Journal Issue

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International Monetary Fund. External Relations Dept.
Published Date:
September 1972
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Excerpts from an address by Dr. Serm Vinicchayakul, Chairman of the Fifth Annual Meeting of the Board of Governors of the Asian Development Bank, Vienna, Austria, April 20, 1972.

“The year 1971 was, in most respects, a prelude. Many economies have yet to adjust to the suddenness with which events overtook them. The process of international monetary adjustment still continues, while the effects of Great Britain’s entry into the European Economic Community and the operation of generalized trade preferences for the products of developing economies will have significant repercussions for the future of Asia.

“The crises which assailed the international monetary structure during the last year had a considerable effect on both the Bank and its developing member countries. Indeed, those who were most affected by these disturbances were in many cases those who could least afford it.

“Monetary stability—both national and international—is an important requirement for development and it is to be hoped that the historic decisions being taken in the international monetary field will redound to the benefit of the developing countries as well.”

Excerpts from an address by Sir Leslie O’Brien, Governor of the Bank of England, at the International Monetary Conference in Montreal, Canada, May 12, 1972.

“After the experience of the past three years, it is impossible to deny that international movements of liquid funds pose problems. …

“We adapted our control framework last autumn to discourage certain types of inflow. It seems to have been effective up to a point, but it was certainly not proof against flows at times when expectations of revaluation were strong: for example a nil interest rate on nonresident bank deposits could not prevent their rising substantially. The measures taken during that period included some that we should be very loath to retain as a permanent feature of the system, because of the interference they brought to normal business transactions—and we were pleased to be rid of them. That problem presents itself in an even more acute way with comprehensive dual market systems. The practical difficulties of constructing such a system for a currency as widely held and used as sterling are daunting.

“These difficulties of controlling capital movements at the point when they cross over a national frontier, coupled with the philosophical distaste for direct restriction of capital transactions have led some commentators to look for a solution in regulating the activities of the principal intermediaries through which the flows take place. The principal subject for such regulation would be banking in Eurocurrencies. I have previously expressed my doubts whether this approach could provide a solution to the practical problems, and those doubts have not been removed. As many of us have learned from our experience in domestic regulation, restrictions which bite at all severely on financial intermediaries lead quite quickly to disinter-mediation or to the rapid growth of new intermediaries not subject to the same strictness of regulation. Furthermore, international intermediaries have a freedom of choice of location that is limited only by the practical requirements for communications. They could, therefore, escape relatively easily from any system of regulation that was not virtually worldwide. Finally, it is difficult to see how a system of control could be applied so as to limit those flows that were causing disturbance, but to allow others to continue as before. Would it be necessary, in order to stop an unwelcome inflow into Europe, to stop as well capital flows to countries such as, say, Brazil?

“The problems of capital flows and of confidence in the exchange rate system are inseparable. I believe that 1971 will be judged, in the light of hindsight, to have given an exaggerated picture of the severity of these problems. It provided one fundamental change. At the beginning of the year, the United States dollar was manifestly in a position of being overvalued, by the criteria that would have been applied to any other currency. But there was still doubt that it was proper for the United States to respond as other countries might, by proposing a new par value for the dollar, or that such a proposal would in fact produce a change in the dollar’s effective exchange rate. Now it has been established that the exchange value of the dollar can be changed by U.S. action, and we have a pattern of exchange rates from which, for the first time in many years, all major distortions have been removed. But, having arrived in a thoroughly disorderly way at this fresh start—which, because of the size of the adjustments required, will still take some while to consolidate itself—we must now set our hands to avoiding a recurrence of the disorder of 1971.

“It is common ground that the exchange rate system should be flexible enough to allow rates to move in accordance with underlying economic trends. I hope our hosts will not mind my saying that it is also essentially common ground among the monetary authorities of the world that a par value system provides the most suitable environment for the development of world trade and prosperity. The question is at what point do the benefits of flexibility outweigh those of fixity, and vice versa.

“This question arises in judging the appropriate size for the permitted margins of fluctuation about parity, and in deciding whether or not the system should provide for a period of temporary floating if a country were to feel unable to continue adding to its exchange reserves at a time of intensive capital inflow. But above all it arises in the reform of the par value system so that needed parity changes are made more promptly and by smaller amounts than hiterto.”

Excerpts from a speech by Dr. Arthur F. Burns, Chairman of the Board of Governors of the Federal Reserve System, to the International Monetary Conference in Montreal, Canada, May 12, 1972.

“If I am right in thinking that the world needs realistic and reasonably stable exchange rates, rather than rigid exchange rates, ways must be found to ensure that payments imbalances will be adjusted more smoothly and promptly than under the old Bretton Woods arrangements. The issues here are many and complex. There was a consensus at the Smithsonian meeting that wider margins around parities can help to correct payments imbalances, and should prove especially helpful in moderating short-term capital movements, thereby giving monetary authorities somewhat more scope to pursue different interest rate policies. Our experience has not yet been extensive enough to permit a confident appraisal of this innovation. It is clear, however, that no matter how much the present wider margins may contribute to facilitating the adjustment of exchange rates to changing conditions, the wider margins by themselves will prove inadequate for that purpose. We may all hope that at least the major countries will pursue sound, noninflationary policies in the future. We should nevertheless recognize that national lapses from economic virtue will continue to occur. In such circumstances, changes in parities—however regrettable—may well become a practical necessity. Moreover, even if every nation succeeded in achieving noninflationary growth, structural changes in consumption or production will often lead to shifts in national competitive positions over time. Such shifts will also modify the pattern of exchange rates that is appropriate for maintaining balance-of-payments equilibrium. In my judgment, therefore, more prompt adjustments of parities will be needed in a reformed monetary system. Rules of international conduct will have to be devised which, while recognizing rights of sovereignty, establish definite guidelines and consultative machinery for determining when parities need to be changed. This subject is likely to become one of the central issues, and also one of the most difficult, in the forthcoming negotiations.

“A major weakness of the old system was its failure to treat in a symmetrical manner the responsibilities of surplus and deficit countries for balance-of-payments adjustment. With deficits equated to sin and surpluses to virtue, moral as well as financial pressures were very much greater on deficit countries to reduce their deficits than on surplus countries to reduce surpluses. In actual practice, however, responsibility for payments imbalances can seldom be assigned unambiguously to individual countries. And in any event, the adjustment process will work more efficiently if surplus countries participate actively in it. In my view, all countries have an obligation to eliminate payments imbalances, and the rules of international conduct will therefore need to define acceptable behavior and provide for international monitoring of both surplus and deficit countries.

“It is sometimes argued that, as a part of the reform, gold should be demonetized. As a practical matter, it seems doubtful to me that there is any broad support for eliminating the monetary role of gold in the near future. Nevertheless, I would expect this role to continue to diminish in the years ahead, while that of SDRs increases. The considerations which motivated the IMF to establish the SDR facility in 1969 should remain valid in a reformed system. However, revisions in the detailed arrangements governing the creation, allocation, and use of SDRs will probably be needed. In the future, as the SDRs assume increasing importance, they may ultimately become the major international reserve asset.

“Next, there is the future role of the dollar as a reserve currency. It has often been said that the U.S. had a privileged position in the old monetary system because it could settle payments deficits by adding to its liabilities instead of drawing down its reserve assets. Many also argue that this asymmetry should be excluded in a reformed system. There thus seems to be significant sentiment in favor of diminishing, or even phasing out, the role of the dollar as a reserve currency. One conceivable way of accomplishing this objective would be to place restraints on the further accumulation of dollars in official reserves. If no further accumulation at all were allowed, the U.S. would be required to finance any deficit in its balance of payments entirely with reserve assets. I am not persuaded by this line of reasoning, for I see advantages both to the U.S. and to other countries from the use of the dollar as a reserve currency. But I recognize that there are some burdens or disadvantages as well.

“There is the issue of “convertibility” of the dollar. It seems unlikely to me that the nations of the world, taken as a whole and over the long run, will accept a system in which convertibility of the dollar into international reserve assets—SDRs and gold—is entirely absent. If we want to build a strengthened monetary system along one-world lines, this issue will have to be resolved. I therefore anticipate, as part of a total package of long-term reforms, that some form of dollar convertibility can be re-established in the future. However, this issue of convertibility has received excessive emphasis in recent discussions. Convertibility is important, but no more so than the other issues. It is misleading, and may even prove mischievous, to stress one particular aspect of reform to the exclusion of others. Constructive negotiations will be possible only if there is a general | disposition to treat the whole range of I issues in balanced fashion.”

Published for the International Bank for Reconstruction and Development


Sectoral programs and policies

The World Bank has during the past year undertaken a review of its policies and practices in each of the major sectors of development. This book contains the resulting papers. Bach chapter describes the economic and developmental problems of one sector, and for the first time publicly reviews Bank operations in each field.

The first sector dealt with is Agriculture, in which the great majority of the population of less developed countries is engaged. Industry is the main alternative occupation; though it involves fewer people it is a mainspring of rapid growth. The “infrastructure” on which such growth can be built is dealt with in four papers: Transportation, Telecomunication, Electric Power, Water Supply and Sewerage.

But development is not dependent on material growth alone. The paper on Education indicates why the Bank has been placing increasing emphasis on this sector. Similarly, the next paper on Population Planning describes the Bank’s effort to help member countries reduce population growth rates and sets out its program in the field, outlining the economic effects of reducing population growth and summarizing available information on the factors involved.

The paper on Tourism describes the factors which have affected the growth of this sector, and the prospects for developing countries to benefit more fully from it. In many parts of the developing world a critical human problem is the explosion of the cities; the problems of Urbanization are examined, and the Bank’s policies in this new field of activity are described in the final paper.

Orders for the English edition should be sent to:

The Johns Hopkins Press, Baltimore, Md., 21218, U.S.A.

$12.50 cloth … $4.95 paper

For the French to:

Dunod, 92 rue Bonaparte, Paris 6eme, France

F 30

…and for the Spanish:

Editorial Tecnos, S.A., O’Donnell 27, Madrid (9), Espana

Rústica, 300 pesetas

What is a world Bank project ?

From early lending for “hardware,” such as telecommunication works, the concept has widened to education, population planning, and other “software” considerations. See page 2.

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