Journal Issue

Views and comments

International Monetary Fund. External Relations Dept.
Published Date:
June 1971
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Excerpts from a speech by Shri S. Jagannathan, Governor of the Reserve Bank of India, to the All-India Seminar on the Role of Financial Institutions in Accelaring Industrial Development in Bombay on January 15, 1971.

“The soundest and most important reason for embarking on a program of industrialization is that it is a way of increasing the national and per capita income of the country. This is very evident. In other words, if a new industrial project does not make a positive contribution to the national income it is somewhat difficult to justify its creation. I am laying stress on this aspect because many of the projects that now come before the financial institutions cannot pass this most basic economic test. An unsound project represents a waste of desperately scarce capital, skills and time. The main reason why many unsound projects from the national economic point of view can pass off as sound proposals is the existence of the situation under which excessive costs and prices can receive protection as a result of import controls which make such the entrepreneur at least in the short run, though they may not be in the national interest.

“The crux of the development process is efficient and effective utilisation of the country’s resources. In the ultimate analysis, no country can attain a stage of self-sustained growth without a progressive improvement in productive efficiency. This aspect of the development process has not always been given the weight it deserves.

“In our country domestic capital and foreign exchange are both very scarce resources. A project, therefore, is worthwhile only if it can utilize these scarce resources in an optimum manner. What is currently being done in the industrial sector is perhaps not surprisingly that projects are identified and implemented that give a fairly high rate of profit from the private point of view. Even so, I have doubts whether all the projects implemented do give an internal rate of return that is consistent with a growth rate of industrial output of about 10 per cent per year. In our context in the light of our plan objectives, I feel that for a project to be considered sound one should be looking for at least an internal rate of return of 20 per cent per annum over the life time of the capital assets.

“But apart from this efficiency test, there ought to be another equally basic test and that is with regard to the foreign exchange resources. A project if it replaces existing or potential imports is efficient only if it can do so while fixing a price for its product that is competitive internationally; otherwise, it would merely exploit the domestic consumers and reduce the potential growth of the country below that which can be attained with efficient policies. Similarly, if it is an export project, its export prices should be internationally competitive. I agree that in the short run some protection, some element of subsidy may be inevitable in a developing country. But no project is truly worthwhile unless it can pass the foreign exchange criterion at least within, say, five years of the commencement of its commercial operations. In brief, a project is worthwhile only if it can save/earn a unit of foreign exchange, say a U.S. dollar, at a cost in terms of rupees that is consistent with the present exchange rate of the rupee. Quite simply, the cost of earning/saving one U.S. dollar should not exceed Rs 7.50 in terms of domestic costs.

“I suspect that most of the projects that seek assistance from financial institutions do not pass this foreign exchange test. In such circumstances our industrial growth rate can hardly be satisfactory or higher than what it is, and that is also the reason why our payments problem continues to be acute. I hope it will be conceded that industries have no right to flourish by passing on the cost of their inefficiency to the domestic consumers.”

Excerpts from a speech by Karl Klasen, President of the Deutsche Bundesbank, to the German-American Chamber of Commerce in New York on January 27, 1971.

“The fight against inflation in the 70s will be harder than ever before. Economic policies of the past have brought many blessings to humanity. Economic crises are history. Depressions as severe as those of the 30s are no longer possible….

“All of us agree that inflation cannot be cured by merely treating the symptoms. Unfortunately, no less than ten European countries have done just that by adopting price controls or even price freezes. Such measures distort the domestic as well as the international exchange of goods and services. In spite of these measures demand continues to rise faster than goods and services are made available. That is where trouble starts and leads ultimately to excessive demands by special interest groups—demands that are not based on what is economically possible but politically expedient. The functioning of a free-enterprise economy is endangered if the common good is sacrificed for the benefit of individual groups.

“Government intervention will not suffice. Labor, business, and government have to work together. Labor and business are usually motivated by their own interests rather than the common good. Therefore, some form of incomes policy seems unavoidable.

“To this end we in Germany have activated what is known as ‘concerted action.’ ‘Concerted action’ involves the top leaders of labor, industry, commerce, and finance as well as government. The central bank is also a participant in the meetings….

“Because inflation is the principal problem of the seventies, we must make every possible effort to cope with this threat. In fact we do not know whether the ‘concerted action,’ the German approach to an incomes policy, will succeed. But it is worth the try….

“Of course we shall always have to rely on the traditional tools of the central bank. Nowadays some people doubt their effectiveness. But in the year since I have become associated with the German Federal Bank I have seen that they work. To be sure there are distorting influences from short-term capital movements. On the other hand, if you listen as I do to the complaints about the restraining effects of our policies on business, then you realize how effective these measures are.

“…We in the Western World have already come a long way. Galloping inflations are now just a memory. No government can afford to print money excessively.

“Today cost inflation is our problem. It is a creeping inflation, but nonetheless dangerous. We have no choice other than to eliminate this threat. I am quite confident that we shall succeed, particularly if we rally our forces.”

Excerpts from a lecture by Rinaldo Ossola, Deputy Director General of the Bank of Italy and Chairman of the Deputies of the Group of Ten, at the Brookings Institution, Washington, D.C. on February 1,1971.

“There are complex issues which those who determine the amount of new SDRs must face. One question is whether the need for international liquidity should be measured on the basis of net rather than gross reserves. For example, an increase in reserves in the form of official holdings of dollars has its counterpart in a deterioration of the U.S. liquidity position (U.S. holdings of SDRs, gold, etc., may be unchanged but its liabilities to other governments in dollar form—liabilities which it may be obliged to pay off with gold or SDRs—may have increased). Even if gross reserve assets were to be the correct concept, granting of SDRs would not necessarily raise U.S. gross reserves; instead, it may induce reluctant holders of dollars to oblige the United States to use up some of its newly allocated SDRs in buying up some of those undesired dollars.

“I have assumed that SDRs will succeed in establishing themselves as a major component of international reserves. However, I must point out that there is some opposition. And the success of the anti-SDR thesis, which could be facilitated by the persistence of large U.S. deficits, would indeed be a calamity. For a time it would, paradoxically, cause the establishment of a dollar standard, for central banks would be forced to accept the surplus dollars being offered by the United States in payment of U.S. deficits.

“In that eventuality two hypotheses are possible. The first one is that gold would again become, although only apparently, the basis of the system; and for gold to serve this purpose its price would have to be raised. However, because gold does not yield interest, reserves would very soon tend to be converted back into a credit asset—most probably dollars. We would then have come full circle, and, as you know, it is always better to run straight than in the best of circles. It is not difficult to forecast that in such circumstances recurring crises would affect the major currencies.

“The second hypothesis might be that of gold sales being suspended by the U.S. Treasury due to massive conversions by foreign monetary authorities. I am convinced that, if the United States were to take such a step towards a de facto, if not indeed a de jure, dollar standard before the European countries had made substantial progress on the road to monetary union it would induce conflicting reactions on the part of EEC countries. This would set in motion a process of disintegration of the Community, which would soon require the restoration of severe exchange controls. A long period of a monetary disorder similar to that which characterized the 20s and the 30s would thus begin.

“For these reasons, I hope that the anti-SDR thesis will not succeed, although I cannot exclude it. Even in the early stages, the smooth continuation of the SDR system, especially if holders of this asset were to be rewarded with an interest rate higher than the present 1 ½ per cent, would have the advantage of increasing the desirability of this asset. While this would mean that the role of the dollar as a reserve currency would be progressively reduced, it would also imply that the dollar could keep the function of intervention currency (possibly together with the other intervention currency that might emerge from the European Economic and Monetary Union) and would increase its role of ‘vehicle currency’ in both commercial and financial transactions and international payments.”

Excerpts from an address by Frank A. Southard, Jr., Deputy Managing Director of the International Monetary Fund, at the Mexican Bankers’ Association Meeting, Guadalajara, Mexico, on April 3,1971.

“I will make some very condensed comments on the world economic outlook. The most notable characteristic of developments in the past few years, particularly among industrial countries, has been the rising tide of prices. Accelerating sharply, price increases from 1969 to 1970 exceeded 5 per cent in the United States and 6 per cent in European industrial countries. In order to counter these inflationary trends, the financial policies of most of the industrial countries were generally and increasingly restrictive during 1969 and the first half of 1970. The result was a marked economic slowdown in the industrial countries as a group, and especially in the United States. This easing of demand pressures has permitted some cautious relaxation of financial policies. One result of this relaxation—again, especially in the United States—has been an irregular but progressive decline in interest rates.

“To date, however, the generally slower growth of total demand in the industrial countries has not been accompanied by any marked slowing of price increases. To a considerable extent, the continuation of these increases has reflected cost-push inflation and, indeed, even now there are few signs of any real abatement of the upward trend of wage rates.

“For 1971, an appreciable recovery is in prospect in the overall rate of expansion of total real output in the industrial countries…. However, the resumption of expansion, notably in the United States but also in some other industrial countries as well, will need to be accompanied by great caution, lest premature relaxation or reversal of restrictive policies should lead to a renewed surge of inflationary trends.

“For the less-developed countries, international trade trends in the last two years have been good, and the aggregate reserves of these countries have increased by something like $4 billion, and about one half of this reserve gain occurred in Latin America. This reflected substantial increases in exports, induced by strong import demands in the industrial world; indeed, both in 1969 and 1970 the exports of the developing countries expanded by 11 per cent. The year 1971 is unlikely to develop as well for the less-developed world, since the prospects are that the imports of the industrial countries will not increase at the exceptionally high rate of the past two years and, on the whole, the general softening of commodity price trends in the latter half of 1970 may continue. The net result may be a marked tapering off of the previously rising trend in reserves of the developing countries.”



This volume reports on the findings of a research project on the structure of protection in developing countries, sponsored by the World Bank and the Inter-American Development Bank. The choice of this topic reflects a preoccupation on the part of the two institutions with the economic policies followed by developing countries, among which the policies of protection have particular importance.

Research on the volume was directed by Bela Balassa, Professor of Political Economy at The Johns Hopkins University, in his capacity as consultant to the Economics Department of the World Bank. He was aided by several collaborators who carried out the country studies on the basis of a common methodology. The countries studied include Brazil, Chile, Mexico, West Malaysia, Pakistan, the Philippines, and for comparison, a developed country, Norway.

The volume presents a comparative evaluation of the results of the country studies and explores the effects of protection on resource allocation, exports, and economic growth. The experience of the seven countries studied is also utilized to derive some general conclusions on protection in developing countries and to provide guidelines for an “ideal” policy of protection.

It is hoped that, apart from their interest to the economics profession, the methods and the results presented in this volume will be useful in the practical work of international and national organizations. In various respects, the findings of the research project have already been utilized at the World Bank; the dissemination of the results should contribute to their increased use by the two sponsoring institutions as well as by the developing countries themselves.

Available in English only at present. $12.00 hardback.

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Since the amendment of its Articles of Agree merit in July 1969. the International Monetary Fund has been charged with the responsibility for determining whether there is a need to create special drawing rights and. if so. the magnitude of that need. In carrying out its responsibilities, the Fund benefits from close contacts with the academic community.

At a Seminar convened by the Fund from June 1- 3, 1970. 22 scholars from all parts of the world and a number of Fund staff members exchanged views on questions relating to inter national reserve needs and availabilities This volume is a record of those proceedings, containing the papers prepared for the Seminar, along with comments and summaries of the ensuing discussions.

The volume also contains a number of related papers prepared by the staff of the Fund, including papers submitted to the Executive Directors in 1969 as background for their consideration of the activation of the special drawing rights facility.

Price: $6.00, or the equivalent in the currencies of most other countries. Pp. xiv + 662.

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“The growth of international trade and the spectacular proliferation of multinational business ventures is major business news in the world press…. One important factor rarely stressed is international tax relations.”

International tax relations are discussed in this issue.

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