and the debt crisis, which have hit hard, sometimes very hard, at all members of the international community—should cause us to pay greater attention to the obvious fact of interdependence and the consequent necessity for complementarity among the interests and the economic and industrial situations of all countries. These same considerations prompted me to propose, seven years ago now, in an entirely different context, the negotiation of a Pact for Growth with Solidarity between the industrial and the developing countries. Briefly stated, this plan aimed to link, flexibly but firmly, the growth rates of the industrial countries to the size of their official development aid. Its goal was to exploit, and to finance in a sustained manner, the complementarity among the differing economic structures of the participants in the pact, in such a way as to encourage the recipients of official aid to undertake economic activities calculated to have important multi- plier effects on growth. Even though the world economic situation has greatly changed since then, it seems to me that the objectives of this proposal remain valid today: all actions in the area of development cooperation, whether multilateral or bilateral, must be based on the necessity of promoting the comparative advantages of all.

We must not underestimate the reorientation which has taken place in the policies of the Bank in response to structural changes in the world economy. The Bank's emphasis on a policy of macroeconomic restructuring seems to me of paramount importance if the goal is to promote convergence, balanced development, and the resurgence of international trade, which are possible only in a climate of free trade. This is why Bel- gium welcomes the cooperation between the International Monetary Fund and the World Bank and their joint initiation of continuous, shared, cohesive actions.

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As to the reform of the international monetary system, Belgium has always favored a system of convergence and order, which is to say one resting on parities that are relatively stable but adjustable according to rules agreed on in advance. Events have shown, since the collapse of the Bretton Woods system in 1971, that floating rates do not impede the transmission of inflationary pressures; do not avoid but even encourage protectionist reactions; and most of all do not resolve the structural adjustment problems of countries whose money is affected by erratic swings. It is a snare and a delusion to suppose that a policy of depreciating its currency will enable a country adopting it to meet the challenges of adapting and mod- ernizing its industrial structures. In the absence of a truly cohesive view within the international community, we can approve the introduction of indicators of the course of economic policy in the largest industrial countries. These indicators should not be merely tools for describing imbalances but should become norms that are taken seriously by the countries concerned. As for the policies launched by the Fund, the magnitude of the difficulties presently encountered by many countries justifies, in my view, the maintenance at their present levels of the limits governing the enlarged access policy and the compensatory financing facility. Belgium also favors a new allocation of SDKs. The difficulties of access to the capital markets facing many developing countries, the need to strengthen the present level of owned reserves in many countries without a crippling compression of their imports, and the need to avoid the risk of deflation associated with the debt crisis militate in favor of such a decision. I repeat here the Belgian proposal concerning a new allocation of SDKs. We have several times suggested a system of voluntary transfer to the Fund of the industrial countries' allocations for utilization on behalf of certain countries which really need them and which would agree to incorporate the SDKs made available to them into a sufficiently coherent readjustment program. I believe that this is the only proposal which will make it possible for us to get around the deadlock which faces us now in connection with SDKs and a deadlock in which we have gotten fully bogged down. I come, at last, to the problem of the Western triangle, consisting of the United States, Europe, and Japan, whose impact is being felt worldwide. Between 1981 and 1986, Japan and Europe have followed restrictive budgetary policies to reduce their internal demand. The United States has followed an opposite policy which has increased both its deficit and its internal demand. The U.S. policy, consisting of a tight monetary policy in combination with tolerance of a continuing and growing budgetary deficit—although Mr. Baker this morning informed us of his administration's welcome intention to cut back that deficit—has kept real interest

©International Monetary Fund. Not for Redistribution 168 SUMMARY PROCEEDINGS, 1986 rates high notwithstanding the lowering of nominal rates. As a result it has become extremely difficult to stimulate investments, especially in Europe, where the difficulty is aggravated by an outflow of capital toward the United States. The rise in real interest rates is also inflicting an acute public debt problem in real terms on many European countries. We must therefore work together, within the Western bloc, to bring down real interest rates. This is of paramount importance to our industrial restructuring and to the fight against unemployment. In recent years Bel- gium has undertaken an extensive program to reform its budget—in 1987 the public deficit will be reduced by 30 percent in a single year—to modernize its industry, to re-establish the competitiveness of its enterprises, and to gradually reabsorb unemployment. We must take care that our efforts are not in vain. But we cannot retreat into economic unilateralism. Supply-side policy, which has great merit and which is absolutely indispensable to the modernization of our industrial plant, will turn out to be useless if it brings about the annihilation of demand. It is also true that a Keynesian stimulation of demand will be counterproductive if supply depends on enterprises which are unprofitable or crushed by regulation or fiscal and parafiscal pressures. We therefore favor a two-way policy, consisting of a supply-side policy based on modernization and a demand-side policy directed toward maintaining demand, but without increasing the costs of production. There are not 36 different means to this end. The only meaningful way of doing it is to reduce fiscal and parafiscal pressure. We welcome the decisions made in this area by the U.S. Government. Its fiscal reform will involve in the short term an increase in savings that will reduce the external deficit; these effects will lay the foundation for an economic expansion sustainable over the medium term, combining modernization of the means of production with demand support. In Europe also, fiscal reforms have been announced or implemented. This is the European contribution to the reflation of the economy by increasing net disposable purchasing power. For the small countries, the international context remains the determining factor. This is why we are totally opposed to any form of protectionism. Belgium, which will soon preside over the councils of the European Com- munity, will try to promote the creation of a single great internal market, on the scale of the European continent. At the world level, we hope that the trade negotiations recently begun at Punta del Este can rapidly lead to a faster liberalization of international trade. What we must do, in fact, is to integrate both our macroeconomic policies and our international trade policies. The economic image of the world is reminiscent of a tachist painting, with splashes of light and shade. The economists, who are never short of

©International Monetary Fund. Not for Redistribution GOVERNOR FOR SWEDEN 169 analyses but are much more parsimonious when it comes to clear and unequivocal conclusions, exhibit a certain confusion. This hardly makes them unique in today's international society, where the only constant is change after change. I am told that the economists have arrived at the conclusion that half their theories are wrong. The problem is they don't know which half. The political leaders, for their part, must reconcile the lucidity which comes with a certain degree of concern and pessimism with the optimism which comes from positive determination.

STATEMENT BY THE GOVERNOR OF THE BANK FOR SWEDEN

Kjell-OlofFeldt

Let me start by expressing a warm welcome—on behalf of the five Nor- dic countries—to the two new members of the Fund, Kiribati and Poland.

World Economic Outlook I agree with those who have voiced their disappointment and concern about the course of the world economy in the most recent period. Like others, we had expected declining interest rates and lower oil prices to provide sufficient stimulus to sustain and even increase the rate of economic growth in many countries. Instead, we have seen a marked slowdown of economic growth in industrial countries, sluggish world trade, and deteriorating prospects in many developing countries. Admittedly, it is difficult to interpret developments correctly at a time when the world economy is in the process of adapting to large shifts in exchange rates, interest rates, and raw material prices. Hopefully, we have witnessed only a pause in the recovery, to be followed by renewed growth this year and next. Indeed, economic activity is likely to strengthen as the effects of lower interest rates and oil prices work themselves through our economies. But this higher activity may be short-lived, and the weaker, underlying trend we have seen earlier this year may reappear. Adjustment needs are currently great and will remain so both within and between countries. As efforts to reduce and eliminate imbalances proceed in many economies simultaneously, a deflationary bias is easily created in the world economy as a whole. Economic policy must be vigilant against this risk. Seen from an international viewpoint, its central task ahead must be to achieve progress in correcting the present large payments imbalances while avoiding adverse effects on output growth.

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But such adverse effects may be very difficult to avoid unless domestic economic policies in some countries are adjusted. The United States is now, hopefully, embarking on an ambitious course of fiscal consolidation in the years ahead. I am sure that we all agree that this is a highly desirable course of action to which we wish to give our fullest support. A lower budget deficit in the United States is a necessary and crucial element in the overall adjustment process. But if an ambitious fiscal consolidation in the United States is combined with an exceedingly cautious policy in Japan and major European countries, while debtor and raw-material-producing countries continue to be forced to restrain their imports—well, then it is difficult to see how a deflationary bias can be avoided. There is a risk that fiscal policy in the industrial countries on aggregate will have a very significant restrictive impact on world demand in the period ahead, and this is a source of serious concern to my constituency. We therefore continue to argue that Europe and Japan must be asked to contribute more to world economic growth. Adjustments in present policies should be possible for countries with a comfortable balance of payments position and with inflation and public expenditures under reasonable control. Coordination of monetary policy in major countries has been helpful in reducing interest rates and in improving the pattern of exchange rates. It is essential that cooperation in this field be intensified in the present circumstances. Stronger growth in Europe and Japan will help speed up progress in correcting the current account imbalances of major industrial countries. This correction should not take place by exchange rate adjustments alone, but also by coordinated adjustments in domestic economic policies in major countries aimed at achieving a more satisfactory pattern of growth. Assessing the compatibility of economic policies and ensuring their coordination should be at the core of international economic cooperation as it is pursued in the Fund and other forums. It is obvious that this task is becoming particularly important in the period ahead.

The Debt Situation In spite of substantial reductions in current account deficits since 1982, developing country debt ratios have continued to mount, and economic growth has been generally disappointing. The prospects for sustained growth for the developing countries as a group seem even bleaker than before. Some countries are beginning to reap the benefits of adjustment, but for sub-Saharan Africa developments during the past few years have been very unfavorable. Present projections for the developing world as a

©International Monetary Fund. Not for Redistribution GOVERNOR FOR SWEDEN 171 whole are beset with even greater uncertainties than usual, given the evolution of oil prices and commodity prices in general. It is now one year since the U.S. Secretary of the Treasury presented his initiative to deal with the debt problems. My constituency remains convinced that the debt problems are best addressed in the framework of a coherent, long-term strategy which builds on and supplements the traditional case-by-case approach. Promoting sustainable growth in the industrial countries is of singular importance for such a common strategy. The prospects for the developing countries, and thereby prospects for effectively tackling the debt crisis, depend crucially on the growth and openness of markets in the industrial economies. The strong Nordic support for the new round of trade negotiations should be seen in this context. However, determined action is also required from other partners. The commercial banks must play their part in supporting effective adjustment. The debtor countries for their part will have to continue on their path of adjustment, mobilizing domestic savings and using scarce resources as effectively as possible. Credible economic policies will also help reduce the problem of capital flight. The Nordic countries welcome the growth- oriented agreement recently concluded between the Fund and Mexico and the agreement reached with the commercial banks yesterday. But we want to emphasize that such programs will have to be tailored to the specific circumstances of each applicant country. The provisions of the Mexican agreement are not necessarily applicable in arrangements with other countries. For the poorest countries additional efforts are needed. We would like to see all industrial countries join in a coordinated action to assist these countries. An effective implementation of growth-oriented adjustment in these countries to a large extent depends on adequate concessional resources. For several years now, ODA flows have been largely stagnant, and prospects for the future point to a declining ratio of ODA to GNP. Increased debt relief in individual cases may also constitute an element in a program to assist the poorest countries. Some of our countries are actively considering additional ODA contributions specifically designed to help the poorest debtor countries reduce their debt burden. And we would encourage others to consider similar action. The multilateral financial institutions must also be provided with the necessary means to fulfill their part of the task in tackling the debt problem. I will now turn to matters more directly related to the Fund's activities. I find the conclusion drawn by the Interim Committee on the enlarged access policy reasonable. The arguments for keeping access limits un-

©International Monetary Fund. Not for Redistribution 172 SUMMARY PROCEEDINGS, 1986 changed are quite convincing, not least since any quota increases that may result from the Ninth Quota Review are unlikely to become effective in the more immediate future. The balance of payments problems of a number of member countries continue to be very serious indeed. Consequently, the Fund must have the capability of providing adequate financing to support comprehensive adjustment programs. It should also be borne in mind that the present debt strategy, with its increased emphasis on economic growth, calls for larger amounts of financing—also from the international financial organizations. It is my general view that lending from the Fund, in normal circumstances, should be based on its own resources. Therefore I welcome the imminent start of the Ninth Quota Review, which should lead to a needed strengthening of IMF funding. The discussion on the role of the SDR seems to have gotten stuck on a very fundamental level. Some argue that the radical changes that have taken place in the international monetary system leave little scope for the SDR. I do not agree. There are still important functions for the SDR to fulfill, in particular as a reserve asset created under international control. To get out of the stalemate, we must all be constructive and try to find compromises in the present broad-ranging discussions on various aspects relating to the future role of the SDR. On this point I agree very much with what Mr. de Larosière said yesterday. The sharply diverging views as to the interpretation of the criteria for new SDR allocations constitute a central obstacle to progress. Instead of repeating twice a year all the well-known arguments, we should focus our attention on more fundamental issues, such as the design of the allocation mechanism. Similarly, if there is broad support for the SDR system functioning as a safety net, we need to consider more closely how that could be brought about. Finally, as to the question of allocations in the next basic period, I remain of the opinion that an SDR allocation of a moderate size is warranted. A resumption of the allocations would also strengthen the credibility of the system. The Nordic countries strongly support the ongoing work in the Fund and in other forums to strengthen multilateral surveillance. We also find it essential that such surveillance be conducted in a consistent way. The central objective of these activities must be to contribute to a reasonable sharing of the adjustment burden among member countries. In other words, the need for policy adjustments should be more systematically analyzed in an international perspective. In this connection, the Fund's review in the latest World Economic Outlook of potential sources of tension seems to me to be a step in the right direction.

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But to become effective, multilateral surveillance should also contain an element of increased peer pressure on policymakers. The introduction of economic indicators might to some extent contribute to that. Of course, there is nothing new in the concept of indicators. Using them as analytical tools would only represent a more systematic examination of a type already made within the present judgmental approach to surveillance. In my opinion, to give more bite to the surveillance mechanism, indicators should also be used as triggers for international deliberations. In such a procedure, there should be no presumption about the choice of corrective measures or about the sharing of the adjustment burden. But the consultations should be conducted with a view to reaching a consensus as to appropriate policy action. In addition to current account balances, an exchange rate indicator based on real effective exchange rate changes would, in my view, be particularly well suited for such a triggering function. It will signal at an early stage the existence of inconsistencies in economic policies and developments. With some delay, other indicators could of course play similar roles within the framework of strengthened follow-up procedures to surveillance. All in all, it must be admitted that introducing indicators will not imply any far-reaching modification of the surveillance process. But the exercise would certainly be worthwhile if it can contribute to a better understanding of economic interactions as well as to an increased preparedness to take international considerations into account. Let me conclude by joining others in paying tribute to Mr. de Larosière. His legendary capacity for work and his firm and imaginative leadership have been crucial in guiding the Fund through a particularly difficult period for the world economy. The Nordic countries express their warm appreciation for Mr. de Larosière's dedicated service and wish him well for the future.

STATEMENT BY THE GOVERNOR OF THE BANK FOR ISRAEL

Michael Bruno

It is an honor and privilege to address this distinguished gathering on behalf of the State of Israel. . . . I wish to express our profound thanks to Executive Directors, J.J. Polak and Ferdinand van Dam, who represented our constituency ably and dili- gently for many years, and who will be completing their assignments shortly. I wish them well in the future.

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We also wish to welcome Poland and Kiribati to the Fund and the World Bank. The early 1970s constituted a watershed in the development of the world economy and in the macroeconomic performance of most individual economies. The collapse of the Bretton Woods international monetary system in 1971 probably marked more than anything else the onset of a period of turmoil in the world economy. The sharp oil and other commodity price increases of 1973 and 1979 induced stagflation in the industrial countries and recession in many developing ones. In the early 1980s sharp rises in real interest rates shocked many Third World borrowers into a similar mix of inflation and unemployment problems of an unprecedented magnitude. The most recent gyrations in world exchange rates, closely related to the fiscal and monetary stance of the United States and other major industrial countries, are compounded by the debt overhang afflicting much of the industrializing Third World and aggravated by the sharp drop in oil and commodity prices. All of these emphasize the failure of the international monetary system to produce an alternative monetary, trade, and payments regime simulating the seeming tranquility which the Bretton Woods Agreement managed to instill into it for a quarter of a century. At the onset of the second half of the 1980s, Europe and many Third World countries are reeling under heavy unemployment, which is giving rise to sharp protectionist trends and serving as an expedient but sad answer to the unsolved world trade and payments questions. Yet, some progress has been made, and there is reason for guarded optimism. World inflation, at least, is back to where it was before the period of turmoil started. Growth and employment have yet to follow. The study of world developments over this period has taught us the paramount importance of policy coordination among the major industrial countries, and the need for continuing dialogue on many levels between North and South. We have also witnessed the increasingly important role that the great institutions that were founded at Bretton Woods some forty years ago and assembled here today can indeed play in the reshaping of the world economy. I can only offer full moral support on behalf of my small country for these great efforts. Barred from the ability to exercise influence over the turbulent world environment, small, open economies must learn to adjust to these external shocks in the best possible way. Each country must strive to learn from its own past mistakes, and there is also an important element of sharing of similar past experiences, of both success and failure of macroeconomic adjustment, that our countries can freely exchange with each other. Keeping our own house in order is one contribution that each one of us can make to the restructuring of the world economy.

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For my own country, as for many others, the 1970s marked a very sharp switch from a period of rapid growth (close to 10 percent per annum), full employment, and relative tranquility on the inflation and balance of payments fronts, to one of stagnation and protracted internal and external imbalance. Government budget deficits, quickly rising to the order of 12-15 percent of GNP, became the major factor contributing to the subsequent failure of the economy to adjust to the external shocks of the 1970s. As a result, Israel, an otherwise high savings and industrial export-led economy, had to resort to continuing outside help and a sharp cut in investments as a means of overcoming its balance of payments problems. Moreover, monetary accommodation, as applied in the past, taking the form of nearly automatic adjustment of money and credit, exchange rates, and wages to price level shocks, helps to explain Israel's step-wise acceleration of inflation from around 10 percent a year at the onset of the 1970s to some 400-500 percent by 1984-85. It is important to stress that Israel's failure for more than an decade to extricate its economy from inflation, low growth, and intermittent balance of payments difficulties has a lot to do with the partial and single-target nature of macro policies that were adopted by various governments. To improve the balance of payments deficits, subsidies were being cut and devaluations decreed, leading in turn to a sharp acceleration of inflation and a further erosion of government tax revenues. On other occasions, partial attempts to decelerate inflation by slowing down the rate of devaluation or by temporary wage restraint, without accompanying monetary and fiscal discipline, led to the renewal of balance of payments problems. It is the lessons of these failed partial attempts and the general deterioration of both inflation and the state of foreign exchange reserves that paved the way for the comprehensive approach on which our recent stabilization program and economic reform were based.

The new approach marking Israel's July 1985 program differed from previous attempts in two major respects. The program was comprehensive in that it attacked both the inflation and the balance of payments targets simultaneously. Second, it took explicit account of the need to reduce inflation alongside all other related nominal aggregates (wages, exchange rates, and bank credit) in a synchronized manner, all at once, and not in a gradual manner. It was for this reason that not only a conventional devaluation, but also sharp fiscal and monetary restraint was introduced. An important part of the program consisted of an explicit tripartite stabilization bargain that was negotiated and signed by the trade unions, the employers' association, and the Government. It included a temporary suspension of wage indexation (over and above an agreed fixed initial and subsequent compensation), a price freeze, and a declaration of intent on the stabilization of the exchange rate. A corresponding nominal bank credit target was

©International Monetary Fund. Not for Redistribution 176 SUMMARY PROCEEDINGS, 1986 also introduced, and indexed demand deposits were abolished. In this way, the program established an immediate new nominal anchor (or rather, a set of consistent anchors) to the reformed monetary system. Un- der the declaration of intent on the exchange rate, which has recently been publicly reiterated, the exchange rate is kept stable (first to the dollar and, since August 1986, against a basket of currencies), provided that the trade unions restrain wages. General price controls have in the meantime been lifted to a large extent.

The results have so far been quite satisfactory. The government budget deficit has been eliminated, the monthly inflation rate is down from 15 percent to about 1-1! /2 percent, and the balance of payments in 1985 and probably also in 1986 is in surplus. (Temporary aid and the unantici- pated drop in oil and commodity prices have, of course, greatly helped.) This, plus the public support for the program and its continued credibility, virtually eliminated unofficial exchange markets by bringing the exchange rate premium to an all-time low. At the same time, the program's cost in terms of unemployment, which rose by less than 2 percentage points, has been minimal. Stability, however, is still vulnerable, depending on continued wage restraint and a balanced budget, none of which is guaranteed.

However, the true test of a reform program like this is its ability to move the economy into a phase of growth while maintaining relative price and balance of payments stability. This, hardest of all, is still far from having been attempted. While recent export performance has improved, domestic private consumption demand is rising too rapidly and investments are still depressed. Also high real interest rates, the affliction of all stabilization efforts, are yet to come down more as the government gradually relaxes its stifling grip on the capital market. Continued budget balance may for the first time enable the gradual introduction of a far-reaching capital market reform. Still the hardest problem of all is bringing about a coordinated tax-cum-public-expenditure cut, a prerequisite for a structural change that is necessary if the economy is to reach at least half of its pre-1970s growth performance.

Going through the exacting experience of adjustment, we have learned two important lessons that I would like to share with my distinguished colleagues at this important assembly. One is the paramount importance of assuring social consensus for the stabilization efforts, so as to avoid the pitfalls of undesirable distributional consequences. There is hardly any other way of attaining rapid and yet sustained stabilization in a democratic society. The other lesson goes back to the overriding importance of availability of external support to countries embarking on the process of adjustment. Such support can come only from industrial countries and from the major international institutions gathered here this week.

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Before concluding, please allow me, ladies and gentlemen, to congratulate Mr. Conable on his assuming the challenging position of steering the world development effort, and to highly salute Mr. de Larosière for the ability and style with which he led for almost a decade the international monetary system during its most difficult times.

STATEMENT BY THE GOVERNOR OF THE FUND AND THE BANK FOR SRI LANKA

Ronnie de Mel At the outset, let me recall that I first addressed this distinguished assembly in 1977. Since then, I have had the good fortune to address you ten times in succession as the Finance Minister of my country. Ten years is a long time in the history of any nation; ten years is also a long time in the development of the international economy. Many events have occurred during this long period, and I think it would be appropriate if I reflect on some of the problems we have faced, the solutions we have urged, and the successes and the failures of our efforts to meet the main challenges of our time: namely, the fashioning of a more orderly and a more equitable international financial system, which would enable industrial countries to grow steadily while containing inflation and unemployment and would permit the developing countries to overcome the problems of endemic poverty. When I first came here in 1977, the world was yet struggling to recover from the recession of 1974-75 and was primarily concerned with the questions of how to promote worldwide economic growth without rekindling inflation and how to promote an expansion of world trade with beneficial effects on developing countries. An expanding Fund, Bank, and IDA were in the forefront of the ongoing adjustment process. My country, Sri Lanka, had just decided to abandon a long-standing inward-looking economic strategy and to open out by liberalizing its economy. The next year, we were in the midst of the second oil shock, which dampened prospects of recovery in the industrial world. Following this, commodity prices col- lapsed and non-oil developing countries commenced a long period of severe deterioration in the terms of trade. Protectionism was rearing its ugly head. World inflation and interest rates rose to intolerable levels, and official development assistance declined. World trade was constrained, and current account deficits of developing countries escalated in an unprecedented manner. My country's new open market policies came under severe strain, with the cost of critical development projects rising several fold. In the early difficult years of 1977-82, I repeatedly urged a greater and more positive role for the Fund and the Bank to take the lead in arresting a

©International Monetary Fund. Not for Redistribution 178 SUMMARY PROCEEDINGS, 1986 serious slump in the world economy. This was because our Bretton Woods institutions were in the unique position of catalyzing adequate resources in support of orderly adjustment. We urged the increase in quotas in the Fund and in the capital of the Bank, relaxation of lending conditionality, and enlarged access to Fund-Bank facilities. Meanwhile, the industrial countries were grappling with adjusting to the emerging realities of high inflation and economic stagnation, and private financial markets had come to the fore in recycling the surpluses of oil exporters. But this was also a time when industrial countries commenced to review the role of the Fund and the Bank in a fundamental manner, with a distinct orientation toward greater emphasis on adjustment than on provision of adequate finance, an unfortunate juxtaposition of policy orientation, in my view.

A new situation arose in 1982. The world's economic ills were compounded by the emergence of the debt crisis in 1982, just when the world economy was showing some signs of recovery from the recession of 1978- 82. Perhaps the debt crisis was the inevitable result of the way we tackled the recession, by overconcentration on demand-containing adjustment and overdependence on private markets to finance the growing current account imbalances. In my first address in 1977, I had suggested the search for a means of recycling the surpluses via the Fund and the Bank, with an increased lending role for these institutions in promoting orderly adjustment. But such views were not fashionable in a world that was gradually coming to give primacy to adjustment over finance and that had considerable faith in the efficacy of private financial markets. Thus, although Fund quotas were increased somewhat modestly, access to Fund resources was progressively curtailed in formal terms and, further, by practice. Conditionality grew in creeping fashion. SDR allocations, which were originally expected to relieve worldwide liquidity needs, were allowed to fall into abeyance. Ad hoc interventions in the most affected countries—the so-called "case-by-case" approach—probably averted a massive catastrophe, but the deeply underlying problems worldwide kept simmering and frequently boiled over. Even those severely affected countries that benefited by the crisis-management approach found adjustment excruciatingly difficult in the face of loan retrenchment by nervous commercial banks and export difficulties arising from growing protectionism in traditional markets. Threats of unilateral action by debtors shook the foundations of the international financial system. However, the hopes of industrial economies to resume sustained noninflationary growth were often thwarted by slower-than-anticipated responses in their economies. We have now come to identify their ills as primarily caused by misalignment of their currencies and deeply imbedded structural rigidities in their economies. Recently, some progress has been made by the industrial countries to better align their currency relativities, but the structural rigidities in these

©International Monetary Fund. Not for Redistribution GOVERNOR FOR SRI LANKA 179 countries appear to be pervasive and difficult to tackle. A promising dialogue among industrial nations has started, with a view to better coordinating their internal policies and recognizing the international implications of their domestic policies. But, as is evident by recent disagreements, this dialogue too has proved to be difficult. Given these travails of industrial economies, the developing countries have taken a further beating, in terms of a dramatic fall in commodity prices, which has once again seriously affected their terms of trade. Their situation has become intolerable. Tea prices in Sri Lanka are less than half of what they were in 1984; coconut prices a fourth of what they were before. The same is generally true of other commodities like rubber, palm oil, sugar, jute, copper, tin, oil, and a host of others. In my later interventions after the debt crisis, I have repeatedly focused on the inadequacy of our global response to meet the emerging problems. I think that it was a fundamental mistake not to expand the Fund-Bank role in the ongoing crisis. We seem to be fighting fires here and there, not realizing that what we face today is a potential global conflagration. The easy prescription of adjustment and more adjustment by developing countries ignores the fact that it is the developing world that has adjusted the most to the emerging global difficulties. They have depreciated their currencies, reduced their fiscal deficits, tightened their monetary policies, and reduced their tariffs and balance of payments deficits. But where has it taken them so far? In this regard, my country is a good example to study. We have opened our economy, created better production incentives, and gotten the economy moving—but every time we see a better tomorrow, we are confronted with unbearable deterioration in our terms of trade or difficulties in expanding our exports because of protectionism. Such problems are endemic in the developing world. When we come to the Fund and the Bank for assistance, despite their recent commitment to growth-oriented adjustment, we are confronted with a thick blank wall of higher conditionality, Fund-Bank cross-conditionality, inadequate resources, and tighter and higher repayment terms. I anticipated this problem way back in 1980, when I said in my speech to this same assembly that year—let me quote— "A year or two from now, there should be no cause to say: the Fund has finance, but conditionality prevented its utilization; the World Bank had policies which encouraged its members to come to it, but having come there, they languished for want of funds. Let us not create a scenario of disillusionment and despair in these difficult times. . . ." In my past interventions in this assembly I have often drawn attention to the imperatives of global interdependence. The industrial and developing countries are in a symbiotic relationship—each group unable to grow without the aid of the other. However, the synergic effects of their collaboration

©International Monetary Fund. Not for Redistribution 180 SUMMARY PROCEEDINGS, 1986 would be considerable. It was this realization that guided the Bretton Woods founders. Today, it is a sad reflection that we have drifted so far away from the spirit that guided our founding fathers. This is the essence of my experience during the past decade. We meet twice a year, undertake some patchwork, and depart, hoping for some world recovery. This recovery has proved to be elusive for the past ten years. Under a regime of volatile exchange rates, discordant economic policies, and structural in- flexibilities, the world appears to be heading toward a phase of "beggar- thy-neighbor" policies, which on previous occasions have preceded great economic recessions. These worldwide uncertainties have made adjustment by our developing countries almost impossible. It would increasingly appear that the Bretton Woods institutions are losing their influence on industrial countries and are losing the faith of developing countries. What we need today is to strengthen and liberalize these institutions by a rededication to the original spirit of Bretton Woods. Having said that, let me now come briefly to some of the issues on our current agenda. I shall concentrate on three issues that are of fundamental importance to my country.

First, I am sure nobody will disagree that commodity prices today, in real terms, are at their lowest levels since World War II. The magnitude of the losses being suffered by developing countries could be gauged by the fact that last year, developing countries are estimated to have lost $50 billion by the fall in commodity prices, at least half of which came from non- oil developing countries. It is ironic indeed that the only positive achievement in recent times, the apparent victory in the fight against inflation, has been largely achieved via drastic declines in primary commodity prices, with severe costs to developing countries. This situation may not be tenable in the long run. Therefore, the need for substantial and meaningful assistance under the compensatory financing facility (CFF) now is greater than ever before. As you are all aware, the CFF was originally designed to safeguard the interest of highly vulnerable primary producers. Its distinguishing features were low conditionality, quick disbursement, and a great deal of automaticity. However, as it operates today, the CFF has been subject to extraordinarily high conditionality through highly restrictive interpretation of the "test-of-cooperation" requirement. This defeats the very purpose for which this facility was designed. The recent drastic reduction in the CFF disbursements is clear evidence of the inflexibility of the prevailing approach. It is imperative that the original features of the CFF are restored forthwith, to make it more responsive to the most urgent needs of the commodity-producing developing countries. Furthermore, it is necessary to reintroduce the automaticity of the facility to ensure quick disbursement. Also, the current access limits do not permit the facility to compensate the affected countries adequately. It is, therefore, vital to de-

©International Monetary Fund. Not for Redistribution GOVERNOR FOR SRI LANKA 181 link access limits from quotas and to relate them instead to the size of the export shortfalls. Second, when the Structural Adjustment Facility (SAP) was introduced, we welcomed it as a much needed source of concessional assistance to low- income countries to overcome the structural rigidities that hindered the effectiveness of shorter-term demand-management policies implemented under traditional stand-by arrangements. There was also a great expectation that SAP borrowing would catalyze supportive additional finance from the Bank and other sources. However, to our great disappointment, we find severe constraints that are preventing eligible countries from obtaining assistance under this facility. The SAP is being increasingly linked to stand-by arrangements and is being subjected to rigid performance criteria—euphemistically called "benchmarks"—that would be more appropriate for stand-by arrangements. Additionality of resources has proved to be a mirage, and the Fund's SAF access is constrained to a mere 47 percent of quota over three years. If the SAF is to be effective in promoting growth- oriented adjustment in low-income countries, it is imperative that it be emancipated from inflexible conditionality and be able to catalyze greater resources. The efforts of the Fund and the Bank must be directed to ensure that adjustment and growth would be facilitated by an appropriate balance between stabilization and liberalization policies. The procedures will have to be greatly simplified and the negotiating process speeded up. Third, we have been repeatedly calling for adequate financial flows to facilitate growth-oriented adjustment. In this respect the World Bank must take the lead in inducing concessional flows to developing countries that are making difficult sacrifices and pursuing painful adjustment programs. . . . Finally, let us welcome Kiribati and Poland to our midst. Also, we warmly welcome Mr. Barber Conable to lead the World Bank at this critical juncture. He has the daunting task of innovating new policies to take the lead in promoting growth-oriented adjustment in the developing world. We wish him well in his difficult task. It is with deep regret that we bid adieu to Mr. Jacques de Larosière, our able Managing Director of the Fund. The whole world owes a deep debt of gratitude to him for the promptness and efficiency with which he brought the Fund into the center of the international debt crisis. By that action, he probably helped to avert another worldwide depression of the scale that we witnessed in the 1930s. When we think of the criticism that the Fund's response was inadequate to the needs, we should also remember that a Managing Director can only be what we, the Governors, want him to be. Hence, given the constraints under which he worked, he has done a truly magnificent job. He has a tremendous capacity for work. He has a deep understanding of the realities of international finance, and has great sympathy for developing country

©International Monetary Fund. Not for Redistribution 182 SUMMARY PROCEEDINGS, 1986 problems and aspirations. Mr. de Larosière, we will indeed miss you in the difficult days ahead, and we wish you all success in your new endeavors. Last, but not least, let me thank the Japanese authorities for their generous gesture of making $3.5 billion of resources available to the Fund for lending to developing countries. We hope that the Fund will make effective use of these additional resources by reviewing its current policies on access and conditionality.

STATEMENT BY THE GOVERNOR OF THE FUND FOR NEW ZEALAND

David F. Cay g ill I would first like to take the opportunity to extend a warm welcome to our newest constituency member, Kiribati, which has recently joined the Fund and the Bank. New Zealand is pleased to see the Pacific island states taking an active role in the international arena. I should also like to thank our hosts here in Washington and to join other countries in extending a warm welcome to Mr. Conable. I congratulate him on an outstanding address yesterday. I believe he successfully en- capsulated the current position of the developing countries and the role of the Bank in their development in a lively and illuminating way. I am confident Mr. Conable will be able to meet admirably the many tasks facing the Bank. Finally, I would also like to pass on New Zealand's best wishes to Mr. de Larosière. In our view he has provided most effective leadership of the Fund over the last eight years and has contributed in a large measure to the central position the Fund holds in the financial and developmental world today. I think one of the most extraordinary aspects of these Annual Meetings, and of the Commonwealth Finance Ministers meeting I attended last week, is the extent of the broad agreement between member countries about the measures needed to improve each country's position. In listening to the speeches made here by ministers of finance from all over the world and by the heads of the most prominent global multilateral institutions, it seems that there is little disagreement over the fundamental policies that are required. Everyone supports the need for comprehensive structural change in many if not most economies in the world. Nobody is arguing that protectionism is a good thing. Quite the reverse, it is now generally agreed that it must be rolled back as a matter of urgency. The agreement reached at Punta del Este has been widely welcomed. There is

©International Monetary Fund. Not for Redistribution GOVERNOR FOR NEW ZEALAND 183 to my way of thinking an unusual degree of complementarity between our collective positions. Where, I think, there is some divergence is in the length of time being taken to implement adjustment policies. There seem to be two main reasons for delay. First, the extent of the adjustment required is significant in many cases. Many countries are concerned about jumping in at the deep end of the adjustment process and finding that it is not possible to stay afloat. Radical change can be daunting. Second, and related to the degree of change required, there are fears about the maintenance of popular support for structural change. Change usually involves difficult social adjustments, and the risks to the government promoting it can be high. With these concerns in mind, let me briefly outline to you the position New Zealand is in at present. The New Zealand Government has undertaken a program of structural reform, the like of which New Zealand has never seen before. It is fair to say that we have succeeded in moving faster and more comprehensively in implementing adjustment policies than almost any other country. And we have done so to date without losing the support of the New Zealand people. We have, I should add, had to come up from a long way back. The rest of the field had passed us in many respects some years ago. In 1985 we floated the New Zealand dollar and have succeeded in moving from a fixed to a floating regime, even with a population of only 3 million people. There has been extensive deregulation in many sectors of the economy. We have lifted comprehensive controls on interest rates, prices, wages, rents, and dividends and have outlawed restrictive trade practices in many professions. As many bankers present may know, we have almost totally deregulated our financial sector, including the lifting of restrictions on banking and sharebroking. There has been a rapid development of the New Zealand capital market, which will, I fully expect, become more and more integrated with world markets over the next few years. These moves have been supplemented by the removal of controls on foreign investment, including those in our domestic airlines. We have exposed our manufacturing and agricultural sectors to much- needed competition by removing quota restrictions against most imports and by axing farm subsidies and export incentives. By next year the average tariff on imports will have been reduced from 25 percent to 15 percent in three years. Just today, we have implemented a comprehensive taxation reform, including the introduction of a 10 percent value-added tax on all goods and services, together with matching reductions in the rates of personal income tax. In virtually all this change, we have acted unilaterally. We have not sought reciprocal concessions from our trading partners. We undertook

©International Monetary Fund. Not for Redistribution 184 SUMMARY PROCEEDINGS, 1986 this program because we believe it is the correct and best thing for us to do and because we believe it will be to New Zealand's advantage in the medium term. We decided that we could not wait for our trading partners to undertake similar reform. We needed to reap the benefits for New Zealand sooner, rather than later. Of course, we have by no means completed our adjustment process. We are in the middle of a program of revitalizing our public sector. We have undertaken systematic reviews of public expenditure and are proceeding with significant corporatization of public utilities. We also have more work to do in labor market reform, but this process too is under way. The New Zealand economy had deteriorated progressively since the early 1970s. The extensive use of policies that were short term and demand driven had left us economically stranded. Bold action was necessary, and it has been undertaken. We are confident that we will see a more flexible, stronger, and more competitive economy as a result. Some may argue that it is harder for larger nations to mobilize their economies in such a fundamental way. We would respectfully regard this point as unproven. In fact, the recent experience in some larger South American countries in their comprehensive and drastic attack on inflation suggests that a greater degree of success is possible than that arising from a more cautious and painfully drawn-out method. To summarize, I have attempted to make just two points here today. The first is that there seems to be a very considerable degree of agreement on the policies necessary to lift the performance of our economies. The second is that the New Zealand experience suggests we do not need to be lukewarm or halfhearted in implementing those policies. In fact, I would leave you with the suggestion that the chances of success are greater when the commitment to change is undertaken vigorously and comprehensively.

STATEMENT BY THE GOVERNOR OF THE BANK FOR GREECE

Constantine Simitis It is indeed a pleasure for me to address this distinguished assembly. First, I would like to join other speakers in expressing my appreciation to the management and staff of the Fund and the Bank for the excellent quality of their work and the arrangements for these meetings. I would like to associate myself with my colleagues in paying tribute to Mr. de Larosière for his able leadership in a period of great challenge, which has enabled the Fund to play a constructive role in dealing with exceptionally difficult

©International Monetary Fund. Not for Redistribution GOVERNOR FOR GREECE 185 world economic situations. I also wish to congratulate Mr. Barber Conable on his recent appointment as President of the Bank. As the Annual Report of the Fund clearly states, a number of important developments over the past year or so have improved economic prospects. Since last year we have seen a substantial depreciation of the U.S. dollar against other major currencies; lower interest rates, especially long-term rates; and a sharp fall in oil prices. While this combination of positive developments has been expected to bring about substantial benefits for most countries, both developed and developing, making conditions more favorable for lower inflation and higher growth, the performance of the world economy so far this year has been disappointing. Inflation abated further in the industrial countries, but the decline in interest rates and the stimulus given to demand in oil importing countries by the oil price fall have not yet been reflected in actual growth revival. In fact, growth has been unexpectedly weak in the industrial countries. The volume of world trade has stagnated, and unemployment remains very high, especially in Europe. The growth of developing countries also has suffered a serious setback; their position was further aggravated by the steep decline in commodity prices, by difficulties in gaining access for their exports to industrial countries, by difficulties in obtaining new financing, and, of course, by the heavy debt service burden. This was reflected, in many cases, in sharp cutbacks in imports and national income. We all recognize the social and political hardships this entails. It is indeed gratifying to note that current projections for the world economy point to an improvement ahead. However, the outlook is generally less encouraging now than a few months ago. While inflation in the industrial countries is expected, on average, to remain quite low, only a modest up- turn in world trade and output is expected, and growth rates would not be adequate to prevent a further rise of unemployment in a number of countries or to solve the other acute problems that confront the developing countries. What is more worrying is that a number of uncertainties and risks remain, which pose a serious threat to growth and financial stability. Some of these have been under discussion for a number of years, but seem to be more real now: the very large external imbalances between major industrial countries and the risk of overshooting in the adjustment of exchange rates in a direction that could provoke a renewed run up of interest rates, with unfavorable repercussions for the world economy. It is generally recognized that the very large adjustments in exchange rates that have occurred so far are unlikely to prove sufficient in themselves to correct the continuing large external payments imbalances between major industrial countries. I think we all recognize the dangers of protection-

©International Monetary Fund. Not for Redistribution 186 SUMMARY PROCEEDINGS, 1986 ism arising from the continuation of these trends. Clearly, therefore, further complementary measures of internal policy adjustment are needed, especially in countries best placed to take such action, if these risks are to be avoided.

While we would all agree that attempts to remove the large external imbalances between major industrial countries must not prejudice the policy achievements in most countries that have led to lower inflation and created conditions for sustainable growth, there is also a need for some countries to exercise flexibility in the pursuit of their fiscal and monetary policies. Suc- cess will clearly depend on the correction of the fiscal and external deficits of the United States because of the size of these deficits and because of the relative weight of the United States in the world economy. But as growth in the U.S. economy slows down, it is essential that other industrial countries consider what scope they may have for policy action on a scale that would be sufficient to make an impact on the U.S. deficit and to support sustained growth of world output and trade.

Over the past year we have seen explicit signs of an effort to improve coordination and consistency of policies among the major industrial countries. However, more remains to be done in achieving mutual consistency of policies among the major industrial countries and correcting the large imbalances in the world economy. We, therefore, welcome the recent commitment to strengthen IMF surveillance on a multilateral basis, aimed at more effective coordination and greater international compatibility of policies.

The IMF staff is to be complimented for its more systematic use of indicators in its analysis of the major countries' economic policies and performance, as set out in the World Economic Outlook. This is a helpful first step in making further progress toward improved economic cooperation and a useful basis for discussing how to achieve more effective international policy coordination. It should help improve our understanding of the actual economic linkages among countries and promote a more effective dialogue, especially among the largest countries, on how they could best cope with interdependence. Further cooperation is clearly needed to improve the functioning of the international monetary system and enhance the prospects for a more sustainable pattern of exchange rates.

All countries are obviously dependent on a stable international financial environment. For Greece this was never more apparent than during the recent past. We have recently embarked on a vigorous stabilization program aimed at restoring a sustainable external and internal balance in the economy and at drastically reducing our inflation differential in relation to our main trading partners. The improvements that we have seen so far

©International Monetary Fund. Not for Redistribution GOVERNOR FOR GREECE 187 indicate that we are on the right track and that our targets are feasible on the two main fronts—inflation and the balance of payments. In regard to inflation, we are firmly on target: a substantial improvement has occurred since 1985. We are determined to stay on this course of sustained deceleration in the rate of inflation until we match the low-to- negligible inflation rates of our partners in the European Community. By the end of 1987 we expect to be down to single-digit inflation. Our balance of payments target is a reduction of the current account deficit to the equivalent of $1.7 billion (less than 4l/2 percent of GDP), as against $3.3 billion (10 percent of GDP) in 1985, and, by 1988, to a level that would be financed by autonomous capital inflows, so that the external debt is stabilized. We have balance of payments data only up to the end of July. When they are seasonally adjusted and annualized, they imply a result close to the $1.7 billion target for the year. Moreover, supplementary measures to tighten credit and reduce absorption, which were taken in the course of 1986, provide additional help for the current account in the second half of the year. Thus, we remain confident that the current account outturn for 1986 will be consistent with our target. Our policies for 1987 will remain firmly consistent with the main objectives of the program. A key factor in my Government's economic strategy is also to emphasize efforts to promote structural adjustment, so as to improve the supply response of the economy and to increase its capacity to cope with rapid changes in the international economic environment. Yet, like so many other small open economies, we must recognize that, however critical the success of our efforts, ultimately we depend on the growth of our overseas markets and on a stable international financial environment for the resumption of sustainable growth and the expansion of employment in our economy. I would like now to comment briefly on some of the other items on the agenda. I wish to welcome strongly the increasing emphasis that is being placed on growth in Fund-supported adjustment programs and the close cooperation of the Fund and the Bank in this field. The increasing recognition of the importance of growth in promoting structural adjustment and resolving domestic and external imbalances should open the way for ground-breaking new initiatives as regards both the design and the dura- tion of programs, as well as the conditionality that will accompany them. Success on these issues will crucially depend on the mobilization of adequate resources. The overall picture, however, is not yet very satisfactory. It is indeed disappointing to see, as we did during the first half of this year, a net outflow of capital from the debtor countries, reflecting a rising volume of repayments. If this situation continues and if the worsening of developing countries' terms of trade persists, we are likely to see very strong

©International Monetary Fund. Not for Redistribution 188 SUMMARY PROCEEDINGS, 1986 deflationary pressures developing over wide areas of the world, which are bound to impede the adjustment process and exacerbate instability and the difficulties relating to the debt problem. For this reason there is an increased and urgent need to meet the liquidity requirements of developing countries and to find a lasting solution to the debt problem, based on particular requirements of individual countries. In these circumstances, the role of the Fund and the Bank, both as direct suppliers of finance and as catalysts for the supply of finance from other sources in support of structural adjustment with growth, is more crucial than ever. In the light of these considerations and the probable demands that will be made on the resources of both institutions, we believe that it is essential to avoid in the first place any decisions that might appear to impair the ability of the Fund and the Bank to intervene adequately and effectively in support of the twin goals of stability and growth. We warmly support therefore the maintenance of the enlarged access facility, as well as all other special facilities in the Fund, without reduction in access limits. We believe, however, that positive actions are required that will be clearly perceived as enhancing the ability of these institutions to play the role expected of them. The replenishment of IDA resources at the level of $12 billion is one such action, and we further look forward to the same positive attitude presiding over the forthcoming discussions on the review of quotas and the increase in the capital of the Bank. A substantial contribution to the stability of the system will be the resumption of allocations of SDKs. Given the not very encouraging forecasts about world trade developments, the magnitude of the debt problem, and the deteriorating balance of payments position of a large number, particularly, of primary producing countries, the pressure on reserves can be expected to increase in the immediate future. Exclusive reliance on market borrowing for their replenishment cannot provide a viable solution. It may well lead to more acute problems in the near future. Borrowed reserves are not only an imperfect substitute for owned reserves; in the current situation, as recent capital market developments clearly show, they are also in rather short supply. In our view, the condition laid down in the Articles of Agreement of a global need for reserves as a prerequisite for allocation of SDKs is fulfilled even though the reserves of some industrial countries are increasing. Fur- thermore, an increase in the supply of SDKs is essential if the SDR is to play the important role that it can and should play in the proper management of the international monetary system and eventually become the principal reserve asset as provided in the Articles of Agreement. We regret, therefore, that the Managing Director has been unable to recommend an allocation of SDKs because the majority required under the

©International Monetary Fund. Not for Redistribution GOVERNOR FOR BOLIVIA 189

Articles of Agreement in support of such an allocation cannot be assembled. This is an important area in which our willingness to cooperate on a global scale is being tested. Please allow me to express the hope that the political will to cooperate in this very important matter will manifest itself in the relatively near future. . . .

STATEMENT BY THE GOVERNOR OF THE FUND AND THE BANK FOR BOLIVIA

Juan Cariaga Osorio

At the outset, I should like to convey to Mr. de Larosière our admiration for his outstanding leadership of the Fund during his terms of office, and I would like to convey our special vote of thanks for his assistance to the international financial community, and in particular, to my country, in its very serious efforts to achieve stabilization. I should also like at the same time to extend my very best wishes to Mr. Conable for a very successful term of office as President of the World Bank. The purpose of my statement is to inform you of my Government's concern with the marked deterioration of the developing countries' terms of trade, caused by the fall in the prices of the principal export commodities. It is now necessary for the more developed countries to become aware of this important fact and to strive to help remedy this injustice, which affects hundreds of millions of people in a large number of countries in the world. This situation is especially serious for countries in the midst of structural adjustments, which, by their nature, exert recessionary effects, further lowering the standard of living of their peoples and jeopardizing their social and political stability. I am referring to countries like Bolivia, which, with a keen sense of responsibility and determination, have introduced measures to contain inflation and revive their economies. May I remind you that three years of mis- management of financial resources in the Bolivian economy unleashed hyperinflation of about 25,000 percent—the seventh highest inflation in the history of mankind and the worst between 1983 and 1985. To remedy this situation, our country is carrying out a stabilization program with the support of the International Monetary Fund, designed in part to increase government revenue and substantially diminish expenditure, thus reducing the deficit, which was equivalent to 29.2 percent of

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GDP in 1984. These efforts reduced the deficit to 12.5 percent of GDP in 1985, and it is expected to fall to only 3.7 percent in 1986. Our adjustment program establishes a model in which prices are free, and the exchange rate, determined by market forces through a public auc- tion system, is flexible. Also under this program, the Government has adopted a tariff reform which sets a single, uniform customs tariff of 20 percent. This makes the Bolivian economy one of the most open and transparent in world trade. In addition, the Government has carried out an innovative tax reform, replacing the traditional system of taxing income with one that taxes consumption and wealth as visible manifestations of income. This reform was adopted because inflation had changed the official Bolivian economy into an informal underground economy involving more than two thirds of the population. Bolivia successfully negotiated a stand-by arrangement with the Inter- national Monetary Fund and is now negotiating a compensatory financing facility and a Structural Adjustment Facility program with both the Inter- national Monetary Fund and the World Bank. It also negotiated a restructuring with the Paris Club of all its past-due obligations and of those that will fall due during the adjustment period, thus obtaining significant balance of payments relief and renewed access to multilateral and bilateral credit. All of these measures are already bearing fruit. Inflation, which reached an annual rate of 23,500 percent in August 1985, has been reduced to a moderate rate—only 2.1 percent in the last five months. The budget deficit, which exceeded 29 percent of GDP in 1984, is down to 3.7 percent in 1986. The National Treasury, which financed 85 percent of its expenditure by borrowing in 1984, now has balanced books, without any financing from the Central Bank. Finally, the tax burden, which represented 3 percent of GDP in 1984, will rise to about 14 percent of GDP in 1986 with an indirect tax on gasoline. Nevertheless, even with all these achievements, Bolivia cannot revive its economy, due to the critical deterioration in its terms of trade caused by the fall in tin, nonferrous metal, and oil prices. Our exports, which amounted to some $1 billion in 1980, fell to about $450 million in 1986, with more than half of those receipts being in kind. The amount of foreign exchange available to us is only one quarter of what it was in 1980, seriously reducing our ability to pay and to import goods and services and to pursue economic growth. Despite our significant economic policy effort, which has given us a year of stability, Bolivia has yet to receive effective support from multilateral and bilateral organizations. The level of external

©International Monetary Fund. Not for Redistribution GOVERNOR FOR BOLIVIA 191 financing has not been sufficient for the nation's needs. To cite one example, the only disbursements we have received to date are a portion of the resources under the stand-by arrangement with the IMF, while the funds from the World Bank, an organization that has always given us its institutional support, have not yet been made available to us due to procedural difficulties which prevent quick disbursement. It is therefore vital that the multilateral organizations make an effort to provide support more promptly to countries that are undertaking the major adjustments required in today's world. It will take nothing less than a considerable inflow of external resources to save Bolivia from the crisis. To restore our growth rates of 20 years ago, we will need to grow 3 percent annually. To do so, we must have about $500 million of external resources annually on concessional terms. Only with the help of multilateral organizations and through bilateral agreements will Bolivia be able to avoid deepening its crisis and falling further behind in its growth. I call upon all the developed countries represented in this world economic forum to develop an awareness of the deterioration that has taken place in the developing countries' terms of trade over the past year, seriously hampering their economic growth and development. This is an appeal to help those countries which, by their own efforts, have implemented adjustment programs enabling them to manage their resources more efficiently but requiring international support to improve their prospects for success. Similarly, if the industrial countries are to assist these efforts, they must avoid protectionist tendencies in international trade, whether through import prohibitions, quotas, or tariffs, that prevent the less developed countries from expanding their exports. Finally, I am appealing to the countries attending this important forum because only with the help of those now profiting from improved terms of trade will we have a world in which all human beings can look forward to a better future.

©International Monetary Fund. Not for Redistribution DISCUSSION OF FUND POLICY AT FIFTH JOINT SESSION l STATEMENT BY THE GOVERNOR OF THE BANK FOR NEPAL

Bharat Bahadur Pradhan It is a great pleasure for me to address this august gathering. The opportunity of meeting many friends and colleagues is a unique advantage of these Meetings. I have been listening to so many enlightening and constructive speeches in the Interim and Development Committees and in this forum over the last few days. I have been very much impressed with the general concern expressed by all the speakers over the none-too-happy world economic situation and the plight of the developing countries in particular. The interest shown by the developed countries in improving the global economic environment and in helping the developing countries is most encouraging. Given the collective will to solve the problem, one can look forward to the future optimistically. I would first like to express my sincere appreciation and grateful thanks to Mr. Ronald Reagan, the President of this great country, the United States, for gracing the opening session and delivering a very inspiring speech. The support he pledged to the International Monetary Fund and the World Bank is indeed encouraging and reassuring. I would like to join earlier speakers in extending my hearty welcome to Mr. Barber Conable, the new President of the World Bank. With his vast background and wide experience, I am sure he will lead this institution to greater success in alleviating the poverty of its member countries. On this occasion, I would like to record my sincere appreciation to Mr. A.W. Clausen for his dedicated service to the Bank in a most difficult period. I wish him well. It is a matter of regret for all of us that Mr. Jacques de Larosière is leaving the Fund at the end of this year. He has made a far-reaching contribution to the Fund during the most difficult times of its existence. We remain very appreciative of his contribution and wish him well in his future endeavors. Let me also take this opportunity to extend my warm welcome to the new members of the Fund and the Bank, Poland and Kiribati.

October 2, 1986.

192

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In the past year, developments in the world economic situation have not been encouraging. The decline in the growth of the industrial countries, the erosion in the prices of primary commodities, a contraction in financial flows to the developing countries, and the volatility of the exchange rates have vitiated the global economic environment and adversely affected the growth of the developing countries. The fall in energy prices has, however, had some positive impact, though at the cost of the oil exporting countries. The decline in international interest rates has also provided some relief to the debt-ridden countries. On the whole, however, while some developing countries could somehow maintain their growth, most developing countries, the least-developed ones in particular, are facing great difficulties in their development efforts. We are happy to note the very frank deliberations taking place on the issues confronting us today. While some issues such as promotion of growth in some developed countries, the general capital increase of the Bank, and the SDR allocation do not seem to be resolved, there is general consensus and agreement on many other issues. The willingness to reduce protectionism, the prospect of the IDA-8 replenishment, and the stress on the flow of commercial credit to the developing countries are most welcome developments. Most encouraging, however, is the acknowledgement by all of the need for helping the developing countries facing severe economic difficulties in their structural adjustment programs. The remark of Mr. Conable, the President of the World Bank, in this context is quite reassuring: "In development lending, we must maintain ... a thoughtful mix of investment and adjustment lending [and] we must maintain flexibility both in the design and the management of the Bank's activities." We are particularly happy to note the flexible approach advocated by the President. The remark of Mr. de Larosière, the Managing Director of the Fund, is no less encouraging: "In the period ahead the Fund will not only be capable of acting as a financial catalyst, but will also be able, at this critical juncture, to provide significant financial support for the strong adjustment efforts of its members." The proposed Structural Adjustment Facility of the Fund is a most welcome development. We look forward to the new approach and assistance of the Bank and the Fund with great hope and enthusiasm. I would now like to mention briefly our efforts for adjustment and growth. During the past 25 years, though there has been significant progress in establishing infrastructure in our country, economic growth has been sluggish. Moreover, the continuously widening budgetary deficit in the last four years had led to excessive pressure on demand, deterioration in the balance of payments, and decline in foreign exchange reserves. In order to address this problem, the Nepalese currency was devalued by

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14.7 percent in November 1985, and we took other economic measures for demand management. But demand mangement is only a short-term measure. It does not solve the basic problem. We have therefore embarked on a structural adjustment program with an emphasis on economic growth. In this respect, we are negotiating with the Bank for the necessary support for this program. Also, we are looking forward to availing ourselves of assistance under the Fund's newly created Structural Adjustment Facility. With the assistance of the Bank and the Fund, together with the support of our bilateral donors, we hope to bring about the structural changes in our economy which will ensure economic growth with stability. With the takeoff of this program, we hope to be able to ensure a sustained growth to provide the basic minimum needs of the people by the turn of the century. This is the challenge before the nation as called upon by our leader, His Majesty the King. Before concluding, we would like to express our deep gratitude to the donor countries for their generous contributions to the Fund and the Bank. Given the crucial role of these institutions in restoring global economic health and, in particular, in alleviating poverty in the developing countries, we hope that there will be a better response from these countries in the years ahead. Let me express our grateful thanks to the management and staffs of the Fund and the Bank for the excellent arrangements made for these Meet- ings. They also deserve our sincere appreciation for their efficient performance in the past year.

STATEMENT BY THE GOVERNOR OF THE BANK FOR AFGHANISTAN

Mohamad Kabir

I am very pleased to represent the Democratic Republic of Afghanistan at these Annual Meetings of the Boards of Governors of the Fund and Bank. At the outset, I want to congratulate the management of the Fund and Bank for the excellent arrangements made for the conduct of these Meetings. Our delegation sincerely welcomes the new members that have recently joined the Fund and Bank. The world economic situation in the past year was not as good as expected. World trade also slowed down lowering prices of goods, especially

©International Monetary Fund. Not for Redistribution GOVERNOR FOR AFGHANISTAN 195 those of the primary commodities. As a result, the terms of trade of the developing countries were eroded, the purchasing power of their export earnings weakened, and their import capacity declined. Consequently, economic activity in the developing countries was adversely affected and the rate of growth in these countries decreased. Moreover, the continued protectionist policies of the Western industrial countries, and inequitable trade relations resulting from these policies, compounded the current account deficits of the developing countries. Thus, the current account deficits of the developing countries rose to more than $47 billion in 1985, and they spent more than 12.5 percent of their export earnings on debt service. The economic state of the low-income, least-developed countries was, and still is, even more distressing. The Democratic Republic of Afghanistan, as a free, independent, non- aligned, peace-loving, and progressive country has achieved great and as- tounding successes in the social, economic, and political arenas since its inception, in spite of the conspiracies, sabotage, economic restrictions, and depredations against our people, and the involvement of our country in an undeclared war imposed from abroad. The main objective of the April revolution of 1978, which overthrew the oppressive feudal system of the past, was, and continues to be, the development of the economy, with a view to raising the standard of living of our people and creating a new, just, and democratic society in which all citizens enjoy equal rights and privileges. In the short period since our national democratic revolution, especially in its new and evolutionary phase, we have implemented land and water reforms and other progressive measures for the benefit of the downtrodden peasants and the working class. The pace of land reform was accelerated through the active participation of farmers during last year. In 1364 (April 1985-March 1986), land was redistributed to 11,073 deserving farmers. Our gross domestic product is expected to grow by 5.5 percent in 1365 (April 1986-March 1987). Of course, the large-scale economic assistance given by friendly countries has contributed enormously toward the implementation of various development projects vital for the improvement of the economy. The Government has all along followed a policy of encouraging private sector investment. The leadership of the Democratic Republic of Afghani- stan has always emphasized the role of the private sector in the development of the national economy and lately has issued definite directives for creating a more favorable climate and sound guarantees for the active participation of that sector in the economic development of the country.

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Remarkable achievements in the social and political life of our people have also been witnessed. Free election campaigns for representatives of local organizations of administrative power have been held and are currently under way in many provinces of the country. Formulation of the new constitution is almost completed, and its promulgation will be finalized in early 1987. The new constitution will ensure the democratic and equal rights of all the people in Afghanistan without any discrimination and in accordance with the accepted international rules and agreements, including the declaration of human rights. Despite these efforts, our economy suffers from the destructive activities of counter-revolutionaries, actively assisted tyy international reaction and imperialism. The rebuilding of assets destroyed by this undeclared war of imperialism and reactionary forces absorbs a large part of our resources, which otherwise would be utilized for the creation of additional productive capacity and infrastructure facilities. Now, we are in the process of implementing the first five-year plan after the April revolution of 1978, which will continue through March 1991. Ac- cording to this plan, the gross product of the country in the course of the next five years will increase by 25 percent, as compared to 14 percent in the past five years. The volume of industrial products will increase by 38 percent, compared to 28 percent; and agricultural and forestry products, by 15 percent, as compared to 4.8 percent in the past five years. The growth rate of national income will increase by more than twofold, or 26 percent, as compared to the 11 percent of the past five years. Thus, an increase of 25.8 percent in the volume of national income is anticipated for the year ending March 21, 1991. Upgrading the living standard of all the citizens, especially the workers, construction of new dwelling blocks, and provision of essential materials and sanitary drinking water for the populace are salient features of the five-year plan. However, for the full implementation of the various development projects incorporated in the five-year plan that would make an appreciable improvement in the living conditions of the vast masses of our people, capital transfer on a very large scale is, indeed, essential. We regretfully witness that development assistance has been totally de- nied to us by the Western countries and also by some of the international financial institutions, such as the World Bank, contrary to the objectives underlying the establishment of these institutions. The latter institutions have not only withheld the release of loans for which agreement had been signed previously, but have also suspended disbursements for ongoing projects on which substantial progress had been made.

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My delegation, representing the Democratic Republic of Afghanistan, a land-locked and least-developed country, earnestly hopes that the international financial institutions in general, and the World Bank in particular, will review their policies toward the Democratic Republic of Afghanistan and take steps to contribute toward the successful implementation of the first five-year plan of our postrevolution era. We appeal to these institutions to be guided in their decisions solely by economic considerations, and not only to resume the disbursement of suspended credits for our disrupted projects, but also to extend further development assistance to our new projects, according to the spirit of the United Nations resolutions, including resolutions 173/40, 178/40, and 183/40, and thereby supplement our efforts to solve, to some extent, the dire and distressing problems of back- wardness in our country. Finally, we express our hopes that the current deliberations come to a successful conclusion.

STATEMENT BY THE GOVERNOR OF THE FUND FOR BELIZE

Manuel Esquivel

It is indeed a privilege to address this meeting on behalf of the Common- wealth Caribbean Constituency, namely, Antigua and Barbuda, the Commonwealth of The Bahamas, Barbados, Belize, the Commonwealth of Dominica, Grenada, Guyana, Jamaica, St. Christopher and Nevis, St. Lucia, and St. Vincent and the Grenadines. I would like to begin by taking the opportunity to welcome our newest members, Kiribati and Poland, who joined us since we last met in Seoul. I would also like to take the opportunity, on behalf of the Caribbean Con- stituency, to say goodbye to Mr. de Larosière, who I understand is attending his last joint meeting as Managing Director of the Fund. We wish to thank him for his tremendous efforts over the last few years, and for the care and sensitivity with which he has discharged his functions. We wish him all the best in the future. Since the last Annual Meeting, it has become clear that the projections of world economic performance have been overoptimistic. The recovery of the past three or four years has remained fragile, and its spread has continued to be unevenly distributed. It is no secret that rapid growth in the major industrial economies is important not only for those economies but for the rest of the world as well. Nearly two thirds of developing country exports go to the industrial countries, with developing countries using the

©International Monetary Fund. Not for Redistribution 198 SUMMARY PROCEEDINGS, 1986 proceeds of export sales both to purchase inputs from the industrial countries—inputs which are essential for our own growth and development—as well as to service debt. The low and declining rates of growth in the industrial countries have had serious implications for us. Added to this, the unevenness of economic performance among the industrial countries has, among other things, created trade imbalances between some of them, and the responses and proposed responses to these imbalances—ranging from protectionism to demand restraint to interest and exchange rate changes—are likely to pose increased difficulties for us in the Third World. Our situation has been further adversely affected by the behavior of commodity prices. Falling commodity prices, both nominally and in real terms, have contributed to substantial deterioration in our terms of trade. Price support systems, subsidies to their own producers, quotas, and other trade protection devices in industrial countries have contributed to the downward pressure on commodity prices at least as much as have low aggregate demand and technological change. We recognize the need for export diversification and some of us are moving substantially in that direction. The shift will not be easy. Because of the small size of all of our countries, scale economies in production, necessary for reasonable product prices, have been achieved at the cost of many of us becoming mono- crop producers. Mr. Chairman, I know that you will appreciate that the process of product diversification—while maintaining employment and incomes in a hostile economic environment—is fraught with danger and difficulty. The issue of protectionism and associated trade protection devices—domestic price supports, quotas, and subsidies—is of particular concern to us. Many of us in the Caribbean are, for example, sugar producers; our recent general experiences over prices and over the quantities we sell to the United States and to the European Communities have left us terribly disappointed. We, who have been making rum for three hundred years, are now experiencing problems in some industrial countries over the definition of the product. Financing made available to some of us for export diversification and production expansion cannot be used for a range of products with which we have acquired some experience because of protectionism in donor countries. It seems sometimes that the harder we try, the more obstacles are placed in our way. It is natural in times of difficulty and adversity to seek help and assistance from those who may be better placed to cope with the problems. However, it seems to us that help and assistance are commodities that are increasingly in short supply, with the small amounts that are being made available being accompanied by increasingly burdensome cross-

©International Monetary Fund. Not for Redistribution GOVERNOR FOR BELIZE 199 conditionality arrangements. This is particularly true of the bilateral arrangements, which seem to be supplanting multilateral arrangements— reflecting the inability or unwillingness of the major donor countries to provide the lending agencies with the resources the latter require to perform their functions adequately. What is of even greater concern, particularly to us who come from very small countries, is the approach being taken by some multilateral institutions. ... In the case of the IMF, the prescription of every Fund consultation mission continues to be for an exchange rate adjustment together with a contraction of public sector activity. These prescriptions continue to be provided even where the constraints are clearly on the supply side and are clearly structural, where output is priced in foreign currency, where all that can be produced is sold, and where the public sector has become involved in productive sector activity because of the absence of entrepreneurs in the private sector, requiring government to play a catalytic role in promoting development.

It seems very clear to us that the World Bank and the Fund continue to pay insufficient attention to the peculiar circumstances and situation of their very small members, that this leads to prescriptions which do not match our ailments, and that we are made even more ill as a result.

We note that it is precisely at a time when Third World countries need large amounts of financial assistance for restructuring their economies and for the expansion of production that there is a net inflow of resources into the Fund and that the net outflow from the Bank has fallen to relatively insignificant levels. How can the Fund justify the pace of adjustment it requires of developing countries that are forced to turn to it for assistance given this situation, and how can the Bank justify its current low level of net disbursements to our countries?

Lest this be interpreted as being wholly negative, we wish to place on record our hope that some recent developments signal a change of attitude on the part of some major actors on the international economic scene. In particular, given the tremendous difficulties some countries are experiencing with regard to debt servicing—many of them through no fault of their own—we welcome the approach taken by the Fund in the recently concluded agreement with Mexico, and hope that a similar attitude will prevail in other programs in the future. Also, we welcome the statement at- tributed to the Chairman of the Federal Reserve Board to the effect that world economic adjustment is a collective matter, in which all countries have a role to play. We note that for years now there have been calls for greater symmetry in the international adjustment process, so that deficit countries should not be required to carry the full burden of adjustment. We welcome the voice of the United States in joining this call.

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The immediate future prospects for the world economy are not bright. Despite how gloomy these prospects may seem from the point of view of industrial countries, they are darker from our point of view. More than ever, all of us in the international economic community need each other's cooperation and goodwill if we are to overcome our problems and provide a better life for our people. There have been so many calls for cooperation and coordination over the years that have apparently gone unheeded that it is easy to become cynical and to want to resort to individual action to further individual interests. We are too interdependent to be able to afford to go this route. Moreover, it is extremely dangerous. We live in one world, and social and political discontent arising from differential economic development will not be contained within political boundaries. We should look at the state of our world very carefully. It is the only one we have.

STATEMENT BY THE GOVERNOR OF THE FUND FOR PAKISTAN

Mian Mohammad Yasin Khan Wattoo

I would like to join my colleagues in extending a warm welcome to the Governments of Kiribati and Poland who have joined our ranks by becoming members of the Fund and the Bank since the last Annual Meetings were held in Seoul. I also take this opportunity to welcome Mr. Conable as the President of the World Bank and offer my congratulations on the assumption by him of this important office. He assumes leadership of this great institution at a critical stage in the relations between the countries of the North and the South. Serious problems confront various parts of the developing world and we need firm leadership from this institution. I am confident that a man with Mr. Conable's wisdom and experience will tailor the policies of the World Bank to help achieve a better future for the global economy. Mr. de Larosière's decision to retire from the Fund has created a vac- uum which will not be easy to fill. He has rendered extremely valuable service to the international community by providing leadership at a time when a strong multilateral hand was needed to guide the world economy toward financial stability. Mr. de Larosière will long be remembered for his accomplishments. The Annual Reports and other documents issued by the Fund and the Bank for these Meetings show remarkable progress made by the family of Bretton Woods institutions. The reports embody a clear enunciation of the issues faced by the world economy. The lucid treatment of these issues in

©International Monetary Fund. Not for Redistribution GOVERNOR FOR PAKISTAN 201 the opening speeches by the President of the Bank and the Managing Di- rector of the Fund have provided a sound basis for our deliberations in these Meetings. We are also inspired by President Reagan's inaugural address which provided deep insight into the problems that confront us today. We particularly welcome his forthright denunciation of protectionist policies. We meet at a time when the world economy, although in the fourth year of recovery from the deep recession of 1980-82, is still in an uneasy and unsettled state. Developments in the first half of 1986 have compelled the Fund staff to revise downward its projection for economic growth for the current year. The growth of the world economy in 1986, initially projected at 3.1 percent, has now been scaled down to 2.9 percent. Industrial countries are now expected to grow by only 2.8 percent, while the projection of the growth rate of developing countries has been reduced to 2.7 percent. In other words, the expected rate of growth in the developing world is only marginally above the increase in population; consequently, once again, per capita incomes in developing countries will not improve. Such growth rates are more akin to a growth recession than a recovery. Moreover, average growth rates of developing countries disguise the disparities among the various regions. China and some other Asian nations including Pakistan have contributed to the positive average growth rate for the developing world, while most developing countries in Africa and Latin America continue to suffer stagnation and show no sign of recovery. Their problems must be addressed urgently and with imagination but, at the same time, nothing should be done to hamper the prospects of the countries that have, until now, done well. The slowdown in the rate of growth in developing countries has resulted from a combination of circumstances, including very modest expansion in the industrial world, low levels of official and private lending, sharp reductions in commodity prices, and weak prospects for export earnings. Wide- spread use of agricultural subsidies by industrial nations has distorted the markets for traditional exports of developing countries and is threatening to play havoc with their adjustment efforts. Commodity prices have fallen to unprecedented low levels. Increased protectionism has restricted industrial exports from newly emerging developing countries. A fundamental change is required in the developing countries' external environment before they can return to the path of sustained development. The problems confronting us are enormous, and a serious effort will have to be made by developing and developed countries alike, in a spirit of cooperation and interdependence, to restore development in the Third World. For the revival of meaningful growth in the world economy with full participation of the industrial countries and the developing nations, it is nee-

©International Monetary Fund. Not for Redistribution 202 SUMMARY PROCEEDINGS, 1986 essary that the severe decline in net transfer of resources to the developing countries is reversed. In some countries the transfer is already negative, implying a flow of resources to the industrial world, and in some others, this situation of negative transfers may be reached very soon. The World Bank and its affiliates have a vital role to play in this connection. At a time when transfer of private resources to developing countries is declining sharply and the prospects of any appreciable increase in bilateral economic assistance are not good, the quantum of Bank and Fund lending and their catalytic role in inspiring confidence among other lenders has assumed crucial importance. . . . The Bretton Woods system has shown great resilience in meeting the challenges of a rapidly changing international economic situation. It has time and again demonstrated the capacity to introduce changes from within, consistent with the continually evolving world economy. In this context, I would strongly urge the need for accelerating the process for arriving at a consensus on the reform of the international monetary system while taking into consideration valuable reports by the Group of Ten and Group of Twenty-Four. I hope that before reaching the stage for decision making, arrangements will be made to ensure that all points of view, including those of the developing countries, are fully taken into consideration as structural changes evolve in the system. A joint examination at the Deputies level by representatives of the Development Committee and the Interim Committee may provide a way for narrowing the differences and arriving at an urgent consensus. In connection with the long-term reform of the monetary system, the issue of SDKs and their allocation needs special attention. The scheme of SDKs was introduced to supplement the global reserves and to make the SDR the principal reserve asset of the international monetary system. This objective, however, has not been achieved. So far, only SDR 21.4 billion has been allocated. The SDR share in non-gold reserves declined from a peak of 8.4 percent at the end of the first basic period to 5.4 percent last year. The limited access to financial markets of many countries has seriously affected the availability of borrowed resources. In the case of many countries, the improvement in reserve accumulation has resulted from cur- tailment of imports rather than growth in exports. Given the desirability of increasing world trade, it is necessary that a more balanced and stable proportion of SDRs in the world reserves be achieved to ensure adequate availability of liquidity. The question of allocation of SDRs has remained under consideration by the Executive Board of the Fund for some time, but the requisite support has thus far not been forthcoming. I would, therefore, urge that serious consideration be given to an allocation of SDRs as recommended by the Group of Twenty-Four and as supported by the Managing Director of the Fund.

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Keeping in view the nature and magnitude of balance of payments problems confronting the developing countries, it is necessary that the Fund play a greater role by providing these countries balance of payments assistance and helping them in their adjustment efforts. This can only be done if the Fund has adequate resources at its disposal. Over the years, mea- sured against world trade or world reserves, the share of Fund quotas has declined. Increasing reliance on borrowed resources has led to increases in charges for recipient countries. It is necessary to give serious thought to augmenting the Fund's resources, including the next General Review of Quotas, which might be speeded up. In the meantime, the Fund has to make the best use of the resources that are available. In this context, institution of the Structural Adjustment Facility to recycle the funds originally made available under the Trust Fund is commendable. I would, however, urge that the conditionality for this facility should be flexibly imposed and should take into account social and political realities.

The external debt problem is one of the most important issues facing the developing countries. Their indebtedness has grown rapidly during the past few years. The external debt of capital importing developing countries is projected to reach nearly $1 trillion in 1986. The problem has recently received a great deal of attention and innovative suggestions have been made for solving it. The most notable of these suggestions is the Baker initiative. While the recent decline in interest rates has provided some relief, the ratio of debt to export of goods and services is projected to rise from 169 percent in 1985 to 180 percent in 1986. The ratio of service payments of developing countries on long-term debt to exports increased from 20 percent in 1984 to 22 percent in 1985. While at times wrong policies and reckless borrowing of an individual country might have contributed to the problem of debt, the harsh external environment over which the borrowing countries had no control has mainly contributed to it. For a successful resolution of the debt problem, there is now the need to adopt a mutually supportive policy to which all parties contribute and assume their respective responsibilities. The aim should be to restore the creditworthiness of the borrowers by supporting their growth-oriented policies, rather than by denying them resources and finance, which would only thwart the process of growth and make the problem more acute.

It is now generally recognized that economies of developed and developing countries are interdependent. Economic problems of our rapidly shrinking world can only be resolved on the basis of international cooperation. It is essential that there should be coordination of economic policies among the developed countries as well as between the developed and the developing countries. The Bank and the Fund provide us with excellent forums for deliberation on economic issues. Unfortunately, it has been difficult to arrive at an international consensus on the shape of a new world

©International Monetary Fund. Not for Redistribution 204 SUMMARY PROCEEDINGS, 1986 economic system, as our international policies are being conducted on the basis of short-term national interests and it is not easy to reconcile these interests. May God give us the vision and statesmanship to take decisions in the context of the long-term interest of humanity, so that the brotherhood of man is not a mere cliche—and we leave for our children a better world than we found.

STATEMENT BY THE GOVERNOR OF THE BANK FOR YUGOSLAVIA

Svetozar Rikanovic

It is my pleasure and honor to address this eminent gathering for the first time in my capacity as Governor for Yugoslavia in the World Bank. May I join earlier speakers in expressing our congratulations and gratitude to the outgoing Managing Director of the International Monetary Fund, Mr. Jacques de Larosière, as well as our best wishes for the success of his work and endeavors to the new World Bank President, Mr. Barber Conable. May I also warmly welcome the new members of the Fund and the Bank, Poland and Kiribati. We are deeply concerned over the lack of essential improvement in the international economic environment since the last Annual Meetings held in Seoul. Developments in the world economy strongly affirm that economic progress in the developing countries is an essential precondition and assumption for sustained economic growth of the world as a whole. The interdependence of national economies obliges all of us jointly and more efficiently to remove obstacles impeding a stable and lasting growth. As many speakers have stressed, those obstacles are the following: —heavy indebtedness of developing countries; —lack of development; —protectionism in the world economy; —insufficient increase in aid funds for the least developed countries; and —a permanent increase in one-way conditionality accompanied by scarce financial support. The depth of the external debt crisis has led the non-aligned countries assembled at their summit conference in Harare, Zimbabwe to voice their deep concern over the lack of an appropriate and durable solution for these problems. They have, therefore, emphasized that the conditionality associ-

©International Monetary Fund. Not for Redistribution GOVERNOR FOR YUGOSLAVIA 205 ated with the financial support to debtor countries has to lead more clearly to ensuring their lasting economic growth and must not serve as a means of political pressure.

By borrowing abroad, the developing nations intended to provide a foundation for their economic and social progress. They have, instead, found themselves in even more seriously pronounced economic and financial difficulties. It is recognized that investments have not always been rational. The responsibility inevitably lies with both debtors and creditors. But one should not ignore the fact that commodity exports from developing countries have been facing serious restrictions, often in the countries from which the developing countries borrowed. Also, their access to the most sophisticated technologies has frequently been hampered. Rather than being conducive to the further expansion of growth, all of these factors have jointly contributed to indebtedness, resulting, as well, from the heavy borrowings in the past.

The solution of the debt crisis cannot, therefore, be reduced to ensuring only debt servicing. Such practices have already led to a negative net transfer of funds from developing to industrial countries and further deterioration of economies in the developing nations. There can be only one response to the debt crisis: efficient development of the highly indebted countries. It is encouraging that there is wide agreement on this issue. However, general verbal agreements are essential but not sufficient. Devel- opment of the less-developed countries requires a capital increase for the World Bank and other institutions and adequate commitments from commercial banks, accompanied by their full economic responsibility for the quality of investments. It is also essential to shift the focus of conditionality to the economic performance of investments, because that is the only conditionality that can spur development.

More favorable credit arrangements are needed in terms of interest rates and repayment periods, especially for the most indebted countries. But particular care should be taken that a drop in interest rates is not always accompanied by a drop in the prices of raw materials and the other export commodities of less-developed nations. This permanently existing phenomenon is as disastrous for the development of less-developed nations as unsustainably high interest rates.

I wish particularly to recall that the developing countries have presented their overall platform through the Group of Twenty-Four. They are calling for a broader framework to be established through a dialogue among creditor and debtor countries, international financial institutions, and other financial organizations in search of a solution for the debt crisis within the

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Nothing and nobody can replace the historical responsibility and role of our institutions in encouraging the economic growth of developing nations. That is why we are supporting the capital increase of these institutions. . . . We are concerned about the policy of further narrowing access to Fund resources. Access is already too constrained in view of the financial needs of less-developed nations, low quotas, and strict procedures for triggering the funds under the General Arrangements to Borrow. The Fund should, instead, resume the enlarged access policy, as long as the ratio between quota limits and world development needs has been established. The economic growth of developing nations can be ensured only by simultaneous adjustments of international financial institutions and industrial countries. It cannot be accomplished only by economic adjustments by debtor countries to the targets set for balancing the world economy. A more efficient multilateral surveillance is needed for this purpose, as well as further strengthening of international liquidity through a major role and new allocation of SDKs. We are aware that the observations made on the importance of the debt problem and on the need to seek global solutions point to the reform of the international monetary and financial systems. We therefore deplore the lack of at least an initial step in establishing a joint ministerial body that would prepare and convoke an international monetary conference. Yugoslavia, as one of the founding members of the International Mone- tary Fund and the World Bank, has been supporting their development, in line with its economic capacity. This is also in line with our development needs. I would finally say that my country is currently undertaking important and austere adjustment measures. We expect our current efforts and achievements to be backed in the future with a major understanding, as well as support both to help solve the developmental and structural problems and to further encourage the positive trends already initiated in Yugoslavia's economic growth.

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STATEMENT BY THE GOVERNOR OF THE FUND AND THE BANK FOR KIRIBATI

Boanereke Boanereke Mr. Chairman, Managing Director of the Fund, President of the World Bank, fellow Governors, distinguished guests, ladies and gentlemen: It is my honor and pleasure to address you as my country's representative on the occasion of our first attendance at the Annual Meetings as a full member of both the Fund and the World Bank. Thank you all for your welcome. My country is pronounced Kiri-Bass, and it is in the center of the Pa- cific. Though relatively small in terms of land area and population, my country is relatively large in terms of ocean. This is a new concept that is nevertheless growing in acceptance. It is my Government's intention to exploit our economic potential, little appreciated though it may be at present, in order to realize our deeply felt commitment to self-reliance. It is with this commitment in mind that my Government decided to join your associations. We need help in order to achieve our goals. For Kiribati, at this stage of our development, this help lies as much in a need to learn as in a requirement to borrow.

STATEMENT BY THE GOVERNOR OF THE BANK FOR BANGLADESH

M. Syeduzzaman Allow me to extend a hearty welcome to Kiribati and Poland. Allow me also to share with you our pleasure in welcoming the new Pres- ident of the World Bank and our profound sense of sadness at the decision of the Managing Director of the Fund to relinquish his high office in the near future for personal as well as professional reasons. The refreshing breadth of Mr. Conable's vision of the World Bank's role reflected in his first address to the Annual Meetings is matched only by Mr. de Larosière's contribution to the strength, resilience, and responsiveness of the Fund. Mr. Conable, we have been heartened by, and we much admire, the spontaneous manner in which you have identified yourself with the world development community in so short a time. This identification seems to be rooted in your heritage, and that augurs well for the institution. We eagerly look forward to many years of your able leadership at the world's premier development institution.

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Mr. de Larosière, I must confess I felt a sudden sense of loss when I learned of your decision to return to France at the end of this year. For nearly a decade you have led the Fund through the most difficult passage of its continuous voyage. You are leaving with this institution a permanent heritage of outstanding professionalism combined with a constant awareness of the complex world outside. We will miss you very much, and we wish you and your family the best of happiness. As we assemble for the Forty-First Annual Meetings of our aging but active twin institutions, some of the world's major stock markets are con- valescing after disturbing free falls presumably caused by an uncertain economic outlook. This has happened at a time when the real economies of our member countries continue to labor under grave imbalances unsustainable for all and damaging to most. This is true of developed as well as developing, surplus as well as deficit, creditor as well as debtor countries. These imbalances make up a tangled ball of threads which no country or institution can even begin to unravel single-handedly. The most critical thread in the tangle of imbalances now on our hands is that of international capital flows, and it is to this that the first unraveling pull must be applied. The ruling conventional wisdom of recent years has relied heavily on automatic market mechanisms for the correction of imbalances and distortions in national economies as well as the global economy. The renewed emphasis on these mechanisms has served a useful purpose in domestic economic management by reminding everybody of the superior leverage of incentives as opposed to commands and also of several other realities. But the evidence is quite clear that, in the management of international capital flows, the move toward a heavy reliance on automatic market mechanisms has had perverse results. In the late 1970s it laid the foundation of the debt crisis of the 1980s. In the 1980s it persistently ac- commodated and encouraged growing imbalances between the major industrial countries, with global consequences, and also worsened the debt burdens and growth problems of developing countries. Finally, it contributed to a steady diminution in the support of several industrial countries to the role of public policy and multilateral development assistance in ensuring a soundly expanding world economy. This was partly arrested only by the bold departure of the U.S. Treasury Secretary from conventional wisdom at Seoul last year. Though his initiative was mainly focused on a sub- set of developing countries and their creditors, like all statesmanly initiatives it offers wider lessons and implications that need to be taken up and developed by others. I believe all of us would do well to set ourselves this task. For those who will look around and beyond the immediate focus of Sec- retary Baker's initiative, it should serve as a forceful reminder of a simple perception underlying the Bretton Woods institutions: the developing

©International Monetary Fund. Not for Redistribution GOVERNOR FOR BANGLADESH 209 countries can continue to interact constructively with the world economic system only when there is the right congruence of growth-oriented long- term capital inflows with efficiency in domestic management. This reminder came at a time when it was indeed sorely needed after several years of continuous decline in net long-term capital flows to developing countries. During the year that has passed since we last met in Seoul, deliberations at all relevant forums of the Bank and the Fund as well as elsewhere have reflected a somewhat greater sensitivity to the importance of reviving capital flows of all kinds to developing countries. However, in trying to address issues that have matured to crisis proportions with varying degrees of visi- bility, we may now be developing certain approaches that require continuous reappraisal. One such approach that deserves a great deal of caution and reappraisal is an emerging tendency to look at global development problems mainly in terms of immediately visible crises identified with specific areas of the world or a limited range of macroeconomic criteria. This tendency, unless constantly guarded against, may over time warp our view of the true role of development assistance and also lead to crises in the efficient and equitable allocation of global resources. The cost of such errors may indeed be very heavy, because the real distribution of development problems is not geo- graphical, nor is it related to a limited set of macroeconomic criteria. It is true that the visible tips of the generalized crisis besetting all developing countries change their location from time to time, and adequate attention must of course be directed toward them. However, global policy must also take into account the need for balance, so as to prevent other crises, not immediately visible to all, from suddenly advancing upon us. The best safeguard against such an eventuality is to maintain the basic principle, reflected in long-standing resolutions of the United Nations, of looking at developing countries in terms of a comprehensive set of criteria reflecting the essence of their varying problems and needs. The UN classification of least-developed countries, for instance, very effectively captures the concerns of sub-Saharan Africa, as well as those of other countries in similar circumstances. It must be said to the credit of the leadership in our two institutions that even while addressing immediate crises, they have hitherto retained their sense of balance. The new President of the Bank has reaffirmed in his per- ceptive maiden statements the essential business of the Bank, which is development, and he has also reminded us that the Bank's involvement in specific crises is to be seen against the background of their relation to development. Unless we constantly guide and redirect ourselves in the light of this basic long-term objective, I am afraid we shall find ourselves facing frequent

©International Monetary Fund. Not for Redistribution 210 SUMMARY PROCEEDINGS, 1986 dilemmas in global development strategy. Indeed, we already have reached a dilemma in regard to an appropriate allocation of official development assistance, and the report of the President of the Bank to the Development Committee has called attention to it. The essence of the dilemma relates to the question, and I quote, "of how to meet sub-Saharan Africa's external resource needs without sacrificing those of other needy aid-recipient countries." . . . In joining others in emphasizing the need for deliberately increasing the volume of resource flows to developing countries, I do not at all intend to underplay the importance of parallel actions by the developing countries themselves in the areas of flexible adjustments and policy reforms. It must be noted, however, that the last few years have seen uninterrupted actions and efforts by the developing countries in these areas, but because of several factors beyond their control, including, but not limited to, inadequate net inflows of long-term capital, these adjustments and reforms are in many instances reaching points of diminishing returns. In my own country, as many of you may have noticed from an analytical inset in this year's World Development Report, we have been fortunate in achieving a satisfactory growth trend in agricultural production through market- and efficiency-oriented policy improvements. But in order to place this achievement on a sustainable basis, and to extend it across all other sectors of the economy including the crucial financial sector, we need to increase and diversify our development effort significantly, and this calls for substantial increases in capital inflows along with ever-vigilant policy improvements. I must also add that this task has not been made easier by the precipitous decline in the prices of commodities that are our major exports.

The various growth-inhibiting factors operating in the world economy today and the overwhelming external factors specially affecting economic performance in the developing countries have been exhaustively discussed in the Fund and Bank documents, and I do not propose to catalog them here. One must underline, however, two very special developments because of their general significance: the failure of growth performance in the industrial countries despite the stimulus of lower interest rates and energy prices, and the dramatic slowdown of export growth in many industrial countries. Many have placed considerable expectations on a proposed policy-directed stimulation of domestic demand in the surplus industrial countries for a resumption of the growth impulse. The adoption of this strategy and its possible consequences will perhaps continue to be subjects of debate and deliberation for some time. But the link between the slowdown in the export growth of industrial countries and the dramatic reduction in the effective import demand of developing countries needs to be recognized immediately. The evidence is clear that the inability of the developing countries to sustain required imports because of the severest

©International Monetary Fund. Not for Redistribution GOVERNOR FOR BANGLADESH 211 terms of trade losses in the postwar era and lack of adequate capital inflows is acting as a significant brake on faster growth in the industrial countries, to the detriment of the global economy.

The resumption of capital flows of all varieties to developing countries in significant volumes is an obvious policy imperative. Starting with the decade of the 1970s, the recycling function was moved, unwisely as we now see, toward the commercial banks. From the mid-1980s, for obvious reasons, the governments of the industrial countries, acting bilaterally and through the multilateral institutions, have to lead the way, with an accompanying assumption of responsibility by the developing countries for growth-oriented adjustments and policy reforms on a sustained basis which will make the recycling productive. The confidence-building effect of broad policy decisions and an affirmation of a multilateral political will on these general issues would far exceed the quantitative impact of specific decisions, which of necessity must be an emerging process, rather than a single dramatic event. The rapid growth of assistance from OPEC member countries to the developing countries set a spectacular example of the generous contribution that a genuinely constructive political will can make to the global development effort.

As the principal vehicles of international economic cooperation, our two institutions—the Bank and the Fund—have heavy agendas replete with issues whose resolution is vital for releasing the brakes on the world economy. Meaningful progress on these issues depends on the emergence of a workable consensus and collective goodwill among all the member countries. Allow me only to touch selectively on one issue that appears to be especially important from the standpoint of long-term capital flows to developing countries—a key factor in any lasting improvement of the world economic outlook: . . . the Structural Adjustment Facility of the Fund, which the Managing Director has put in motion so ably despite the numerous complexities surrounding the subject, needs to be nurtured carefully in order to ensure that it does not lose the essential features envisaged at its birth: growth orientation of programs, a low level of conditionality, and induction of additional concessional resource flows. . . .

A lasting improvement of the world economic outlook will, of course, require a number of other collective measures involving the international monetary and trading system. These have been discussed at various forums before and during the current Annual Meetings, and will, we trust, continue to receive further collective consideration in the coming months. It must be our combined endeavor to arrive at viable agreements on these issues, including, in particular, the allocation and postallocation distribution of SDKs aimed at improving the supply and distribution of interna-

©International Monetary Fund. Not for Redistribution 212 SUMMARY PROCEEDINGS, 1986 tional liquidity quantitatively as well as qualitatively—an indispensable minimum requirement for global production, trade, and growth. The firmly neutral management of our two institutions and their thoroughly professional staff are eternally dependent on consensus among the member countries, big and small. The issues that I have touched upon and others that my distinguished fellow Governors have explored and will explore cannot be fruitfully resolved unless we present the President of the Bank and the Managing Director of the Fund with that consensus. The world economy needs that consensus urgently, and I trust that it is within our power to achieve it, if we try hard enough.

STATEMENT BY THE GOVERNOR OF THE FUND AND THE BANK FOR ROMANIA

Alecsandru Babe

It is a particular pleasure for me to join my colleagues who have already spoken in congratulating the new members of the Fund and the World Bank—Kiribati and Poland. Allow me to express our willingness to cooperate actively, both here and now and also in the future, in the effort to solve the complex and difficult problems facing these two organizations, problems that concern us all. Such cooperation is of great interest to us. The International Monetary Fund and the World Bank, two prestigious financial organizations, in accordance with their Articles of Agreement and in light of the decisions they have made, have important responsibilities in the preparation and implementation of strategies that are viable, efficient, and acceptable to all their members. But I would like to stress that, in our opinion, which I hope is also shared by my colleagues, the Fund and the Bank should play a more active role in the complex situation now facing us and expand certain of their functions, affording greater support, particularly of a preventive nature, to the developing countries, which have been the most seriously affected by the world economic crisis. The world today is not the world of yesterday, nor is the world of tomorrow that of today. If we do not act resolutely and with lucidity, the economic contradictions will become more serious and more widespread, and events, whether we like it or not, will have passed us by. Hence the particular responsibilities incumbent upon all of us; history will judge us merci- lessly if we do not look at the situation objectively, disregarding certain limited and subjective interests, and if we do not take action to improve it.

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We share certain views that have been put forward at this meeting, which essentially express one of the inescapable realities of today's world: the world economy is still far from recovery and consolidation. Certain promising signs in the industrial countries have become clouded and have sometimes even been eliminated throughout the world economy by more serious issues facing the developing countries. The external debt burden is growing heavier and heavier; capital market interest rates are too high and barely tolerable; and the continued high levels of inflation are producing negative effects on the achievement of economic objectives and leading to lowered standards of living for the peoples concerned. In many countries, we are, in fact, seeing an economic decline.

When the developing countries obtain new loans, the terms imposed are often hard, which then lead to a new increase in the external debt; interest payments are sometimes higher than the principal to be repaid.

At the same time, we must recognize that, despite the desire to discuss in the international organizations the serious consequences of external debt, there has sometimes been a tendency to stop short of adopting a concrete solution. The experts have also conducted a number of studies covering certain ideas and have made valuable proposals, which have unfortunately not been fully acted upon.

Romania, on the basis of the precepts of its President, His Excellency Nicolae Ceausescu, believes that the issue of the external debt of the developing countries calls, first and foremost, for a global political and economic approach with the participation of all the countries involved, of the International Monetary Fund and the World Bank, and of the other international financial organizations and the commercial bank representatives. This approach would comprise the following principal proposals:

—in the case of the poorest countries, with per capita incomes not ex- ceeding $500-$600, forgiveness of the external debt;

—in the case of developing countries with per capita incomes not ex- ceeding $1,000-$!,200, a substantial reduction of the debt;

—in the case of the other developing countries, classified into two or three groups according to their national income and economic potential, a 50-70 percent reduction of their debt;

—rescheduling over 15-20 years of repayments of the balance of the debt, at a reduced interest rate of 3 to 4 percent, or without any interest for a period of 3 to 5 years;

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—for the developing countries, the setting of a ceiling to ensure that their external debt payments do not exceed 10 percent of their export earnings; —establishment of a maximum interest rate level of 3 to 4 percent for existing loans, any amounts paid in excess of that ceiling being regarded as reducing the volume of the external debt; —continuation of new lending to the developing countries on concessional terms, with interest rates of up to 5 percent. As I have already mentioned, this suggestion represents the general con- ceptual framework on which the external debt negotiations with each country should be based, taking into account the concrete conditions and the options for development objectives in each case. We are happy to note that some of our proposals are quite close to those expressed by other countries. This boosts our confidence in the fairness of the solutions based on Romania's firm position of promoting a new international economic order grounded in a relationship of collaboration, equality, and mutual advantage. At the same time, we are ready to discuss now, or in the future, any other suggestions concerning the external debt question, in order to support the developing countries. To assist the organization we are representing in contributing more to the identification of solutions to the external debt problem, Romania will be supporting a new allocation of SDRs and a general increase in the capital of the World Bank, together with calls on capital markets in order to obtain supplementary funding. Certainly, the measures we have in mind, or those upon which we shall be agreeing, will yield their results only to the extent that the developing countries resolve to intensify their efforts to ensure better utilization of their own resources, based on economic development programs that take account of the concrete potential of each country, on sociopolitical options, and on the need to raise the living standards of their people. In our opinion, the problems requiring solution call for a certain redefi- nition and restructuring of the policies and operating methods of the national and international financial and banking organizations, areas in which the Fund and the World Bank should play leading roles by offering workable and sound models for adoption. There are indeed many points to be discussed in this area. Allow me to advance the idea that by concerted efforts it is possible to create the conditions in which at least part of the developing countries' debt would be paid in their domestic currencies, thereby enabling the interests of both creditor and debtor countries to be better served.

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Thus, for example, taking account of the present level of our country's development, we intend, with the financial and banking organizations, to promote medium- and long-term current operations in lei—Romania's national currency—in both the export and the import sectors, at mutually advantageous prices and exchange rates. We are ready to begin specific discussions on this point with all parties involved in operations of this type.

On the basis of the economic and scientific policy of our country's Presi- dent, Romania is at a stage where all efforts are concentrated on intensive development of the economy. We shall be maintaining sustained growth rates and we shall be carrying out new investment projects in order to continue to modernize our economy, so as to fit it more closely into the international division of labor with the cooperation of all the countries of the world without regard to their social system, in a spirit of equality and mutual advantage. We are making efforts to reduce our external debt in the future, to bring us up to date on all our payment obligations.

We shall act on several fronts. We have taken steps to strengthen the economic management of enterprises; we have programs to raise the quality of our production; we are now reorganizing our production processes in line with the requirements of the scientific and technological revolution and with the possibilities for enhancing labor productivity; we have already revised our domestic financial and credit policy, and some of the measures we have taken and those we shall take in the future are indeed fundamental. I assure you that our objectives are analytically sound and, therefore, realistic.

Of course we have certain difficulties (many of them owing to factors independent of our economy). I think it essential to be fully aware of the deeper causes and interconnections and then to take steps to eliminate the adverse factors.

We are convinced that, with the joint efforts of all the world's countries, through calm discussion conducted in a constructive spirit, it will be possible to resolve or alleviate the severe financial and monetary problems facing the present international mechanisms. The Romanian Government, following the economic strategy of the nation's President and his policy of peace and international cooperation, is resolutely committed to improving activities in all fields, thus finding concrete ways and means to enhance economic, financial, and monetary efficiency and to promote international trade and cooperation.

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STATEMENT BY THE GOVERNOR OF THE BANK FOR EGYPT

Kamal El-Ganzoury

It is a singular privilege to address this august body on behalf of the Government of Egypt. Let me start by extending a warm welcome to the new President of the World Bank, Mp. Barber Conable. I wish him every success. At the same time, I would like to express my deep regret that these are the last Meetings in which Mr. de Larosière participates as the Manag- ing Director of the Fund. During his vigorous and inspiring leadership, Mr. de Larosière has earned the admiration and gratitude of all those concerned with international economic cooperation. I would like also like to welcome Poland and Kiribati to the membership of the Bretton Woods institutions. When we met last year in Seoul, Korea, we had reason to be moderately optimistic about the prospects of the world economy. Today, unfortunately, we have much less ground for optimism. The world economy is clouded by a great deal of uncertainty. World output shows a marked slowdown, and prospects for the coming year are hardly encouraging. The slow rate of growth in the industrial countries is having an adverse effect on world trade. Protectionism is on the rise, and foreign exchange markets are dominated by wide swings in the value of the major currencies. At the same time, external imbalances have reached unsustainable levels and could lead to a new wave of protectionist measures with ominous implications for the world economy and international economic cooperation. Developing countries in particular are faced with an extremely difficult situation. This is obvious in the case of oil exporters who suffered substantial losses in income and export earnings as a consequence of the sharp drop in oil prices. But it is no less true in the case of non-oil developing countries. Their situation has greatly worsened in view of depressed commodity prices, sluggish growth in exports, deterioration in terms of trade, and stagnation in financial flows. The position in the heavily indebted countries, whether oil exporters or not, remains a cause for serious concern. The state of the world economy is simply untenable. We are confronted with a number of major economic issues at the global level which call for serious and immediate attention by the international community. These issues are not new. They have been with us for some time. As time passes, they become more intractable. We raise the level of our rhetoric, but we fail to muster the necessary political will to deal with them. The solution is evidently beyond the reach of any single country or group of countries. Our experience points clearly to the need for a higher level of international eco-

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nomic cooperation between all groups of countries. Failing that, the world economy is condemned to unsatisfactory levels of performance, which could degenerate into a deep recession if not a devastating depression. A great share of responsibility falls upon the major industrial countries. They are the richer, the more powerful, whose economic performance de- termines the health or malady of the world economy. Given the high degree of interdependence obtaining in the world economy, it is inconceivable to have prosperity if the major industrial countries fail to provide the stimulus to the rest of the world. My delegation is dismayed by the news that the countries of the Group of Seven have failed to reach agreement on coordination of their policies. The cost of such a failure could be heavy, not only to themselves, but to developing countries which are least capable of facing a further deterioration in the world economic environment. Obviously, the present framework for coordination is not functioning as well as what is called for by the occasion. There is an urgent need to strengthen the mechanism of multilateral surveillance over the macroeconomic policies of the industrial countries. The purpose would be to eliminate inconsistencies between their policy positions, to take account of the international consequences of their national policies, to maintain minimum levels of noninflationary growth, and, no less important, to ensure an equitable distribution in the burden of adjustment between deficit and surplus countries. A higher level of international cooperation is also needed to deal with the debt problem. The debt overhang continues to pose a serious threat to the international credit system, the economic and political stability of the indebted countries, and indeed, the growth of the world economy at large. At last year's Annual Meetings we were encouraged by the announcement of Secretary Baker's initiative. It contained many positive elements which were lacking in the conventional approach to the problem. The initiative recognized the structural nature of the problem, the vital importance of adjustment with growth, the need for balance between adjustment effort and availability of finance, and, last but not least, the role of the World Bank alongside the IMF in dealing with the debt problem. The results of the initiative, however, are yet to be seen. Some of the basic assumptions have not materialized, namely, a reasonable rate of growth in the industrial countries, a vigorous expansion of exports from the indebted countries, and above all the participation of commercial banks at appropriate levels. In the view of my delegation, the Baker initiative needs to be reinforced by a higher level of international cooperation aiming at a long-term durable and equitable solution. So far the international community has failed to produce such a solution. We are still muddling through from one crisis

©International Monetary Fund. Not for Redistribution 218 SUMMARY PROCEEDINGS, 1986 to another. At the present levels of indebtedness, there is a basic contradiction between repayment and growth of the indebted countries, a contradiction that can only be removed by, on the one hand, a significant reduction in the debt service burden and, on the other, a substantial increase in export earnings and voluntary lending. We support the call of the Group of Twenty-Four for the creation of an ad hoc committee of Deputies from developed and developing countries to undertake a thorough and comprehensive review of the debt situation and to present a report to the Develop- ment Committee at its meeting in the spring of 1987. We also welcome the announcement by the Chairman of the Group of 77 to convene a consultative meeting on external debt to be held in November of this year.

A third area for a higher level of international cooperation is protectionism. My delegation welcomes the agreement reached in Punta del Este to launch a new round of trade negotiations in Geneva as soon as possible. It is hoped that these negotiations will diffuse the protectionist pressure and provide the occasion to address the problems of world trade in general and those of developing countries in particular.

The last few years have seen the proliferation of nontariff barriers in a variety of forms and descriptions. The burden of these barriers has fallen upon developing countries with particular severity. They tend to be more restrictive in precisely those lines of production in which developing countries enjoy a comparative advantage. In the context of adjustment programs these countries are urged to follow an outward-looking, export- oriented development strategy. No doubt this is more efficient than inward-looking import substitution. But what is the good of export- oriented development if the major export markets are not accessible? The problem is compounded by export subsidies, procurement practices, and industrial policies which discriminate, openly or subtly, against the more efficient production from developing countries. We hope that the new round of trade negotiations will start a new page and that the industrial countries will practice what they preach. It is also hoped that the Geneva round will not repeat the mistakes and shortcomings of previous rounds.

The fourth area for a higher level of international cooperation is that of energy. There is universal agreement that stability of energy supplies and prices are of vital importance for the health and prosperity of the world economy. However, the world oil markets have been subject to sharp and unpredictable fluctuations. The first and second oil shocks during the 1970s were blamed for all types of economic malaise in the world economy. This year has witnessed an oil shock in the opposite direction. The immediate effect was a massive transfer of wealth from the oil exporting to the oil importing countries, which is estimated at about $75 billion, 80 percent of which accrued to the oil importing industrial countries.

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This net gain, however, has been associated with some adverse side effects. The most serious loss, of course, was suffered by the oil exporting countries. But many industrial and developing countries were also exposed to some negative fallouts. The present situation can be described as one of complacency on the part of the oil importing countries, particularly the beneficiaries among the major industrial countries. My delegation believes that this is a dangerous and short-sighted policy. It carries the seeds of trouble in the not too distant future. At the present levels of oil prices, most alternative sources of energy will cease to be profitable. Sooner or later the fundamentals of the oil market will reassert themselves. Shortages will reappear, and oil prices will skyrocket once more. This is not a self-serving analysis. It represents a scenario which is es- poused by a large number of analysts and energy experts. This would seem to be the most propitious time to initiate closer cooperation between oil producers and oil consumers, developed and developing. The purpose would be to ensure the long-term stability of oil supplies and prices. Finally, there is room for a higher level of international cooperation in the field of financial flows. The link between international development and financial flows is too obvious to warrant elaboration. During the last decade capital flows have become a dominant feature of international economic relations. It is perhaps not realized that capital flows are now about ten times as large as trade flows. The major portion of these flows is accounted for by private commercial lending. The privatization of international capital flows is a relatively new phenomenon which is characterized by a higher degree of volatility with important implications for foreign exchange stability and liquidity of the borrowing countries. There is need for greater cooperation between the sources and users of private commercial funds to ensure a greater degree of stability in international lending. At the same time, official development assistance represents the principal source of external financing for a large number of low-income countries. The flow of ODA has been virtually stagnating since the early 1980s. My delegation welcomes the recent agreement of IDA Deputies on the Eighth Replenishment of somewhat less than $12 billion, although we believe that this amount is significantly less than what is warranted by the considerable needs of low-income countries, especially the sub-Saharan African countries. We were hoping for a more generous replenishment, given the massive transfer of wealth to the major industrial donors following the decline in oil prices. My delegation would like to express its opposition to any hardening in IDA terms at the present juncture. The World Bank and the IMF have an important role to play in the adjustment process, both as sources of finance and as catalysts for mobiliz-

©International Monetary Fund. Not for Redistribution 220 SUMMARY PROCEEDINGS, 1986 ing finance from alternative sources. My delegation supports a general increase in the capital base of the World Bank so as to enable it to reach a level of lending of $21.5 billion annually by fiscal 1990. This is the minimum level consistent with its increased role in the heavily indebted countries and its traditional role in other borrowing countries. At the same time we support the continuation of the IMF policy of enlarged access and op- pose any reduction in the present access limits.

STATEMENT BY THE GOVERNOR OF THE FUND FOR POLAND

Bazyli Samojlik

I would like to express my thanks to all those states that voted for the admission of Poland to the International Monetary Fund and the World Bank, and to those representatives of many countries who have welcomed Poland's return to both institutions during the current session. Poland was one of the founding members of the International Monetary Fund as well as the International Bank for Reconstruction and Development. However, 36 years have passed since my country participated in Annual Meetings. We hope that Fund and Bank memberships will facilitate our active role in international financial cooperation. We want to collaborate with both organizations in implementing their objectives and to participate constructively in their functions. We are convinced that in contemporary times economic interdependence is growing. Our common interest is to strengthen all factors and forces that unite the world economy. We believe that the Fund and the Bank can contribute to further development of international economic and financial cooperation, stabilization of economic relations without any form of discrimination, and elimination of the factors that make those relations dependent on the political mood and are consequently detrimental to mutual confidence. I would like to say a few words about the economic situation of Poland. Let me turn your attention to two problems. First, after a recent period of serious economic difficulties, Poland is stabilizing its economy and improving its external position in spite of various restrictions and limited cooperation by creditors. Our trade and financial relations with CMEA countries are growing. Beginning in 1982, we have achieved a relatively high trade surplus, which during this period has constituted about one fourth of our export revenues. This achievement was the result of considerable efforts designed

©International Monetary Fund. Not for Redistribution GOVERNOR FOR POLAND 221 to accommodate our economic possibilities and development needs. Un- fortunately, the trade surplus has been inadequate to balance the current account, especially taking into consideration the relatively high level of real interest rates. I must add that, in spite of our serious efforts to service our debt, we do not have access to new credit. Almost 90 percent of our imports from Western countries are financed on a cash or semicash basis. Second, we have undertaken complex changes in our economic management to create the foundation for sustained growth. We have started the second phase of a serious economic reform, a program for speeding up qualitative changes in our economy. We assume that, while maintaining budgetary balance, we shall achieve a drastic decrease in subsidies and a reduction of the inflation rate from 18 to 6 percent annually. We will fix the rate of exchange closer to the equilibrium level and adjust structural prices. We have created the legal basis for an increase in the propensity of enterprises to establish capital and production ties abroad. I would like to stress that my Government, in its effort to speed up reforms, enjoys the support of all political forces in Poland. This direction of economic policy has also been confirmed recently by the Tenth Congress of the Polish United Workers' Party. I would like to take the liberty of saying a few words on the world economy as a whole. We fully share the apprehensions and concerns expressed here regarding prospects for the stable economic development of the world. In spite of improvements in certain countries and regions, there are still destabilizing factors creating danger in others. Poland, prior to its membership in the Fund and the Bank, closely observed the efforts of both organizations aimed at improving international monetary and financial relations. We notice a gradual change of climate and an increasing understanding of the sources of difficulties encountered by individual member countries. We appreciate the work done by the previous and present sessions of the Boards of Governors. It is of particular importance to understand that the problems of indebtedness cannot be solved at the country, regional, and global level without the creation of realistic conditions for the long-term development of the indebted countries and without taking into consideration the interests of creditors as well as those of the debtor countries. Serious structural adjustments require considerable resources. It is necessary, therefore, to correlate adjustment programs properly with the real capabilities of indebted countries. They also require time. One should not forget the saying, "Quick fixes don't fix big problems." Indebtedness is undoubtedly a big problem for many countries.

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In conclusion, I would like to stress that Poland looks forward to close cooperation with the International Monetary Fund and the World Bank for mutual advantage.

STATEMENT BY THE GOVERNOR OF THE FUND AND THE BANK FOR WESTERN SAMOA

Faasootauloa S.P. Saili

I have the honor to speak not only on behalf of Western Samoa but also on behalf of two other small island developing country members of our constituency, Solomon Islands and Vanuatu. At the outset, we take great pleasure in welcoming Kiribati and Poland as members in the family of Fund-Bank institutions. Kiribati joins the increasing number of small island member states which, we believe, have special problems to which the standard solutions can rarely be successfully applied. Let us take, for instance, the uniform insistence on a policy of aggressive export orientation with a generalized depreciation of currencies recommended as a panacea for developing countries. There is now a realization that excessive preoccupation with external trade as an engine of growth has tended to saturate commodity markets and depress prices. Under these circumstances, the adjustment measures imposed on the least developed countries—and I must stress the least developed countries and Western Samoa is one of them—often produce intolerable strains. Devaluations followed by higher inflation rates, distorted growth, increased unemployment, and social tensions hardly seem to be a recipe for improvement. Concurrently, the larger economies pursue fiscal, monetary, and trade policies without due regard to their international repercussions. As a result, world economic growth has become uneven. There is a disturbing and disheartening tendency among the larger nations to opt for bilateralism in economic relations rather than multilateral cooperation. If economic history has taught us anything, it is that such an approach may give temporary gains, but may create divisions and unnecessary barriers to the realization of an acceptable world economic order. The true spirit of cooperation, as envisaged at Bretton Woods, can be regained only by political initiative and direction at the highest level. Passing to the individual topics of discussion, I see a common thread and rationale running through all of them. That common thread is the

©International Monetary Fund. Not for Redistribution ALTERNATE GOVERNOR FOR VIET NAM 223 insufficiency of external financing flows to help the developing countries to achieve and sustain a rate of economic growth appropriate to their social needs and aspirations. A further reduction in the availability in real terms of external resources now lends more urgency to the problems of deteriorating current accounts and large debt burdens, which are compelling many developing countries to contract the growth of real domestic demand. Turning to the question of an SDR allocation, it is disheartening that, despite the existence of such an overwhelming case, no allocation has taken place since 1981. Limits of enlarged access have been reduced in stages, while the quota increase under the Eighth General Review was restricted to less than half the increase favored by a majority of the Fund membership. May I repeat again: there are genuine fears of a further tightening of conditionally attached to Fund financial assistance to low-income countries. The small quotas of the smallest member countries of the Fund result in our access to Fund resources being tiny in absolute terms and in relation to our financing needs in the adjustment process. We have very limited access to other sources of financing. In these circumstances, the value to us of the Fund's technical assistance and training programs is especially important. Prospective cuts in the real level of such assistance on the part of the Fund are of considerable concern to us. We request, in the strongest possible terms, the maintenance of the real level of technical assistance and training available to us in recent years. The cost, in relation to the Fund's operations—or the cost of these Annual Meetings—is insignificant. For us, it is the greatest, perhaps often the only, benefit of membership. . . . In conclusion, allow me, on behalf of our island member countries, to welcome Mr. Conable as the new President of the Bank, and to thank you, Mr. de Larosière, for your valuable services to the Fund. We wish you future success.

STATEMENT BY THE ALTERNATE GOVERNOR OF THE FUND AND THE BANK FOR VlET NAM

Le Hoang

Allow me first to extend my greetings to our two new members, Poland and Kiribati, which are attending these Annual Meetings for the first time. Since the 1985 Annual Meetings, the world has seen extraordinary changes which have had diametrically opposite effects on economic growth, the financial and monetary system, and the international pay-

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ments situation, thus creating conditions that are favorable for the industrial countries but quite unfortunate for the developing countries. Contrary to what might be expected, the recovering economies of the industrial countries are no longer playing a locomotive role for the world economy, especially for the economies of the developing countries. It is disturbing to note today that the resources of the developing countries are flowing more and more to the developed countries. The decline in commodity prices alone, particularly those of oil and basic agricultural products, has produced a windfall of up to $100 billion for the developed countries, while the developing countries in 1985 had to pay over $60 billion in interest on the debts they had contracted and the investments they had received. It is deplorable that the flow of resources from the developed countries to the developing countries is far from proportionate to the tor- rent pouring each moment in the other direction. All of the developing countries' efforts to boost their export volume thus do not suffice to offset their losses due to the decline in export prices. The poor countries relying on financial aid from the major oil exporting countries are being hit hard from this angle as well. The balance of payments of the developing countries is deteriorating seriously. In these circumstances, the economic growth of the developing countries has slowed down, their investment plans have not been realized for lack of capital, unemployment has risen, and inflation has become very serious and chronic. To survive in such an adverse world economic environment, these countries have had to make the adjustments needed to adapt to reality. Many have had to formulate rigorous adjustment programs, tanta- mount in fact to economic austerity policies, involving strict containment of domestic demand and the channeling of all resources toward exports, at a time when world market prices are falling sharply. As a result, they are constantly in a vicious circle—weak economic growth, flight of capital abroad, declining creditworthiness, expanding external debt, ever greater difficulty in repaying their debts, and the impossibility of raising living standards. We consider it necessary for the Fund and the Bank to face head-on this state of affairs in the developing countries, especially the poorer among them. The policies of both institutions should help these countries make adjustments oriented toward economic growth, so they can overcome their problems instead of sinking further and further into difficulty. We therefore favor an allocation of SDKs in the fifth period to provide additional funds for countries needing them. Reforms in the international monetary and economic system must take place at the same time, creating a favorable climate for world trade and for the economic development of various countries. We are pleased that the Fund and Bank have moved forward with the new Structural Adjustment Facility. Thus far, however, very few

©International Monetary Fund. Not for Redistribution ALTERNATE GOVERNOR FOR VIET NAM 225 countries have been able to benefit from it because its conditionality is too complex and rigorous. The Fund requires its members to implement flexible policies but rigidly applies its Articles of Agreement in helping them overcome their difficulties. The elimination of these impediments will create conditions conducive to the provision of more adequate funding for countries in need, thus contributing effectively to the establishment of the new economic order that has been justly demanded at several international conferences. It is our hope that the policies agreed to at this year's Annual Meetings will have a direct impact on the problems we have just mentioned.

May I turn now to a brief sketch of the economic situation in Viet Nam. We have just completed the 1981-85 economic and social development plan and achieved significant progress. While agricultural production increased at an annual rate of 4.9 percent during the five-year period, the food problem persists, with output prospects uncertain due to adverse weather conditions. Marked changes have taken place in industry, especially small-scale and handicraft industries and the provincial industrial sectors. Industrial production has increased at a rate of 9.5 percent per year. But these results fall far short of meeting the needs of economic development and of improved living standards in a country with a population of 60 million.

The consequences of a long war, an economic blockade by hostile forces, and natural disasters have compelled us to cope with a number of difficulties—shortages of raw materials, energy, and goods, in addition to financial and monetary instability. In view of these difficulties, Viet Nam has formulated and adopted a series of adjustment measures designed to bring about positive changes in production, expand export volume, and gradually stabilize and raise the standard of living. However, it will take time for these measures to yield viable results.

It is against the background of these achievements and problems that we enter the five-year period 1986-90. Our economic progress will be much greater if we can obtain the necessary aid from international organizations and friendly countries. But it is regrettable that, for quite illegitimate reasons, the World Bank has until now remained aloof from our efforts. From the lessons of the past, with the determination of all our people and with effective support from friendly countries and international organizations, we firmly believe we shall be able to achieve further successes.

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STATEMENT BY THE GOVERNOR OF THE FUND AND THE BANK FOR IRELAND

John Bruton

All of us have our own concerns in our own countries. Let us get them into proportion by looking at the World Bank's World Development Re- port presented to us recently. The report draws attention to the justifiable concern about the malnutrition which still remains in many parts of the world. The scale of the problem is evident from recent World Bank esti- mates which put the number suffering from chronic malnutrition in developing countries somewhere between 340 million and 730 million people. This situation is due more to poverty and the uneven distribution of income rather than to an inherent incapacity to produce sufficient food to feed all the people in the world. Policies to redress this situation are and must remain the focus of the Bank's activities. The message in the report that, in the long run, people can obtain food security only if they have adequate incomes highlights the overriding need for appropriate development policies. Only through such policies can we ensure access by all people to enough food at all times for an active and healthy life. The report highlights the role of agriculture in the world economy. One of the major themes in the report is the extraordinary contradiction that developing countries, which have inadequate food supplies and are heavily dependent on agriculture, have tended to adopt policies which are biased against agricultural development, while industrial countries have done the opposite. In many countries, and not only the developing ones, there are very close links between policies to promote general economic development and policies to improve the well-being of people earning their living from the land. Trade, exchange rate, fiscal, and monetary policies have an impact on agriculture that often entirely overshadows sector-specific policies. These more general macroeconomic policies are often the principal source of bias against growth of real incomes in rural areas. In the past few years indebted countries have experienced exactly the same problems as indebted businessmen and farmers in the private sector in the Jeveloped world, and when people ask me in my own country and others in other countries how public debts have piled up, the easiest illus- tration is the comparison with a private sector business. Take the example of the farm sector. Three causes have been identified for the problems farmers in the developed world face today in servicing these debts:

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—erroneous expectations in the 1970s that burgeoning exports would continue, leading to mistaken overborrowing; —an inflationary psychology wherein farmers invested in assets for their own sake without due regard to long-run value or return; —in 1979-81, an abrupt change in conditions, including a contraction of world trade and a demand for credit that outpaced supply, which led to a simultaneous drop in earnings and an increase in interest rates. This is exactly what has happened to farmers in the developed world, and it is also what has happened to many developing countries. Many nations are themselves in a similar position. Things would be completely different, however, if the apparently benign conditions of the late 1970s had continued. They did not continue and are unlikely to return. An understanding of how the problem arose, of how national policymakers, like businessmen and farmers, made what appeared to be reasonable decisions in the late 1970s but which now appear so unreasonable, is necessary in order to avoid a repetition of such errors. The IMF's World Economic Outlook gives grounds for sober reflection on the magnitude of the global economic problems facing us today. While there may be some disagreement on the assessment of the short-term prospects, one would not wish to challenge its main conclusions: we are not yet on a path that will lead to satisfactory progress on the major problems confronting us—unemployment, the persistence of major imbalances, the plight of the developing debtor countries, and insufficient growth in world trade. Current account imbalances also endanger progress and stability. It is only by reducing these imbalances in the context of continuing economic growth that we can give hope to the unemployed and to those developing countries overburdened with debt. There are no easy solutions. However, it is clear that the policies adopted to date need reinforcing. In particular, failure to take account of the international implications of policies will lead to overreliance on exchange rate adjustments and will encourage protectionist pressures. This will not only worsen the medium-term prospects but will also threaten the progress that we have already made in the past few years. We therefore strongly support moves to strengthen international policy coordination as a means of maintaining and accelerating the growth of the world economy and avoiding excessive fluctuations and, possibly, recession. The challenge is to maintain a balanced and buoyant growth in world trade while reducing the international imbalances. If this twin action does not succeed, the plight of the developing countries will become more acute.

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You will recall that this was the main theme of the recent UNCTAD Trade and Development Report. The developing countries have not only seen growth in their export markets weaken, but have also suffered severe export price reductions. It is not realistic to expect these countries to rely solely on increased efficiency and adjustments to their domestic policies— usually entailing reductions in their already very low standards of living— to provide for their rapidly growing populations. Equally, the modest growth in industrial countries does not offer the prospect of a recovery in commodity prices. The industrial countries must be willing to translate some of their real terms of trade gains into positive opportunities for the developing countries. The single most important way of doing this is to ensure the continuance of the open trading system and the expansion of demand in our economies to the maximum sustainable extent. Other countries, especially those in the process of fiscal adjustment, also need a higher growth of world trade than is now envisaged to support their adjustment efforts. My own country exemplifies this situation. With external trade equivalent to almost 140 percent of GNP, we rely heavily on export-led growth and, hence, on growth in world trade. Domestic demand cannot provide the necessary stimulus, given the scale of the fiscal adjustment now being implemented and the high level of unemployment. Sustained growth must have for its basis a continuous rise in investment. Such investment would be facilitated by a climate that includes lower interest rates than those prevailing currently. The high level of interest rates weakens growth of output in many industrial countries and affects the prospects for world trade. Progress has been made in the coordination of policies in recent times. This is evident from the Plaza agreement and subsequent interest rate and exchange rate developments, as well as the Tokyo economic summit. Coor- dination and international surveillance require reliable and acceptable indicators of performance. The efforts of the Fund to improve the analysis of international disequilibria using relevant indicators are welcome. In reaching agreement on the indicators to be adopted, it is essential that due prominence be given to unemployment. There has been some progress on the international debt situation over the past year. The size of the problem is such that it can only be solved gradually over a period of years. I would like to compliment both the Fund and the Bank on the positive role they are playing. In particular, the increased cooperation between the two organizations is welcome. It gives confidence that an integrated and comprehensive approach will be developed to both the short-term and long-term adjustment needs of the debtor countries. The emphasis must be on growth-oriented adjustment policies. The substantial increase last year in the Bank's new loan commitments to

©International Monetary Fund. Not for Redistribution GOVERNORS FOR THE LEAGUE OF ARAB STATES 229 the heavily indebted countries to support structural and sectoral reforms augurs well for the future. It is to be hoped that this will encourage the commercial banks to play an increased role in the debt strategy. I welcome the establishment of the Structural Adjustment Facility to provide additional balance of payments assistance on concessional terms to low-income countries. I am glad to see that the policy of enlarged access to IMF resources is being continued for 1987. It is important that the safety net provided by the potential access to substantial Fund resources should remain available, given the difficult situation faced by many developing countries. There has been much discussion in the Fund over the past year on the role of the SDR and how to ensure a better distribution of SDR holdings. This is timely, since changes in the structure of the international monetary system have modified the rationale for the SDR. However, the SDR cannot play a significant role if it represents only a small and declining fraction of total reserves. Regrettably, the absence of further SDR allocations dimin- ishes its significance progressively. I would like to take this opportunity to express my regret that Mr. de Larosière is leaving the IMF in the near future. He has played a crucial role in his time at the Fund. He has been a figure who had the confidence of the developed countries and the trust of the less developed. He has not allowed his understandable preoccupations with the major international monetary issues of the past decade to obscure his concern with the problems of the smaller countries, and it can truly be said that he has left the Fund a stronger institution than he found it. ...

JOINT STATEMENT BY THE GOVERNORS OF THE FUND AND THE BANK FOR THE LEAGUE OF ARAB STATES We wish first to welcome the new President of the World Bank, Mr. Conable, to his first Annual Meetings, and, at the same time, to bid farewell to the Managing Director of the International Monetary Fund, Mr. Jacques de Larosière. We are grateful for his invaluable services to the Fund. We will miss him and wish him well in his future endeavors. We also welcome Kiribati and Poland as new members. Global economic developments in recent months have been disappointing. Growth rates in many countries have slowed down; world trade has continued to be sluggish; and primary commodity prices have deteriorated further. It is of particular concern that the outlook for developing countries has worsened, mainly as a result of declining real export earnings.

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Moreover, the failure of the external imbalances among industrial countries to decline, despite all efforts, is disturbing. Although the current recovery has reached a vulnerable stage, we believe that an economic downturn can be avoided. However, the return to satisfactory growth while maintaining the low rates of inflation will depend crucially on the economic policies pursued to address the immediate causes behind the current slowdown. It is important that the industrial countries maintain appropriate growth in aggregate demand and reduce their external imbalances. Budgetary adjustment, particularly in the United States, is essential; but the cutback in fiscal stimulus in the industrial countries as a group must be accompanied by increased private sector spending to absorb the resources released by the public sector. To improve the growth potential in industrial countries over the medium term, structural adjustment policies should be continued and strengthened. We urge the industrial countries to move ahead toward genuine multilateral surveillance. The work done by the Fund on economic indicators and in the World Economic Outlook provides a useful starting point toward that objective. However, in spite of the attempts by large industrial countries to strengthen their policy coordination, and notwithstanding the improvement in exchange rate patterns over the last year, the exchange market remains volatile. We hope the countries concerned will show the necessary political will to deal with these problems. In our view, the Fund can provide a suitable framework within which policy coordination can be carried out. What happens in the developing countries is also of concern to the industrial countries in this increasingly interdependent world. This is not only because the developing countries' debt situation has a direct impact on the international financial system, and on the world economy in general, but also because aggregate demand in developing countries is of increasing importance to the economic growth of the industrial countries. It is imperative, therefore, that high priority be given to fostering adequate growth in the developing countries. The industrial countries can facilitate this in a number of important ways, namely, 1. by sustaining their own economic growth and by pursuing appropriate policies relating to interest and exchange rates; 2. by encouraging more adequate capital flows to developing countries, both official and commercial; 3. by resisting protectionist pressures and dismantling existing trade barriers and by avoiding capital market restrictions, including in particular the freezing by major countries of other members' assets, as happened recently. The freezing of member country assets is not only against the spirit of the Articles of Agreement of the Fund, but

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is also inconsistent with the principle of free trade and capital movements. It is also in conflict with the special responsibility of major currency countries in preserving the credibility of the international financial system. At the same time, developing countries themselves need to intensify their efforts to make their economies more efficient by more effective resource allocation and by the diversification of their exports. It is encouraging that developing countries are already implementing strong policies of adjustment and growth. It is important, however, that these countries persist in their efforts and that the international environment be conducive to the success of these efforts. Without adequate financial flows and a favorable environment for exports of developing countries, the adjustment process would have to rely on further import compression, thus jeopardizing the growth prospects of these countries. It is crucial, therefore, that financial support provided to developing countries be commensurate with the financing requirements of growth-oriented adjustment. With the large drop in oil prices cutting deeply into the revenues of the oil exporting countries and the associated large income transfer to industrial countries, which in 1986 alone is estimated to reach about $60 billion, there is an added reason for the latter to step up external financial assistance so as to compensate for the inevitable reductions in such flows from the former. External financial assistance provided by a number of Arab oil exporting countries over the past many years constituted a high proportion of their GNP. The national and regional funds established by these countries have played, and continue to play, an important role in extending financial assistance to other developing countries. As a result of the plunge in oil prices, several of these countries are having to make difficult financial adjustments of their own. Moreover, for a number of indebted countries, and this includes some large ones, which have been hurt directly or indirectly by the drop in oil prices, the external financing requirements have increased considerably. The problem of international indebtedness continues to be a serious concern. In our view, a lasting solution to this problem has to be based on improved growth and export performance in indebted countries. Further- more, the management of the debt situation requires close cooperation of all the parties concerned. The indebted countries need to pursue, with persistence, the implementation of their economic reforms. The industrial countries need to sustain their economic growth, reduce trade barriers, and facilitate capital flows. The commercial banks need to extend adequate relief on existing debts and to provide new financing flows. The Fund and the World Bank should continue to perform their catalytic and financing roles and should increase their efforts in helping developing countries accelerate structural adjustment and growth and thus improve

©International Monetary Fund. Not for Redistribution 232 SUMMARY PROCEEDINGS, 1986 their debt-servicing capacity. We encourage the managements of both institutions to continue adapting their policies to deal with the evolving debt situation in the most effective manner. On access to Fund resources, it is important to maintain the flexibility of the Fund to respond to the needs of its members. Although we recognize that access limits are not targets, it is important that in actual applica- tions, countries' access to Fund resources be maintained at appropriate levels. Countries' needs and particular circumstances should be taken into consideration in determining actual access to Fund resources, both under the policy of enlarged access and for the special facilities. The demand for the compensatory financing facility may increase in the period ahead in view of the large export shortfalls experienced by many countries as a result of the worsening of the commodity price situation, as well as oil market developments. We are strongly opposed to proposals and practices that may run contrary to the basic and original purpose of this facility and undermine its role. We continue to believe that the SDR can play an important role in the international monetary system. We also take this occasion to express our disappointment that a decision to resume an SDR allocation could not be reached. . . . We are pleased to see the progress that has been made on IDA-8. We note, in particular, that it is intended to use about half of the resources generated under IDA-8 to help low-income countries in Africa and that sub-Saharan Africa is getting additional financial resources in this manner. These resources will usefully complement those available under the World Bank's Special Facility for Sub-Saharan Africa. Moreover, the Fund's newly created Structural Adjustment Facility can play an important role in assisting low-income countries in achieving their reform and growth objectives. It is encouraging that a few countries have already started to benefit from this facility and that a number of others are expected to do so in the near future. The ongoing cooperation between the Fund and the Bank in the context of this facility can contribute significantly to its effectiveness. However, it is important that the conditions associated with drawing under this facility be applied in a flexible manner and that any cross-conditionality between the Fund and the Bank be avoided. It is also essential that the resources available under this facility be augmented sufficiently by other resources if the objectives of the facility are to be fully achieved. . . .

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STATEMENT BY THE GOVERNOR OF THE BANK FOR AUSTRIA

Ferdinand Latina

It is a great pleasure and honor for me to address the Annual Meetings of the International Monetary Fund and the World Bank for the first time. I would like to join the preceding speakers in welcoming Mr. Barber B. Conable as the new President of the World Bank and in wishing him well in the difficult task he has taken up by accepting this position. I would like then to extend my sincere thanks to the U.S. Government for its hospitality, as well as my warmest welcome to the two newest members of our organizations, namely, Poland, as a rejoining member, and Kiribati. The Fund staff is to be congratulated for its medium-term assessment as set out in the World Economic Outlook. Some of us may have reservations about certain assumptions and projections, but uncertainties remain high. Recent developments in the world economy present a rather mixed picture. Counter to earlier, more optimistic expectations for 1986, output growth has slowed down in industrial countries, particularly in the United States. World trade has remained sluggish, primary commodity prices have declined steeply, whereas protectionist pressures have not abated. These developments are deplorable, as they have not allowed the alleviation of the most disturbing problems the world economy faces today: unemployment and developing countries' indebtedness. In industrial countries the present pace of expansion is just sufficient to keep unemployment figures stable at an intolerably high level. Although the recently published OECD Employment Outlook differentiates between employment prospects for individual OECD member countries, the outlook by and large remains bleak. In developing countries, growth-oriented adjustment strategies have been frustrated by weak export earnings, resulting in a further worsening of debt-export ratios. Still, certain improvements have been achieved. These include a further slowdown in inflation and lower nominal interest rates. It is, furthermore, encouraging that agreement could be reached in Punta del Este to launch a new GATT round and to refrain from taking any trade-restricting or distorting measures inconsistent with the GATT. Developments in my country have largely followed trends in industrial countries: output growth has been dampened by a weakening external demand, to probably 2 percent a year this year and in 1987. Price developments have been even more moderate than anticipated, boosting real incomes. However, domestic demand, particularly private consumption, has not yet fully reflected this increase in purchasing power. The current ac-

©International Monetary Fund. Not for Redistribution 234 SUMMARY PROCEEDINGS, 1986 count is expected to remain in equilibrium or show a slight surplus. The Austrian schilling has appreciated markedly, in line with the strongest European currencies. The world economy is also threatened by financial and economic imbalances within industrial countries. The U.S. current account deficit and the still persistent uncertainties regarding U.S. fiscal policy are major factors. They have contributed to intensifying protectionist pressures, which, however, the U.S. Administration by and large has successfully resisted so far. But this phenomenon is not at all confined to the United States. If we were not to succeed in warding off these pressures—and I would like to stress once again the encouraging prospects offered by the Punta del Este meeting—we could easily find ourselves involved in a trade war with very destructive effects on the world economy. Policy action, therefore, is needed to enhance the chance for durable and noninflationary growth. One key element of this strategy is a correction of the fiscal and external deficits of the U.S. economy. But it is clear that this can only be achieved by mutually supportive and consistent policies of the major industrial countries. In this context, the Fund indeed has to play an important role within the framework of its surveillance function by encouraging member countries to choose the right policies. However, we should not overlook the fact that without the full support of its membership the Fund cannot succeed in fulfilling this important task. With regard to the international monetary system as discussed in the reports of the Group of Ten and the Group of Twenty-Four, I want to encourage the Fund's Executive Board to continue with its deliberations on possible improvements of the system, particularly with respect to the volatility of exchange rates. Given a growing international interdependence, a closer convergence of the underlying fundamentals is certainly one of the preconditions for improvement. But whatever the findings will be, in the very end the chances for improving the international monetary system will depend on the political will and on the full cooperation of all member countries to transform the new findings into reality. In this context, I am disappointed that once again no agreement on a further allocation of SDRs has been reached because of the persisting doubts of some important members regarding the role of the SDR in our present multireserve currency system. I would, therefore, like to express my hope that the ongoing comprehensive examination of the role of the SDR by the Fund's Executive Board will lead to a solution that will be acceptable to all members by making the SDR a more usable reserve instrument. This would consequently lead to a further allocation. Such a

©International Monetary Fund. Not for Redistribution GOVERNOR FOR AUSTRIA 235 decision would not only correspond to long-term global needs but would also reduce member countries' dependence on borrowed reserves. The continuation of the Fund's policy of enlarged access for another year, which has now been agreed on, is clearly justified under prevailing circumstances and will sustain confidence in the international monetary system. The cooperation of the Bretton Woods institutions has considerably improved over the last year. The joint approach of the Bank and the Fund to formulate policy framework papers for the Structural Adjustment Facility (SAP) indicates the direction for further steps of cooperation. The Fund and the World Bank have played a major role in helping developing countries to overcome their financial difficulties. They have furthermore begun to respond to Secretary Baker's proposition that growth-oriented adjustment policies are essential to finding long-term solutions to the developing countries' problems. Only joint and decisive efforts of the Fund and the Bank, as well as of governments and the banking community, will bring a durable solution to the debt problem. The interrelation between monetary and fiscal issues on the one side and developmental issues on the other side stresses the need for closer cooperation in the regions that deserve our attention most. Therefore, Austria welcomes the importance given to sub-Saharan Africa within the SAP of the Fund. Preparing the ground for urgent action in favor of sub-Saharan Africa, the Special Facility, to which Austria contributes, was introduced at a time when several African countries undertook major reform programs. Considering the fast increase of Africa's population, further steps will be required to provide the region's people, in particular the African youth, with adequate employment opportunities. The development of agriculture and agro-industries deserves priority; however, to cope with the future supply of labor, jobs in other sectors will be required. In this context, I particularly welcome IFC's initiatives of placing more emphasis on poorer or less developed member countries and of launching the Africa Project Development Facility. When discussing adjustment programs and structural loans for Africa, one has to keep in mind that—like the development of other regions— Africa's development will require project financing, too. Besides expenditure in production-oriented projects and general infrastructure, investment in the environment, in particular reforestation, will be required in order to provide future generations with a sound basis for living. . . . In concluding, I would like to reiterate the importance of further improvements in cooperation and policy coordination between developing countries, multilateral institutions, bilateral donors, and financiers in or-

©International Monetary Fund. Not for Redistribution 236 SUMMARY PROCEEDINGS, 1986 der to mobilize adequate domestic and foreign development resources to meet the formidable challenges lying ahead of us.

STATEMENT BY THE GOVERNOR OF THE BANK FOR FIJI

Mosese Qionibaravi

I wish to join my fellow Governors in congratulating the new President of the World Bank, Mr. Barber Conable. His appointment comes at a time of continuing difficulty and uncertainty in the world economy. I have no doubt that Mr. Conable's wide experience and leadership will guide us through these troubled times. At the same time, I deeply regret the decision of the Managing Director of the International Monetary Fund, Mr. de Larosière, to retire in the near future. Under his leadership, the Fund has played a very effective role in the international adjustment process. The Managing Director's role in managing the debt crisis of the 1980s has been one of the outstanding contributions he has made to the international financial system. I would also like to welcome the new members, Kiribati and Poland, to the International Monetary Fund and the World Bank. I thank the President of the United States for his words of welcome. I also thank the Bank and the Fund for the excellent arrangements for our meetings this week. Since we last met, the world economy and its outlook, as surveyed by the Bank and Fund staffs, leave little room for comfort. Global economic activity suffered a major setback from the widely shared optimism of our last meeting. The prospects for a sustained and balanced recovery of economic activity are underlined by a number of uncertainties. The risk of a further slowdown in the growth of industrial countries is quite real, particularly in the light of the expected fiscal retrenchment in the United States, uncertainties surrounding interest and exchange rate developments, the continuing fragility of the external positions of a number of indebted countries, and the intensifying protectionist pressures. In view of this difficult situation and the uncertain prospects, I believe that a coordinated policy action is needed by the international community. Given the predominant impact of the policies of the industrial countries on the world economy, greater policy coordination among these countries is needed to promote sustained and balanced growth of the world economy. In this regard, I welcome the current discussions within the Fund to em-

©International Monetary Fund. Not for Redistribution GOVERNOR FOR FIJI 237 ploy economic indicators that would signal the need for policy coordination, particularly among the large industrial countries. At this juncture, I would like to note that the disappointing world economic prospects can be improved somewhat if the fiscal retrenchment in the United States can be offset through fiscal and monetary stimulus in those countries that are in a position to undertake expansionary policies.

The developing countries are facing worse prospects, both in the short and medium term. The outlook for commodity prices is bleak, with the terms of trade expected to be 18V2 percentage points below the level of last year. This is expected to fall by a further 7V2 percent in 1987. This trend needs to be reversed if the global debt problems are to be resolved. The importance of vigorous economic growth in the industrial countries cannot be overstressed, given the interdependence in the world economy; but this is not enough. We need to create opportunities for increasing exports from developing countries by reversing the protectionist measures in industrial countries. Efforts on the part of the industrial countries alone will not steer the developing countries out of their difficulties. Developing countries need to reduce their dependence on foreign capital through greater resource mobilization, through changes in domestic economic and financial policies that increase domestic savings, attract foreign capital, and prevent capital flight. Improvements in domestic agricultural policies and production incentives are also necessary to encourage efficiency and economic growth.

I now come to the role that the Bank and the Fund can play in the adjustment process, given the current and expected world economic climate. The continuing difficult debt situation and the low level of export growth of the developing countries suggest that both the Bank and the Fund will have a special role to play. In this connection, it is disconcerting to note that net lending of the Bank and the Fund in real terms has fallen in recent times. For these institutions to play a more meaningful role in the adjustment and growth process, I believe that action is needed in the following four areas. First, adequate funding through the Ninth General Review of Quotas in the Fund and a general capital increase in the Bank cannot be overstressed. Second, access to the resources of these institutions must be commensurate with the development and adjustment needs of their member countries. Third, a more flexible approach to conditionality is needed so that the long-term viability of adjustment programs is considered against the political and social realities of member countries. Finally, because of the reluctance of the commercial banks to play their part in the global debt strategy and their participation in the Baker initiative, the Bank and the Fund must play a bigger role in coordinating the flow of resources to capital-importing countries.

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I note with great disappointment that the required support has not been forthcoming to make a proposal for an allocation of SDRs in the fifth basic period. An important aim under the Fund's Articles of Agreement is to make the SDR a principal reserve asset in the international monetary system. This objective has been severely frustrated by the absence of an allocation in the fourth basic period and the continuing lack of progress toward a convergence on possible allocations of SDRs in the fifth basic period. I believe that the criteria for an allocation have been met. Data to date show that between December 1984 and May 1986 total non-gold reserves declined from SDR 406 billion to SDR 399 billion. Further, the ratio of non-gold reserves to imports also declined for all countries taken together. Demand for reserves is expected to grow further against the 7.6 percent annual growth in imports projected for 1988-91. An allocation of SDRs at this time not only will assist in acting as a safety net against unforeseen circumstances, but also will reduce the heavy reliance on borrowed reserves by a number of member countries and soften the impact of deflationary policies in many others. I, therefore, strongly support a reasonable SDR allocation, especially in the present environment of low inflation, depressed economic activity, and restricted access to capital markets for some countries. I wish to make a few remarks on the technical assistance provided by the Fund. The new and smaller member countries of the Fund have looked for technical assistance from the Fund in the past and continue to do so now where they find there is such a need. Such assistance from the Fund has been of great value to these countries, including ours. In recent years, however, offers of technical assistance have been less forthcoming. Since technical assistance from the Fund has been a major benefit for many smaller countries, measures to reduce its technical assistance should be resisted by the Fund. . . .

STATEMENT BY THE GOVERNOR OF THE FUND AND THE BANK FOR THE LAO PEOPLE'S DEMOCRATIC REPUBLIC

Kikham Vongsay

I consider it a great personal honor to represent the Government of the Lao People's Democratic Republic at the Forty-First Annual Meetings of the Boards of Governors of the International Monetary Fund and the World Bank. On behalf of the Lao delegation, I wish to congratulate the President of the World Bank, the Managing Director of the International Monetary

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Fund, their associates, and the authorities of the host country for the excellent arrangements made for this conference. My delegation would also like to take this opportunity to extend a warm welcome to the delegations of the friendly countries that have become full members of our two institutions. Finally, I would like to welcome the new President of the World Bank, who is taking part for the first time in the Annual Meetings of the Boards of Governors of the World Bank and the International Monetary Fund. After almost two years of strong expansion, economic growth slowed in the industrial countries in 1985, affecting world trade. Since the economic performance of the developing countries depends in large measure on general economic trends, there was a significant reduction in the prices of primary commodities and a pronounced slackening in the expansion of world trade. With economic activity slowing in the industrial countries, the growth of the world economy, which had registered almost 5 percent in 1984, dropped to less than 3 percent. The impact of this on the economies of the developing countries was aggravated by the deterioration of their terms of trade, itself the consequence of the lower raw materials prices. The slackness of the developing countries' export markets affected their domestic economic activity. Quite logically, efforts to exploit natural resources suffered from these unfavorable developments, with the most severe impact being felt by the oil exporting and commodity exporting countries. In addition, the debt problems of many developing countries and the budgetary austerity which prevails in a number of industrial countries are increasing the uncertainties weighing on development finance. In the first quarter of 1986 there were unmistakable signs of improvement in the international economic environment; stronger-than-expected world growth, inflation-related factors, and the downward trends of interest rates and petroleum prices have been confirmed, and there has recently been a correction of exchange rates from levels that had contributed to disequilibrium—such rates now more accurately reflecting economic realities. While unemployment remains high in most industrial countries, a coordinated effort will be required in order to strengthen medium-term growth without inducing a new surge of inflation. I would now like to turn to the development strategy and plans that have been implemented in the Lao People's Democratic Republic in 1985. We are pleased to report that the past year has been marked by a number of successes, despite the enormous difficulties resulting from natural

©International Monetary Fund. Not for Redistribution 240 SUMMARY PROCEEDINGS, 1986 disasters, and especially from the pressures exerted on and the subversion, aggression, and sabotage against our country perpetrated by the enemies of the Lao Revolution. In 1985, we completed the implementation of the fifth year of our first Five-Year Plan, the initial results of which have been encouraging. National income rose by 8 percent over the 1984 level, while agricultural production rose by 8 percent, industrial production by 55 percent, and export receipts by 20 percent. These successes are due to the determined efforts of our people, to internal reorganization, and to fruitful cooperation with brother socialist countries, friendly countries, and international organizations, including the World Bank and the International Monetary Fund. On behalf of the Lao people and Government, I would like to take this opportunity to extend my sincere thanks and profound gratitude to the Bank and the Fund for their valuable and beneficial assistance. The results of implementing our first Five-Year Plan for 1981-85 are relatively satisfactory. This year, the Government of the Lao People's Democratic Republic is beginning the execution of the second Five-Year Plan, covering 1986-90, taking as its basis the physical and technical infrastructure established under the first Plan. But our country is still experiencing innumerable difficulties, princi- pally in the areas of basic construction in various economic sectors, including transportation, communications, and industry, which normally require sizable investment. For this reason, our country requires substantial amounts of capital both for improving and constructing roads, promoting agriculture, intensifying the exploitation of forest resources with a view to increasing export- oriented production, and developing hydroelectric potential so as to promote industrialization. In this regard, the Lao Government is counting on increased close cooperation with all the development finance institutions, including the World Bank and the International Monetary Fund. . . . As regards the future role of the International Monetary Fund, we wish to propose the following: —In order to promote well-conceived adjustment and lasting growth, the Fund should continue to cooperate with its member countries in determining the optimum mixture of adjustment and financing to be used within the context of programs designed to solidify the bases for lasting growth. —The Fund should play an important role in assisting its member countries in restoring the conditions needed for economic growth and pros-

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perity in the longer term, encouraging adjustment efforts while providing its member countries with greater assistance, to meet needs with regard to the balance of payments, and to address the particular circumstances of each member country. —We firmly support the Fund's efforts to establish the Structural Ad- justment Facility, which will make it possible to provide balance of payments assistance to low-income member countries, so as to facilitate their implementation of a structural adjustment program and macroeconomic policy aimed at increasing their economic growth and improving their balance of payments. In conclusion, I would like to extend my warmest congratulations to the President of the World Bank and the Managing Director of the Interna- tional Monetary Fund for the outstanding manner in which they are carrying out their duties, and to wish the greatest success to the work of these Forty-First Annual Meetings.

STATEMENT BY THE GOVERNOR OF THE FUND AND THE BANK FOR MALTA

Wistin Abela The two underlying themes of the world economic situation in recent years have been the fragility of the recovery from the recession of 1980-82 and the unevenness of this recovery. With regard to the first theme, in recent months there have been sharp differences of opinion. Some authoritative voices have expressed fears of another impending recession; others claim that, after the short pause in the first half of this year, the world economy is set for a period of stable growth. The Fund itself seems to take a middle view between these two extremes but has recently revised downward its projections for growth in the industrial world. There is no doubt that output growth in the first six months of 1986 has been unexpectedly sluggish, and this has dented in no small way the relative optimism prevailing until a few months ago. As to the second theme, there remain serious reasons for anxiety about the un- balanced nature of the recovery, not only among and within the industrial countries but, above all, between developed and developing countries. The general failure of the recovery in the developed countries in recent years to relieve the critical situation prevailing in much of the developing world has indeed been a cause of great concern. The bleaker economic outlook, the steep fall in the prices of internationally traded commodities, and the decline in new financial flows to the developing countries have ren-

©International Monetary Fund. Not for Redistribution 242 SUMMARY PROCEEDINGS, 1986 dered these countries' plea even more desperate. Indeed, these adversities have all compounded doubts about the likelihood that growth in the industrial countries will be transmitted, rapidly and effectively, to the developing world. Although the two themes of fragility and unevenness in the recovery have been with us for the past three years, this year has also seen some important new developments. One has been the collapse of oil prices, the immediate effect of which has been a massive transfer of income from the oil exporting countries to the industrial countries. The other has been in the realm of policy and consists in the recognition by the leading industrial countries of the need for more active management of the world economy to achieve stable economic growth. These changed perceptions have so far led to a coordinated realignment in the exchange rates of the major currencies, a reduction in the general level of interest rates, and some progress toward recognizing the importance of the role of surveillance by the Fund. The developing country debt problem has also benefited from a more active involvement by the governments of the major countries and, in particular, from a recognition that official financing needs to be administered with greater flexibility and on a larger scale. More attention, too, has been paid to the acute problems of sub-Saharan Africa and, more generally, to questions of how developing country adjustments can be made more growth oriented. Although it is still too early to say whether these changes in attitudes will be adequately translated into effective policies that will be commensurate with the scale of the problems besetting the world, they are nonetheless welcome. It is imperative, however, that they should be so translated. For despite the opportunities for greater growth presented by lower oil prices and falling inflation, the possibility of the world economy sliding into another period of recession definitely exists. If this should happen, the outlook for many developing countries, which is already poor—especially on account of the adverse trends in international trade—would become bleak indeed. Macroeconomic policy coordination among the industrial countries and measures to support growth-oriented adjustment in the developing countries will avail little if nothing is done to roll back the tide of protectionism. At our meeting last year, we expressed fears of an impending trade war between the world's major economies. While this danger, which has not yet been completely overcome, must be resisted at all cost, we must not underestimate the lesser evil of "creeping" protectionism either. In this respect, the latest ministerial declaration on the Uruguay Round of multilateral trade negotiations is most welcome. It is now hoped that unified action on a broad front would produce concrete results in the shortest possible time, thus paving the way for a more open multilateral trading system.

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Growth-oriented adjustment is also implausible without greater external support. The weakness of commodity prices over the last few years, even in the face of the recovery, coupled with the current somewhat poor outlook for world growth, points to the need for greater realism in expectations of what the developing countries can themselves achieve through export growth.

In this context, we feel that the external financing requirements of the developing countries are being seriously understated in most scenarios. Moreover, given the difficulties of achieving an early revival of private financial flows, a greater responsibility falls on official flows. Thus, while the recent commitment to increase finance for the multilateral development banks is welcome, a more credible policy should also include the provision of more resources through the Fund and the World Bank. There is an urgent need not only to reactivate discussions on SDR allocations but to explore ways and means as to how their distribution could be directed to those countries most in need. Preparations should also be taken in hand for the Ninth Review of Quotas, so that a decision on quota increases can be taken by next year's Annual Meetings. If necessary, new credit lines should also be arranged, so that when existing borrowing arrangements run out, the Fund will still be in a position to meet the growing demands on its resources. Furthermore, a substantial capital increase for the World Bank and a strong replenishment of IDA are also called for.

Complementing the resource flows channeled through the Fund and the Bank, there should be increases in bilateral official development assistance. These should reflect the windfall gains made by the industrial countries from the decline in commodity prices and the aid-giving capabilities of countries with large surplus savings.

However, it is not just the quantum of aid that is important, but also the quality. The recent steps taken by the Fund and the Bank to implement U.S. Treasury Secretary Baker's initiative launched at last year's Meetings in Seoul are welcome as far as they go, but there is a need to achieve a better balance between adjustment and financing in all Fund-supported programs. To this end, we feel the Fund should review its conditionally guidelines, with a view to ensuring greater growth orientation in such programs. Furthermore, current access limits under the enlarged access policy should be maintained at least up to the Ninth Quota Review, and the compensatory financing facility liberalized further. We also feel that resources supplementary to those available under the Structural Adjustment Facility (SAP) should be provided, so as to ensure larger financial support to low-income countries. It is important also to avoid linkages between the

©International Monetary Fund. Not for Redistribution 244 SUMMARY PROCEEDINGS, 1986 use of SAP resources and drawings under the normal facilities of the Fund, as well as cross-conditionality between the use of Fund facilities and Bank loans.

Perhaps the greatest challenge facing the Fund is not the provision of resources to developing and indebted countries; rather, it may be the exercise of effective surveillance over the policies of the major industrial countries, so as to ensure greater policy coordination between them. We are glad to note, in this respect, that following the recommendations made last year in the report of the Group of Ten on the functioning of the international monetary system, the Fund has begun to devote a separate chapter of its World Economic Outlook to the international repercussions of the national policies of the industrial countries. For policy coordination and Fund surveillance to be effective, however, a number of questions still need to be resolved. For instance, we are aware that there is still profound disagreement among major countries about the appropriate indicators to be used for making forecasts and recommending policy changes. Neverthe- less, the active participation of the Fund, through its Managing Director, in the Group of Seven and the Group of Five discussions should assist in the formulation of a common set of indicators. It should ensure also the adoption of policies that will enhance the prospects for world growth and that take into account the interests of the rest of the world.

The attention of the international community—and of the Fund and Bank—is focused at the moment on three main groups of countries. These are the most heavily indebted countries, the very low-income countries (especially those of sub-Saharan Africa), and the so-called blend countries of Asia, in which live the largest proportion of the world's poor. This is understandable in the circumstances, but I should like, before concluding, to put in a word on behalf of my own country, which falls into none of these three categories. For Malta, too, has been adversely affected by the recession and has yet to benefit from the recovery—especially on the employment front. One initiative which my Government had hoped would be of particular benefit to Malta was the establishment of the Multilateral In- vestment Guarantee Agency (MIGA) which, we think, should encourage more flows of private investment to developing countries. We note with satisfaction that considerable progress has been made toward the realization of this new institution. . . .

Finally, I wish to extend a warm welcome to the two new members of the Fund and the Bank, Poland and Kiribati.

©International Monetary Fund. Not for Redistribution GOVERNOR FOR PARAGUAY 245

STATEMENT BY THE GOVERNOR OF THE BANK FOR PARAGUAY

Cesar Romeo Acosta On behalf of the Government of the Republic of Paraguay we have the honor to convey our most cordial and friendly greetings to the Chairman of these Annual Meetings, to the President and Executive Board of the World Bank, to the Managing Director and Executive Board of the International Monetary Fund, and to the Governors and Delegates of the member countries and participating institutions. The Forty-First Joint Annual Meetings furnish a fresh opportunity to consider the factors that hamper, first, the implementation of enlarged technical and financial assistance policies and, second, the strengthening of the multilateral institutions and thereby access to their resources by the developing countries on more flexible terms. The new efforts accomplished to provide these institutions with instruments for expanding their financing programs have achieved some success; however, some important issues remain for which short-term solutions are needed in order to achieve solid progress in assistance to adjustment programs that require strong financial support. . . . Turning to the world economic environment and the prevailing international financial conditions, we consider that trade protectionism should be abolished and appropriate interest rates established in order to improve balance of payments and current account situations, and to increase external debt service capacity. The prospect of sluggish economic growth in the industrial countries in the next few years is cause for concern because of the adverse repercussions it will have on the developing countries in the form of deferred investment and loan decisions. With regard to the role of the International Monetary Fund in supervis- ing the exchange system, we wish to express our concern about the short- term volatility of exchange rates. These fluctuations create comparative disadvantages, at both the domestic and the international levels, which can cause investments in the export sector to be postponed, especially in those developing countries that lack exchange risk coverage mechanisms. This adverse situation gives rise to balance of payments disequilibria, with repercussions on the world economy, and is moreover exacerbated by the economic policies that the industrial countries have been following. There is therefore a need for greater coordination of policies, with strengthened supervision by the Fund. The allocation of SDKs is a top-priority necessity to help resolve balance of payments problems. Proposals and alternatives need to be studied as a

©International Monetary Fund. Not for Redistribution 246 SUMMARY PROCEEDINGS, 1986 step toward the prompt installation of appropriate payment mechanisms to deal with the difficult cyclical situation of the countries that are implementing adjustment programs. With the same purpose, it is essential that the effectiveness of the extended facilities be prolonged, and access limits held to at least their present levels. The Fund's liquidity position is comfortable, and the introduction of restrictions is not justified. The Eighth General Review of Quotas and the borrowing agreements signed in 1984, together with the growing volume of repurchases, have resulted in a favorable development in the Fund's liquidity position. The lower access limits provided for in the use of the Fund's various facilities also help to explain this strengthened overall liquidity. The balance of repurchases and new disbursements indicates that in 1986 and 1987 repurchases will exceed disbursements, so that the Fund's liquidity position will remain strong. The reduction in the interest rate from 7.87 to 7.0 percent in May 1986 has helped the member countries that use the Fund's resources. Mainte- nance of a moderate rate will help to smooth out the social cost of the adjustment programs. It can also be expected that, in its capacity of a multilateral institution, the Fund will be called upon to perform an important complementary role in the solution of the debt crisis. In view of the uncertain world economic prospects and the balance of payments situation, a number of countries, particularly the debtor countries, will see their external financing requirements increase. Access to the Fund's special facilities should therefore be widened and become automatic. Also, an additional special facility should be established to compensate for interest rate increases that affect the payments balances of debtor countries. I should like now to make a few remarks concerning the recent economic situation and prospects of my own country. As in most countries with a limited market, particularly those which, like Paraguay, are eminently agricultural and exporters of raw materials and semifinished products, Para- guay's economy is influenced to a significant degree by the aggressive protection and subsidy policies that are being increasingly applied by the industrial countries and their distorting impact on world trade. In the face of this situation of uncertainty and despite the difficulties of applying corrective measures to its economy, Paraguay has been making very large efforts to raise and consolidate the quality of life of its people. The economic growth experienced in the 1970s was succeeded by a sudden period of stagnation in 1982 and 1983, followed by partial recovery of 3.1 percent in 1984, 4 percent in 1985, and an estimated 3 percent in 1986. Domestic prices have been subjected to pressures due to an expanded money supply resulting from the increase in public current and capital expenditures and the difficulty of compensating for these through budgeted

©International Monetary Fund. Not for Redistribution GOVERNOR FOR PARAGUAY 247 fiscal resources. The reduction in the supply of goods and services depressed aggregate domestic demand. The deterioration in import capacity that accompanied the rise in domestic liquidity boosted the annual inflation rate from 25 percent in 1985 to 35 percent in 1986. The international trade prices index has shown signs of deterioration in recent years, especially 1986. The prices of raw materials are falling and those of imported products are rising. The export/import ratio was 65 percent in 1984 and 69 percent in 1985; it is estimated at 51 percent in 1986. Moreover, external capital inflows were lower and the balance of payments situation unfavorable during those years; the deficits were financed by drawing on international monetary reserves. On July 31, 1986, net international monetary reserves amounted to $357.4 million, a fall of 24 percent from their December 31, 1985 level. These reserves represented nine months of imports. They comprised $279.4 million in transferable foreign exchange and $78 million in non- transferable external holdings. External payment obligations have been met regularly out of export earnings and other foreign exchange sources and in part out of the drawdown of international reserves. Paraguay has not sought external balance of payments financing. Paraguay's public external debt will reach $1,725 million in December 1986, and its private external debt, $25 million. Debt service will reach $185 million, compared with $175.5 million in 1985. Undisbursed loans totaled $671.5 million as of June 30, 1986. Paraguay's economic recovery prospects depend not only on the domestic effort put out by the Government, but also, to a substantial degree, on the opening up and viability of the external market, which is currently beset by considerable uncertainty. It is to be expected, however, that international cooperation can be strengthened and consolidated through appropriate measures and instruments to safeguard world economic equilibrium and extend more equitable treatment to the developing countries. In this spirit the Government of Paraguay has taken a series of measures to help strengthen the economy, in the form of a program designed to increase production, reduce the fiscal deficit, rationalize domestic credit, bring inflation under control, increase savings and productive investment, protect wages and salaries, support exports, bring the balance of payments into equilibrium, and increase external investment. Through these measures the Government hopes to boost the economic growth rate, raise real incomes, and correct external disequilibria, reducing international trade deficits and strengthening external capital inflows. We wish to stress the decisive role that falls to international financial cooperation, particularly to the Bank and the Fund, in accomplishing these objectives. We are therefore confident that we shall continue to re-

©International Monetary Fund. Not for Redistribution 248 SUMMARY PROCEEDINGS, 1986 ceive a timely and adequate flow of resources to enable us to carry out the necessary investments to propel the country toward more ambitious goals of development and well-being. The delegation of Paraguay expresses its appreciation to the people and Government of the United States of America for their magnificent hospitality and the efficiency they have brought to bear for the successful organization of these meetings. We have pleasure in extending a cordial welcome to Mr. Barber Conable, the distinguished President of the World Bank, and in wishing him every success at the head of our prestigious international financial organization, whose mission is the progress and well-being of our peoples.

STATEMENT BY THE GOVERNOR OF THE BANK FOR THAILAND

Panas Simasathien

On behalf of the Government of the Kingdom of Thailand and myself, permit me to join my fellow Governors in expressing our warmest welcome to Mr. Conable as President of the World Bank. I am confident that he will be able to lead the World Bank in our common quest of accelerating the pace and improving the quality of socioeconomic development for the developing world. At this time, I wish to express our deep appreciation and sincere regret at the great loss of Mr. de Larosière whose stewardship of the Fund in the past eight years in the most trying circumstances has been most exemplary. We will surely miss him and his wise counsel. I wish to also welcome Kiribati and Poland as our two newest members and look forward to their active participation in our two institutions. Permit me also to express our warmest appreciation for the visionary address of President Reagan and his call for economic freedom for all countries. It is most heartening to note his announcement to continue the fight against protectionism which must begin first in the United States and the industrial countries as well as in the developing countries. We shall await most eagerly the lead of the United States in concrete action toward this end. It is imperative that these noble ideals be transmitted into immediate concrete actions. We are gathered once again to review the prospects for the world economy and to forecast as well as reinforce new directions to cope with the problem of developmental growth and the continuing problem of bringing

©International Monetary Fund. Not for Redistribution GOVERNOR FOR THAILAND 249 about financial and monetary stability in the world economic arena. We are saddened by the fact that economic output in major industrial countries grew at a very moderate pace. World trade and terms of trade for developing countries, although improved, remain at stagnant levels. In- debtedness, a critical issue four years ago, continues to be a primary concern. Although we are heartened by some significant progress as enumer- ated by Mr. de Larosière in his address to this assembly, much more remains to be done. The Baker initiative launched in Seoul continues to be a viable framework from which it is possible to see some medium- and long-term relief, provided that the major industrial countries, the commercial banks, and the World Bank and the Fund can cooperate meaningfully to reduce the staggering debt burden of developing countries in a meaningful way. While the outlook may seem more optimistic than last year, for many of us in the developing countries who are undergoing necessary yet very painful structural readjustments, the world economy has turned increasingly more hostile. The reduction in interest rates and lowering of oil prices had some positive effects for developing oil importing countries; however, at the same time declining commodity prices, increasing protectionism, and the continuing unwillingness of developed countries and commercial banks to provide increased financial resources at better terms and lower official development assistance levels have combined to merely keep the developing countries at a stationary level. Growth in the developing countries is definitely the key to the solution and no matter how much we of the developing countries work to attempt to actively mobilize and use our own domestic resources rather than relying on external flows of capital, the debt overhang will remain the albatross for many years to come. . . . With regard to Fund policy issues, the first I would like to consider is the access limits. It is regrettable that a decision has been taken to maintain the access limits under the enlarged access policy, especially when the financing requirements of member countries are on an increasing trend. Considering the comfortable liquidity position of the Fund even with the present limits, I believe that such a decision would be sending the wrong signal to financial markets and would undermine the Fund's policy of playing a catalytic role. It is also rather unfortunate that the average amount actually approved has been curtailed to less than one half of the access limits whereas the conditionally has been tightened. I am convinced that this is the reason why most of the member countries shy away from turning to the Fund for financial assistance at the early stage of their problems, thus making it more complicated both for the Fund and the member to cure the subsequently serious case. I, therefore, urge the Fund to be more realistic on this matter. As for the special facilities, I feel that with continuing low prices of primary commodities, the amount under the

©International Monetary Fund. Not for Redistribution 250 SUMMARY PROCEEDINGS, 1986 compensatory financing facility should be approved with less conditionality, especially the upper tranche of that facility. Second, on the allocation of SDKs, it is disappointing that the fourth basic period for the allocation of SDKs is coming to an end with no allocation despite the continuing support from the majority of members. How- ever, I wish to emphasize that although reserves can be supplied through some other mechanism, most of them are borrowed reserves and, for a large part of member countries, more difficult to acquire owing to a lack of creditworthiness coupled with less lending by commercial banks. Consid- ering the projections of the World Economic Outlook, which imply a likely expansion in the long-term global need for reserves, we urge that a reasonable amount of SDKs be allocated during the fifth basic period which be- gins next January.

STATEMENT BY THE GOVERNOR OF THE FUND FOR THE UNITED KINGDOM

Nigel Lawson Before I enter into the main body of my speech, I would like to pay a very brief tribute to the Fund's Managing Director, who very sadly has announced his impending retirement. We shall, of course, have many occasions over the next few days to pay fuller tributes to him, so I shall be brief on this occasion. But I am sure that my colleagues in the European Com- munity would wish to take this first opportunity to register our enormous admiration for him during his tenure of office; for the way he has tackled tasks, which I believe have been tougher and more difficult than any of his predecessors have ever had to tackle; for the leadership he has given to the whole of the free world in tackling these problems; and our gratitude to him for setting us on the right path to a successful resolution of the many problems that still remain. I have the honor of addressing this meeting on behalf of the member states of the Community, which, since the start of the year, includes Spain and Portugal. Economic activity in most industrial countries, particularly industrial production, has been somewhat sluggish since the final quarter of 1985. While this is disappointing, it is likely to prove a transitional phase as the world economy adjusts to the major shifts in relative prices which have occurred over the past year or so. The price of oil on world markets is now about half its level of a year ago, the prices of many other primary products have weakened, and there has been a substantial realignment of exchange rates between the major currencies—the exchange rate of the U.S. dollar has, for instance, fallen by about a fifth in effective

©International Monetary Fund. Not for Redistribution GOVERNOR FOR UNITED KINGDOM 251 terms since the Plaza agreement last September. These developments have contributed to a further fall in inflation—to its lowest rate in 20 years— and have facilitated a general reduction in interest rates, although they are still high in real terms. While the adverse impact of the fall in the oil price on world trade and demand has been rapid, the favorable effect of the increase in oil consuming countries' real income is taking time to feed through into higher domestic demand. The depreciation of the dollar is also altering the balance of domestic and external demand in the economies of the countries whose currencies have appreciated, as well as in the United States.

The delay before the full effects on output of lower oil prices become apparent is not unprecedented—the response of output to the oil price increases in 1973-74 and 1979 also took some time to take effect. There is, therefore, a reasonable expectation that economic activity in industrial countries will pick up as domestic demand responds to lower nominal interest rates and higher real incomes. And, indeed, signs of a pickup of activity in a number of European countries are apparent.

However, some risks remain in the outlook. Perhaps foremost among them are the very large current account imbalances in some of the major industrial countries—which are incompatible with the orderly expansion of the world economy and are unsustainable over the medium term—as well as the protectionist sentiment caused by these and other tensions in the world trading system. But exchange rates now better reflect economic fundamentals, though we must accept that current account positions will take rather longer to adjust.

We believe that the industrial countries should continue to pursue policies that provide the sound financial framework essential to achieving sustained noninflationary growth and expanding trade. In particular, monetary policy in all countries must be committed to preventing a resurgence of inflation. But in many countries government deficits need to be reduced further to permit a lasting reduction in real interest rates. The United States has a major role to play here because of the size of the Federal Gov- ernment deficit and because of the contribution that its correction can make to reducing current account imbalances. It is crucial that Japan should make its contribution by implementing rapidly the recommendations of the Maekawa Commission designed to reduce the export-oriented nature of the Japanese economy and to increase its openness to imports, thus sustaining a faster rise in domestic demand. The Community countries are also aware of the need to contribute to the correction of existing imbalances and to the maintenance of sustained growth of world demand and trade.

©International Monetary Fund. Not for Redistribution 252 SUMMARY PROCEEDINGS, 1986

Unemployment remains a major problem which is particularly serious in the member countries of the European Community. The European Coun- cil at its meeting in The Hague last June confirmed the necessity of continuing macroeconomic and microeconomic policies aimed at structural improvement, in combination with additional efforts to generate gainful employment. The Community countries are committed to continue their efforts to increase the flexibility of their economies and thereby their capacity for domestically generated growth. Structural rigidities in our economies have to be tackled, and the evolution of real incomes and costs in the member states of the Community must be consistent with the goal of reducing unemployment. Some progress has been made in recent years, but much remains to be done. The next few years provide a major opportunity for advance.

Despite the success of the major industrial countries in reducing inflation, substantial current account imbalances have persisted, in large part through failure to take account of the international repercussions of the mix of domestic policies.

The EC member states welcome the steps that have been taken over the past year to improve international policy coordination. They also welcome the decisions which have been taken at the recent meetings of the Interim Committee and at the Tokyo summit in May 1986 for strengthening Fund surveillance and improving its multilateral setting. The Community countries consider that the special chapter in the World Economic Outlook in which the policies of the large countries are analyzed on the basis of quantitative indicators offers an encouraging starting point for regular discussions in the framework of the Fund. This should help improve understanding of the international dimension of domestic decisions, thereby providing essential background for policy discussions aimed at correcting imbalances and making the exchange rates of the main currencies more stable. Such steps should contribute to the improvement of the functioning of the international monetary system, which remains one of our main tasks.

Over the last year changes in the world economy have probably had, on balance, a beneficial effect on the debt problem, although the situation of some countries has seriously deteriorated. The fall in the dollar has less- ened the effective debt burden of the many debtors having a large share of their debt denominated in dollars. Lower interest rates have reduced the cost of servicing debt, although real rates remain at high levels. The reduction in oil prices has helped many developing countries, although it is having very serious implications for those debtors relying on oil exports; the situation of a number of them has been worsened by the fall in export prices.

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These developments over the past year—particularly the fall in oil prices—underline the fact that the case-by-case approach to the debt problem is the most appropriate strategy; each country faces different problems and needs to look for different solutions. They also reinforce the need to make changes to structural policies designed to foster balanced growth and a sustainable external position, the central planks of any realistic long-term solution to individual countries' debt problems. Major oil producing debtors, in particular, need to undertake a comprehensive adjustment to lower oil prices, since their economic development will have to become less dependent on the oil sector. The EC countries recognize that structural changes will be neither easy nor painless, and consider that the international financial institutions should strengthen their vital role in assisting countries to develop structural reform policies appropriate to their individual situations, and in helping to mobilize financial resources to support them. In particular, the continuation of the role of the Fund is of crucial importance for an adequate participation of commercial banks in the present debt strategy. The member states of the European Community welcome the considerable progress that some developing debtor countries have already made in implementing structural reforms in their economies. The governments of the industrial countries can best contribute to easing debt problems by pursuing policies to achieve sustainable growth and by widening access to their markets, in addition to their contribution through official development assistance, officially guaranteed export credits, Paris Club rescheduling, and ensuring that the international financial institutions have adequate resources. The forthcoming GATT round provides the most comprehensive opportunity for multilateral negotiations on the opening of markets since the Tokyo Round a decade ago. The European Community will enter these talks with the objectives of consolidating and further developing the open trading system. We hope too that the negotiations will bring a fuller participation of individual developing countries commensurate with their stage of economic development. The European Community welcomes the progress made at the September GATT ministerial meeting in Uruguay. The Fund continues to have a central role in the adjustment process, and the countries of the Community stand fully behind it in its work. The Fund must be able to perform this task with flexibility. In supporting the Fund's role in promoting medium-term balance of payments viability without exchange and payments restrictions, we are convinced that the combination of sound financial policies and structural reforms remains essential for success. In view of the serious payments difficulties that many Fund members continue to face, the EC member states welcome the decision by the In-

©International Monetary Fund. Not for Redistribution 254 SUMMARY PROCEEDINGS, 1986 terim Committee to maintain the policy of enlarged access for another year and to keep the access limits unchanged for 1987. In present circumstances, it is also right that the Executive Board should retain the flexibility to approve, in special circumstances, adjustment programs for amounts above the normal limits. Attention this year has been focused especially on the adjustment problems of Africa. The creation of the Structural Adjustment Facility, strongly supported by the Community, reflects the recognition by the Fund of the particular difficulties faced by the 60 poorest countries, most of them in Africa. These loans at concessional rates to countries undertaking structural adjustment programs are rightly set in the context of a medium- term policy framework developed jointly with the Fund and Bank. The Community countries attach the greatest importance to the integ- rity of the Fund's income position and urge those countries in arrears to the Fund to clear them speedily. However, recognizing the consequences for the Fund stemming from the problem of overdue obligations, it welcomes the agreement in the Fund for a scheme of burden sharing. The Fund must ensure that it has sufficient usable resources to give financial backing for appropriate adjustment programs and to ensure the liquidity of the Fund's liabilities. The member states of the Community are prepared to participate constructively in the discussions on the Ninth Gen- eral Review of Quotas. A comprehensive study of the SDR has been undertaken in the last year to clarify its role in the international monetary system. In this context, the arguments for and against an allocation remain a matter for judgment. Any decision must, of course, be fully consistent with the Fund's Articles of Agreement. . . .

©International Monetary Fund. Not for Redistribution CONCLUDING REMARKS 1 STATEMENT BY THE GOVERNOR OF THE FUND AND THE BANK FOR BAHRAIN

Ibrahim Abdul Karim

Bahrain is privileged to have been selected for the chairmanship of the Boards of Governors of the World Bank and the International Monetary Fund and views it as an honor for itself and the region. Bahrain, though small in area, has recently developed as a regional financial market and is therefore not alien to the environment of international cooperation. It is in this spirit that we shall endeavor to carry out the duties of the chairmanship with the same enthusiasm, efficiency, and dili- gence as that demonstrated by our Chairman for this year's Annual Meet- ings, His Excellency, the President of the Republic of Colombia. I would like to take this opportunity to express our gratitude and admiration for Mr. de Larosière, who will be stepping down from his position as Managing Director of the Fund. He has led the institution through a difficult and challenging period, demonstrating remarkable imagination and skill in addressing the changing circumstances in the world economy and in promoting international monetary cooperation. I look forward to working closely with President Conable and the Man- aging Director of the Fund in the coming year and to welcoming all of you to the 1987 Annual Meetings.

STATEMENT BY THE CHAIRMAN OF THE EXECUTIVE BOARD AND MANAGING DIRECTOR OF THE INTERNATIONAL MONETARY FUND

J. de Larosière

Mr. Chairman, we have had a week of wide-ranging and productive discussions. We have reviewed thoroughly the problems facing the world economy, and we have identified the policies and actions that must be at the core of their solution.

1 Delivered at the Closing Joint Session, October 3, 1986.

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In reflecting upon the interventions of Governors, I have been struck by two underlying themes. One is that cooperation and co-responsibility are absolutely indispensable for sustaining noninflationary growth, for making further progress on the debt problem, and for improving the functioning of the international monetary system. In today's highly interdependent global economy, international cooperation cannot be regarded solely as a tool of crisis management. Instead, it has to be an integral element in the design of policy itself. The second theme is that countries can best foster sustained growth by putting in place sound macroeconomic and structural policies and by persevering in their implementation. In a time of sharply changing economic circumstances, some flexibility may be appropriate— but only if that flexibility is consistent with financial stability over the medium term. In these closing remarks, I shall group my comments under three head- ings: economic policy in industrial countries; growth and debt in the developing world; and mechanisms of international cooperation.

Economic Policy in Industrial Countries Governors considered that the progress made over the past few years has been considerable and should not be underestimated: inflation is at its lowest point in two decades; international interest rates have declined conspicuously; exchange rates of major currencies have become better aligned with fundamentals; and the industrial world is now in its fourth consecu- tive year of expansion. Still, there is no denying that the current situation is also marked by areas of concern and of uncertainty. The large existing current account imbalances among the largest economies are widely recognized as a source of tension and instability. Unless these external imbalances—and the di- vergences in financial policies underlying them—are tackled, markets could react in ways that would undermine the strength and sustainability of the expansion. Such imbalances also have the unhealthy side effect of encouraging protectionist pressures. Much attention has also been drawn to the persistence of high unemployment rates and to the slower-than- expected pace of economic activity in industrial countries in the early part of 1986. This weakness of activity was seen as contributing to the sluggish growth in world trade and to further weakening of primary commodity prices. While a number of speakers felt that economic activity would strengthen in late 1986 and 1987 as lower interest rates and terms of trade gains in industrial countries feed through to domestic demand, there was nevertheless wide agreement that the situation contained uncertainties and thus merited close monitoring. Governors stressed that several actions are needed to place the ongoing expansion on a firmer footing. First, it is essential that the United States

©International Monetary Fund. Not for Redistribution CONCLUDING REMARKS 257 carry through with its plan for a major reduction in the federal fiscal deficit. Second, domestic demand outside the United States has to be sustained at an adequate pace. Together, these developments would support the needed correction of external imbalances; foster sustainable growth in the world economy; and prevent too much of the adjustment burden from falling on exchange rates. Third, monetary policy has to steer a careful course. The aim should be to facilitate a needed lowering of interest rates over time without rekindling inflationary expectations. Finally, authorities have to build on their achievements in dismantling structural rigidities. Deregulation, privatization, tax reform, and increased flexibility in labor markets—each has an important role to play. In all this, Governors have been clear that there should be no return to excessive "fine-tuning." What is required are cooperative actions within the medium-term pursuit of sound financial policies.

Growth and Debt in the Developing World While acknowledging the significant achievements that have been made in handling the debt problem over the past few years, many speakers noted that the problem has become more pressing since we met in Seoul. The sharp decline in the prices of primary commodities has been the principal factor in the increase in debt-to-export ratios in developing countries and in the downward revision of their growth prospects. The massive transfer of resources from the Third World to the industrial countries caused by recent declines in developing countries' terms of trade was underlined by a number of Governors. It has created a stringent liquidity situation in many developing countries, resulting in a compression of imports and cutbacks in investment expenditures. This being said, I was nevertheless impressed with the strong reaffirmation by Governors of two key tenets of the current debt strategy. First, as the President of Colombia emphasized, further progress depends critically on all the major parties pulling their weight. Second, a satisfactory solution is feasible only in the context of sustainable growth in the indebted countries. A first priority continues to be effective policies in indebted countries themselves. This encompasses sound macroeconomic management on the demand side, and determined structural policies on the supply side. In this connection, I have been encouraged by the strong support for foreign direct investment, trade liberalization, fiscal reform, rationalization of public enterprises, and conversion of existing debt to equity. As I noted in my opening remarks, more than two thirds of the 15 heavily indebted countries mentioned in the U.S. debt initiative have either implemented growth-oriented economic programs or are well on their way to doing so. In this respect, it has been heartening to hear many Governors express the

©International Monetary Fund. Not for Redistribution 258 SUMMARY PROCEEDINGS, 1986 view that the Fund and the World Bank are providing valuable assistance in helping members to design growth-oriented programs, and in mobilizing the finances needed to carry them out. Emphasis was given to the importance of close and effective collaboration between the Fund and the World Bank, although the need to avoid cross-conditionality was also stressed. This week's events have brought home in a dramatic way another key ingredient of a successful debt strategy, namely, the active participation of commercial banks. Many Governors regretted the relatively slow response of commercial banks in stepping up their new loan commitments. It is in this light that we can all welcome the agreement reached on the commercial bank financing package in support of Mexico's adjustment efforts. This is an important example of the parties involved acting together in their common interest. A more adequate pace of new net lending can be fully consistent with prudential considerations when the programs being supported enhance the productive and export bases of the countries concerned. An improved global economic environment would be of enormous help in managing the debt problem. This was another common thread running through the interventions of Governors. In addition to the policies that I have already mentioned, industrial countries should assist the debt strategy through two other channels. One is by rolling back the array of protectionist measures that have been allowed to proliferate over the past few years. Creditor countries must not ask debtors to adopt outward-looking policy reforms and to honor their heavy debt-service obligations and simultaneously handicap their ability to do so. The second contribution is to facilitate financial flows to the developing countries, including providing adequate official export credits and redoubling efforts to increase official development assistance.

Mechanisms of International Cooperation As I suggested earlier, an important theme of these meetings has been the importance—I would say the necessity—of strengthening international cooperation. But that theme would have a hollow ring if it were not accompanied by concrete measures to improve the existing mechanisms of cooperation. Three areas merit explicit mention. The first one is economic policy coordination among the large economies. Coordination of sound policies is vital for promoting growth with stability not just in the countries directly concerned but also in the entire world community. Failure to take account of the international repercussions of policies would lead to overreliance on exchange rate adjustments, which could encourage protectionist pressures and possibly result in recession. In this connection, a more systematic use of economic indicators can

©International Monetary Fund. Not for Redistribution CONCLUDING REMARKS 259 play a useful role, although as many Governors emphasized, indicators should not be used as a mechanistic trigger. A constructive start has been made. The guidance we have received this week from Governors will enable us to build on our initial exploratory work on economic indicators, and to enhance the efficacy and symmetry of Fund surveillance. In this respect, I was encouraged to hear that the special chapter on Interactions included in our World Economic Outlook report was considered a good start.

A second major area of international cooperation concerns the role of the Fund in the system. Governors supported the Fund's central role in the reinforced debt strategy and stressed the importance they attach to the Fund's advice — in the context of both Article IV consultations and technical assistance missions. The implementation of the new Structural Adjust- ment Facility was welcomed, although some Governors felt that its catalytic financing function had to be strengthened. Another welcome development has been the offer by Japan to lend the Fund SDR 3 billion. The agreement in the Interim Committee to leave unchanged for 1987 the enlarged access limits is also encouraging. These developments will help ensure that the Fund is in a position to continue to carry out its mandate. A number of Governors underlined the importance of the upcoming quota exercise. In addition, the role of the SDR as a means of supplementing global liquidity was stressed. Some Governors suggested that strengthening the monetary character of the SDR could facilitate reaching a consensus on an allocation. We shall be continuing our studies on this subject.

The third area of cooperation is in safeguarding the international trading system. As President Reagan reminded us, the Great Depression showed clearly what protectionism brings — nothing is protected, everything is destroyed. The international community must overcome protectionist pressures if it wants to reinstate trade policy as an engine of economic growth and efficiency. It was encouraging to hear speaker after speaker at these meetings reiterate their commitments to the standstill and rollback provisions of the Punta del Este Declaration. An international framework is now in place to pursue comprehensive trade liberalization. It is time to translate good intentions into action.

In closing, I want to thank Governors for their generous remarks and warm good wishes to me personally. As I take my leave of you, may I offer you and the institution we all serve my best wishes for success in meeting the challenges that lie ahead. I know that the spirit of cooperation, from which I have benefited so much, will be a source of strength to you all.

©International Monetary Fund. Not for Redistribution 260 SUMMARY PROCEEDINGS, 1986

STATEMENT BY THE CHAIRMAN OF THE BOARDS OF GOVERNORS, THE GOVERNOR OF THE FUND AND THE BANK FOR COLOMBIA

Cesar Gaviria Trujillo l Three days ago President Barco of Colombia opened these Annual Meetings; it is now my privilege to bring these Meetings to a close. I think we can all agree that, at this critical juncture for the world economy, our discussions have been purposeful and productive. I would like to take this opportunity to thank my fellow Governors, the Managing Director of the Fund, and the President of the World Bank for their thoughtful contributions and, personally, for their assistance to me in carrying out my duties as Chairman. I am also grateful to my colleagues from India and Norway who, in their capacity as Vice-Chairmen of the Boards of Governors, assisted me particularly with the process and procedures pertaining to the election of the Executive Directors of the Fund and the Bank. The heads of our institutions have already reviewed the broad economic issues of concern expressed by Governors in these and other meetings during this past week. I do not wish to repeat these points at this stage. Let me just add that we are all now aware of the major areas where further immediate action is necessary: to develop policies aimed at achieving growth with stability and to promote strong world trade so as to tackle the fundamental causes of the debt problem; to push for increased financial flows— from both public and private sources—to the developing countries; to increase the resources of our multilateral institutions; to resist and roll back protectionism; and, more generally, to create an international environment conducive to the pursuit by individual countries of their economic goals without adversely affecting the performance of others. The basic for- mulas for success are simple; the challenge is to implement them. Many speakers have focused on the respective roles to be played by our institutions in achieving the goals we have set for ourselves. On the Fund side, mention has been made in particular of the importance for the Fund to continue to play a strong role in carrying out the debt strategy by promoting growth-oriented programs and acting as a catalyst in their financing. Of equal importance is the development in the Fund of work on indicators that can provide a basis for ensuring that the policies and economic performance of countries are consistent and mutually beneficial. But I have also heard it stressed that the institution must itself provide more resources and must be sufficiently flexible in its application of conditionally to meet the individual needs of its members. For the most part,

1 Mr. Trujillo assumed the chairmanship on the second day of the Meetings and presided thereafter.

©International Monetary Fund. Not for Redistribution CONCLUDING REMARKS 261 additional resources will have to come from quotas, and it is fitting that discussions will soon begin on the Ninth General Review of Quotas. Fur- ther, I join those who have welcomed the offer by Japan to provide the Fund with SDR 3 billion in resources to enhance its ability to support members' domestic policies. The Fund also has the power to create additional resources in the form of SDRs and to allocate them to members. I regret that despite strong arguments in favor of an allocation, and the majority of members pressing for it, the broad support needed under the Articles of Agreement is still lacking. Regarding the World Bank, Governors have made several points very clear. First, the Bank must continue to pursue its fundamental mission: to accelerate economic growth and alleviate poverty in its borrowing member countries. Second, it must assist member governments in formulating programs aimed at structural changes. In implementing such programs, the Bank ought to take a leading role, particularly in helping to resolve the debt problems. At the same time, it must maintain its role as the world's premier development institution. It was gratifying that, in his first annual address, Mr. Conable emphasized this historic commitment of the Bank and expressed the intention to build upon its past achievements and reser- voir of expertise. To achieve these objectives, the Bank must be ready to expand the scale and range of its activities and be able to respond quickly to changing circumstances; but it must also be assured of a sufficient resource base. On this point, Governors gave a strong and clear message that the Bank's ability to play its vital role must not be constrained by a lack of capital. Concerning IDA, Governors believed it imperative that negotiations on the Eighth Replenishment be completed very quickly now, and at a minimum level of $12 billion. Another major point underscored by Governors was that the Bank's capabilities to act as a catalyst for both financial and nonfinancial assistance must be maximized. The importance of private flows to the developing countries was emphasized, as were the important catalytic contributions to be made by the Multilateral Investment Guarantee Agency and the Inter- national Finance Corporation. I would like to take this occasion to express my appreciation to Mr. de Larosière, who has formally announced at our Meetings his intention to resign from his post as Managing Director of the International Monetary Fund. We have been fortunate to have benefited from his guidance during a challenging period for the global economy. I thank him and wish him well in his future endeavors. I should also like to pay my respects to Mr. Conable and wish him good luck in his new undertaking.

©International Monetary Fund. Not for Redistribution 262 SUMMARY PROCEEDINGS, 1986

Before concluding, I would like again to extend my congratulations and best wishes to the Governor for Bahrain who succeeds me as Chairman of the Boards of Governors. Finally, I wish you all a safe journey home. The 1986 Annual Meetings of the Fund and World Bank and its Affiliates are hereby adjourned.

©International Monetary Fund. Not for Redistribution DOCUMENTS and RESOLUTIONS OF THE BOARD OF GOVERNORS

©International Monetary Fund. Not for Redistribution This page intentionally left blank

©International Monetary Fund. Not for Redistribution SCHEDULE OF MEETINGS 1

Sunday 9:30 a.m.—Interim Committee2 September 28 3:00 p.m.—Interim Committee2

Monday 8:00 a.m.—Interim Committee2 September 29 9:30 a.m.—Joint Development Committee 2:30 p.m.—Joint Development Committee 6:45 p.m.—Joint Development Committee

Tuesday 9:15 a.m.—Opening Ceremonies September 30 Address from the Chair Annual Address by Managing Direc- tor, IMF Annual Address by President, IBRD, IFC, and IDA Address by the President of the United States 3:00 p.m.—Annual Discussion

Wednesday 9:30 a.m.—Annual Discussion October 1 3:00 p.m.—Annual Discussion IMF Election of Executive Directors IBRD Election of Executive Directors

Thursday 9:30 a.m.—Annual Discussion October 2 2:45 p.m.—Joint Development Committee 5:30 p.m.—Joint Procedures Committee

Friday 9:30 a.m.—Annual Discussion October 3 Joint Procedures Committee Reports Comments by Heads of Organizations Closing Remarks from the Chair Adjournment

1 Meetings of the Joint Development Committee were held jointly with the Board of Gover- nors of the Bank. The sessions of the Annual Meetings were held jointly with the Boards of Governors of the Bank, IFC, and IDA. 2 Fund only.

265

©International Monetary Fund. Not for Redistribution PROVISIONS RELATING TO THE CONDUCT OF THE MEETINGS

Admission 1. Sessions of the Boards of Governors of the Fund and of the Bank, IFC, and IDA will be joint and shall be open to accredited press, guests, and staff. 2. Meetings of the Joint Procedures Committee shall be open only to Gov- ernors who are members of the Committee and their advisers, Execu- tive Directors, and such staff as may be necessary.

Procedure and Records 3. The Chairman of the Boards of Governors will establish the order of speaking at each session. Governors signifying a desire to speak will generally be recognized in the order in which they ask to speak. 4. With the consent of the Chairman, a Governor may extend his statement in the record following advance submission of the text to the Secretaries. 5. The Secretaries will have verbatim transcripts prepared of the proceedings of the Boards of Governors and the Joint Procedures Committee. The transcripts of proceedings of the Joint Procedures Committee will be confidential and available only to the Chairman, the Managing Di- rector of the Fund, the President of the Bank and its Affiliates, and the Secretaries. 6. Reports of the Joint Procedures Committee shall be signed by the Com- mittee Chairman and the Reporting Member.

Public Information 7. The Chairman of the Boards of Governors, the Managing Director of the Fund, and the President of the Bank and its Affiliates will communicate to the press such information concerning the proceedings of the Annual Meetings as they may deem suitable.

266

©International Monetary Fund. Not for Redistribution AGENDA

1. 1986 Annual Report

2. Report of the Chairman of the Interim Committee (Fund Document No. 4)

3. Annual Report of the Joint Development Committee (Fund Document No. 5)

4. 1986 Regular Election of Executive Directors (Fund Document No. 6)

5. Financial Statements and Audit Report (Appendix VIII of 1986 Annual Report and Fund Documents Nos. 7 and 8)

6. Administrative Budget for Financial Year ending April 30, 1987 (Appendix VII of 1986 Annual Report and Fund Documents Nos. 8 and 9)

7. Amendments of Rules and Regulations (Fund Document No. 10)

8. Selection of Officers and Joint Procedures Committee for 1986-87

267

©International Monetary Fund. Not for Redistribution REPORTS OF THE JOINT PROCEDURES COMMITTEE

Chairman Colombia Vice Chairmen India Norway Reporting Member Germany

Other Members: Algeria, Barbados, Bolivia, Burma, Congo, France, Guinea-Bissau, Hungary, Japan, Jordan, Luxembourg, Rwanda, Saudi Arabia, Somalia, Trinidad and Tobago, United Kingdom, United States, Western Samoa

Report 11

October 2, 1986

Mr. Chairman: At the meeting of the Joint Procedures Committee held on October 2, 1986, the items of business on the agenda of the Board of Governors of the International Monetary Fund were considered. The Committee submits the following report and recommendations: 1. 1986 Annual Report The Committee noted that provision had been made for the annual discussion of the business of the Fund. 2. Report of the Chairman of the Interim Committee The Committee noted the presentation made by the Chairman of the Interim Committee. 2 The Committee recommends that the Board of Governors of the Fund thank the Interim Committee for its work. 3. 1986 Regular Election of Executive Directors

1 Report I and the Resolutions contained therein were adopted by the Board of Governors of the Fund, in Joint Session with the Boards of Governors of the Bank, IFC, and IDA, on October 3, 1986. 2 See pages 32-37.

268

The Committee noted that the 1986 Regular Election of Executive Di- rectors of the Fund [Annex I] had taken place and that the next Regular Election of Executive Directors will take place at the Annual Meeting of the Board of Governors in 1988.

4. Financial Statements, Report on Audit, and Administrative Budget

The Committee considered the Report on Audit for the financial year ended April 30, 1986, the Financial Statements contained therein (Fund Document No. 7 and Appendix VIII of the 1986 Annual Report), and the Administrative Budget for the financial year ending April 30, 1987 (Fund Document No. 9 and Appendix VII of the 1986 Annual Report).

The Committee recommends that the Board of Governors of the Fund adopt the draft resolution set forth in Fund Document No. 8. 3

5. Amendments of Rules and Regulations

The Committee has reviewed and noted the letter of the Managing Di- rector and Chairman of the Executive Board to the Chairman of the Board of Governors, dated September 30, 1986, reproduced as Fund Document No. 10, regarding amendments of the Rules and Regulations set forth in Attachment 1 to that document [Annex II].

The Committee recommends that the Board of Governors of the Fund adopt the draft resolution set forth in Attachment 2 of Fund Document No. 10. 4

Approved:

/s/ CESAR GAVIRIA TRUJILLO /s/ H. TIETMEYER Colombia—Chairman Germany—Reporting Member

Resolution No. 41-5; see page 309. Resolution No. 41-6; see page 309.

Annex I to Report I Regulations for the Conduct of the 1986 Regular Election of Executive Directors 1. Definitions: In these Regulations, unless the context shall otherwise require: (a) "Articles" means the Articles of Agreement of the Fund. (b) "Board" means the Board of Governors of the Fund. (c) "Chairman" means the Chairman or Vice Chairman acting as Chairman of the Board. (d) "Governor" includes the Alternate Governor or any temporary Alternate Governor when acting for the Governor. (e) "Secretary" means the Secretary or any acting Secretary of the Fund. (f) "Election" means the 1986 Regular Election of Executive Directors. (g) "Eligible votes" means the total number of votes that can be cast in the election.

2. Date of Election: The election shall be held during a plenary session of the 1986 Annual Meeting to be held Wednesday, October 1, 1986.

3. Eligibility: The Governors eligible to vote in the election shall be all of the Governors except those of the members that: (a) are entitled to appoint an Executive Director pursuant to Article XII, Section 3(e)(i); (b) have notified the Managing Director, in accordance with the procedure established by the Executive Board, of their intention to appoint an Executive Director pursuant to Article XII, Section 3(c).

4. Schedule E: Subject to the supplementary regulations set forth herein, the provisions of Schedule E of the Articles shall apply to the conduct of the election.

5. Number of Executive Directors to be Elected: Sixteen Executive Di- rectors shall be elected. "Sixteen persons" shall be substituted for "fifteen persons" in paragraphs 2, 3, and 6, and "fifteen persons" shall be substituted for "fourteen persons," and "sixteenth" shall be substituted for "fifteenth" in paragraph 6 of Schedule E.

6. Proportion of Votes Required to Elect: In paragraphs 2 and 5 of Schedule E, "four percent," and in paragraphs 3, 4, and 5, "nine percent," shall not be changed. 7. Nominations: (a) Any person nominated by one or more Governors eligible to vote in the election shall be eligible for election as an Executive Director. (b) Each nomination shall be made on a Nomination Form furnished by the Secretary, signed by the Governor or Governors making the nomination, and deposited with the Secretary. (c) A Governor may nominate only one person. (d) Nominations may be made until 12 o'clock noon on the day before the day on which the election is scheduled to be held. The Secre- tary shall post and distribute a list of the candidates. 8. Supervision of the Election: The Chairman shall appoint such tellers and other assistants and take such other action as he deems necessary for the conduct of the election. 9. Ballots and Balloting: (a) One ballot form shall be furnished, before a ballot is taken, to each Governor eligible to vote. On any particular ballot only ballot forms distributed for that ballot shall be counted. (b) Each ballot shall be by a call of members whose Governors are eligible to vote, and each ballot form, signed by the Governor, shall be deposited in the ballot box. (c) When a ballot has been completed, the Chairman shall cause the ballot forms to be counted and shall announce the names of the persons elected promptly after the tellers have completed their tally of the ballot forms. If a succeeding ballot is necessary, the Chairman shall announce the names of the candidates to be voted on and the members whose Governors are eligible to vote. (d) If the tellers are of the opinion that any particular ballot form is not properly executed, they shall, if possible, afford the Governor concerned an opportunity to correct it before tallying the results, and the ballot form, if corrected, shall be deemed valid. (e) If a Governor does not vote on any ballot in which he is eligible to vote, he shall not be entitled to vote on any subsequent ballot and his votes shall not be counted, under Article XII, Section 3(i)(iii), toward the election of any Executive Director.

(f) If, at the time of any ballot, a member does not have a duly appointed Governor, such member or its Governor shall be taken not to have voted on that ballot. 10. If on any ballot there are more candidates than the number of Execu- tive Directors to be elected and two or more candidates tie with the lowest number of votes, no candidate shall be ineligible for election on the next succeeding ballot, but if the same situation is repeated on such succeeding ballot, the Chairman shall eliminate by lot one of the candidates from the following ballot. 11. If on any ballot two or more Governors having an equal number of votes have voted for the same candidate and the votes of one or more, but not all, of these Governors could be deemed under paragraph 4 of Schedule E to have raised the total votes received by the candidate above nine percent of the eligible votes, the Chairman shall determine by lot the Governor or Governors, as the case may be, who shall be entitled to vote on the next ballot. 12. When on any ballot the number of candidates is the same as the number of Executive Directors to be elected, and no candidate is deemed to have received more than nine percent of the eligible votes, each candidate shall be considered elected by the number of votes received even though a candidate may have received less than four percent of the eligible votes. 13. If the votes cast by a Governor raise the total votes received by a candidate from below to above nine percent of the eligible votes, the votes cast by the Governor shall be deemed under paragraph 4 of Sched- ule E not to have raised the total votes of the candidate above nine percent. 14. Any member whose Governor has voted on the last ballot for a candidate not elected may, before the effective date of the election, as set forth in section 16 below, designate an Executive Director who was elected, and that member's votes shall be deemed to have counted toward the election of the Executive Director so designated.

15. Announcement and Review of Result: (a) After the tally of the last ballot, the Chairman shall cause to be distributed a statement setting forth the result of the election. (b) The Board of Governors, at the request of any Governor, will review the result of the election in order to determine whether, in light of the objectives set forth in Chapter O, Section 2 of the Re- port by the Executive Directors to the Board of Governors on the Proposed Second Amendment to the Articles of Agreement an ad-

ditional Executive Director should be elected to serve for the term of office commencing November 1, 1986. 16. Effective Date of Election of Executive Directors: The effective date of election shall be November 1, 1986, and the term of office of the elected Executive Directors, and of any Executive Director appointed under Article XII, Section 3(c), shall commence on that date. Incum- bent elected Executive Directors shall serve through October 31,1986. 17. General: Any questions arising in connection with the conduct of the election shall be resolved by the tellers, subject to appeal, at the request of any Governor, to the Chairman and from him to the Board. Whenever possible, any such question shall be put without identifying the members or Governors concerned. As approved by Board of Governors Resolution No. 41-4, August 29, 1986

STATEMENT OF RESULTS OF ELECTIONS, OCTOBER 1, 1986

Members Whose Votes Candidate Elected Counted Toward Election5 Number of Votes Ahmed Abdallah Botswana 471 Burundi 677 Ethiopia 956 Gambia, The 421 Kenya 1,670 Lesotho 401 Liberia 963 Malawi 622 Mozambique 860 Nigeria 8,745 Sierra Leone 829 Sudan 1,947 Swaziland 497 Tanzania 1,320 Uganda 1,246 Zambia 2,953 Zimbabwe 2,160 26,738

Dai Qianding China 24,159

Jacques de Groóte Austria 8,006 Belgium 21,054 Hungary 5,557 Luxembourg 1,020 Turkey 4,541 40,178

Democratic Kampuchea, Poland, and South Africa did not participate in this election.

Members Whose Votes Candidate Elected Counted Toward Election Number of Votes Alvaro Donoso Argentina 11,380 Bolivia 1,157 Chile 4,655 Paraguay 734 Peru 3,559 Uruguay 1,888 23,373

Mohamed Finaish Bahrain 739 Egypt 4,884 Iraq 5,290 Jordan 989 Kuwait 6,603 Lebanon 1,037 Libya 5,407 Maldives 270 Oman 881 Pakistan 5,713 Qatar 1,399 Somalia 692 Syrian Arab Republic 1,641 United Arab Emirates 2,276 Yemen Arab Republic 683 Yemen, People's Democratic Republic of 1,022 39,526

J.E. Ismael Burma 1,620 Fiji 615 Indonesia 10,347 Lao People's Dem. Rep. 543 Malaysia 5,756 Nepal 623 Singapore 1,174 Thailand 4,116 Tonga 282 Viet Nam 2,018 27,094

Alexandre Kafka Brazil 14,863 Colombia 4,192 Dominican Republic 1,371 Ecuador 1,757 Guyana 742 Haiti 691 Panama 1,272 Suriname 743 Trinidad and Tobago 1,951 27,582

Members Whose Votes Candidate Elected Counted Toward Election Number of Votes Hans Lundstrôm Denmark 7,360 Finland 5,999 Iceland 846 Norway 7,240 Sweden 10,893 32,338

Marcel Massé Antigua and Barbuda 300 Bahamas, The 914 Barbados 591 Belize 345 Canada 29,660 Dominica 290 Grenada 310 Ireland 3,684 Jamaica 1,705 St. Christopher and Nevis 295 St. Lucia 325 St. Vincent 290 38,709

Mawakani Samba Benin 563 Burkina Faso 566 Cameroon 1,177 Cape Verde 295 Central African Republic 554 Chad 556 Comoros 295 Congo 623 Côte d'Ivoire 1,905 Djibouti 330 Equatorial Guinea 434 Gabon 981 Guinea 829 Guinea-Bissau 325 Madagascar 914 Mali 758 Mauritania 589 Mauritius 786 Niger 587 Rwanda 688 Sao Tomé and Principe 290 Senegal 1,101 Togo 634 Zaïre 3,160 18,940

Members Whose Votes Candidate Elected Counted Toward Election Number of Votes Guillermo Ortiz Costa Rica 1,091 El Salvador 1,140 Guatemala 1,330 Honduras 928 Mexico 11,905 Nicaragua 932 Spain 13,110 Venezuela 13,965 44,401

G.A. Posthumus Cyprus 947 Israel 4,716 Netherlands 22,898 Romania 5,484 Yugoslavia 6,380 40,425

C.R. Rye Australia 16,442 Kiribati 275 Korea 4,878 New Zealand 4,866 Papua New Guinea 909 Philippines 4,654 Seychelles 280 Solomon Islands 300 Vanuatu 340 Western Samoa 310 33,254

Ghassem Salehkhou Afghanistan 1,117 Algeria 6,481 Ghana 2,295 Iran, Islamic Republic of 6,850 Morocco 3,316 Tunisia 1,632 21,691

Arjun K. Sengupta Bangladesh 3,125 Bhutan 275 India 22,327 Sri Lanka 2,481 28,208

Members Whose Votes Candidate Elected Counted Toward Election Number of Votes Salvatore Zecchini Greece 4,249 Italy 29,341 Malta 701 Portugal 4,016 38,307

/s/ NRIPENDRA MISRA /s/ HERMOD SKÂNLAND (India) (Norway) Teller Teller

Annex II to Report I September 30, 1986

Dear Mr. Chairman: In accordance with Section 16 of the By-Laws, the attached amendments of the Rules and Regulations adopted since the 1985 regular meeting (Attachment 1) are submitted for review by the Board of Governors. A draft resolution for approval by Governors appears in Attachment 2. The Executive Board decided in 1980 that the list and amounts of the currencies that determine the value of the SDR be revised with effect on January 1, 1986, and on the first day of each subsequent period of five years, unless it decided otherwise. The value of the SDR is based on the currencies of the five Fund members whose exports of goods and services have the largest value in the five-year period ending twelve months before the effective date of the valuation. With effect from January 1, 1986, the Executive Board determined that these currencies are the U.S. dollar, the Deutsche mark, the Japanese yen, the French franc, and the pound sterling, with percentage weights in the valuation of 42, 19, 15, 12, and 12, respectively. The units of these five currencies in the valuation basket were calculated on December 31,1985, effective January 1,1986, on the basis of the new weight for each currency and the average exchange rates for each of the currencies in the basket for the period October-December 1985 in such a manner as to ensure that the value of the SDR in terms of these currencies was the same on December 31, 1985, under both the previous and the revised valuation baskets. The amount of each currency was rounded to three significant digits. The revised currency amounts used to determine the value of the SDR were incorporated in an amended RuleO-1. Following the review of the Fund's income position, the Executive Board decided that the impact on the Fund's income of overdue financial obliga-

©International Monetary Fund. Not for Redistribution 278 SUMMARY PROCEEDINGS, 1986 tions should be shared equitably among the Fund's debtor and creditor member countries through an increase in the rate of charge and a decrease in the rate of remuneration. The Executive Board therefore decided to abolish paragraph (d) of Rule MO, effective August 1, 1986, which had called for the review of the remuneration coefficient when the rate of charge on the use of the Fund's ordinary resources exceeded the SDR rate of interest, in order to consider whether the remuneration coefficient should be set, within the range prescribed by Article V, Section 9(a), at such a level as would permit a rate of charge equal to the SDR interest rate and still meet the target amount of net income for the year. The Executive Board also amended paragraph (a) of Rule 1-10 so as to set the rate of remuneration at 100 percent of the SDR interest rate effective February 1, 1987. On July 28, 1986, the Executive Board amended the list of official Fund holidays in Rule B-4, replacing November 11 with a holiday on the Friday following the fourth Thursday in November. The Fund's list of official holidays now parallels that of the World Bank.

The Executive Board has made no other changes in the Rules and Regu- lations since the last Annual Meeting. Very truly yours, /s/ J. DE LAROSIÈRE Managing Director and Chairman of the Executive Board Chairman of the Board of Governors 1986 Annual Meeting International Monetary Fund

Attachment 1. Rules and Regulations Amended Since the 1985 Annual Meeting

1. Rule B-4. Text as amended July 28, 1986. Business day of the Fund refers to the normal working hours of the Fund, 9:00 a.m. to 5:30 p.m. at the official time for the District of Columbia, on Monday through Friday of each week with the following exceptions (which will include the preceding Friday whenever one of the dates specified below falls on a Saturday and the following Monday whenever one falls on a Sunday):

January 1 The third Monday in January The third Monday in February The last Monday in May July 4 The first Monday in September The second Monday in October The fourth Thursday in November The Friday following the fourth Thursday in November December 25 2. Rule MO. Text as amended July 25, 1986, effective August 1, 1986. (a) The rate of remuneration shall be equal to 85 percent of the rate of interest on holdings of SDKs under Rule T-l (hereafter referred to as the "SDR interest rate"). The relationship of the rate of remuneration to the SDR interest rate will be referred to as the "remuneration coefficient." (b) Beginning April 30, 1984, the remuneration coefficient during each quarter shall be at the level determined under (1), (2), (3), and (4) below, but no higher than permitted by Article V, Section 9(a): (1) During the period May 1, 1984 to April 30, 1987, the remuneration coefficient shall be the higher of (i) or (ii) below: (i) The remuneration coefficient in effect on January 1, 1984 increased by 3.33 percentage points in each of the three financial years beginning May 1, 1984, May 1, 1985, and May 1, 1986; (ii) The remuneration coefficient in effect on January 1, 1984, increased or decreased on the first day of each quarter by 1 percentage point for each Vo of 1 percentage point that the SDR interest rate on the day before the beginning of the quarter is below or above the SDR interest rate in effect on April 30, 1984, provided that the remuneration coefficient in any quarter in each of these three financial years shall not be more than 2.5 percentage points above the amount of the coefficient for that year as determined under (i) above. (2) Following the adjustment in the remuneration coefficient on May 1, 1986, the rate of remuneration shall be reviewed before May 1, 1987. This review shall be conducted in the light of all the relevant considerations, including, in particular, the SDR interest rate and the rate of charge.

(3) Beginning May 1, 1987, the remuneration coefficient shall be the higher of (i) or (ii) below: (i) The remuneration coefficient existing at the end of the preceding financial year; (ii) A remuneration coefficient of 95 percent, increased or decreased on the first day of each quarter by 1 percentage point for each Vo of 1 percentage point that the SDR interest rate on the day before the beginning of a quarter is below or above the SDR interest rate on April 30, 1987, provided that the remuneration coefficient in any quarter of a financial year shall not be more than 2.5 percentage points above the level at the end of the preceding year. (4) The rate of remuneration, while less than 100 percent of the SDR interest rate, shall be rounded to the nearest two decimal places. (c) The operation of (b) above shall be reviewed on the occasion of the reviews of the rate of charge under Rule 1-6(4) and the SDR interest rate under Rule T-l(d). 3. Rule MO. Text as amended July 25, 1986, effective February 1, 1987. (a) The rate of remuneration shall be equal to 100 percent of the rate of interest on holdings of SDRs under Rule T-l (hereafter referred to as "SDR interest rate"). (b) The relationship of the rate of remuneration to the SDR interest rate will be referred to as the "remuneration coefficient." 4. Rule O-l. Text as amended December 31, 1985, effective January 1, 1986. The value of the SDR shall be the sum of the values of the following amounts of the following currencies: U.S. dollar 0.452 Deutsche mark 0.527 Japanese yen 33.4 French franc 1.02 Pound sterling 0.0893

Report III l

October 2, 1986

Mr. Chairman: The Joint Procedures Committee met on October 2, 1986 and submits the following report: 1. Development Committee The Committee noted that the Annual Report of the Joint Ministerial Committee of the Boards of Governors of the Bank and the Fund on the Transfer of Real Resources to Developing Countries (Development Com- mittee) has been presented to the Boards of Governors of the Fund and the Bank pursuant to paragraph 5 of Resolutions Nos. 29-9 and 294 of the Fund and the Bank, respectively (Fund Document No. 5 and Bank Docu- ment No. 3) [Annex]. The Committee recommends that the Boards of Governors of the Fund and the Bank note the report and thank the Development Committee for its work. 2. Officers and Joint Procedures Committee for 1986/87 The Committee recommends that the Governor for Bahrain be Chair- man, and the Governors for Argentina and New Zealand be Vice Chair- men, of the Boards of Governors of the Fund and of the Bank and its affiliates, to hold office until the close of the next Annual Meetings. It is further recommended that a Joint Procedures Committee be established to be available, after the termination of these Meetings and until the close of the next Annual Meetings, for consultation at the discretion of the Chairman, normally by correspondence and, if the occasion requires, by convening; and that this Committee shall consist of the Governors for the following members: Argentina, Bahrain, Belgium, Burundi, France, The Gambia, Germany, Greece, Guatemala, Jamaica, Japan, Ko- rea, Malta, Mauritania, Mauritius, New Zealand, Saudi Arabia, Singa- pore, Tunisia, United Kingdom, United States, and Venezuela. It is recommended that the Chairman of the Joint Procedures Commit- tee shall be the Governor for Bahrain, and the Vice Chairmen shall be the Governors for Argentina and New Zealand, and that the Governor for the United States shall serve as Reporting Member.

1 Report 11 dealt with the business of the Boards of Governors of the Bank, IFC, and IDA. Report III and the recommendations contained therein were adopted by the Boards of Gover- nors of the Fund, and of the Bank, IFC, and IDA, in Joint Session, on October 3, 1986.

Approved:

/s/ CESAR GAVIRIA TRUJILLO /s/ H. TIETMEYER Colombia—Chairman Germany—Reporting Member

Annex to Report III

September 29, 1986

Sir: As Chairman of the Joint Ministerial Committee of the Boards of Gover- nors of the Bank and the Fund on the Transfer of Real Resources to Developing Countries (Development Committee), I have the honor to present herewith to the Boards of Governors a report by the Committee on the progress of its work during the period July 1985-June 1986. The report is presented in compliance with Section 5(i) of the Bank Board of Governors Resolution No. 294 and the Fund Board of Governors Reso- lution No. 29-9, adopted on October 2, 1974.

Sincerely yours, /s/ GHULAM ISHAQ KHAN Chairman Development Committee

Attachment

His Excellency Virgilio Barco Chairman of the Boards of Governors International Monetary Fund and the World Bank

Attachment

Report of the Joint Ministerial Committee of the Boards of Governors of the Bank and the Fund on the Transfer of Real Resources to Developing Countries (July 1985-June 1986)

I. INTRODUCTION

1. This is the twelfth annual report of the Joint Ministerial Committee of the Boards of Governors of the Bank and the Fund on the Transfer of Real Resources to Developing Countries (Development Committee). It covers the period from July 1985 to June 1986. 2. During the year under review, the Committee addressed a range of current international economic issues facing the developing countries. There were two meetings during the year under the chairmanship of His Excellency Ghulam Ishaq Khan, Chairman of the Senate of Pakistan. The first was held in Seoul on October 7, 1985 at the time of the Annual Meet- ings of the Boards of Governors of the Bank and the Fund; the second meeting took place in Washington on April 10-11, 1986. Both meetings followed the new format adopted in April 1985 which reduced the length of the plenary session and allowed more time for discussion in an informal session between Members. A joint luncheon for members of the Develop- ment Committee and the Interim Committee, held in April 1986, provided an occasion for a discussion on matters of common interest. 3. In the context of the new format, observers were asked to present their statements in advance so that they could be sent to Members. Some observers have done so; others made their papers available at the meeting. During the year, the Committee received documents from the President of the African Development Bank, the Commonwealth Secretary General, the Director General of GATT, the President of the Inter-American Devel- opment Bank, the President of the International Fund for Agricultural Development, the Vice-Président of the Islamic Development Bank, the Director General of the OPEC Fund for International Development, the Secretary-General of UNCTAD, the United Nations, and the State Secre- tary for Switzerland. 4. The major subjects on which the Committee focused attention in the year were the World Bank's lending program and resource requirements, the resource problems of sub-Saharan Africa, a strategy for sustained

©International Monetary Fund. Not for Redistribution 284 SUMMARY PROCEEDINGS, 1986 growth of the heavily indebted middle-income developing countries, and issues arising from the Task Force report on concessional flows. Other subjects addressed were the Eighth Replenishment of the International Development Association (IDA), the status of the Convention for a Multi- lateral Investment Guarantee Agency (MIGA), developments on international trade issues and reports by the Group of Ten (G-10) and Group of Twenty-Four (G-24) on international monetary reform.

II. GLOBAL ECONOMIC SITUATION AND PROSPECTS FOR THE DEVELOPING COUNTRIES

5. The Committee discussed the major international economic issues against the background of the Bank's World Development Report 1985, the Fund's World Economic Outlook, and the opening statements by the Chairman of the Committee. The Managing Director of the International Monetary Fund reported to the Committee on discussions in the Interim Committee on the world economic outlook.

6. In October 1985, the Managing Director noted progress in the world economic situation as reflected in a decline in the rate of inflation and nominal interest rates, efforts to secure a better adjustment of the major exchange rates and a reduction in the balance-of-payments deficits of the developing countries. Nevertheless, uncertainties in the world economic outlook remained, as indicated by uncertain growth prospects in the industrial countries, slowing down in growth of world trade, weakness in commodity prices, high real interest rates, and the reluctance of commercial banks to resume lending. Thus, achievement of development objectives along with the servicing of debt in the face of growing protectionism continued to be difficult.

7. At the April 1986 meeting, the Managing Director reported that developments in the world situation had, on the whole, generally improved the outlook for sustainable growth. Several favorable developments were referred to: the adjustment in exchange rates of the major currencies, the continued decline in interest rates, the reduction in inflation, and the sharp fall in oil prices. The decline in oil prices from 1985 to 1986 involving a large transfer of income from oil-exporting developing countries to the industrial world presented opportunities which should be seized by the industrial countries to promote non-inflationary growth. The Managing Di- rector referred to the emphasis placed in the Interim Committee on the decline in interest rates and improvement in managing fiscal and inflationary pressures which would particularly assist the situation of the indebted countries. The exceptionally difficult economic situation which continued to be faced by the low-income countries in Africa was particularly noted.

8. Since April 1985 the Chairman has circulated in advance to Mem- bers an opening statement aimed at guiding the discussions in the Com- mittee. In presenting his views on the prospects for the developing countries in his statement in October 1985, the Chairman pointed to the impact of the slowing down in economic activity in the industrial countries on economic growth in the developing world, also noting the volatility in exchange rates, increased protectionism, and the decline in commodity prices. The special problems of sub-Saharan Africa, particularly with the decline in official development assistance (ODA), were emphasized. The particular difficulties of the heavily indebted countries of Latin America in the face of declining commercial flows and protectionist barriers against manufactured exports were also highlighted. The Chairman recommended a framework for adjustment based on a cooperative effort from the industrial countries to open their trading systems and increase financial flows; from the developing countries with a continuation of the adjustment process in order to achieve medium-term economic growth; from the multilateral financial and development institutions with an appropriate approach to advice on structural reform; and from the commercial banks with a revival in voluntary lending.

9. In April 1986, the Chairman stressed that on balance the international environment in 1985 was less supportive of the developing countries and adjustment in the indebted countries' than a year before as a result of a variety of adverse factors. These included a slowdown in OECD countries' growth rates, a slackening in world trade, increased protectionism, persistence of high real rates of interest, the continued slump in commodity prices, further decline in financial flows to the developing countries from commercial banking and private sources, and the dramatic decline in oil prices with its impact on the major oil exporting countries. The projected growth in developing countries in 1985-95 was expected to average well below the rate attained in 1973-80, and entailed difficulties in finding a long-term solution to the debt problem and alleviation of poverty in sub- Saharan Africa. The Chairman noted, however, the encouraging developments in cooperation among the major industrial countries (Group of Five) on exchange rates in the Plaza Agreement and the recognition given at the October 1985 meeting of the Committee that a process of sustained growth in the developing countries was essential for a solution to the debt problem. The Chairman also appealed to the industrial countries gaining from the decline in the oil prices to be more generous with assistance to the developing world.

III. CURRENT DEVELOPMENT ISSUES OF MAJOR Focus DURING THE YEAR JULY 1985 TO JUNE 1986

A. World Bank's Lending Program and Resource Requirements

10. A major subject on which the Committee concentrated its attention during the year was the World Bank's lending program and its resource requirements. In the April 1985 meeting, the stage for these discussions had been set by the Committee's consideration of the subject of the future role of the World Bank. The Committee had then endorsed the broad consensus emerging from a year-long discussion in the Bank's Board. In calling for an expanded lending program by the Bank in light of agreement on the qualitative aspects of the future role of the Bank, the Committee had requested the Bank's management to submit five-year projections of Bank lending in a report to its October 1985 meeting. This report should also examine the implications of the lending program in terms of resources with a view to seeking an early consensus on the future financial requirements of the Bank, including the possibility of a capital increase. 11. At the Seoul meeting in October 1985, the proposals by Bank management were presented to the Committee. These proposals involved a projected lending program of $40-45 billion over the three-year period (fiscal year 1986-88), rising to an annual level of between $16.5 billion and $20 billion by the end of the five-year period (fiscal year 1990). The projections implied a 6-8 percent increase in nominal Bank commitments in the low case and 9-12 percent in the high case, as compared to a growth rate in the past decade (fiscal year 1975-85) of 10.2 percent. It was noted that the Bank management had started discussions with the Executive Board on the resource and borrowing implications for the Bank. In this connection, it was reported that the additional capital required to support the upper range of the Bank lending proposed for fiscal year 1990 would be $53 billion on current repayment terms, while, if the lower end of the lending range was adopted, the comparative figure would fall to between $31- 38 billion. Other factors to be considered are the share of fast disbursing lending, possible changes in repayment terms of Bank loans and the prospects for expanding borrowing requirements associated with the proposed range of lending. 12. After careful consideration of a report by the World Bank President on lending prospects and their implications for future financial requirements at its October 1985 meeting, the Committee gave its support for an expanded role for the Bank to assist countries in adjusting to the external economic environment. To help deal with the problem of the heavily indebted countries, a consensus was reached that sustained economic growth was necessary in all countries, and that in this situation the World Bank

©International Monetary Fund. Not for Redistribution COMMITTEE REPORTS 287 had an increasingly important role to play. The Committee accordingly expressed strong support for a substantial expansion in the Bank's lending program, in order that it could be more responsive to the needs of its borrowers, and agreed that there should be no constraint by inadequacy of capital or lack of borrowing authority to increase quality lending by the Bank in meeting future demand. The Bank's management was urged by the Committee to commence discussions with the Executive Board on proposals that would enable the Bank to meet its resource requirements over the next five years, including the possibility of a general capital increase (GCI) and to report on this matter at the April 1986 meeting of the Committee.

13. The discussion on the World Bank's lending program and resource requirements continued to be pursued at the April 1986 meeting based on the Bank President's Report to the Committee, which covered the agenda item, the World Bank's lending program and resource requirements, and a Bank staff paper on the "Achievement of Sustained Growth in Middle- Income Countries Encountering Debt Servicing Difficulties and Its Impact on the World Bank's Overall Lending Program and Resource Require- ments." The Bank paper indicated that the management of the Bank proposed to increase the upper limit in the range of Bank lending over the period fiscal year 1986-88 to $50 billion, as compared with an upper limit of $45 billion proposed in October 1985. Proposals for expanded lending by the Bank followed on a revision of the medium-term strategies for the heavily indebted countries and a revised assessment of the overall requirements of its borrowing member countries. The new planning assumptions also proposed a wider range of possible outcomes for fiscal year 1990 from $16.5-21.5 billion. 14. The Committee at its April 1986 meeting reviewed the report by the Bank noting the increased projections of lending for fiscal year 1986-88 and reaffirmed strong support for the Bank's lending program. In particular, the Committee welcomed steps taken by the Bank to assist the heavily indebted countries and the prospect that in 1986 lending for adjustment purposes to these countries would increase substantially. The consensus reached in Seoul that the Bank should be unconstrained by lack of capital or borrowing authority in meeting requirements for quality lending was reaffirmed. Note was taken of the fact that Bank lending for fiscal year 1987 might possibly exceed the level of lending that could be sustained by the current levels of capital. In welcoming the discussions which were scheduled in the Bank Board on issues relating to the general capital increase, the Members agreed that the Executive Board of the Bank should come to an early resolution so that agreement on a general capital increase could be reached quickly. The Committee underlined the importance of continuing to monitor closely progress in meeting the capital requirements

©International Monetary Fund. Not for Redistribution 288 SUMMARY PROCEEDINGS, 1986 of the Bank and the need to ensure adequate capital. The World Bank was requested to prepare a progress report on their work on the Bank's lending program and the adequacy of its capital for discussion at the September 1986 meeting.

B. The Resource Problems of Sub-Saharan Africa

15. The Committee continued to pay special attention to the difficult economic situation of sub-Saharan African countries. Following on the creation of the Special Facility for sub-Saharan Africa by the World Bank on July 1, 1985 in response to a request by the Committee at its September 1984 meeting, progress in providing contributions to the Special Facility was kept under review. It was noted with satisfaction that some $1.2 billion had been contributed to the Special Facility for sub-Saharan Africa when it became effective and that in April 1986 the Special Facility stood at $1.6 billion with widespread support from the donor community. At its October 1985 meeting, the Committee took particular note of the severe debt situation of sub-Saharan Africa and its continued resource problems. The use of IMF Trust Fund reflows was seen as making a contribution to a solution of these problems. The World Bank and the Fund were requested to strengthen their cooperation in policy advice to sub-Saharan African countries, with a view to the alleviation of poverty and the promotion of growth in the region. The World Bank was asked to prepare a study on the resource problems of sub-Saharan Africa to be considered at the April 1986 meeting. 16. A report entitled, "Financing Adjustment with Growth in Sub- Saharan Africa, 1986-90," prepared by the World Bank was reviewed by the April 1986 meeting of the Committee. The report stressed that medium-term programs of growth-oriented adjustment are essential if Af- rica's decline is to be reversed. These programs of policy reform, which have been adopted by a significant number of African governments, need to be supported by adequate external capital flows. Note was particularly taken of the fact that low-income Africa is poorer today than in 1960, with a fall in per capital income in the region between 1980 and 1986 of about 12 percent. The sharp increase in debt service payments especially in some low-income African countries with acute debt difficulties created severe problems. The minimum objective should be a growth rate of at least 3-4 percent a year by 1990 and concessional flows of $35.3 billion a year between 1986 and 1990. Taking into account the flow of other resources to Africa, there was likely to be a resource gap of $2.5 billion a year to be filled by additional concessional flows and debt rescheduling. Bilateral and multilateral agencies needed to act in a concerted fashion to encourage and support the efforts of African governments.

17. In reviewing the World Bank's report, the Committee in April 1986 agreed on the need for concerted action to tackle the region's problems. The industrial countries were urged to exert their best efforts to close the gap in concessional flows to countries in the region undertaking significant reform programs. The Committee also emphasized the need for strengthening donor aid coordination to improve the effectiveness of aid flows to sub-Saharan Africa. The Bank was asked to lead in working closely with interested governments as well as with the UNDP, OECD/DAC, the Euro- pean Community, and other concerned parties in improving aid coordination and to report back to the next meeting on progress achieved, including progress on the establishment of improved monitoring mechanisms. A request was also made by the Committee for a study on the market prospects of raw materials to be considered at a future meeting of the Committee.

C. Strategy for Sustained Growth in the Middle-Income Heavily Indebted Developing Countries

18. In their discussions in October 1985, the Committee concluded that despite the progress made by many heavily indebted countries in their adjustment efforts, it was essential that all countries needed to move as quickly as possible toward sustained economic growth. A number of elements were noted by the Committee to achieve this objective, including sustained growth in the industrial countries, open markets, stable exchange rates, lower interest rates, comprehensive structural and development policies, as well as provision of net new resources by commercial banks and greater participation by the multilateral development banks and the IMF. In this context, the Committee came to the conclusion that the World Bank had an increasingly important role to play in the restoration of growth in the developing countries. The Bank's management was requested to prepare a report for the April 1986 meeting of the Committee on how sustained growth could best be achieved by these countries. A Bank staff paper entitled, "Achievement of Sustained Growth in Middle- Income Countries Encountering Debt Servicing Difficulties and Its Impact on the World Bank's Overall Lending Program and Resource Require- ments," was accordingly considered by the April 1986 meeting of the Com- mittee. 19. The Bank paper outlined the adjustment and growth packages which needed to be adopted by the developing countries and supported by complementary action by industrialized countries. These adjustments and growth packages should include attention to exchange rates, appropriate pricing policies, rationalization of the public sector, and encouragement of domestic and foreign investment. On the part of the industrial countries, essential elements were an environment of sustainable growth, increases in commodity prices, improvements in terms of trade, and a lowering in real

rates of interest. The consensus reached at the Committee's meeting in October 1985 on the importance of concerted action by all the major parties—the indebted countries, the industrial countries, the commercial banks, and the multilateral financial institutions—was reiterated. It concluded that even with substantial policy reforms in the developing countries, large amounts of net flows of capital estimated to be about $14-21 billion annually would be required to restore growth and creditworthiness of the developing countries over a five-year period. The paper pointed out that the initiative by the U.S. Secretary of the Treasury Baker in Seoul in October 1985 could provide a strong stimulus in attracting external flows for any financing program in which the commercial banks would be a critical component. The World Bank, in association with the IMF, had an important role in helping to establish and implement domestic policy reform programs needed to attract lenders and investors.

20. The general approach set out in the World Bank's paper for achieving sustained growth in the heavily indebted countries was endorsed by the Committee at its April 1986 meeting. All the major parties—the indebted countries, the industrial countries, the commercial banks, and international and financial development institutions—were urged to redouble their efforts for the design and implementation of medium-term growth- oriented programs. There was also agreement that a lasting solution to the debt problem required not only adjustment and growth on the part of the developing countries but a range of policies in the industrial countries as well, which would promote expansion in international trade, greater stability in exchange markets, lower real interest rates, improvements in commodity prices, and increased external capital flows. The Committee emphasized the need for a rollback in protectionism.

21. As a source of external financing, the Committee particularly drew attention to the importance of external credit agencies (EGAs) and welcomed the intention of the World Bank to work toward timely and adequate support by ECAs in countries undertaking adjustment and growth programs. Commercial bank flows could also be encouraged to assist the medium-term programs if creditor governments were not unduly restrictive in regulating the banks which would inhibit such flows. The necessity for greater flows of foreign investment to support such programs was also noted. While stressing the need to avoid cross-conditionality and maintain their respective areas of competence, a strengthening in the collaborative roles of the World Bank and the IMF in the design, financing, and monitoring of growth-oriented adjustment programs was re-emphasized by the Committee as important in helping build confidence in the steps being taken by the heavily indebted countries to restore strength to their economies.

D. Task Force Report on Concessional Flows

22. The report prepared by the Task Force on Concessional Flows, a group set up by the Committee in May 1982, was presented to the October 1985 meeting of the Committee by its Chairman, Mr. John P. Lewis. The Task Force comprised representatives from 18 developing and industrialized countries. The report was discussed by the Committee under the agenda item "Issues Arising from Recommendations of the Task Force on Concessional Flows." The Task Force was given a broad mandate to study the problems that affect the volume, quality, and effective use of concessional flows, as well as the effect of such flows in the developing countries and on international economic developments. The report reached three broad conclusions. On aid effectiveness—that most aid had been productive and helpful to development although there was room for improvement. On public support for aid—this varied between countries but did not appear to have weakened in recent years. There was a need for political leadership to play a role in strengthening support for aid. And, as regards the volume of aid, donor governments should exert redoubled efforts to increase aid flows to low-income countries, as a matter of urgency, particularly as official development assistance (ODA) is forecast to grow by only about 2 percent annually for the rest of the decade, as compared with 6 percent in the 1970s. This implied that available resources of ODA needed to be used more effectively. 23. In expressing appreciation for the report and the conclusions reached on the critical issues, the Committee urged that the report and its suggestions should be taken into account by all governments concerned. The Committee asked the World Bank to take the lead in following up on the Task Force's conclusions and to report to future Development Com- mittee meetings on the progress achieved. At its April 1986 meeting, the Committee requested the World Bank to prepare a report for its next meeting on the volume of ODA flows forecast for the period 1986-90.

IV. OTHER DEVELOPMENT ISSUES ADDRESSED BY THE COMMITTEE A. IDA-8

24. A progress report on the status of the Eighth Replenishment of IDA was made to the October 1985 meeting of the Committee. A Bank report on IDA-8 referred to the request made at the meeting of IDA Deputies in January 1984 for a mid-term review of IDA-7. In this context, the Commit- tee's attention was drawn to the Task Force Report on Concessional Flows indicating the clear need for increased flows of concessional assistance. Following the meeting of the IDA Deputies in Seoul, Korea on October 5, 1985, the Chairman of the IDA Deputies, Mr. Moeen Qureshi, Senior Vice President, Finance, in the World Bank made a report on that meeting to

©International Monetary Fund. Not for Redistribution 292 SUMMARY PROCEEDINGS, 1986 the Members of the Committee. The Committee urged that a successful and adequate replenishment of IDA should be achieved by September 1986. A further progress report was made to the Committee by the Chair- man of the IDA Deputies at its April 1986 meeting on current negotiations for the replenishment of IDA. Virtually all Members of the Commit- tee hoped for an IDA replenishment of some $12 billion, which would maintain in real terms the concessionary resources now available through IDA-7 and the Special Facility for sub-Saharan Africa and enable IDA to continue its role in poverty alleviation, economic development, and to provide necessary support, in conjunction with the IMF, to IDA-eligible countries undertaking growth-oriented adjustment programs. The Committee reiterated its hope that the negotiations for IDA-8 should be concluded before its next meeting in September with the reaching of a consenses on outstanding issues such as fair burden-sharing and the equitable allocation of resources.

B. Structural Adjustment Facility

25. The Committee at its April 1986 meeting welcomed the IMF decision to establish a Structural Adjustment Facility (SAP) to provide concessional assistance to low-income countries with protracted balance-of- payments problems in support of medium-term macroeconomic and structural adjustment programs. While expressing the hope that additional bilateral and multilateral concessional assistance would complement Structural Adjustment Facility resources in support of those medium-term programs, the importance of close coordination by the Fund and the World Bank in the formulation of a comprehensive medium-term policy framework was underlined. The Committee reaffirmed that arrangements to complement SAF would not adversely affect the availability of concessional assistance for low-income countries not utilizing Trust Fund reflows.

C. International Trade Issues

26. As in previous meetings, Mr. Dunkel, the Director General of GATT, was invited to inform the Committee of current developments on international trade issues. 27. At the October 1985 meeting, the Committee welcomed the agreements reached in the GATT concerning preparations for a proposed round of multilateral trade negotiations. The Committee also renewed its call for governments to resist protectionism. The Committee was further advised at its April 1986 meeting by the GATT Director General of progress made in GATTs Preparatory Committee in defining the agenda for the proposed new round of trade negotiations. The Committee encouraged gov-

©International Monetary Fund. Not for Redistribution COMMITTEE REPORTS 293 ernments to launch the new round at an early date and expressed the hope that the contracting parties would take into account trade liberalization measures adopted in developing countries' programs in the context of trade negotiations within the GATT framework. The Director General of GATT was requested to continue to keep the Committee informed of further developments.

D. Group of Ten/Group of Twenty-Four Reports on International Monetary Reform

28. At the October 1985 meeting, the Committee took note of the preliminary discussions which had taken place in the Interim Committee on the reports on the functioning of the international monetary system by the Group of Ten (G-10) and Group of Twenty-Four (G-24). It welcomed the commitment of the Chairman of the Interim Committee to communicate with the Chairman of the Development Committee on possible arrangements for cooperation on matters relating to development arising in these reports. At the April 1986 meeting of the Interim Committee, the Chair- man of the Development Committee presented his views in a statement to the Interim Committee on the developmental aspects of issues in the G-10 and G-24 reports. Chairman Khan noted that the developmental concerns of monetary reform are not peripheral to, but constitute an integral part of, the mainstream analysis on international monetary reform issues. 29. At the April 1986 meeting of the Development Committee, the discussions in the Interim Committee on the G-10 and G-24 reports were noted. Members requested the Chairman, taking note of his intervention in the April meeting of the Interim Committee, to report to the September 1986 meeting of the Committee, after consultations with the Chairman of the Interim Committee, his views on the modalities of cooperative arrangements for improvement in the financial and monetary system's impact on growth and development.

E. Multilateral Investment Guarantee Agency (MIGA) 30. At its meeting in April 1985, the Committee encouraged the Bank to hold further discussions with governments on the creation of MIGA, with a view to reaching an understanding among governments. Progress in preparing a draft Convention for MIGA was noted at the Committee's meeting in October 1985 with the transmittal of the Convention to the Boards of Governors of the World Bank recommending that it now be opened for signature by interested governments. 31. In April 1986, the Committee discussed the role of MIGA in the context of the need for greater flows of foreign investment to developing countries and noted that the Convention had now been signed by 19 gov-

©International Monetary Fund. Not for Redistribution 294 SUMMARY PROCEEDINGS, 1986 ernments, including 4 industrial countries. Other interested governments were encouraged by the Committee to ratify the Convention as soon as possible so that it could be put into force.

Annexes

A. Members of the Committee B. Observers to the Committee C. Text of Parallel IBRD and IMF Resolutions Establishing the Devel- opment Committee (see Summary Proceedings, 7975, pages 278-82) D. Agendas and Press Communiqués of Meetings Held in October 1985 and April 1986.

Annex A Members of the Committee

Member Countries 1. His Excellency Saudi Arabia Sheikh Mohammed Abalkhail Minister of Finance and National Economy Saudi Arabia

2. The Honorable United States James A. Baker III Secretary of the Treasury United States

3. His Excellency France Edouard Balladur Minister of Economy, Finance and Privatization France

4. His Excellency Afghanistan, Algeria, Ghana, Mohamed Berrada Islamic Republic of Iran, Minister of Finance Morocco, Tunisia Morocco

5. His Excellency Burma, Fiji, Indonesia, Lao Daim Zainuddin People's Democratic Republic, Minister of Finance Malaysia, Nepal, Singapore, Malaysia Thailand, Viet Nam, (Tonga)

6. His Excellency Denmark, Finland, Iceland, Uffe Ellemann-Jensen Norway, Sweden Minister of Foreign Affairs Denmark

Member Countries 7. His Excellency Austria, Belgium, Hungary, Mark Eyskens Luxembourg, Turkey Minister of Finance Belgium

8. The Honorable Greece, Italy, Malta, Portugal Giovanni Goria Minister of the Treasury Italy

9. His Excellency Bahrain, Iraq, Jordan, Kuwait, Ghulam Ishaq Khan2 Lebanon, Libya, Maldives, Oman, Chairman of the Senate Pakistan, Qatar, Somalia, Pakistan Syrian Arab Republic, United Arab Emirates, Yemen Arab Republic, People's Democratic Republic of Yemen

10. The Honorable Australia, Korea, New Zealand, Paul J. Keating, M.P. Papua New Guinea, Philippines, Treasurer Seychelles, Solomon Islands, Australia Vanuatu, Western Samoa

11. His Excellency Benin, Burkina Faso, Cameroon, Abdoulaye Koné Cape Verde, Central African Minister of Economy and Republic, Chad, Comoros, Congo, Finance Côte d'Ivoire, Djibouti, Côte d'Ivoire Equatorial Guinea, Gabon, Guinea-Bissau, Madagascar, Mali, Mauritania, Mauritius, Niger, Rwanda, Sao Tomé and Principe, Senegal, Togo, Zaïre

12. The Right Honorable United Kingdom Nigel Lawson, M.P. Chancellor of the Exchequer United Kingdom

13. The Honorable Botswana, Burundi, Ethiopia, Chu S. P. Okongwu The Gambia, Guinea, Kenya, Minister of Finance Lesotho, Liberia, Malawi, Nigeria Mozambique, Nigeria, Sierra Leone, Sudan, Swaziland, Tanzania, Uganda, Zambia, Zimbabwe

2 Mr. Faisal A. Al-Khaled, Director-General, Kuwait Fund for Arab Economic Develop- ment, Kuwait, served as Alternate Member to permit His Excellency Ghulam Ishaq Khan to serve as Chairman at the October 7, 1985 Meeting, and Dr. Moinuddin Baqai, Secretary, Planning Division, Pakistan, served as Alternate Member to permit His Excellency Ghulam Ishaq Khan to serve as Chairman at the April 10-11, 1986 Meeting.

Member Countries 14. His Excellency Cyprus, Israel, Netherlands, H. O. Ruding Romania, Yugoslavia Minister of Finance Netherlands 15. The Honorable Bangladesh, Bhutan, India, Vishwanath Pratap Singh Sri Lanka Minister of Finance India 16. His Excellency Costa Rica, El Salvador, Carlos Solchaga Guatemala, Honduras, Mexico, Minister of Economy and Nicaragua, Spain, Venezuela Finance Spain

17. His Excellency Brazil, Colombia, Dominican Francisco X. Swett3 Republic, Ecuador, Guyana, Minister of Finance and Haiti, Panama, Suriname, Public Credit Trinidad and Tobago Ecuador 18. His Excellency Japan Noboru Takeshita Minister of Finance Japan 19. His Excellency China Wang Bingqian State Counselor and Minister of Finance China 20. His Excellency Federal Republic of Germany Juergen Warnke Federal Minister for Economic Cooperation Germany

21. The Honorable Antigua and Barbuda, The Michael H. Wilson Bahamas, Barbados, Belize, Minister of Finance Canada, Dominica, Grenada, Canada Ireland, Jamaica, St. Christopher and Nevis, St. Lucia, St. Vincent

22. His Excellency Argentina, Bolivia, Chile, Ricardo Zerbino Cavajani Paraguay, Peru, Uruguay Minister of Economy and Finance Uruguay

3 His Excellency Alberto Dahik became Minister of Finance and Public Credit of Ecuador in June 1986.

Annex B Observers to the Committee African Development Bank Arab Bank for Economic Development in Africa Arab Fund for Economic and Social Development Asian Development Bank Commission of the European Communities Commonwealth Secretariat Development Assistance Committee European Investment Bank General Agreement on Tariffs and Trade Inter-American Development Bank International Fund for Agricultural Development Islamic Development Bank OPEC Fund for International Development Organization for Economic Cooperation and Development Government of Switzerland United Nations United Nations Conference on Trade and Development United Nations Development Program Annex C The text of the parallel IBRD and IMF Resolutions establishing the Development Committee is reproduced in Summary Proceedings, 1975, pages 278-82. Annex D Agendas and Press Communiqués of Meetings Held in October 1985 and April 1986 Meeting of October 7, 1985 A. Agenda

1. IBRD Lending Prospects and their Implications for Future Fi- nancial Requirements

2. Issues Arising from Recommendations of the Task Force on Con- cessional Flows

3. Progress Reports

4. Annual Report of the Committee

5. Other Business

B. Press Communiqué (text published in Summary Proceedings, 1985, pages 285-89)

Meeting of April 10-11, 1986

A. Agenda 1. Achievement of sustained growth in the middle-income countries encountering debt-service difficulties and its impact on the World Bank's overall lending program and its future resource requirements 2. The resource problems of sub-Saharan Africa

B. Progress Reports —The World Bank's lending program and resource requirements —Eighth replenishment of IDA —Follow-up on the conclusions reached by the Task Force on Con- cessional Flows —Report on the Convention establishing the Multilateral Invest- ment Guarantee Agency (MIGA)

C. Press Communiqué 1. The Development Committee held its twenty-eighth meeting in Washington, D.C. on April 10-11, 1986, under the chairmanship of His Excellency Ghulam Ishaq Khan. Mr. A. W. Clausen, President of the World Bank, Mr. J. de Larosière, Managing Director of the International Monetary Fund, and Mr. Fritz Fischer, Executive Secretary of the Devel- opment Committee, participated in the meeting. Observers from a number of international and regional organizations and Switzerland also attended. 2. The Committee heard a report from the IMF Managing Director on the Interim Committee discussions on the world economic outlook and on the debt situation and strategy, and endorsed the Interim Committee's conclusions. 3. The Committee reviewed the progress that had been made in addressing the problems of the most heavily indebted middle-income countries in the period since its Seoul meeting and the announcement of U.S. Treasury Secretary Baker's initiative. In this context, the Committee reviewed the background paper on this subject prepared at its request by the World Bank, and endorsed the general approach set out for achieving sustained growth in the heavily indebted countries. The Committee heard with great interest reports of progress made in recent months by a number

©International Monetary Fund. Not for Redistribution COMMITTEE REPORTS 299 of countries in designing such programs and urged all major parties—indebted countries, industrial countries, commercial banks, and international financial and development institutions—to redouble their efforts so that medium-term growth-oriented adjustment programs can be designed and implemented as soon as possible. 4. The Committee recognized that the problems of these countries were deep-seated and would not be resolved quickly, as the outstanding debt burden on government finance and balance of payment hampers growth prospects and a return to creditworthiness. The Committee emphasized the need for a rollback in protectionism. It agreed that a lasting solution for the debt problem requires not only sustained adjustment and growth in developing countries, but also industrial country policies which will promote a further decline in real interest rates, expansion in international trade, improvements in commodity prices, greater stability in exchange markets, and increased external capital flows. In this context the Commit- tee urged industrial countries to redouble their efforts in removing these obstacles to a lasting solution to the debt problem. 5. The Committee stressed that even with substantial policy reforms in developing countries and satisfactory rates of non-inflationary growth in industrial countries, restoration of growth in developing.countries requires large amounts of net flows of capital, including repatriation of flight capital. Success will depend essentially upon the creation of an environment which would help promote timely action by the commercial banks and by all sources of finance providing adequate amounts of resources. 6. In this context, the Committee emphasized the importance of export credit agencies (ECAs) as a major source of financing and endorsed the Interim Committee's conclusions on this topic. Members welcomed the World Bank's intention to work more closely with all parties concerned to encourage timely and adequate support by ECAs in countries undertaking adjustment for growth programs to help ensure their success. 7. The Committee also urged creditor governments to ensure that regulations and guidelines imposed by their bank supervisors do not impede financing arrangements that can provide increased commercial bank flows, consistent with prudential considerations, to countries implementing significant medium-term programs of adjustment and growth. The Committee agreed that new flows of international bank credit in such circumstances can help to improve the quality of outstanding credits. 8. The Committee also recognized the role of the private sector in development and the need for greater flows of foreign investment to developing countries. In this context, members noted that the Convention establishing the Multilateral Investment Guarantee Agency (MIGA) has now been signed by 19 governments, including 4 industrialized countries. The Com-

©International Monetary Fund. Not for Redistribution 300 SUMMARY PROCEEDINGS, 1986 mittee encouraged other interested governments to sign and ratify the Con- vention so that it may enter into force as soon as possible. 9. The Committee re-emphasized the consensus reached in Seoul on the need for the enhanced participation of the World Bank and the IMF in the design, financing, and monitoring of growth-oriented adjustment programs. The Committee agreed that this would help inspire greater confidence that the heavily indebted countries are taking appropriate steps to restore growth and creditworthiness. The Committee stressed that in fur- thering their collaboration, the Bank and the Fund should maintain their respective areas of competence and avoid cross-conditionality. 10. Consistent with the Bank's global commitment to development, growth, and poverty alleviation, the Committee reaffirmed its strong support for a substantial expansion of the Bank's lending program. It noted that since the Committee's meeting in Seoul, Bank Management had increased projections of lending in fiscal year 1986-1988 to a range of $40-50 billion, and was now contemplating a lending level of up to $21.5 billion in fiscal year 1990. The Committee expressed its strong support for the steps taken by the Bank to assist the heavily indebted countries to develop credible growth-oriented programs. The increase in Bank net disbursements to these countries was welcomed, as was the prospect that in 1986 adjustment-related lending to them will increase substantially. The Com- mittee urged the Bank to take further steps to strengthen its ability to play a leading role in support of programs aimed at adjustment and growth as well as of investment projects throughout the world. 11. Ministers reiterated the understanding reached in Seoul that the Bank should be provided with the capacity to increase its quality lending and that the Bank should not be constrained by lack of capital or borrowing authority in meeting future demand. The Committee welcomed the additional efforts of the Bank in promoting growth-oriented adjustment and the associated increase in financial commitments it has undertaken in support of such programs. The Committee emphasized the essential role of the World Bank, together with the IMF and commercial banks, in supporting comprehensive adjustment programs. It noted that, provided other participants continue to fulfill their obligations in the adjustment programs, Bank lending for fiscal year 1987 may possibly exceed the level of lending that could be sustained with the capital at present available to it. The Committee welcomed the forthcoming discussion in the Bank Board of several matters bearing on the calculation of future capital requirements, including the valuation of IBRD capital. Ministers agreed that the Bank's Executive Board should seek an early resolution of these issues so that an agreement on a General Capital Increase can be arrived at promptly. In this context, and in light of these encouraging developments, the Commit- tee stressed the importance of continuing to monitor closely progress in

©International Monetary Fund. Not for Redistribution COMMUTEE REPORTS 301 meeting the Bank's capital requirements and the need to ensure adequate capital. The Ministers requested that the World Bank prepare a progress report for discussion at the next meeting on the Bank's lending program and on the continued adequacy of its capital. 12. Members reviewed the World Bank's most recent report, prepared at the Committee's request, on the continuing severe difficulties of sub- Saharan Africa and agreed that concerted action is urgently needed to address the region's problems. The Committee reiterated its strong support for the Joint Program of Action endorsed at its September 1984 meeting. The Committee also requested that a study on the market prospects of raw materials be prepared for a future meeting of the Committee. 13. The Committee noted with satisfaction the growing commitment of African governments to policy reform, as illustrated by examples in the Bank's report of adjustment measures now being implemented. Some promising results are already evident. The Committee stressed that success of medium-term, growth-oriented adjustment programs require increased external capital flows, particularly in view of continued weakness in commodity prices and heavy debt service obligations. Members noted the Bank's estimate of $2.5 million in additional concessional flows that are needed annually, over the next five years, to help meet low-income sub-Saharan Africa's financial needs. Members called upon industrial countries to exert their best efforts to close this gap by providing additional official development assistance, through both bilateral and multilateral channels, to countries in the region undertaking significant reform programs. Furthermore, most Ministers agreed that donor countries should not be net recipients of official capital flows from African countries undertaking adjustment programs. 14. Ministers also agreed on the need to enhance further the effectiveness of aid flows to sub-Saharan Africa and noted the World Bank's suggestions for strengthening donor aid coordination. The Committee reaffirmed that the central responsibility for aid coordination lies with each recipient government. In this context, the Committee urged the Bank to take the leadership role in improving aid coordination, working closely with interested governments as well as with the UNDP, the OECD/DAC, the European Community, and other concerned parties. The Committee asked the Bank to report back at the next meeting on progress achieved in all aspects of coordination, including progress in the establishment of improved monitoring mechanisms. 15. The Committee heard a progress report on current negotiations for the replenishment of IDA. Ministers emphasized the special importance of IDA to the success of development programs in poor countries throughout the world. Virtually all Ministers expressed the strong hope that an IDA-8

©International Monetary Fund. Not for Redistribution 302 SUMMARY PROCEEDINGS, 1986 replenishment of $12 billion will be achieved. This would maintain in real terms the concessionary resources now available through IDA-7 and the Special Facility for sub-Saharan Africa and enable IDA to continue its role in poverty alleviation and economic development and also to provide necessary support, in conjunction with the IMF, to IDA-eligible countries undertaking growth-oriented adjustment program. Ministers urged donors to exert maximum efforts in the coming months to reach a consensus on outstanding issues related to the next replenishment, including fair burden-sharing and an equitable allocation of resources, and expressed the wish that negotiations be concluded before the next meeting of the Committee in September. 16. The Committee welcomed the recent decision taken by the IMF Ex- ecutive Board establishing the Structural Adjustment Facility (SAP) in the Fund, which will provide assistance on concessional terms to low-income countries with protracted balance of payments problems in support of medium-term macroeconomic and structural adjustment programs. The Committee noted that the new Facility will require close coordination between the Fund and the World Bank to assist eligible members in the formulation of a comprehensive medium-term policy framework. The Com- mittee expressed the hope that the SAP resources would be complemented by additional bilateral and multilateral concessional assistance in support of agreed programs. Ministers reaffirmed that such arrangements would not adversely affect the availability of concessional development finance for low-income countries not utilizing Trust Fund reflows. 17. The Committee recognized that concessional flows are of critical importance to the success of adjustment and growth programs in the poorest developing countries. In this context, the Committee welcomed further Bank reports following up on the conclusions of the Task Force on Conces- sional Flows. As part of the effort to encourage implementation of the Task Force Report's conclusions, including an increased flow of official development assistance, the Committee requested the World Bank to prepare a report for its next meeting on the volume of ODA flows forecast for the period 1986-90. 18. The Ministers took note of the discussion in the Interim Committee on the issues raised in the recent G-10 and G-24 Reports. The Ministers also recalled the commitment made by the Chairmen of the Interim and Development Committees at the Seoul meetings to communicate with each other, with a view to seeing to what extent arrangements could be made for cooperation on matters pertaining to development. Taking note of the Chairman's intervention in the meeting of the Interim Committee, the Ministers requested him, after holding further consultations with the Chairman of the Interim Committee, to report to the next meeting of the Development Committee his views on the modalities of cooperative ar-

©International Monetary Fund. Not for Redistribution COMMITTEE REPORTS 303 rangements for improvements in the financial and monetary system's impact on growth and development. 19. The Committee was informed by the GATT Director General of the latest developments on international trade issues and the progress made by GATT's Preparatory Committee in defining the agenda for the proposed new round of trade negotiations. The Committee reiterated its call for all governments to resist protectionism and encouraged governments to launch the new round under GATT auspices at an early date, with a view to further opening markets and strengthening the trading system. Minis- ters expressed the hope that Contracting Parties would take into account trade liberalization measures adopted in developing country adjustment and growth policies in the context of trade negotiations within the GATT framework. It invited the GATT Director General to continue to keep it informed about further developments. 20. The Committee expressed its profound appreciation to the retiring President of the World Bank, Mr. A. W. Clausen, for his energetic support and encouragement of the work of the Committee, and for the highly significant contributions he has made during his five years in office to the cause of economic and social progress in the developing world. His imaginative and dedicated leadership of the Bank during a period of considerable stress in the global economy has, the Committee noted, positioned the institution well to build on the expanded role which has rightly been assigned to it. The Committee wished him well for the future. 21. The Committee agreed to meet again in Washington, D.C. on September 29, 1986.

Resolution No. 41-1 Salary of the Managing Director

The Executive Board resolved on January 23, 1986 to recommend an adjustment in the salary of the Managing Director. In accordance with Section 13 of the By-Laws, the following Resolution was submitted to the Governors on January 24, 1986 for a vote without meeting: RESOLVED: That, effective December 17, 1985, the annual salary of the Managing Director of the Fund shall be one hundred and twenty-nine thousand six hundred United States dollars (US$129,600). The Board of Governors adopted the foregoing Resolution, effective February 28, 1986.

Resolution No. 41-2 Membership for Kiribati

On July 18, 1984, the Government of Kiribati applied for admission to membership in the International Monetary Fund. The Executive Board resolved on January 31, 1986 that action on the application should not be postponed until the next regular meeting of the Board of Governors. In accordance with Section 13 of the By-Laws, the following Resolution was submitted to the Governors on February 4, 1986 for a vote without meeting: WHEREAS, Kiribati on July 18, 1984 requested admission to membership in the International Monetary Fund in accordance with Article II, Section 2 of the Articles of Agreement of the Fund; WHEREAS, pursuant to Section 21 of the By-Laws of the Fund, the Exec- utive Board has consulted with the representative of Kiribati and has agreed upon the terms and conditions which, in the opinion of the Execu- tive Board, the Board of Governors may wish to prescribe for admitting Kiribati to membership in the Fund;

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Now, THEREFORE, the Board of Governors, having considered the recommendations of the Executive Board, hereby resolves that the terms and conditions upon which Kiribati shall be admitted to membership in the Fund shall be as follows:

1. Definitions: As used in this Resolution: (a) The term "Fund" means the International Monetary Fund;

(b) The term "Articles" means the Articles of Agreement of the In- ternational Monetary Fund, as amended.

2. Quota: The quota of Kiribati shall be SDR 2.5 million.

3. Payment of Subscription: The subscription of Kiribati shall be equal to its quota. Kiribati shall pay 22.7 percent of its subscription in SDRs or in the currencies of other members selected by the Manag- ing Director from those currencies that the Fund would receive in accordance with the operational budget in effect at the time of payment. The balance of the subscription shall be paid in the currency of Kiribati.

4. Timing of Payment of Subscriptions: Kiribati shall pay its subscription within six months after accepting membership in the Fund.

5. Exchange Transactions with the Fund and Remuneration: Kiribati may not engage in transactions under Article V, Section 3, or receive remuneration under Article V, Section 9, until its subscription has been paid in full.

6. Exchange Arrangements: Within 30 days after accepting membership in the Fund, Kiribati shall notify the Fund of the exchange arrangements it intends to apply in fulfillment of its obligations under Article IV, Section 1 of the Articles.

7. Representation and Information: Before accepting membership in the Fund, Kiribati shall represent to the Fund that it has taken all action necessary to sign and deposit the Instrument of Acceptance and sign the Articles as contemplated by paragraph 8(a) and 8(b) of this Resolution, and Kiribati shall furnish to the Fund such information in respect of such action as the Fund may request.

8. Effective Date of Membership: After the Fund shall have informed the Government of the United States of America that Kiribati has complied with the conditions set forth in paragraph 7 of this Resolu- tion, Kiribati shall become a member of the Fund on the date when Kiribati shall have complied with the following requirements:

(a) Kiribati shall deposit with the Government of the United States of America an instrument stating that it accepts in accordance with its law the Articles and all the terms and conditions prescribed in this Resolution, and that it has taken all steps necessary to enable it to carry out all its obligations under the Articles and this Resolution; and (b) Kiribati shall sign the original copy of the Articles held in the Archives of the Government of the United States of America.

9. Period for Acceptance of Membership: Kiribati may accept membership in the Fund pursuant to this Resolution not later than six months after the effective date of this Resolution, which date shall be the date of its adoption by the Board of Governors; provided, however, that, if the circumstances of Kiribati are deemed by the Execu- tive Board to warrant an extension of the period during which Kiri- bati may accept membership pursuant to this Resolution, the Executive Board may extend such period until such later date as it may determine.

The Board of Governors adopted the foregoing Resolution, effective March 5, 1986. The Articles of Agreement were signed by the Honorable Boanereke Boanereke, Minister of Finance of the Republic of Kiribati, on behalf of the Government of Kiribati, on June 3, 1986.

Resolution No. 41-3

Membership for Poland

On November 6, 1981, the Government of Poland applied for admission to membership in the International Monetary Fund. The Executive Board resolved on April 21, 1986 that action on the application should not be postponed until the next regular meeting of the Board of Governors. In accordance with Section 13 of the By-Laws, the following Resolution was submitted to the Governors on April 24, 1986 for a vote without meeting: WHEREAS, Poland on November 6, 1981 requested admission to membership in the International Monetary Fund in accordance with Section 2 of Article II of the Articles of Agreement of the Fund; WHEREAS, pursuant to Section 21 of the By-Laws of the Fund, the Exec- utive Board has consulted with the representative of Poland and has agreed upon the terms and conditions which, in the opinion of the Executive

Board, the Board of Governors may wish to prescribe for admitting Poland to membership in the Fund; Now, THEREFORE, the Board of Governors, having considered the recommendations of the Executive Board, hereby resolves that the terms and conditions upon which Poland shall be admitted to membership in the Fund shall be as follows: 1. Definitions: As used in this Resolution: (a) The term "Fund" means the International Monetary Fund; (b) The term "Articles" means the Articles of Agreement of the In- ternational Monetary Fund, as amended; (c) The term "SDR" (or SDRs, as appropriate) refers to the special drawing right of the Fund. 2. Quota: The quota of Poland shall be SDR 680 million. 3. Payment of Subscription: The subscription of Poland shall be equal to its quota. Poland shall pay 22.7 percent of its subscription in SDRs or in the currencies of other members selected by the Managing Di- rector from those currencies that the Fund would receive in accordance with the operational budget in effect at the time of payment. The balance of the subscription shall be paid in the currency of Po- land. 4. Timing of Payment of Subscription: Poland shall pay its subscription within six months after accepting membership in the Fund. 5. Exchange Transactions with the Fund and Remuneration: Poland may not engage in transactions under Article V, Section 3, or receive remuneration under Article V, Section 9, until its subscription has been paid in full. 6. Exchange Arrangements: Within 30 days after accepting membership in the Fund, Poland shall notify the Fund of the exchange arrangements it intends to apply in fulfillment of its obligations under Article IV, Section 1 of the Articles. 7. Representation and Information: Before accepting membership in the Fund, Poland shall represent to the Fund that it has taken all action necessary to sign and deposit the Instrument of Acceptance and sign the Articles as contemplated by paragraph 8(a) and 8(b) of this Resolution, and Poland shall furnish to the Fund such information in respect of such action as the Fund may request. 8. Effective Date of Membership: After the Fund shall have informed the Government of the United States of America that Poland has complied with the conditions set forth in paragraph 7 of this Résolu-

tion, Poland shall become a member of the Fund on the date when Poland shall have complied with the following requirements: (a) Poland shall deposit with the Government of the United States of America an instrument stating that it accepts in accordance with its law the Articles and all the terms and conditions prescribed in this Resolution, and that it has taken all steps necessary to enable it to carry out all its obligations under the Articles and this Reso- lution; and (b) Poland shall sign the original copy of the Articles held in the Ar- chives of the Government of the United States of America.

9. Period for Acceptance of Membership: Poland may accept membership in the Fund pursuant to this Resolution not later than six months after the effective date of this Resolution, which date shall be the date of its adoption by the Board of Governors; provided, however, that, if the circumstances of Poland are deemed by the Execu- tive Board to warrant an extension of the period during which Poland may accept membership pursuant to this Resolution, the Executive Board may extend such period until such later date as it may determine.

The Board of Governors adopted the foregoing Resolution, effective May 27, 1986. The Articles of Agreement were signed by the Honorable Stanislaw Nieckarz, Minister of Finance of the Polish People 's Republic, on behalf of the Government of Poland, on June 12, 1986.

Resolution No. 41-4

1986 Regular Election of Executive Directors

The Executive Board resolved on July 25, 1986 that action in connection with the regulations for the conduct of the 1986 regular election of Execu- tive Directors should not be postponed until the time of the next regular meeting of the Board of Governors, at which the election would take place. In accordance with Section 13 of the By-Laws, the following Resolution was submitted to the Governors on July 25, 1986 for a vote without meeting: RESOLVED:

(a) That the proposed Regulations for the Conduct of the 1986 Regu- lar Election of Executive Directors are hereby adopted; and

(b) That a Regular Election of Executive Directors shall take place at the Annual Meeting of the Board of Governors in 1988. The Board of Governors adopted the foregoing Resolution, effective Au- gust 28, 1986.

Resolution No. 41-51

Financial Statements, Report on Audit, and Administrative Budget RESOLVED: That the Board of Governors of the Fund considers the Report on Audit for the Financial Year ended April 30, 1986, the Financial Statements contained therein, and the Administrative Budget for the Financial Year ending April 30, 1987 as fulfilling the requirements of Article XII, Section 7 of the Articles of Agreement and Section 20 of the By-Laws.

Resolution No. 41-61

Amendments of the Rules and Regulations RESOLVED: That the Board of Governors of the Fund hereby notifies the Executive Board that it has reviewed the amendments of Rules B-4, I-10, and O-l, which have been made since the 1985 Annual Meeting, and has no changes to suggest.

1 Adopted by the Board of Governors of the Fund, in Joint Session with the Boards of Governors of the Bank, IFC, and IDA, on October 3, 1986.

©International Monetary Fund. Not for Redistribution Interim Committee of the Board of Governors on the International Monetary System

PRESS COMMUNIQUÉ

September 29, 1986

1. The Interim Committee of the Board of Governors of the Interna- tional Monetary Fund held its twenty-seventh meeting in Washington, D.C. on September 28-29, 1986, under the chairmanship of Mr. H. Onno Ruding, Minister of Finance of the Netherlands. Mr. Jacques de Larosière, Managing Director of the International Monetary Fund, participated in the meeting. The meeting was also attended by observers from a number of international and regional organizations and from Switzerland.

2. The Committee noted that economic developments since its last meeting have been somewhat mixed. The pace of activity in the industrial countries was slower than expected in the early part of the year, contributing to sluggish growth in world trade and a further decline in already low commodity prices. Also, unemployment still remains high in many countries. More recently, however, there have been indications that economic activity had begun to pick up and that economic performance in industrial countries would be stronger in the second half of 1986 and in 1987, as the lagged effect of lower interest rates and terms of trade gains led to higher private expenditure in real terms.

The Committee welcomed the further improvement in price performance in industrial countries, as well as the lower level of interest rates and the adjustments in exchange rates that have taken place among the major currencies and have led to a more satisfactory pattern of exchange rates. It felt that these developments will help place the international economy on a firmer footing. Nevertheless, the Committee realized that uncertainties still exist and considered that the basis for durable growth must be strengthened: the reduction in the federal fiscal deficit sought by the U.S. authorities has to be translated into fact; domestic demand growth outside the United States has to be sustained at an adequate pace, especially in those countries whose relatively strong domestic and external positions provide them with room for maneuver; current account imbalances have to be reduced, not least because of their role in encouraging protectionist pressures; and structural impediments to the growth of output have to be tackled.

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3. The Committee noted that the export earnings of developing countries have been severely affected by recent declines in oil and the continued deterioration of other commodity prices, and that it has been necessary for these countries to curb further the growth of imports and domestic demand. Thus, following the recovery of 1984, the rate of growth in developing countries fell in 1985, and is expected to fall further in 1986. Fuel exporting countries and other primary product exporting countries have been severely affected by recent developments and have suffered from stagnant or declining export earnings. The Committee observed that the debt export ratio of the indebted countries, which fell in 1984, rose in 1985 and seems likely to rise again in 1986 to a higher level than that prevailing at the outset of the debt crisis. On the other hand, declines in international interest rates have brought about some reduction in the cost of servicing outstanding debt, although they remain high in real terms. 4. Committee members stressed the importance of determined implementation of the strengthened debt strategy introduced at the Seoul meetings. They agreed that a satisfactory resolution of the debt difficulties facing the indebted countries was dependent on three basic requirements: effective policies in the indebted countries themselves, aimed at the mobilization of domestic savings, improved allocation of resources, and the maintenance of external competitiveness; satisfactory growth in, and access to, export markets; and adequate external financial support for growth-oriented programs of adjustment. The Committee members emphasized the central role of the Fund in promoting growth-oriented adjustment programs, including the provision of assistance to its members in the design and financing of such programs, taking into account the individual circumstances of indebted countries. They noted that close collaboration between the Fund and the World Bank has been an essential part of efforts to support efficient resource use and growth-oriented policy reforms in member countries. In this connection, they welcomed the stepped-up loan commitments of the World Bank. The contribution that both institutions are making as financial catalysts was also stressed. Committee members welcomed the proposed package for Mexico as an example of the strengthened debt strategy and hoped that the package can be finalized promptly. The Committee recognized the significant debt relief provided by official rescheduling in the Paris Club. In this connection, it noted with satisfaction the greater flexibility of official export credit agencies of industrial countries in resuming, or increasing, cover for countries whose debts have been rescheduled and which are undertaking the necessary policy adjustments to restore creditworthiness. It was noted that a significant number of the most heavily indebted countries have made good progress in strengthening domestic economic performance and improving their pros-

©International Monetary Fund. Not for Redistribution 312 SUMMARY PROCEEDINGS, 1986 pects for attracting increased flows of funds. Nevertheless, while the recent volume of lending commitments by multilateral development banks has been encouraging and officially supported export credits have grown notably, other sources of finance, particularly commercial bank lending, have declined and need to play a greater role. The Committee also urged that concessional assistance to low-income countries should increase. 5. The Committee expressed concern that protectionist pressures have intensified and noted that many difficult trade policy issues are in need of urgent attention. Particular mention was made of the harmful consequences of subsidies. The importance of a liberal trading environment was also stressed as a key element for a satisfactory solution to current debt difficulties and for the needed structural changes in both industrial and developing countries. In addition, it was emphasized that a strengthened and more open multilateral trading system is needed to reinforce international cooperation and improve world growth prospects. The major trading nations have a special role to play in keeping markets open and tackling trade policy problems flexibly, but developing countries should also resist pressures toward inward-oriented policies. The Committee warmly welcomed the recent Ministerial Declaration on the Uruguay Round of multilateral trade negotiations, which is aimed at halting and reversing protectionism and developing a more open multilateral trading system, thereby reaffirming the role of trade policy in facilitating sustainable economic growth. Given the difficulty of the task, the Committee urged governments to make every effort to ensure an early and successful conclusion to the new round. 6. The Committee noted the progress made thus far in operations under the Structural Adjustment Facility (SAP) and the strengthened Fund- Bank collaboration evident in these operations. The Committee members stressed the potential that the SAF holds for promoting adjustment and growth in low-income countries and agreed that it would be desirable to enhance the catalytic role of the SAF in mobilizing additional multilateral and bilateral concessional resources for those countries that can absorb them most efficiently, without adversely affecting the availability of concessional development finance for low-income countries not availing themselves of the SAF. They noted that the Executive Board is due to review the operation of the facility in the light of the experience gained. 7. The Committee continued its exchange of views on issues related to the international monetary system that were examined in the reports put before it by the Group of Ten and the Group of Twenty-Four in October 1985. The Committee urged the Executive Board to examine expeditiously the role of the Fund as referred to in the reports of the Group of Ten and

©International Monetary Fund. Not for Redistribution INTERIM COMMITTEE 313 the Group of Twenty-Four. The Committee's discussion focused on the use of indicators in surveillance and the potential role of the SDR. Committee members welcomed the agreement at the Tokyo Summit to use indicators in conducting surveillance as part of efforts to strengthen international economic cooperation. They also supported the greater use, in the latest World Economic Outlook analysis, of indicators of economic policies and performance. They considered that this analysis was helpful in focusing attention on potential incompatibilities in national economic policies and projections, particularly among the larger countries whose policies have substantial international impact. A key focus of indicators should be on points of interaction among national economies, in particular developments affecting the sustainability of balance of payments positions, and on the policies underlying them. It was generally agreed that a better use of indicators would be a helpful tool in strengthening the Fund's surveillance activities. The Committee asked the Executive Board to develop further the application of indicators in the context both of the periodic consultations with individual member countries and of the World Economic Out- look so as to facilitate the multilateral appraisal and coordination of economic policies.

8. With regard to the role of the SDR in the international reserve system, the Committee noted that the Executive Board had reviewed various aspects of the SDR system, including proposals relating to post-allocation adjustments of the distribution of SDRs among members and to techniques for improving the pattern of members' SDR holdings in relation to other reserve assets. The Committee welcomed the substantial increase in voluntary transfers of SDRs among members, which served to improve the liquidity and usability of the asset. It considered that the SDR, which is an owned reserve asset, can play a useful role as a component of international reserves and as a unit of account. It also recognized the potential use of the SDR as a "safety net" against unexpected contingencies. The Committee requested the Executive Board to continue its discussions of proposals to enhance the contribution of the SDR to the creation and allocation of international liquidity.

9. The Committee noted the report by the Managing Director on a recent Executive Board discussion of the question of SDR allocation in the next allocation period, 1987-91. Although most of the Executive Directors had supported an SDR allocation in that discussion, the broad support needed under the Articles of Agreement had been lacking. The Committee urged the Board to keep the matter under review. In this regard, the Com- mittee welcomed the intention of the Executive Board to study further the long-term global need for reserve supplementation in the context of the conditions under which the international monetary and exchange systems are now operating. It invited the Board to report on the results of this ex-

©International Monetary Fund. Not for Redistribution 314 SUMMARY PROCEEDINGS, 1986 amination and on the progress made about an allocation at the Commit- tee's next meeting. 10. The Committee discussed the question of the Fund's policy on enlarged access and the limits on access to the Fund's resources in 1987. It was recalled that enlarged access is of a temporary character and that this policy and the limits applicable under it, as well as the access limits under the Fund's special facilities, were to be reviewed before the end of 1986. The Committee noted that, in view of the uncertainties that continued to surround the world economy and of the worsening payments difficulties of a number of member countries, there was a need to continue the enlarged access policy. In the circumstances, it was judged that the present access limits, both under the enlarged access policy and under the special facilities, should be retained in 1987. The Committee also noted that the Execu- tive Board had concluded, in its recent review of the Fund's liquidity and financing needs, that the Fund's liquidity position continues to be broadly satisfactory. The Committee requested the Executive Board to complete, before the end of this year, the necessary action in order to implement the agreement reached in the Committee. 11. The Committee welcomed the offer made by Japan to provide the Fund with SDR 3 billion to enhance its ability to support members' adjustment efforts. 12. The members of the Committee paid special tribute to Mr. de Larosière's wise, imaginative, and courageous leadership of the Interna- tional Monetary Fund. They were unanimous in expressing warm and deep appreciation for his many outstanding accomplishments as Manag- ing Director and for his invaluable contributions to the work of the Interim Committee. His dedication to achieving the purposes of the International Monetary Fund and his inspiring service have been of key importance in the guidance of the international monetary system at a critical period for the world economy. 13. The Committee agreed to hold its next meeting in Washington, D.C. on April 9, 1987.

INTERIM COMMITTEE COMPOSITION

as of September 28-29, 1986 H. O. Ruding, Chairman Mohammad Abalkhail1 Saudi Arabia Hikmat M. Al-Azzawi Iraq James A. Baker III United States Edouard Balladur France Mark Eyskens Belgium Kjell-Olof Feldt Sweden Dilson Domingos Funaro Brazil Giovanni Goria Italy Paul J. Keating Australia Nigel Lawson United Kingdom Liu Hongru China Kiichi Miyazawa Japan Bader-Eddine Nouioua Algeria Pay Pay wa Syakassighe Zaïre Gustavo Petricioli Mexico H. O. Ruding2 Netherlands Kamchorn Sathirakul Thailand Vishwanath Pratap Singh3 India Juan Vital Sourrouille Argentina Gerhard Stoltenberg Germany, Federal Republic of Robert C. Tubman Liberia Michael H. Wilson Canada

Alternate attending for the member: 1 Hamad Al-Sayari 2 W. F. Duisenberg 3 R. N. Malhotra

©International Monetary Fund. Not for Redistribution Joint Ministerial Committee of the Boards of Governors of the Bank and the Fund on the Transfer of Real Resources to Developing Countries (Development Committee)

PRESS COMMUNIQUÉ

September 29, 1986

1. The Development Committee held its twenty-ninth meeting in Wash- ington, D.C., on September 29, 1986, under the chairmanship of His Ex- cellency Ghulam Ishaq Khan. Mr. Barber B. Conable, President of the World Bank, Mr. Jacques de Larosière, Managing Director of the Interna- tional Monetary Fund, and Mr. Fritz Fischer, Executive Secretary of the Development Committee, participated in the meeting. Observers from a number of international and regional organizations and Switzerland also attended.

2. The Committee heard a report from the IMF Managing Director on the discussions in the Interim Committee on the world economic outlook and on the evolving debt situation. The Committee also heard the Manag- ing Director on the progress made by many developing countries in promoting adjustment and growth with support from the Fund.

3. In considering the importance of reviving growth in the heavily indebted middle-income countries, the Committee reiterated its support for the general approach to achieving sustainable growth as endorsed at its previous two meetings. It recognized, however, that substantial additional efforts continue to be required by all the major participants—indebted countries, industrial countries, commercial banks, and international financial and development institutions—given the current economic environment. The Committee requested that the Bank and Fund continue to review the implementation of growth-oriented programs, including the availability of adequate financing, and report on progress achieved to future meetings of the Committee.

4. The Committee was encouraged that many developing countries are undertaking domestic policy reforms which are the basis upon which concerted international action has been built. The heavily indebted countries need to continue to implement growth-oriented adjustment programs, with support from the Fund and the Bank. Such programs should allow these countries to put less reliance on debt-creating external financing, en-

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©International Monetary Fund. Not for Redistribution DEVELOPMENT COMMITTEE 317 courage reflows of flight capital, and promote increased equity investment, domestic and foreign. 5. The success of such programs undertaken by the developing countries is dependent, however, on actions taken by the industrial countries which include, inter alia, greater coordination of macroeconomic policies, domestic policy changes, trade liberalization, and further long-term structural adjustment designed to assure a higher level of sustained growth. 6. Overall net lending to heavily indebted countries by commercial banks has thus far fallen short of expectations. Bearing in mind the critical place of commercial banks in implementation of the debt strategy, the Committee stressed the importance of the banks' providing substantial net additional flows, in adequate amounts and on appropriate terms, in support of comprehensive growth-oriented programs. 7. The Committee welcomed the initiatives taken by the World Bank and the IMF in many highly indebted countries. The catalytic and advisory roles of these two institutions have been, and will continue to be, of help in developing and implementing effective programs. The Committee welcomed the significant expansion in the past year of World Bank lending for structural and sectoral reforms in these countries, which provides further evidence of the Bank's ability to move rapidly and substantially in support of borrowers' structural adjustment and development programs. A report from the Bank on the poverty impact of such programs was requested by Members to be submitted for consideration at a future meeting of the Committee. The Committee agreed it would be extremely important to assure that the momentum of reform now underway in these countries be maintained and that the scale and range of Bank activities would need to continue to grow in support of these developments. 8. Ministers also reaffirmed the importance they attached to the central role of the World Bank as a global development institution; its fundamental objectives continue to be the acceleration of economic growth and the alleviation of poverty, and the support of investment activities should remain the predominant part of the Bank's total lending program. 9. Given these expanding requirements for Bank involvement in both the heavily indebted countries and other Bank borrowers, the Committee noted with satisfaction that IBRD lending in the current fiscal year was expected to increase to about $15 billion, from $11.4 billion in fiscal year 1985 and $13.2 billion in fiscal year 1986, with further increases in future years expected to follow the growth path approved in April 1986 by the Committee. The Committee reiterated its assurance that lack of capital should not be a constraint on increases in the Bank's quality lending and noted that the existing capital stock of the Bank can currently support a maximum continued lending level of about $14.5-15 billion per year.

10. To maintain the momentum of the reform effort and to permit the growth in IBRD lending envisaged for the period through fiscal year 1990, the Committee agreed that a substantial general capital increase (GCI) will be required if quality lending materializes as expected. The Committee urged the Bank's Executive Directors to continue their discussions of GCI modalities to permit agreement on a proposal for a General Capital In- crease as needed to ensure that the Bank's lending program is not constrained by the availability of capital. In this context, Members of the Committee recognized that, should quality lending materialize as projected, it is possible the program for fiscal year 1988 might exceed the sustainable lending limit on a temporary basis.

11. The Committee also concentrated its attention on issues of particular concern to low-income countries. In these discussions it benefited from the participation of the Chairman of the OECD Development Assistance Committee (DAC). The Committee discussed the resource needs of all low- income countries and recognized the importance of official development assistance (ODA) flows to their improved economic performance and sustained growth. The Committee expressed its concern that total ODA flows are likely to grow slowly and remain inadequate for the pressing needs of low-income countries. The Committee encouraged donor country members to make maximum efforts, as a matter of urgency, to increase their ODA budgets, especially to help meet the needs of the poor countries. The value of a strong multilateral concessional assistance system was also emphasized, particularly given its focus on the poorest countries.

12. The Committee noted the progress made thus far in the operation of the Fund's Structural Adjustment Facility (SAF), including closer Fund- Bank collaboration. Ministers reiterated that cross-conditionality must be avoided and that the two institutions should seek to complement the SAF with additional bilateral and multilateral resources.

13. The Committee welcomed the statement of the Chairman of the IDA Deputies, reporting great progress achieved in the negotiations held on September 23-25. It encouraged all parties contributing to IDA to fi- nalize the replenishment agreement for an IDA-8 of $12 billion or more. In this context, Ministers urged additional voluntary contributions from all donors in a position to make them. The Committee hoped the entire replenishment negotiation would be completed as soon as possible, but not later than November 1986, to enable IDA-8 to take effect on July 1, 1987. Some members of the Committee expressed concern about effects on borrowing countries of shortening of maturities and differentiation in terms during IDA-8 and expressed hope that the universal character of the Asso- ciation could be maintained.

14. The Committee reviewed recent developments concerning sub- Saharan Africa, including the constructive outcome of the U.N. Special Session which, inter alia, adopted the U.N. Program of Action for African Economic Recovery and Development, 1986-1990. Ministers urged multilateral and bilateral agencies to assist in implementing the program. Mem- bers noted that 1986 offered some welcome, albeit modest, relief from difficult economic conditions for many of the poorest African countries, but it recognized that these improvements did not indicate a break in the long- term declining trend in economic and social indicators. African governments continue to make progress in policy reform, but resource availability remains a major constraint. The Committee recalled its conclusion in April 1986 that industrial countries should exert their best efforts to close the estimated $2.5 billion annual gap in concessional flows needed over the next five years by low-income countries in sub-Saharan Africa undertaking significant reform efforts; members agreed that further efforts were required if this goal were to be met and asked the Bank to report in a year's time on progress achieved.

15. In accord with the Committee's mandate, members agreed on the need to maintain a regular overview of developments in the transfer of resources, including concessional flows, to developing countries. In this context, the World Bank was asked to prepare for a future meeting a study of the external resource requirements of poor countries outside Africa as well as to continue its regular review of Africa's economic situation and resource requirements.

16. The Committee also stressed the importance of strengthening the coordination of aid flows in low-income countries to increase their effectiveness and to reduce administrative burdens on recipient governments. It appreciated the actions already taken by the international community (as summarized in a World Bank report on Aid Coordination in Sub-Saharan Africa prepared at the Committee's request) and urged the Bank to continue to exert leadership when taking or participating in further initiatives along the lines set forth in the report, including strengthening aid recipients' capacity to play the central role in aid coordination and encouraging joint monitoring in interested recipient countries through adequate mechanisms. Ministers also encouraged the Bank to follow up its suggestion that the costs of aid coordination be shared with other donors. The Com- mittee requested a report in a year's time on further progress achieved in aid coordination.

17. The Committee agreed to discuss at its next meeting the issues of environment, growth, and development, including policy dimensions and project experience, on the basis of a report to be prepared by the World Bank.

18. The Committee noted that the Convention establishing the Multi- lateral Investment Guarantee Agency (MIGA) has been signed by 45 countries, including 34 developing countries, and that preliminary agreement has just been reached among signatory countries on MIGA's detailed plans and operational policies. Interested governments were urged to sign the MIGA Convention, and, if they have already done so, to ratify it as soon as possible so that the new agency can quickly begin to serve its objectives, including the stimulation of increased flows of private investment to developing countries. 19. Members expressed concern about growing problems in world trade, which were having an adverse impact on developing country growth prospects, including, particularly, increased protectionism and the spread of subsidies or other incentives to production and export of agricultural commodities and other goods. The Committee noted that in response to its request at the April 1986 meeting, the Bank and Fund are preparing a report on market prospects of raw materials for discussion at its next meeting. The Committee asked that this report also include analysis of the impact of industrial countries' agricultural policies on developing countries' economic prospects. 20. The Committee was informed by the GATT Director General of the Punta del Este decision to launch a new round of multilateral trade negotiations—the Uruguay Round—and welcomed it as a significant step in strengthening and expanding the international trading system. The Com- mittee emphasized that effective implementation of the standstill and rollback commitment made at Punta del Este was essential for reducing protectionism and to the success of the new round. Members invited the GATT Director General to continue to keep the Committee informed about progress in the negotiations. 21. The Committee took note of a report by the Chairman on the modalities of cooperative arrangements for improvements in the financial and monetary system's impact on growth and development. This report had been requested by the Committee at its April 1986 meeting. 22. Members placed on record their special appreciation for the Chair- man's long and distinguished service to the Committee. His imaginative, active, thoughtful, and balanced direction of the Committee's work contributed significantly to its effectiveness as a forum for consideration of important international economic issues facing developed and developing countries. Members expressed their deep appreciation and gratitude for his lasting contributions to the promotion of development and wished him well in the future. 23. The Committee recorded its deep appreciation to Mr. de Larosière for the singular achievements and the exceptional leadership that had dis-

©International Monetary Fund. Not for Redistribution DEVELOPMENT COMMITTEE 321 tinguished his years as the Managing Director of the International Mone- tary Fund. He had helped the international community to meet the demands of difficult times with boldness, resourcefulness, and per- severence, and the Committee wished him well in his future tasks.

24. The Committee agreed to meet again in Washington, D.C. in the second week of April, 1987.

DEVELOPMENT COMMITTEE COMPOSITION

as of September 29, 1986

Ghulam Ishaq Khan, Chairman Mohammad Abalkhail! Saudi Arabia James A. Baker III United States Edouard Balladur2 France Mohamed Berrada Morocco Alberto Dahik3 Ecuador Daim Zainuddin Malaysia Uffe Ellemann-Jensen4 Denmark Mark Eyskens Belgium Giovanni Goria Italy Ghulam Ishaq Khan5 Pakistan Paul J. Keating6 Australia Abdoulaye Koné Côte d'Ivoire Nigel Lawson United Kingdom Kiichi Miyazawa Japan Chu S. P. Okongwu Nigeria H. O. Ruding Netherlands Vishwanath Pratap Singh7 India Carlos Solchaga Spain Wang Bingqian China Juergen Warnke Germany, Federal Republic of Michael H. Wilson Canada Ricardo Zerbino Cavajani Uruguay

Alternate attending for the member: 1 Hamad Al-Sayari 2 Daniel Lebegue 3 Carlos Julio Emanuel 4 Bjorn Olsen 5 Bader Meshari Al-Humaidhi 6 Jaime V. Ongpin 7 S. Venkitaramanan

PRESS ANNOUNCEMENT

October 2, 1986

At its thirtieth meeting in Washington, D.C., on October Z, 1986, the Development Committee selected His Excellency B. T. G. Chidzero, Min- ister of Finance, Economic Planning and Development of Zimbabwe, as Chairman.

DEVELOPMENT COMMITTEE COMPOSITION

as of October 2, 1986

Ghulam Ishaq Khan, Chairman Mohammad Abalkhail{ Saudi Arabia James A. Baker III2 United States Edouard Balladur3 France Mohamed Berrada4 Morocco B. T. G. Chidzero Zimbabwe Alberto Dahik5 Ecuador Mark Eyskens6 Belgium Giovanni Goria7 Italy Paul J. Keating8 Australia Ghulam Ishaq Khan9 Pakistan Abdoulaye Koné Côte d'Ivoire Nigel Lawson10 United Kingdom Kiichi Miyazawa11 Japan Gustavo Petricioli Mexico H. O. Ruding12 Netherlands Vishwanath Pratap Singh13 India Suthee Singhasaneh14 Thailand Pekka Vennamo Finland Wang Bingqian China Juergen Warnke15 Germany, Federal Republic of Michael H. Wilson16 Canada Ricardo Zerbino Cavajani17 Uruguay

Alternate attending for the member: 1 Usamah J. Faquih 10 J. A. L. Faint 2 Robert B. Keating 11 Kenji Yamaguchi 3 Hélène Ploix 12 Leo Van Maare 4 M'Hamed Tazi M'Zalek 13 C. R. Krishnaswamy Rao Sahib 5 Carlos Julio Emanuel 14 Vibul Aunsnunta 6 Jan M. G. Vanormelingen 15 Eberhard Kurth 7 Mario Draghi 16 B. J. Drabble 8 Ronald H. Dean 17 Diego Cardoso 9 Fawzi Hamad Al-Sultan

Afghanistan J. Julio Dreizzen Eduardo J. Escasany Governor Bassir Ranjbar Ernesto Feldman Santiago J. Galindez Temporary Alternate Governor Carlos Garcia Tudero Gul Ahmad Hasin Rene Santiago Giorgis Jorge Gonzalez Algeria Gustavo Grinspun Governor Beatriz Harretche Bader-Eddine Nouioua Luis Herrera Temporary Alternate Governor Guillermo J. Hunt Bouasria Belghoula Alberto F. Ibanez Advisors Mario Luis Kenny Mustapha Achour Cristian Andres Koch Fawzi Benmalek Oscar Lamberto Cherif Chikhi Benito J. Lucini Mourad Khellaf Roque Maccarone Sid Amar Lazli Daniel Marx Ferhat Lounes Jorge Matzkin H.E. Mohamed Sahnoun Daniel Merino Mahfoud Zerouta Monica Merlo Fernando L. Nebbia Antigua and Barbuda Arturo O'Connell Juan Manuel Peire Governor Keith Hurst Horacio Patricio Peralta Ramos Luis Remaggi Alberro Alternate Governor Alphonsus C. Derrick Antonio Martin Rivolta Rodolfo Rua Boiero Jesus Sabra Argentina Jorge Sakamoto Governor Arturo Valles Bosch H.E. Juan Vital Sourrouille Oscar Jose Viglianco Alternate Governor Mario Alejandro Weitz Mario S. Brodersohn Eduardo A. Zalduendo Advisors Raul Zavalla Carbo Ubaldo Jose Aguirre A. Guillermo Zoccali Horacio A. Alonso Hugo Arbarello Enrique E. Ariotti Australia Raul Baglini Governor Felix Alberto Camarasa Hon. Paul J. Keating, M.P. H.E. Enrique Candioti Temporary Alternate Governor Carlos Alberto Carballo R.J. Whitelaw, O.B.E., A.M. Pablo Marón Challu Advisors Alfredo V. Chiaradia Grant A. Bailey Jorge F. Christensen J.A. Fraser Ramon da Bouza Graham K. Hodges Santiago del Puerto Barry Hughes

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Australia (continued) Advisors Advisors (continued) Winston A. Cox H.E. Peter D. Laurie W.E. Norton Rashid O. Marville Brett G. Rowse George L. Reid C. Richard Rye Ewen L. Waterman Belgium Austria Governor Jean Godeaux Governor Alternate Governor Stephan Koren Rene Lauwerijns Alternate Governor Advisors Thomas Lachs Jean-Pierre Arnoldi Temporary Alternate Governor Jacques de Groóte Heinrich G. Schneider Dirk P.M.F. Heremans Advisors Luc Hubloue Wolfgang Duchatczek Georges A.E. Janson Heinz Kienzl Guy Noppen Klaus Muendl Christian Petit Jacques Roelandts The Bahamas Andre Taymans Governor Alois van de Voorde Rt. Hon. Sir Lynden O. Pindling, KCMG, PC Walter Van Gerven Alternate Governor Jan M.B. Vanormelingen William C. Allen Advisors Owen S.-M. Bethel Belize Gerard Burrows Governor Carlene Francis Rt. Hon. Manuel Esquivel Calvin Knowles Alternate Governor Hon. Alfred T. Maycock Alan David Slusher H.E. Margaret E. McDonald Advisors H.E. Edward A. Laing Bahrain Nestor Vasquez Governor H.E. Ibrahim Abdul Karim Benin Alternate Governor Abdulla Hassan Saif Governor H.E. Hospice Antonio Advisor Isa Ali Saad Alternate Governor Gilbert Medje Advisors Bangladesh Placide Azande Governor Constant B. Koukoui M. Nurul Islam Alternate Governor M. Mustafizur Rahman Bhutan Temporary Alternate Governor Governor Nazem Ahmed Chowdhury Dorji Tshering Advisors Alternate Governor M.A. Halim Chowdhury Yeshey Zimba A.K. Nasim Hyder

Barbados Bolivia Governor Governor Hon. Richard C. Haynes H.E. Juan Cariaga Osorio Alternate Governor Alternate Governor Courtney N. Blackman Jaime Delgadillo Cortez

Advisors Adroaldo Moura da Silva David Blanco Jose Souza Santos Roberto Capriles Maria Celina Arraes Vinhosa Miguel Fabbrt Carlos Fernandez Burkina Faso Fernando Gonzalez Guido Hinojosa Governor H.E. Talata Eugene Dondasse Jose Justiniano Temporary Alternate Governor Julio Leon Prado Noel Kabore Luis Minaya Advisor Ramiro Moreno Moussa Kone Luis A. Paz Edgar Schwarz Burma Botswana Governor U Maung Maung Hla Governor Alternate Governor Charles N. Kikonyogo U Kyaw Myint Alternate Governor Advisors Cosmas Gabotlhatswe Mogami U Aye Lwin Temporary Alternate Governor U Win Naing Muhammad N. Bhuiyan Aung Pe Advisors Ben I. Gasennelwe K. Kuiper Burundi Ditshego Isaac Mosienyane Alternate Governor Andre Nikwigize Brazil Advisors H.E. Edouard Kadigiri Governor P. Mikanagu H.E. Dilson Domingos Funaro Bernard Sunzu Alternate Governor Fernao C.B. Bracher Temporary Alternate Governors Cameroon Alvaro Gurgel de Alencar Governor Gamillo Calazans de Magalhaes Edouard M. Koulla Alexandre Kafka Alternate Governor Luiz P.P. Lampreia Gottlieb Titti Antonio de Padua Seixas Temporary Alternate Governor Francisco Thompson-Flores Netto H.E. Paul Pondi Advisors Advisors Jose Roberto N. Almeida Henri Epanda Sergio Silva do Amaral Isaac Njiemoun Joaquim Ferreira Amaro Bayard Nna Ze Carlos Alberto Amorim, Jr. Luiz Barbosa Paulo Nogueira Batista, Jr. Canada Luiz G.M. Belluzzo Governor Antonio de Azevedo Bonfim Hon. Michael H. Wilson Marco Antonio Diniz Brandao Alternate Governor Carlos R. Cristalli Bernard J. Drabble Luiz Fernando Monteiro Faria Temporary Alternate Governors Steven Charles Kanitz Gerald K. Bouey Dalmir Sergio Louzada John C. Coleman Francisco Vidal Luna Stanley H. Hartt Alexandre Augusto de Faria Machad Marcel Massé Pedro Luiz Carneiro de Mendonca Advisors Roberto Muller Richard B. Davis Ivo Pereira de Oliveira Filho Robert R. de Cotret Jose Roberto Procopiak Walter N. Engert

Canada (continued) Andres Pasicot (continued) Vladimir Radie Piraino Advisors Adolfo Rojas Gandulfo Gerry Grant Cristian A. Salinas Glen D. Hodgson Hernán Somerville S. Alain Jubinville Boris Subelman B. Don McCutchan Roberto Tosso Blaine Modin Jorge Valenzuela Richard Remillard Karen Richter Philip M. Smith China David S. Wright Governor Liu Hongru Cape Verde Alternate Governor Zhang Zhixiang Governor Temporary Alternate Governors Amaro Alexandre da Luz Dai Qianding Alternate Governor Huang Fanzhang Jose Maria Cardoso Jiang Hai Wang Baoliu Central African Republic Advisors Governor Chang Liangcai H.E. Jean-Louis Gervil Yambala Song Guangwei Alternate Governor Wang Xiaoping Alphonse Koyamba Yang Jingping Advisors Yang Weimin Jean Baptiste Assiga Ahanda Ye Xiaoyan Constant Gouyomgbia-Kongba-Zeze H.E. Christian Lingama-Toleque Colombia Maurice Moutsinga Governors X.L. Nguyen H.E. Virgilio Barco Hon. Cesar Gaviria Trujillo Chad Alternate Governor Governor Francisco J. Ortega H.E. Ngarnayal Mbailemdana Temporary Alternate Governors Alternate Governor Hernán Mejia J. Madji Adam H.E. Francisco Posada de la Pena Advisor Advisors Clabe Guile Enrique Arias Jimenez Julio Manuel Ayerbe Felipe Bautista-Palacio Chile Andres Buraglia Torres Governor Juan Mario Calderón Enrique Seguel Feroce S. Dean Temporary Alternate Governor Ernesto Franco-Holguin Francisco Garces Garrido Luis Jorge Garay Advisors Florangela Gomez de Arango Lucia Avetikian de Renart Cesar Gonzalez Muñoz Marcos Ayala Antonio Hernandez Julio Barriga Silva Oscar Jaramillo Leon Dobry Folkman Consuelo Lleras Alvaro Donoso Andres Lloreda H.E. Hernán Felipe Errazuriz Armando Lloreda Francisco Javier Errazuriz T. Oscar Marulanda Roberto Kelly Vasquez Alberto Mejia Jorge Lezaeta Jorge Mejia Salazar Eliodoro Matte Larrain Eduardo Michelsen-Cuellar Benjamin Mira Fernando Montes Maria Elena Ovalle de Vignea Guillermo Nunez Vergara

Alfredo Quintero Lancina Dosso Fernando Rey Augustin Douoguih Bernardo Rueda Osorio Tekalign Gedamu Gabriel Turbay H.E. Charles Gomis Enrique Umana Yao Patrice Konan Jesus Enrique Villamizar Ángulo Babacar N'Diaye Leopoldo Villar-Borda Roger Ngosso Alvaro Villegas Villegas Martin Ogang Roberto Wills Obregon D.G. Rwegasira Oumar Alpha Sy Mamadou Taofiqui Toukourou Comoros Governor H.E. Said Ahmed Said Ali Cyprus Alternate Governor Mohamed Halifa Governor A.C. Afxentiou Advisor Caabi Elyachroutu Alternate Governor H.G. Akhniotis Advisor Congo, People's Republic of the H.E. A. lacovides Governor H.E. Itihi O. Lekoundzou Alternate Governor Denmark Gabriel Bokilo Governor Advisors Erik Hoffmeyer Mr. Bokatola Dieudonne Dibady-Mayla Alternate Governor Erling Jorgensen Alphonse Ekagna Leroy Celestin Gaombalet Temporary Alternate Governors Richard Mikkelsen Henri Biaise Gnali Lars Tybjerg Adoum Malloum Jean-Marie Omog-Samnick Advisors Niels Aage Friis Henrik W. Fugmann Costa Rica Jorn Holdt Governor H.E. Eigil Jorgensen Eduardo Lizano Fait John Kristensen Temporary Alternate Governors B. Dan Nielsen Olivier Castro Perez Jorgen Ovi Walter Coto Molina Advisors Federico Alvarez Fernandez Djibouti Silvia Charpentier Luis Liberman Governor Roberto Picado Hidalgo Luc A. Aden Silvia Saborio Alternate Governor Guillermo Solorzano A. M. Samir Koraiem

Côte d'Ivoire Governor Dominica Hon. Abdoulaye Koné Governor Alternate Governor Hon. Mary Eugenia Charles Charles Konan Banny Alternate Governor Advisors Cecil Jacobs Tiemoko Yade Coulibaly Advisors Aboubakaar Diaby-Ouattara H.E. McDonald Benjamin Tiebenon Diarrassouba William G. Demás Nicole Diaw Crispin Sorhaindo

Dominican Republic Advisors Pedro Abelardo Delgado Governor Luis Julian Perez Alfredo Milian Edgar Leonel Saballos Munguia Temporary Alternate Governor Heriberto de Castro Equatorial Guinea Advisors Juan Jose Arteaga Temporary Alternate Governors Jose Miguel Bonetti Tomas Esono Ayingono Rafael Herrera Cabrai Charles Martimore Roberto Liz Castellamos Advisors Luis Manuel Piantini Amine Ben Barka Felipe Vicini Angel N. Eman George Khamis Daniel Turover Ecuador Governor Ethiopia Carlos J. Emanuel Governor Alternate Governor Tadesse Gebre-Kidan Donato Yannuzzelli Temporary Alternate Governor Advisors Ephrem Asebe Miguel Babra Lyon Advisors Raul Basantes Tilahun Abbay Juan F. Casals Alemu Aberra Victor Eastman Muluneh Alemu Marcos Espinel Tsegaye Asfaw Rodrigo Espinosa Nigist Mekonnen Michael Hollinan Mauro Intriago H.E. Mario Ribadeneira Fiji Edgar Teran Jacinto Velez Governor H.R. Hardie Alternate Governor Egypt Sada Reddy Advisors Governor H.E. Ratu Jone Filipe Radrodro H.E. Mahmoud Salah el din Hamed Janardana Reddy Alternate Governor Abdul H. Yusuf Aly M. Negm Advisors Mahmoud Abdel-Wahab Finland Abdel Moneim Aboul-Saad Governor Abdel Halim Ali Rolf Kullberg Mohamed Mohamed Badr Alternate Governor Kazim H. Barakat Pentti Uusivirta Mohamed El Gawaly Temporary Alternate Governor H.E. El Sayed Abdel Raouf El Reed Matti Vanhala Said El-Naggar Advisors A. Abdel Ghaffar Markus Fogelholm Ahmed Ismail Antti K. Juusela Mohamed Awny Mahfouz Ilkka Puro Mahmoud Ahmed Rouby

France El Salvador Governor Governor Michel Camdessus Alberto Benitez Bonilla Temporary Alternate Governors Alternate Governor Hélène Ploix H.E. Ricardo J. Lopez Denis Samuel-Lajeunesse

Advisors Helmut Schlesinger Philippe Adhemar Hans Tietmeyer Francis Cappanera Advisors Sylvain de Forges Wolf-Ruediger Bengs Pierre de Lauzun Axel Bertuch-Samuels Bertrand de Mazières Emil Boenke Jean de Rosen Klaus Buenger Alain Dromer Enno Carstensen Jean-Claude Faure Bernd Esdar Michel Flesch Johannes Esswein Robert Granet Jochen Feilcke Paul Lemerle Hans Gliem Thierry Moulonguet Wolfgang Glomb Georges Nguyen Horst Gobrecht Christian Noyer Bernd Goos Ariane Obolensky Hansjoerg Haefele Alain Remy Gerd Haeusler Vincent Rousset Gert Haller Benoit Tellier Alois Jelonek Jean-Pierre Teyssier Karl-Heinz Kleine Patrice Vial Claus Koehler Jacques Waitzenegger Ingrid Matthaeus-Maier Stephen B. Modly Gabon Manfred H. Oblaender Heinz Rapp Governor Hans Reckers H.E. Jean-Pierre Lemboumba-Lepandou Guenther Rexrodt Alternate Governor Jean-Paul Leyimangoye Wolfgang Rieke Klaus Rose Advisors Marcel Doupamby-Matocka Adolf Roth Maurice Eyambat-Tsimat Gerd Saupe Pierre-Parfait Gondjout Dietmar Thorand Alfred Mabika Mouyama H.E. Guenther Van Well Narcisse Massala-Tsambat Ludger Volmer Samson Ngomo Karl H. von den Driesch Emmanuel Ondo-Methogo Dietrich Von Kyaw Rudiger Von Rosen Ludolf-Georg Von Wartenberg The Gambia Peter Wende Governor Hon. Sheriff S. Sisay Alternate Governor T.G.G. Senghore Advisors Momodou C. Bajo Ghana Mousa Gibril Bala Gaye Abdou Janha Governor Kwesi Botchwey H.M.M. Njai Alternate Governor John S. Addo Germany, Federal Republic of Advisors Governor George Sakyi Aburam Karl Otto Poehl Kay Amoah Alternate Governor CD. Anyomi H.E. Gerhard Stoltenberg Joao Goncalves Baeta Temporary Alternate Governors John Bentum-Williams Leonhard Gleske Yaw Osafo Maafo Guenter Grosche H.E. Eric K. Otoo Waldemar Muller-Enders Osei-Tutu Poku

Greece Guinea-Bissau Alternate Governor Governor Dimitrios Chalikias Pedro A. Godinho Gomes Temporary Alternate Governor Alternate Governor Nikolaos Garganas Alfredo Rodrigues da Silva Advisors Julia Panourgia Clones Guyana Constantine D. Georgoutsakos Governor Vassilis Kafiris Patrick E. Matthews Nikos Kyriazidis Temporary Alternate Governor Nikos Melissaropoulos D. Harris Loucas D. Papademos Advisors Spyros P. Papanicolaou H.E. Cedric Hilburn Grant Nikolaos Skoulas J. Murray Constantinos Sophoulis Haiti Governor Grenada Onill Millet Governor Temporary Alternate Governor Hon. Herbert Augustus Blaize Fritz Viala Alternate Governor Advisors Lauriston F. Wilson, Jr. Patrick Charles Advisors Joachim Noel Samuel Orgias H.E. Albert O. Xavier Honduras Governor Gonzalo Carias Pineda Guatemala Alternate Governor Abel Salazar Reyes Governor Jose Federico Linares Martinez Temporary Alternate Governors Alternate Governor Emin Abufele Hon. Rodolfo Paiz Andrade H.E. Juan Agurcia Ewing Temporary Alternate Governor Jorge Bueso Arias Gabriel Castellanos Dante Gabriel Ramirez H.E. Jaime R. Rosenthal Oliva Advisors Jorge Alexei de Synegub Advisors Gustavo Leiva Jorge A. Alvarado L. Julio Noriega Herrarte Guillermo Bueso Jose Orive Marta Julia Cox Jorge Papadopolo Carlos Falck Contreras Edgar Pape Daniel Figueroa Roberto Valladares Ramiro Figueroa Edin Velasquez Mario Gaicano Roberto Calvez Barnes Gilberto Goldstein Guinea Felix Martinez Dacosta Arecio Ochoa Governor Mario Rietti Matheu H.E. Lamine Bolivogui Armando San Martin C. Temporary Alternate Governor Jerónimo Sandoval H.E. Ousmane Sylla Paul Vinelli Advisors Abdoul Bah H.E. Tolo Beavogui Hungary Alphe Abdoul Diallo Governor Doukoure Mahamadou Janos Fekete Ousmane Kaba Alternate Governor Michel Kamano Peter Medgyessy

Advisors Iraq Ede Bako Governor Pal Péterfalvy Hikmat M. Al-Azzawi Istvan Racz Temporary Alternate Governor Tarek Al Tukmechi Advisors Iceland Muddhir M. Al-Hillawi Governor Sami F. Atto Johannes Nordal Faik Abdul Rasool Alternate Governor Mahmoud Ahmed Uthman Jon Sigurdsson Abdul Hassan Zalzalah Advisors Ingimundur Fridriksson Ireland Olafur Isleifsson Governor Hon. John Bruton Alternate Governor India Tomas F. O'Cofaigh Alternate Governor Advisors R.N. Malhotra Patrick T. Downes Temporary Alternate Governors Luke Leonard Bimal Jalan Timothy O'Grady Walshe Nripendra Misra Michael G. Tutty Arjun K. Sengupta Advisors Israel K.L. Deshpande Governor V. Govindarajan Emanuel Sharon Chander Vasudev A. Vasudevan Alternate Governor Israel Igra Advisors Valéry Amiel Indonesia Pinchas Dror Governor Ehud Polonsky Hon. Radius Prawiro Gideon Schurr Alternate Governor Channa Weinberg Sujitno Siswowidagdo Advisors Italy Sofjan Djajawinata Governor Soedradjat Djiwandono Hon. Giovanni Goria Achyar lijas Alternate Governor J.E. Ismael Lamberto Dini Adrianus Mooy Advisors Mohammad Seng Paselleri Francesco Cerulli Karnaen A. Perwataatmadja Filippo Di Mauro Retno Rahadjeng S. Giannandrea Falchi Mukhlis Rasyid Tiziano Garbo Muchtaruddin Siregar Paolo Janni H.E. Soesilo Soedarman Luigi Marini Made Sukada Rainer Stefano Masera Mauro Masi Stefano Micossi Iran, Islamic Republic of Vincenzo Prati Governor Paolo Ranuzzi Mohammad J. Vahaji Felice Scordino Alternate Governor Livio Tornetta Ali Manavi-Rad Sergio Vento Advisor Salvatore Zecchini Muhammad Arab Augusto Zodda

Jamaica Jordan Governor Governor Rt. Hon. E.P.G. Seaga, P.C. H.E. Hanna Salim Odeh Alternate Governor Alternate Governor Headley Brown Husayn S. Kasim Advisors Advisors Asgar Ally Ismail El-Zabri Horace G. Barber Adeeb Khalil Haddad Sharon R. Brown Basil A.R. Jardaneh Cécile Clayton Michel I. Marto Clement Jackson Abdul Majeed Shoman H.E. Keith Johnson, O.J. Fayez Tarawneh Derrick Latibeaudiere Jennifer Lester Kenya Deborah Lindo Governor Harold Milner, C.D. H.M. Mule Masie Plummer Alternate Governor Lorraine Wilkin Andrew K. Mullei Advisors Francis S.O. Awuor Japan W.E. Hiribae Governor Ben Kipkorir H.E. Kiichi Miyazawa H.E. S.O. Mageto Alternate Governor J.W. Mumelo Satoshi Sumita Nahashon N. Nyagah Temporary Alternate Governors G.H. Okello Hirotake Fujino Risper Okonji Toyoo Gyohten Frederick N. Ondieki Fumiya Iwasaki M.M. Wandera Toshio Ohsu Takeshi Ohta Kiribati Makoto Utsumi Kiichi Watanabe Governor Hon. Boanereke Boanereke Kenji Yamaguchi Temporary Alternate Governor Advisors Tetsuma Fujikawa Steve Pollard Yuzo Harada Tsuneo Hattori Korea Masakazu Hayashi Governor Sohei Hidaka Hon. In Yong Chung Naoki Kajiyama Alternate Governor Akira Kanno Sung Sang Park Isao Kubota Temporary Alternate Governors Masatoshi Kuratani Soo-Byung Choi Motoo Kusakabe Hong Woo Nam Iwane Maru Hyung-Sup Shim Hachiro Mesaki Advisors Zenbei Mizoguchi Young-Wook Chin Itsumi Mizumori Kun-Ho Cho Shoji Mori Joon-Gie Chung Kazuya Murakami Dong-Il Kim Akira Nambara Young Bin Kim Atsuo Nishihara Yung-Jin Kwon Masaki Ohmura Chang Soo Lee Masahiro Sugita Hak-Sung Lee Hiroo Taguchi Jong-Nam Lee Koichi Takahashi You Kwang Park Koji Yamazaki Un-Sun Ryo

Kuwait Libyan Arab Jamahiriya Governor Governor H.E. Jassim Mohamed Al-Kharafi Salem M. Geweli Temporary Alternate Governor Alternate Governor Abdul Aziz Mohammad Al-Othman AH Mohammad Souri Advisors Advisors Fahed Rashid Al-Ibrahim Abdulgader AH Muttardy Fahad Abdulla Al-Ouda Mahmud M. Shenghir Abdulal S. Al-Qenaei Muftah AH Sherif Fahed Mohamed Al-Rashed Khalid Nasser Al-Sabah Luxembourg Sheikh Salem Abdullah Al-Ahmed Al Sabah Governor Mohammed Al-Saneh H.E. Jacques F. Poos Mohammed Al-Saneh Alternate Governor Mustafa Al-Shamali Pierre Jaans Mohammed Haider-Ghuloum Advisors Ernst-Guenther Breeder Lao People's Democratic Republic H.R.H. Prince Guillaume of Luxembourg Yves Mersch Governor Alain Prate Kikham Vongsay Richard Ross Temporary Alternate Governor Jacques Silvain Chanpheng Luangsouvanvong Madagascar Lebanon Governor Governor Richard Randriamaholy Hussein Kanaan Alternate Governor Temporary Alternate Governor Nirina Ideal Andriamanerasoa Samir Akkari Advisors Advisors Tantely Andrianarivo Raouf Abou Zaki Henri Jean-Marie Tanal Al-Sabah Victor Rabary Rafic Chahine Jocelyn Rafidinarivo Fouad El-Khazen Raphael Ramanana Rahary A.A. Jammal Mamy Ramanjatoson Salim Khaireldine Jean C. Ramasinaivo Robert Ramelina Henri Ranaivosolofo Lesotho Governor Edward Waddington Malawi Alternate Governor Governor Erik L. Karlsson Hon. S.C. Hará Advisors Temporary Alternate Governor Stanley E. Khoali C.T. Mwalwanda Pascalis Tseliso Mafike Advisors E.H. Phoofolo H.M.L. Chithodwe Harry M. Mapondo Liberia A.A. Upindi Governor Hon. Robert C. Tubman Malaysia Alternate Governor Governor John G. Bestman Hon. Daim Zainuddin Advisors Alternate Governor Antoinette Monsio Sayeh Dato' Jaffar bin Hussein Christiana Tah Temporary Alternate Governor Penti Tarpeh, Jr. Tun Ismail bin Mohamed Ali

Malaysia (continued) Srikant Madan Chitnis Jagnaden P. Coopamah Advisors Khalil Akasah Premduth Kumar Fulena Abu Bakar bin Karim Rameswurlall Basant Roi Mustapha Dzulkefly Rama Sithanen Ahmad Rasidi Hazizi Dennis J. Ignatius Mexico Zakaria Bin Ismail Mohd. Izzuddin bin Yusoff Governor Jaafar Ahmad H.E. Gustavo Petricioli Abdul Kadir Alternate Governor Khong Kim Nyoon Miguel Mancera Mustapa bin Mohamed Temporary Alternate Governors Zamani bin Abdul Ghani Salvador Arrióla Ariel Buira Seira Maldives Jose Luis Flores Alfredo Phillips Olmedo Governor Carlos Sales Hon. Fathulla Jameel Francisco Suarez Davila Alternate Governor Advisors Adam Maniku Roberto Contreras Mauricio Gonzalez Mali Timoteo Harris Governor Guillermo Ortiz H.E. Dianka Kaba Diakite Hildegard Rohen Alternate Governor Ernesto Zedillo Najim Ould Hamadi Carlos Zorrilla de la Garza Advisors H.E. Lassana Keita Abdoulaye Koita Morocco Amidou Oumar Sy Governor Adama Seydou Traore Ahmed Bennani Temporary Alternate Governors Malta H.E. Abdellatif Filali Governor Mohamed Tazi Hon. Wistin Abela Advisors Alternate Governor Mohamed Aboulfadl H.C. de Gabriele H. Alaoui-Abdallaoui Advisors Hassan Belkoura Charles Cassar Fouad Benzakour Alfred Falzon H.E. Abdellatif Jouahri Omar Kabbaj Mauritania Abdellatif Loudiyi Taieb Raouf Governor M'Hamed Sagou Dieng Boubou Farba Alternate Governor Sidi Mohamed Ould Boubacar Advisor Mozambique H.E. Abdellah Ould Daddah Governor H.E. Abdul Magid Osman Mauritius Alternate Governor Joao Coutinho Governor Advisor Hon. Seetanah Lutchmeenaraidoo H.E. Valeriano Ferrao Alternate Governor Indurduth Ramphul Nepal Advisors Rundheersing Bheenick Governor Marc Bourdet Ganesh Bahadur Thapa

Alternate Governor Advisors Heet Singh Shrestha Malam Annou Mamane Advisors Boubakar Idi Gado Singha B. Basnyat Mahamadou Gado Satyendra P. Shrestha Assoumane Guiaouri Mohammed Moudi Adamou Souna Netherlands Governor W.F. Duisenberg Nigeria Alternate Governor Governor C. Maas Alhaji Abdulkadir Ahmed Temporary Alternate Governors Alternate Governor Pieter Stek Alhaji Abubakar Alhaji Andre Szasz Advisors Advisors Y. Seyyid Abdulai D. H. Boot Alhaji Abubakar Abdulkadir J. de Beaufort Wijnholds S.A. Adekanye Tom de Vries R.N. Ezeife Ronald Keller Ayodele Fadare Alfonso L. Nicolaas B.N. Iloabachie J. J. Polak Kalu I. Kalu Godert A. Posthumus R.O. Mowoe Vimy A. Servage L.C. Nebeolisa Huibrecht van der Burg O.O. Ogba Jaap Weeda N.E. Ogbe A.J.T. Williams H.E. Ignatius C. Olisemeka J.O. Sanusi Paul Uhebagwi New Zealand B.N. Unachukwu Governor Hon. David F. Caygill Alternate Governor Norway Spencer T. Russell Governor Advisors Hermod Skânland Ross L. Milner Temporary Alternate Governor Murray A. Sherwin Steinar Sorbotten Ross Tanner Advisors Bruce D. White Knut J.M. Andreassen H.E. Kjell Eliassen Nicaragua H.E. Oddmund Graham Terje Johannessen Governor Sigurd Simonsen H.E. Joaquín Cuadra Chamorro Trygve Spildrejorde Alternate Governor Arve Thorvik Jaime Valdivia Temporary Alternate Governor Silvio Conrado Oman Advisors Governor Jose Paiz Abdul Wahab Khayata Marcos Wheelock Alternate Governor Abdullah Suleiman Al-Mahrooqy Niger Governor H.E. Boukary Adji Pakistan Alternate Governor Governor Boukary Wassalke H.E. Mian Mohammad Yasin Khan Wattoo Temporary Alternate Governor Alternate Governor Mamadou Diop V.A. Jafarey

Pakistan (continued) Crispiniano Sandoval Julio Cesar Schupp Advisors Moinuddin Baqai Elodia B. Vargas H.U. Beg LA. Hanfi Peru Ihsan ul Haq Governor A.G.N. Kazi Leonel Figueroa Ramirez H.E. Jamsheed K.A. Marker Temporary Alternate Governor Hector Neyra Chavarry Panama Advisors Jaysuno Abramovich Governor H.E. Ricaurte Vasquez M. Javier Abugattas Gaston Acurio Alternate Governor Luis Alberto Arias Augusto David T. Arzubiaga Scheuch Marco Balarezo Temporary Alternate Governors Patricio Barclay Hernando A. Arias Cesar Humberto Cabrera Jose Baiz H.E. Dominador Kaiser Bazan Juan Candela Guillermo Castañeda H.E. Jose B. Cardenas Julio Cruzado Mario de Diego, Jr. Raul Delgado Mateo Milwood Hernán Garrido Lecca Pedro Mora Franciso Rodriguez Alfredo Granda Milton Guerrero Advisor Luis Heysen Zegarra Reinaldo Decerega Patricia Jenkins Adela Lerner Papua New Guinea Carlos Malpica Governor José Mejia Regalado Sir Henry To Robert, K.B.E. Raymundo A. Morales Alternate Governor Jose Ortiz Robert Kaul Felipe Osterling Advisors Javier Paulinich H.E. Kiatro Abisinito Ramón Ponce de León Lorna Brown Juan Francisco Raffo Augustine Mak Carlos Rivas Bernard Paliau Fernando Sánchez Serege Saiade Javier Silva Ruete Longas C. Solomon Celso Sotomarino Eliakim Tobolton Julio Vega Ricardo Vega Paraguay Cesar Villacorta Ricardo Watson Alternate Governor Richard Webb Duarte Oscar Jacinto Obelar Áureo Zegarra Temporary Alternate Governors Julio Rejis Sanguina Cesar Tellechea Philippines Advisors Marciano Brun Governor Juan J. Diaz Perez Jose B. Fernandez Oscar Estigarribia Temporary Alternate Governor Julio Gutierez Ernest Leung Carlos A. Heisecke Advisors Amado Martinez F. Alfiler Pedro O. Montorfano Tristan E. Beplat Manuel Nogues Evelyn M. Escudero Jesus Manuel Pallares Jesus P. Estanislao Epifanio Salcedo Carlos S. Garrido

Edward S. Go St. Kitts and Nevis Benito Legarda Governor Enrique Manalo Hon. Richard L. Caines Manuel L. Morales Alternate Governor Raul Ch. Rabe Suswin Mills Antonio V. Romualdez Advisors Reginald S. Velasco Erstein M. Edwards Edgardo P. Zialcita Hugh Guishard

Poland St. Lucia Governor Governor H.E. Bazyli Samojlik Hon. John G.M. Compton Alternate Governor Alternate Governor Zbigniew Karcz Dwight Venner Advisors Advisors Jan M. Boniuk V. Adrian Augier Jacek Czabanski McDonald Dixon Mieczyslaw Fronczak H.E. Joseph Edmunds Krzysztof Krowacki Daniel Girard Zdzislaw Ludwiczak Stanislaw Raczkowski St. Vincent and the Grenadines Portugal Governor Henry A. Gaynes Governor Alternate Governor Jose A. Vasconcelos Tavares Moreira Gillian Nanton Alternate Governor Antonio Carlos Feio Palmeiro Ribeiro Advisor Kingsley Layne Advisors Paulo Ernesto Carvalho Amorim Carlos Saldanha Do Valle Sao Tomé and Principe Governor Qatar Prudencio Reis Nascimento Oliveira Rita Governor Majed Mohd Majed Al-Saad Temporary Alternate Governor Arlindo de Carvalho Advisor Romania Maria Fatima Fortes Governor H.E. Alecsandru Babe Saudi Arabia Temporary Alternate Governor Governor Stelian Marin H.E. Sheikh Hamad Al-Sayari Advisors Alternate Governor Sergiu Contineanu Mohammed Al-Sharif loan Petre Mada Temporary Alternate Governor Traían Munteanu Yusuf A. Nimatallah Vladimir Soare Advisors Ahmed Abdulatif Rwanda Mohammed S. Abduljawad Governor Abdulaziz Al-Dukheil Augustin Ruzindana Ibrahim I. Al-Eissa Alternate Governor Mohammed Al-Hakami Juvenal Ndisanze Yusuf Hamadan Al-Hamdan Advisors Saleh Al-Humaidan Cyprien Habimana Abdulatif Hamad Al-Jabr H.E. Simon Insonere Ayeidh Al-Jeaid Emmanuel Mangona Abdulaziz Al-Kulaibi Theodore Mpatswenumugabo Khalid A. Al-Masoud

Saudi Arabia (continued) Advisors Advisors (continued) F. Jones Asgil Mohammed Al-Nafie J. Sanpha Koroma Abdullah Al-Omran Christian J. Smith Abdallah Al-Romaizan William B. Wright Liam Patrick Ebrill Abdulrahman El-Naiem Singapore Adnan Khodary Governor Suliman S. Olayan Teh Kok Peng Abdessatar Ouanes Alternate Governor Abdulrahman Sehaibani Tharman Shanmugaratnam Omar A. Sejeny Advisor Ibrahim Shams Hon Chee Won Jobarah E. Suraisry Sheikh Abdul Aziz Zaidan Solomon Islands Governor Senegal Anthony Vernon Hughes Governor Temporary Alternate Governor Hon. Mamoudou Touré John T. Kaitu Alternate Governor Advisors Alia Diene Drame John Rofeta Temporary Alternate Governor H.E. Francis J. Saemala Alioune Diagne Advisors Somalia Cheikh Cisse A. Diagne Governor D. Diagne Omar Ahmed Omar Mamadou Diatta Alternate Governor Abdoul Aziz Diop Mohamud Mohamed Nur Ahmed El Mansour Diop Advisors Silcarneyni Gueye Ali Abdi Amalow H.E. Falilou Kane Leone Fici Ousmane Noel Mbaye Abdulkadir Aden Mohamed Mamadou Ndiaye Hussein Mohamud Siad Amadou Maleine Niang Rakoto-Ramambason Ramambazafy South Africa Adama Sail Governor H. Sail Hon. B.J. du Plessis Mamadou Samb Alternate Governor Magatte Pathe Sene Christian Lodewyk Stals Abdoulaye Seye Temporary Alternate Governor Alwyn B. Taylor Gerhard P. Croeser Prosper Aliou Youm Advisors T.M. Barrett Seychelles Johannes L. Birkenstock A. Heydenrych Governor A.A. Julies Guy Morel Emile Matthee Temporary Alternate Governor Lewis Chang-Leng A.H. Peacey Y. Samie Advisor R.W.J. Grandcourt P.A. Swanepoel C. van der Walt

Sierra Leone Spain Governor Governor Victor E. Bruce Miguel Angel Fernandez Ordonez Alternate Governor Alternate Governor D.A.B. Minah Antonio Sanchez Pedreno

Advisors Swaziland Jose Casas Governor Manuel Conthe Hon. Barnabas S. Dlamini Joaquín de la Herran Alternate Governor Jose Luis Feito H.B.B. Oliver, C.B.E. Carmen Fuente Salvador Advisors H.E. Gabriel Manueco Carlton M. Dlamini Pedro Perez G.T. Magagula Juan Prat Coll Stanley Matsebula Luis Angel Rojo Duque H.E. Peter H. Mtetwa Mercedes Rubio M. Samketi Jesus Ruiz-Ayucar Fernando Sanchez-Rau Luis Sempere Sweden Alfonso Tena Governor Bengt Dennis Sri Lanka Alternate Governor Erik Asbrink Governor Temporary Alternate Governors Hon. Ronnie de Mel Thomas Franzen Alternate Governor Gunnar Lund Warnasena Rasaputra Advisors Temporary Alternate Governors Bengt Ake Berg H.E. Susantha de Alwis Lars Kalderen A.S. Jayawardena Margareta Kyhlberg Advisors Goran Lind Gamini Abeysekera Bertil Lund I. Coomaraswamy Hans Lundstrom Tara de Fonseka Ragnar Sohlman T. Sivagnanam Birgitta Von Otter

Sudan Syrian Arab Republic Governor Governor Ismail El Misbah Makki H.E. Muhammad Imady Alternate Governor Alternate Governor Abo Zied Mohamed Salih Hicham Mutewalli Advisors Advisors A.M. Afifi Souheil Al-Jafari H.E. Salah Ahmed Hamid Merci Hussain Y. Al-Ani Mohamed el Fatih Zein Alabidin Tanzania El Tayeb Hasab el Rasoul El Kogali Governor Ágil M. Elmanan Hon. C.D. Msuya M a moon I. Hassan Alternate Governor Abdel Moneim Khalifa Khogali Charles M. Nyirabu K. Marzoug Osman Ahmed Mekki Advisors H.E. Asterius M. Hyera Fath El Rahman Hassan Taha E. Kamba Sid Ahmed Tayfour M.T. Kibwana J.P. Kipokola Tuvako N. Manongi Suriname Richard E. Mariki Governor Gray Shwaibu Mgonja Subhas Ch. Mungra John M. Mugasha Alternate Governor J. Mwandumbya Dirk M.R. Currie M.B. Ngatunga Advisor S. Odunga Kenneth Schoon A.A. Suleiman

Thailand Tunisia Governor Governor Kamchorn Sathirakul Mohamed Skhiri Temporary Alternate Governors Alternate Governor Nibhat Bhukkanasut Tahar Sioud Manoch Kanchanachaya Advisors Advisors H.E. Habib Ben Yahia Somsiri Devahastin Na Ayudhy Abdeslem Ben Younes Siri Ganjarerndee Habib Bourguiba, Jr. Phaibul Ingkhavat Abdelmajid Fredj Pisit Leeahtam Chekib Nouira Sommai Phasee Mustapha Zardi

Togo Turkey Governor Governor H.E. Komla Alipui H.E. I. Kaya Erdem Alternate Governor Bawa Sandani Mankoubi Alternate Governor Yavuz Canevi Temporary Alternate Governor Boubakar Amadou Hama Advisors Oral Akman Advisors Bozkurt Aran Emmanuel Adedze Cengiz Aysun Yao Mensah Aho Osman Birsen Johnson Assiba Kutsan Celebican Aboubakar Baba-Moussa Hidir Colpan Lansina Bakary Gulden Dagci Johnson Couadjo Selcuk Demiralp Laurence Egue Gazi Ercel Cheikh Ibrahim Fall Kadir Gunay F.J. Geiser Sungur Alev Kaymak Koffi Johnson Ali Teoman Kerman Kigbafori Silue Sefa Ocak Michel Komlanvi Klousseh Gurhan Ozdogan Kwassi Klutse M. Bulent Ozgun Antoine N'Diaye Bahar Sahin Ngoran Niamien Rustu Saracoglu Kossi R. Paass Hikmet Ulugbay H.E. Ellom-Kodjo Schuppius Eftal Yurday Mande Sidibe R.W. Temple Uganda Tonga Governor Governor Hon. Ponsiano Serumaga Mulema Selwyn Percy Jones Alternate Governor Alternate Governor Leo Kibirango Penisimani Vea Advisors Per Aasmundrud Trinidad and Tobago H.E. Elizabeth Bagaya F. Kalema Governor S.E.N. Mukasa Hon. Anthony Jacelon A.S. Njala Alternate Governor G.S. Odong Euric Bobb E. Tumusiime-Mutebile Advisors Lennox Archer Lingston Cumberbatch United Arab Emirates Terrence Farrell Governor Jerry Hospédales H.E. Ahmed Humaid Al-Tayer

Alternate Governor James W. Conrow Abdul Malik Al Hamar Robert A. Cornell Advisors E. Gerald Corrigan Anis Al Jallaf Sam Y. Cross Yousuf Abdul Latif Al Sirkal Michael R. Darby Sheikh Suroor bin Sultan Al-Dhahe Hugh W. Foster Sultan Rashid Al-Dhahiri Manuel H. Johnson, Jr. Abdul Ghaffar Al-Hashimi Hon. David M. Kennedy Sultan Nasser Al-Suwaidi Oscar M. Mackour Ahmed Lutfi AH William B. Milam Salim Ibrahim Darwish Hon. G. William Miller Ibrahim Payez Michael L. Mussa Saeed Ghobash Charles H. Powers Mohammed Khalfan Khirbash Ernest H. Preeg Abed Alia Usama Malki William Ryan Abdulla Mohamed Saleh Charles Schotta L. William Seidman United Kingdom Charles O. Sethness S. Bruce Smart Governor Rt. Hon. Nigel Lawson Beryl W. Sprinkel Edwin M. Truman Alternate Governor A.D. Loehnis Temporary Alternate Governors Uruguay H.P. Evans Governor Michael Foot Ricardo Pascale T.P. Lankester Alternate Governor Sir Geoffrey Littler Juan Olascoaga R.G. Ware Advisors Advisors Tomas Brause A. Allan Juan Ignacio Garcia Pelufo Sir Terence Burns H.E. Hector Luisi W.P. Cooke Fernando L. Scelza R.P. Culpin Carlos Steneri Richard Fox Juan Filipe Yriart Piers Jacobs Stuart King Vanuatu T.L. Richardson P.J. Warland Alternate Governor Edward E. Fillingham United States Venezuela Governor Hon. James A. Baker HI Governor Alternate Governor Hernán Anzola Jimenez Paul A. Volcker Alternate Governor Temporary Alternate Governors Manuel Azpurua Charles H. Dallara Temporary Alternate Governors Robert B. Keating Benito Raúl Losada M. Peter McPherson Enrique Urdaneta David C. Mulford Advisors Henry C. Wallich Carlos A. Bernárdez Advisors Luis Enrique Berrizbeita Harvey E. Bale, Jr. J. David Brillembourg Hon. Joseph W. Barr Remigio Elias Perez Thomas J. Berger Mariano Gurfinckel Richard Bissell William Larralde John A. Bohn, Jr. Felix Miralles C. Mary K. Bush Jesus E. Rodriguez Robert L. Clarke Hector Santaella

Viet Nam Bojana Mladic Branka Mrkic Alternate Governor Bozo Novoselac Le Hoang Branko Radivojevic Temporary Alternate Governor Miroslav Sarenac Cao Dac Cuong Branislav Vasic Gregor Zore Western Samoa Governor Zaïre Hon. Faasootauloa S.P. Saili Governor Alternate Governor Pay Pay wa Syakassighe John Howard Alternate Governor Advisors Mambulu-Makudia N'Siala Afamasaga Dan Betham S.V. Mackenzie Advisors Ongona Elongo Barry Muntz Luono Kimbanga Tommy Scanlan Tshiunza Mbiye Sir Peter Tapsell Lendo Muanda Michael Young B. Senga Unen Ukati Yemen Arab Republic Governor Zambia H.E. Alawi S. Aï-Salami Governor Alternate Governor Hon. Basil Kabwe, M.P. Mohammed Ahmed Al-Gunaid Alternate Governor Advisors L.S. Chivuno Khalid A.J. Afif Abdulaziz Al-Zariqah Advisors V. Lavu Ahmed Ahmed Ghaleb J.M. Mapoma G.B. Mbulo Yemen, People's Democratic Republic of H.E. Nalumino Mundia Governor Leo Mweemba Mahmood Saeed Madhi J.N. Ndhlovu Alternate Governor L. Nyambe Salem M. Al-Ashwali Adam Zulu

Yugoslavia Zimbabwe Governor Governor Dusan Vlatkovic Hon. B.T.G. Chidzero Alternate Governor Alternate Governor Slobodan Stanojevic K.J. Moyana Temporary Alternate Governor Advisors H.E. Mico Rakic Arthur T.M. Charamba Advisors D.C. Danha Milica Borlja Edward Mashiringwani Gordana Hofmann Rosemary Mazula Vojkica Jancic V. McNicol Nemanja Jovic Joseph Mubika Planinko Kapetanovic Dinah Zuademoyo Mutungwazi Budimir Kostic D.S. Wood Josip Kulisic Nhamo E. Zengeni

OBSERVERS AND REPRESENTATIVES OF INTERNATIONAL ORGANIZATIONS

International Fund for Eric Martin Agricultural Development Dante Martinelli ~ • j c D Rudolf Ramsauer Donald S^ Brown Sommaruga VeraP.Gathnght Markus Zimmerli

Switzerland Pascal Bridel United Nations David de Pury Klaus Jacobi Yves Berthelot Rolf Jeker Isaac Cohen Daniel Kaeser Iqbal Haji Thomas Kupfer R- Lawrence Pierre Languetin Pedro Malan Alexis Lautenberg Shuaib Uthman Yolah

©International Monetary Fund. Not for Redistribution EXECUTIVE DIRECTORS, ALTERNATES, AND ADVISORS Alternate Executive Advisors to Executive Executive Directors Directors Directors Abderrahmane Alfidja Mawakani Samba Lubin K. Doe Jean-Christian Obame Norbert Toé Koffi Yao Charles H. Dallara Mary K. Bush Donald C. Templeman Jacques de Groóte Heinrich G. Schneider Pal Péterfalvy Mohamed Finaish Tariq Alhaimus Mohamad B. Chatah M.Z.M. Qureshi Hirotake Fujino Masahiro Sugita Kazuya Murakami Guenter Grosche Bernd Goos Wolf-Ruediger Bengs Huang Fanzhang Jiang Hai Song Guangwei J. E. Ismael Jaafar Ahmad Siri Ganjarerndee Alexandre Kafka Hernando A. Arias Jerry Hospédales T. P. Lankester Michael Foot Hans Lundstrôm Henrik Fugmann Ilkka Puro Marcel Massé Luke Leonard Glen D. Hodgson E.I.M. Mtei Ahmed Abdallah Patrick E. Archibong Sabir M. Hassan Fernando L. Nebbia Jaysuño Abramovich Mario Alejandro Weitz Yusuf A. Nimatallah Jobarah E. Suraisry Liam Patrick Ebrill Abdessatar Ouanes Pedro Pérez Guillermo Ortiz Roberto Valladares Hélène Ploix Sylvain de Forges Georges Nguyen J. J. Polak J. de Beaufort Wijnholds C. Richard Rye Antonio V. Romuáldez Hak-Sung Lee Ghassem Salehkhou Omar Kabbaj AH A. Agah Arjun K. Sengupta A. S. Jayawardena A. Vasudevan Salvatore Zecchini Nikos Kyriazidis

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©International Monetary Fund. Not for Redistribution Reference List of Principal Topics Discussed1 BALANCE OF PAYMENTS DISEQUILIBRIA (see also Non-Oil Developing Countries, External Payments Position) Adjustment 17, 19, 21, 22, 26, 36, 38, 39, 43, 51, 59, 63, 64, 65, 66, 82, 83, 87, 92, 94, 105, 106, 107, 108, 109, 113, 114, 115, 118, 119, 120, 131, 148, 165, 166, 169, 170, 172, 173, 174, 176, 177, 178, 183, 185, 186, 199, 206, 208, 216, 217, 221, 228, 230, 234, 243, 245, 246, 249, 251,252,256,257 Fund role in 14, 15, 26, 27, 36, 40, 43, 55, 61, 63, 68, 95, 102, 106, 114, 115, 149, 163, 164, 172, 176, 181, 187, 199, 219, 220, 236, 237, 240-41, 243, 245, 246, 253, 254, 258 Macroeconomic policies 10, 11, 20, 21, 22, 23, 24, 27, 43, 50, 51, 52, 54, 59, 65, 71, 80, 83, 85, 94, 95, 99, 107, 108, 122, 123, 127, 128, 131, 144, 160, 166, 168, 169, 170, 174, 175, 182, 186, 199, 208, 209, 210, 217, 226, 230, 234, 237, 240, 242, 251, 252, 256, 257, 260 Financing from commercial banks 13, 17, 41, 53, 66, 73, 74, 88, 98, 124, 211, 216, 219 from International Monetary Fund 68, 102, 106, 114, 172, 188, 199, 254 DEVELOPMENTS IN THE WORLD ECONOMY Current Situation and Outlook 1, 3, 4, 6, 10, 19, 20, 21, 22, 32, 33, 37-38, 42- 43, 47-48, 51, 55-56, 59, 62, 64, 65, 72, 76, 82, 86, 92, 93, 97, 104, 107, 111-12, 126, 127, 130, 131, 132, 135, 140, 141, 160, 164, 165, 169, 174, 177-78, 185, 193, 194-95, 197, 200, 201, 204, 208, 213, 216, 221, 223-24, 227, 229-30, 233, 236, 239, 241-42, 245, 248-49, 250-51,256 Debt (see also Non-Oil Developing Countries, External Debt) 5, 7, 9, 12, 22, 25, 26, 27, 28, 30, 32, 34, 40, 41, 48, 53, 54, 57, 60, 62, 66, 72, 73, 87, 88, 93, 95, 96, 100, 105, 106, 108, 112, 113, 119, 159, 161, 164, 165, 166, 167, 170, 171, 178, 179, 181, 188, 203, 204, 205, 206, 208, 213, 214, 217, 218, 219, 220, 221, 228, 229, 231, 235, 236, 237, 245, 246, 249, 252, 253, 256, 257, 258, 260

'This list relates only to the Addresses and Statements. It excludes discussions of individual countries, tributes to the host country, and personal tributes. References are to pages.

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DEVELOPMENTS IN THE WORLD ECONOMY (continued) Case-by-case basis 26, 34, 60, 95, 109, 171, 178, 253 Commercial banks 5,13,14,17, 22, 26, 27, 34, 39, 40, 41, 48, 53, 57, 60, 63, 73, 74, 87, 88, 95, 98, 105, 109, 112, 113, 116, 122, 124, 141, 143, 171, 205, 211, 213, 217, 219, 229, 231, 232, 235, 237, 249, 250, 253, 258 Fund role in 14, 17, 26, 27, 34, 40, 53, 60, 63, 74, 92, 95, 109, 113-14, 123, 165-66, 178, 179, 188, 202, 203, 213-14, 217, 219, 220, 224, 228, 231, 235, 237, 243, 246, 249, 253, 258, 259, 260 International financial institutions 22, 39, 40, 48, 57, 66, 73, 87, 112, 122, 123, 172, 205, 206, 213, 214, 153 International strategy 5, 7, 12, 25, 26, 27, 30, 34, 40, 41, 53, 54, 60, 66, 72, 73, 75, 80, 87, 88, 92, 95, 100, 109, 113, 122, 129, 143, 161, 164, 171, 203, 208, 217, 228, 235, 237, 243, 249, 253, 257, 258, 260 Multilateral institutions' role in 17, 41, 53, 74, 98, 99, 171, 199, 211, 235, 243, 246 Paris Club 13, 26, 253 Rescheduling of 6, 13, 15, 34, 57, 72, 105, 113, 142, 164, 213, 253 Developing Countries (see Non- Oil Developing Countries) Exchange Rates 5, 7, 8, 9,10, 19, 21, 22, 23, 25, 33, 35, 38, 44, 47, 49, 51, 54, 56, 59, 60, 62, 63, 70, 79, 80, 83, 92, 94, 99, 104, 106, 107, 108, 116, 119, 126, 127, 128, 131, 132, 139, 140, 141, 162, 169, 170, 173, 174, 178, 185, 186, 193, 198, 199, 216, 227, 230, 234, 236, 239, 242, 245, 250, 251, 256, 257, 258 Industrial Countries 3, 4, 5, 6,10,11,12,15,19, 20, 21, 22, 25, 28, 29, 32, 33, 35, 38, 39, 40, 41, 42, 43, 44, 45, 47, 48, 49, 50, 51, 52, 53, 55, 56, 57, 62, 63, 65, 66, 72, 76, 77, 78, 79, 80, 82, 83, 84, 85, 86, 87, 91, 92, 93, 94, 95, 97, 98, 99, 100, 102, 104, 105, 107, 108, 109, 111, 112, 113, 117, 119, 120, 124, 127, 128, 129, 131, 132, 133, 134, 135, 138, 139, 140, 141, 143, 147, 152, 160, 161, 162, 163, 164, 165, 166, 167, 170, 171, 174, 176, 177, 178, 179, 185, 186, 189, 191, 192, 193, 195, 197, 198, 200, 201, 202, 203, 205, 206, 208, 210, 211, 213, 216, 217, 219, 222, 224, 226, 228, 230, 231, 233, 234, 236, 237, 239, 241, 242, 243, 244, 245, 248, 249, 250, 251, 252, 253, 256, 257, 258

Inflation 3, 5, 10, 11, 14, 20, 21, 22, 29, 34, 38, 47, 51, 52, 62, 64, 80, 82, 83, 84, 92, 97, 104, 107, 108, 111, 122, 124, 127, 131, 134, 141, 160, 164, 167, 169, 170, 174, 177, 178, 180, 184, 185, 186, 189, 213, 222, 224, 230, 233, 238, 239, 242, 251, 252, 256, 257 Interdependence and Cooperation 5,18, 22, 25, 28, 29, 42, 45, 48, 49, 53, 54, 59, 60, 62, 63, 64, 66, 67, 69, 70, 83, 92, 93, 98, 105, 107, 108, 117, 118, 120, 122, 125, 128, 134, 135, 141, 162, 163, 165, 166, 170, 174, 179, 186, 200, 201, 203, 204, 215, 216, 217, 218, 219, 220, 222, 227, 230, 231, 234, 235, 236, 237, 244, 247, 252, 256, 258 Group of Five (Plaza Agreement) 5,10, 44, 59, 63, 108, 119, 126, 128, 140,162, 164, 228, 244, 251 Group of Seven (Tokyo Economic Summit) 5,10, 35, 44, 45, 100, 118, 120, 218, 228, 244, 252 Group of Ten 32, 34, 106, 162, 202, 234, 244 Group of Twenty-Four 32, 34, 35, 102, 106, 111, 115, 116, 159, 162, 202, 205, 218, 234 Interest Rates 3, 5, 9, 10, 11, 19, 20, 21, 22, 24, 25, 33, 38, 43, 47, 48, 51, 55, 57, 59, 60, 62, 65, 66, 80, 92, 94, 95, 99, 104, 105, 107, 109, 112, 113, 116, 123, 124, 127, 131, 140, 160, 165, 167- 68, 169, 170, 174, 185, 193, 198, 203, 205, 210, 213, 227, 228, 230, 233, 236, 239, 242, 245, 246, 249, 251, 252, 256, 257 International Liquidity 25, 27, 35, 36, 68, 110, 116, 178, 206, 211-12 Middle-Income Countries 55, 87, 88, 105 Oil Exporting Countries 19, 20, 34, 127, 132, 138, 139, 160, 217, 218, 219, 224, 231, 239, 242, 253 Oil Prices 9, 19, 20, 33, 38, 47, 51, 55, 62, 64, 66, 76, 80, 82, 86, 97, 104, 107, 109, 112, 114, 124, 127, 132, 138, 139, 160, 164, 166, 169, 171, 174, 185, 193, 210, 216, 218, 219, 224, 231, 232, 239, 242, 249, 250, 251, 253 Recovery 4,10, 20, 23, 62, 76, 77, 80, 82, 92, 94, 96, 97, 104, 117, 131, 140, 160, 161, 177, 178, 180, 197, 201, 213, 224, 230, 236, 241, 243 Trade 6, 7, 12, 14, 20, 28, 29, 32, 33, 38, 43, 44, 49, 52, 56, 62, 63, 65, 72, 78, 79, 82, 83, 86, 87, 91, 92, 93, 97, 98, 99, 112,118, 119, 120, 121, 124, 127, 128, 131, 133, 134, 139, 141, 160, 161, 166, 168, 169, 177, 185, 186, 188, 194, 198, 202, 203, 212, 215, 216, 218, 222, 224, 227, 228, 229, 231, 233, 239, 242, 249, 251, 260

DEVELOPMENTS IN THE WORLD ECONOMY (continued) General Agreement on Tariffs and Trade 6, 7, 11, 28, 29, 43, 44, 56, 59, 62, 65, 75, 78, 83,91,94, 109, 118, 120,233,253 Liberalization 5, 24, 25, 28, 44, 52, 75, 78, 84, 93, 95, 123, 161, 168,257,259 Protectionism 6, 7, 10, 12, 28, 33, 38, 44, 45, 48, 52, 56, 57, 59, 62, 63, 65, 66, 70, 74, 78, 80, 83, 91, 94, 96, 105, 107, 108, 109, 112, 119, 121, 127, 128, 134, 135, 141, 160, 161, 163, 165, 167, 168, 174, 177, 178, 182, 185-86, 191, 193, 195, 198, 201, 204, 216, 218, 227, 230, 233, 234, 237, 238, 242, 245, 248, 249, 251, 256, 258, 259, 260 Quotas 28, 191, 198 Subsidies 10, 28, 44, 52, 54, 74, 91, 112, 134, 198, 201, 218 Punta del Este (ministerial trade negotiations) 11, 28, 33, 38, 43, 44, 56, 59, 65, 75, 78, 91, 105, 120, 168, 182, 218, 233, 234, 242, 253, 259 Unemployment 11, 17, 21, 33, 65, 71, 93, 107, 131, 140, 141, 165, 168, 174, 177, 185, 222, 224, 227, 228, 233, 239, 252 INTERNATIONAL MONETARY FUND Articles of Agreement 15, 84, 102, 106, 115, 116, 145, 146, 188, 189, 212, 225, 230, 238, 254, 261 Collaboration with the World Bank 17, 19, 27, 29, 33, 34, 55, 60, 61, 63, 74, 84, 88, 92, 101, 102, 110, 115, 163, 166, 187, 228, 232, 235, 254, 258 Cross-conditionality 74, 81, 101, 103, 106, 116, 198-99, 232, 244, 258 Increased role for the World Bank 27, 48, 60, 88, 181 Development Committee 15, 16, 19, 45, 51, 61, 62, 86-92, 130, 192, 202, 218 Interim Committee 26, 31, 32-37, 43, 51, 62, 66, 105, 106, 110, 130, 171, 192, 202, 252, 253-54, 259 Quotas Ninth General Review 15,30,41,43,69,74, 101, 106, 109, 115, 172, 203, 237, 243, 259, 261 Role in International Monetary System 9, 14, 15, 27, 36, 56, 68, 95, 96, 119, 145, 234, 236, 245 SDRs Allocations 15, 27, 32, 35, 36, 49, 57, 61, 63, 68, 74, 84, 102, 106, 110, 116, 140, 167, 172, 178, 188, 193, 202, 206, 211, 214, 223, 224, 229, 232, 234, 238, 243, 245, 250, 254, 259, 261

Role in international monetary system , .27, 28, 35, 36, 57, 68, 84, 102, 106, 110, 116, 163, 172, 188, 202, 206, 211-12, 229, 232, 234-35, 238, 254, 259 Surveillance 15, 25, 30, 35, 38, 49, 54, 56, 57, 66, 68, 81, 83, 93, 95, 100, 108, 118, 123, 128, 162, 172, 173, 186, 206, 217, 228, 230, 234, 242, 244, 252, 259 Use of Fund Resources Access limits 15, 32, 36, 49, 57, 69, 75, 81, 84, 102, 105, 109, 114, 171, 178, 180, 182, 188, 199, 206, 220, 223, 232, 237, 243, 246, 249, 254 Compensatory financing facility 102, 106, 167, 180, 232, 243, 250 Conditionality 81, 114, 148, 178, 180, 182, 187, 203, 211, 223, 225, 237, 243, 249, 260 Enlarged access policy 26, 30, 36, 43, 49, 54, 57, 61, 68, 69, 75, 84, 95, 102, 105, 109, 114, 167, 171, 178, 188, 206, 220, 223, 229, 232, 235, 243, 249, 254, 259 Structural Adjustment Facility 5, 27, 33, 48, 57, 61, 69, 84, 101, 103, 106, 110, 123, 166, 181, 193, 203, 211, 224, 229, 232, 235, 241, 243, 244, 254, 259 Technical Assistance 81, 103, 129, 223, 238, 245, 259 Trust Fund 106, 203 World Economic Outlook Exercise 35, 62, 67, 82, 94, 108, 112, 163, 172, 186, 227, 230, 233, 244, 250, 252, 259

INTERNATIONAL MONETARY SYSTEM Bretton Woods Institutions (see also International Monetary Fund, Role in International Monetary System) .17, 30, 70, 75, 165, 167, 174, 178, 180, 200, 202, 208, 222 Functioning and Reform of . 19, 27, 32, 34, 38, 54, 70, 95, 96, 97, 102, 106, 116, 119, 140, 144, 145, 159, 163, 165, 167, 172, 174, 177, 178, 186, 202, 206, 223, 224, 229, 231, 234, 235, 244, 252, 256

NON-OIL DEVELOPING COUNTRIES Adjustment 12, 13, 14, 19, 22, 23, 24, 26, 27, 28, 34, 50, 52, 54, 55, 61, 63, 70, 73, 74, 84, 86, 87, 88, 90, 92, 95, 98, 99, 100, 101, 106, 109, 113, 114, 123, 124, 160, 161, 163, 164, 167, 176, 178, 179, 180, 181, 188, 189, 191, 193, 199, 201, 203, 206, 210, 211, 214, 218, 222, 223, 224, 228, 231, 233, 235, 242, 249, 253, 254, 257

NON-OIL DEVELOPING COUNTRIES (continued) Commodity Prices 12, 19, 20, 22, 23, 29, 32, 33, 38, 44, 47, 54, 56, 57, 62, 63, 76, 80, 82, 86, 90, 93, 95, 97, 98, 104, 106, 112, 114, 127, 132, 133, 138, 139, 140, 141, 160, 169, 171, 174, 177, 179, 180, 185, 189, 193, 195, 198, 201, 205, 216, 222, 224, 228, 229, 232, 233, 237, 239, 241, 243, 249, 256

Economic Situation 5,10,11, 22, 23,32,33, 47-48,50, 53,54, 55- 56, 62, 63, 72, 76, 77, 83, 86,94, 98,104-105, 112-13, 123, 127, 132, 133, 135, 140, 141, 143, 158, 160, 163, 169, 170-71, 177, 179, 185, 192, 193, 195, 197, 198, 201, 204, 205, 209, 210, 213, 214, 216, 222, 223, 224, 228, 229-30, 233, 237, 239, 241-42, 245, 249, 257

Export and Capital Markets, Access to 10, 17, 22, 23, 28, 34, 39, 56, 66, 68, 73, 75, 78, 87, 91, 95, 110, 140, 160, 163, 167, 185, 202, 218, 228, 231, 237, 238

External Debt (see also Developments in the World Economy, Debt) 5, 11, 12, 13, 15, 21, 22, 24, 25, 26, 27, 28, 34, 39, 48, 54, 57, 60, 63, 64, 66, 70, 72, 73, 74, 75, 77, 78, 87, 88, 90, 93, 95, 98, 99, 100, 101, 104, 105, 106, 109, 112, 113, 116, 118, 119, 122, 123, 124, 126, 127, 128, 129, 130, 132, 135, 138, 141, 143, 145, 147, 149, 152, 161, 165, 170, 171, 174, 185, 188, 193, 198, 199, 203, 204, 205, 208, 213, 214, 216, 223, 224, 226, 227, 228, 229, 230, 231, 233, 235, 237, 239, 242, 249, 252, 256, 257, 258

External Payments Position 12, 13, 19, 22, 23, 27, 41, 44, 48, 97, 98, 112, 113, 126, 132, 133, 134, 135, 138, 139, 141, 147, 160, 161, 163, 177, 188, 195, 203, 223, 224, 229, 233, 236

Low-Income Countries 18, 27, 33, 35, 57, 61, 69, 87, 89, 100, 101, 104, 105, 110, 123, 171, 181, 193, 195, 209, 219, 222, 223, 229, 232, 241, 242, 243, 244, 254

Sub-Saharan Africa 13, 17, 33, 48, 49, 61, 84, 87, 90, 98, 103, 110, 111, 130, 143, 144, 170, 209, 210, 232, 235, 242, 244, 254 Terms of Trade 12, 48, 60, 62, 65, 86, 88, 93, 98, 99, 104, 111, 112, 133, 134, 138, 139, 177, 179, 187, 189, 191, 195, 197, 198, 201, 210, 211, 216, 218, 224, 228, 237, 239, 249, 257

Transfer of Resources Official development assistance 11, 27, 33, 63, 72, 81, 87, 89, 91, 104, 112, 143, 166, 201, 208, 209, 210, 211, 219, 223, 230, 243, 244, 249, 253, 258, 260 Other 11, 17, 63, 72, 78, 79, 80, 87, 99, 106, 110, 112, 128, 129, 142, 143, 147, 171, 193, 201, 202, 205, 208, 209, 210, 211, 219, 223, 230, 231, 237, 241-42, 243, 244, 249, 253, 258, 260

Development Committee Joint Ministerial Committee of the Boards of Governors of the Bank and the Fund on the Transfer of Real Resources to Developing Countries EC European Communities EMS European Monetary System GATT General Agreement on Tariffs and Trade GDP Gross domestic product GNP Gross national product Group of Five Intergovernmental group of industrial countries Group of Ten Industrial Countries Participating in General Arrangements to Borrow Group of Twenty-Four Intergovernmental Group of Twenty-Four on International Monetary Affairs IBRD International Bank for Reconstruction and Development (World Bank) IDA International Development Association IDB Inter-American Development Bank IFC International Finance Corporation IMF International Monetary Fund Interim Committee Interim Committee on the International Monetary System LDCs Less developed countries MDBs Multilateral development banks MIGA Multilateral Investment Guarantee Agency ODA Official development assistance OECD Organization for Economic Cooperation and Development UN United Nations UNCTAD United Nations Conference on Trade and Development

Note: Throughout the book the $ symbol refers to U.S. dollars. Other dollar currencies are identified by a preceding initial.

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