Journal Issue

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International Monetary Fund. External Relations Dept.
Published Date:
March 1969
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Excerpts from α speech by Pierre-Paul Schweitzer, the Managing Director of the International Monetary Fund, at the Annual Meeting of the Institute of Life Insurance in New York, on December 10, 1968

“The instruments of economic policy invariably have limitations.”

“National governments have multiple objectives in the formulation of economic policy: a satisfactory rate of growth, high employment, a reasonable degree of price stability, and balance of payments equilibrium. Furthermore, economic policy-making during the later postwar years—especially in the major industrial countries—has been markedly affected by the greater international integration of national economies. This has resulted primarily from the easing of restrictions on trade and from the movement of European countries some ten years ago to external convertibility of their currencies. The enhanced freedom of goods and private capital to flow across national boundaries has brought new situations and problems, together with a growing recognition of the indivisibility of the world economy—of the interdependence of its parts. In the event, development of a greater international consciousness during the 1960’s has added a new and significant dimension to the framing of economic policies in the main industrial countries.

“In principle, the multiple objectives of national economic policies are compatible. Experience has demonstrated, however, that only very seldom are all the objectives met simultaneously over any extended period. The instruments of economic policy invariably have limitations, in part reflecting institutional and political factors. Knowledge concerning economic processes and the impact of government policies is partial and uncertain. The system of economic statistics, though differing markedly among the industrial countries, is less than fully adequate in any of them. Also, economic forecasting is rendered inherently difficult by ever-changing developments at home and abroad. But aside from these practical difficulties, a country may make inadequate use of its capacity for continuous appraisal and timely adaptation of its economic policies; and the relative priority that it attaches to its several policy objectives may become inappropriate to its evolving situation.

“Although the industrial countries have been generally successful in the pursuit of their growth and employment objectives during the postwar period, their record with respect to price stability and external equilibrium has been noticeably less satisfactory. In part, the more effective harmonization of countries’ multiple objectives depends on further progress in the areas of policy instruments and of economic diagnosis and forecasting. Every effort should be made to bring more precision and flexibility into the instruments of fiscal policy. This would prevent an undue burden on monetary policy and, in general, would contribute materially to the effectiveness of demand management, enabling the authorities to cope more successfully with rapid changes in domestic conditions or in the balance of payments. By way of supplementing the instruments of demand management, greater attention should be given to the development of incomes policies, and of programs of labor training and mobility, in order to promote price stability under conditions of full employment. Again, more research is needed to improve our understanding about the interactions between employment, productivity, and costs and prices at high levels of resource utilization; about the linkages between financial developments and real developments; and about various other aspects of the functioning of national economies and of the international system.

“Strengthening of policy instruments and gains in economic knowledge undoubtedly would prove valuable, especially over time. But I want to stress that much can be done within the existing framework to improve the performance of the industrial countries. This comment applies not only to their objectives in respect of prices and the balance of payments, but also insofar as their economic assistance to the developing countries is concerned.

“In this last area the record has been particularly discouraging. Preoccupied with their domestic problems of fostering growth and full employment, grappling with inflationary and budgetary pressures, and protecting payments or reserve positions, the industrial countries as a group—despite their growing affluence—have not lived up to their responsibilities in the provision of various forms of assistance to the developing countries.”

Excerpts from an interview with Karl Schiller, Minister of Economic Affairs of the Federal Republic of Germany, published in Der Spiegel, November 25, 1968

“We really didn’t deserve this.”

“Many people claim that at some point there will have to be a worldwide realignment, a readjustment of monetary policy. Now this definitely speaks against a prior concession on the part of the Federal Republic and against our going it alone. We really didn’t deserve this, with full employment, high real growth, and excellent price stability. Such a realignment and such a reorientation is not possible at this time, because the country with the leading currency, the United States, would be drawn into such a procedure.

“I certainly do not want to put us on a very high pedestal, but I would remind you of our Stabilization Law. The Stabilization Law is an order, and it says, in effect, that after all the means of international coordination have been utilized, the Federal Government must take measures to safeguard the economy from harmful external influences. We have now applied tax policy measures, and this is certainly covered by Article 4 of the Stabilization Law in view of the order this law gives.

“There are various ways of safeguarding the economy from harmful external influences. Article 4 of the Stabilization Law makes such safeguarding mandatory. We consider it necessary, if only because there is a danger that price rises will spread to us in the future. And as for revaluation, I say again that it will not do as a prior concession on the part of Germany alone. It will not do unless there is certainty that all concerned will, on their part, bring their exchange rates down or up—whichever is necessary—and that at the same time definite steps will be taken toward a parallel policy consistent with stability and growth. Without these two conditions revaluation just isn’t the proper measure here and now.”

Excerpts from the Madon Memorial Lecture by L.K. Jha, Governor of the Reserve Bank of India, at the Indian Merchants Chamber in Bombay on November 26, 1968

“The prospects for development assistance have become none too bright.”

“One facet of this problem is essentially a trading problem. Most developing countries have traditionally been exporters of primary products and importers of manufactured goods. When they try to increase their export earnings by increasing their production of primary products they are confronted with a drop in their prices which means that while they export more they earn less. This trend is aggravated by the advance of science and technology in the developed countries bringing forth synthetic substitutes for the primary products on which the economies of developing countries have depended. When developing countries set up industries and try to export their products they are again confronted with obstacles and difficulties. If their manufactures are competitive and cheap they face special trade barriers set up against them on the ground that they have cheap or sweated labour. However, more often than not, the products of their infant industries are not truly competitive and if they try to subsidise them, they are accused of dumping and adopting unfair practices. If they try to make their industrial products more competitive by devaluing their currency, their foreign exchange earnings from their traditional exports of primary products or semi-processed goods are apt to go down. And if they have recourse to internal measures to restrain demand in order to create export surpluses, their development process gets slowed down.

“Thus, part of the problem of developing countries, no doubt, pertains to the field of trade and I do not propose to discuss this aspect further except to say that one cannot logically conceive of an orderly international payments system without sufficient attention being paid to trade problems. In fact, in the first flush of enthusiasm following World War II the need to have an international trade charter alongside one for a new international monetary order was recognised. The international trade organisation which was then thought of did not come into being. An attempt was made to deal with it in the GATT. This did not prove adequate and a new organization was set up in the shape of UNCTAD, which has been focussing attention on trade problems of developing countries. But progress so far has not been commensurate with expectations.

“The other part of developing countries’ problems, which is much more germane to their payments problem, is their need for capital. As I said at the beginning, the Fund is concerned primarily with current payments and only indirectly with long-term capital movements. It was the World Bank that was charged with the responsibility of directing capital flows from the developed to developing countries. Yet, it is important to remember that neither the World Bank nor any other international agency plays a comprehensive role in regulating international capital movements. By and large they are determined by national policies. This situation is, in a way, in marked contrast to the arrangements symbolised in the Fund system. The Fund has introduced in international monetary affairs a measure of discipline in the sense of getting countries to observe certain ground rules in the field of international payments. The system has, as I have described, worked reasonably well despite the stresses and strains on it. With the current attention being given to the problem of providing international liquidity, there is every hope that it will adapt itself even further to the needs of the future. Yet, it is, I think, a mistake to segregate the problem of international monetary order from that of the orderliness of capital movements, including flows of long-term developmental capital. It is a sad reflection on our times that just when a major step forward in the deliberate creation of international liquidity is being planned, the prospects for development assistance seem to have become none too bright. It is perhaps the contrast between the disciplinary role of the Fund and the purely volitional character of development assistance that is responsible for this state of affairs. The resources of the international agencies such as the World Bank and its affiliates are in the last resort dependent on what they can obtain from the more developed countries. And here, the short-term payments problems of some of the developed countries have come in the way of their contribution to development assistance. There is, to my mind, no justification for this.

“The argument for a link between international monetary reform and enlargement of capital assistance should not occasion surprise. After all, the Bank and the Fund have always been regarded as twins. Betwen them and in co-operation with each other they constitute the hopes for a rational international economic order designed to promote world economic growth. Just as the balance of payments can be balanced at a low enough level of output and employment, only to the detriment of the country concerned and the world economy, so, too, there are dangers of a shrinkage of the flows of development capital if this latter is regarded as a separate problem for just discretionary action. Only when the shorter term and longer term aspects of the balance of payments are thus viewed together, could we say that the Grand Design set out at Bretton Woods would reach its logical fulfilment.”

Excerpts from a speech by Robert S. McNamara, President of the World Bank Group, at the United Nations, New York, on December 5, 1968

“But the progress of most of the poor countries will be handicapped unless they are able to meet a larger part of their needs for development finance on better terms than are available from the World Bank or than they have been receiving under most bilateral programs of development assistance. The terms of that assistance, in fact, have deteriorated over the past three years. The burden of debt service laid on the backs of the poor countries continues to grow heavier.

“The Bank Group’s chief approach to this problem, as you know, is through the International Development Association (IDA) and the 50-year, interest-free credits which IDA extends to the poorer of the developing countries. The scale of IDA’s operations has never been equal to the need but, until recently, the Association represented a growing asset to the low-income countries. After an experimental period, its average annual rate of lending reached a level of $300 million annually in the fiscal years 1963-67. The Governors of IDA then agreed, subject to necessary legislative approvals, to further contributions by member governments that, taken together with special contributions from members and transfusions from the Bank itself, would have enabled IDA to increase its rate of commitments by more than half.

“This replenishment, however, is now more than two years overdue. For that length of time, IDA has been living on considerably less than half rations. It was able to lend only a little more than $100 million last year.

“The essential reason for this predicament is quite simple. The participation of the United States in the replenishment of IDA’s resources is required to make the contributions of other governments effective, and the United States Congress has not yet acted.

“The World Bank can cover some, but far from all, of the present acute deficiency in IDA’s treasury. In October, out of its net income for the last fiscal year, the Bank made a grant to IDA of $75 million. In the case of countries scheduled to receive a mixture of Bank loans and IDA credits, some projects which otherwise would have been financed by IDA will now be financed by the Bank, with lengthened terms of grace and maturity to ease the obligations as much as possible. While this will result in a temporary hardening of the blend of Bank Group assistance to the countries concerned, this can be reversed by the extension of additional IDA credits as and when sufficient funds become available.

“In the past few weeks, there have been other encouraging developments. The Governments of Canada, Denmark, Italy, Norway, and Sweden are taking action to make their participation in the proposed IDA replenishment effective in advance of action by the United States. Certain other governments have indicated that they may follow suit.

“This keeps IDA alive; but it still leaves a wide gap in finance for the developing countries.

“Early action by the incoming Administration and Congress of the United States is urgent.

“As we look forward to the 1970’s it is clear that one of the most crucial problems facing the world is how it will organize to accelerate progress throughout the developing countries. The preparations for the Second Development Decade now taking place within the UN family are of great significance, and the Bank is glad to be playing its part in this important work.

“But as we look back over the First Development Decade which is now drawing to its close, we must recognize that its weakest element was the lack of political will for development on the part of all too many nations—both givers and receivers of aid. Above all there has been a growing disillusion with the effectiveness of the aid-for-development partnership, and a consequent drawing apart of the rich countries and the poor.

“It is in this area particularly that I hope the Pearson Commission’s work will help to lay the foundations for a development campaign running through the decades that remain in this century. I should emphasize that this Commission, though sponsored by the Bank, is completely independent of the Bank, and of governments. Its function is to examine the past aid efforts, and to see what lessons they teach for the future on both the political and economic level. The caliber of men that Mr. Pearson has chosen for the Commission ensures, in my opinion, that proper weight will be given to the necessity of having a firm foundation of political acceptance for the world’s development efforts.

“Much of mankind, I am convinced, yearns for a new philosophy in the conduct of human affairs, for a re-ordering of our time, our skills, and our material resources to build a more creative world order.

“A danger of present economic trends is that they will add both to internal and global tensions. If the development of the poor countries lags, their sense of frustration will be an element threatening the stability of society, exacerbating conflict and hobbling progress. The growing contrast between the rich and poor countries in material achievements and ways of life will make dialogue between the two more and more difficult.”

Excerpts from a speech by Dinesh Singh, President of the Second Session of the United Nations Conference on Trade and Development (UNCTAD II) at the United Nations, New York, on October 28, 1968

“I have given the Assembly the background to the work of the second session of UNCTAD. I have described what happened in New Delhi. I have spoken of the hopes that we had, the frustrations that came our way, and the gains that we were able to register. Developments in New Delhi cannot be evaluated in isolation. They must be viewed in the context of the politico-economic situation of the world we live in. The emerging introspection of prosperity and the increasing impatience of poverty create potentially explosive situations. The old attitudes have to change. Expressions such as “aid” when only repayable loans are in fact involved do not convince anyone. They only help to create a sense of excessive complacency in some centres. The countries of Asia, Africa, and Latin America missed the industrial and technological revolutions through no fault of their own. They are now asserting their right to alter the socioeconomic situation which they inherited from their colonial past.

“How then has their bid to emerge into a real, and not merely a formal, freedom been received by the rich and the powerful of the world? After forty-five sessions of the Economic and Social Council, after two sessions of the United Nations Conference on Trade and Development, and despite all the promises that had been held out by the United Nations Development Decade, it is estimated that the developing countries will take, according to projections made, more than a century and a half to double their per capita income. After these hundred and fifty years their income would be no more than fifty cents per day.

“While matters of interest to developed countries have been tackled through multilateral negotiations, measures in support of the self-reliant efforts of the developing countries have eluded agreement. Could that be merely accidental? How long are development problems going to be treated as residual? While we talk of international trade as the principal instrument of development, progress in this field has been least perceptible. The numerous conditions imposed by donor states on transfer of financial resources make it a gesture that begins abroad, but ends up by bringing dividends home. The greater the effort made by the developing countries to improve their lot, the more numerous the constraints they have to encounter.

“Developing countries have received suggestions to alter their priorities and to concentrate on areas less complex and less difficult. There can be no easy solution to basic problems. The temptation to turn to easier problems, while leaving out the basic ones, cannot be realistic.”

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