James C. Corr
At the 1982 Annual Meeting of the Board of Governors of the International Monetary Fund in Toronto, awareness of the severity of the world’s current economic difficulties was compounded by concerns for individual countries’ external positions and the potential strains they created for the international financial system as a whole.
However, by the time the Meeting drew to its close, delegates were able to leave Toronto having achieved a considerable degree of consensus in two central areas: on the economic policies that should be pursued to deal with the problems still confronting the world economy, and on the role of the Fund in helping its members through that adjustment process in a spirit of international cooperation.
Indeed, the theme of international cooperation was one of the most frequently mentioned throughout the Meeting, cooperation not only in trade but also in exchange rates, coordination among central banks, increasing the flow of official assistance from the industrial to the developing world, and in a greater coordination of macroeconomic policies, especially among major industrial countries. A number of speakers particularly welcomed the decision in June by the countries participating in the Versailles economic summit (Canada, France, the Federal Republic of Germany, Italy, Japan, United Kingdom, and United States) to strengthen their cooperation with the Fund in its work of surveillance. Many Governors felt that this collaborative effort would make an important contribution to more coordination and stability in the policies of the major industrial countries, and thereby to greater exchange market stability.
As the Fund’s Managing Director, Jacques de Larosiere, noted in his opening address to delegates, the process of transition to an inflation-free environment appeared at last to be underway. Several of the major industrial countries had made notable progress in slowing down price increases, interest rates had begun a welcome decline, and many countries were taking steps along the difficult but necessary path toward adjustment. However, Governors reaffirmed that inflation still remained unacceptably high in most countries, and that the restoration of economic growth and reductions in unemployment could not be accomplished without a more sustained decline in inflation and inflationary expectations.
The outlook for the non-oil developing countries was seen as particularly bleak. Finance Ministers of the developing countries, meeting as the Group of Twenty-Four before the start of the Annual Meeting, emphasized the difficult problems they faced—the near stagnation in world trade, unemployment at record postwar levels, continued deterioration in developing countries’ terms of trade to their lowest level since the 1950s, and persistently high current account deficits. At the same time, reduced access to and high costs in international capital markets were making the task of financing the imbalances extremely onerous. “Unless the adverse trends in the international economy are reversed,” Ministers stated in the Group’s communiqué, “the whole international system of trade and finance could collapse.” A recovery program was called for, to include as its key elements a concerted effort by industrial countries to bring about a revival of their economies through an appropriate mix of policies, the removal of protectionist barriers to international trade, the reduction of military expenditures, and a rechanneling of such resources to increase official development assistance and other flows.
An “appropriate mix of policies” was a favorite phrase throughout the meetings, cropping up, directly or in a slightly modified form, in the communiques of the Group of Twenty-Four, the Group of 10, the Interim Committee, and the Development Committee (see box), as well as in the subsequent speeches of many Governors in the plenary session itself.
Despite differences on the precise operational significance to be attached to “appropriate mix,” there were important areas of agreement among Governors on certain broad elements of policy. Many Governors, both from industrial and from developing countries, remarked that while monetary policy had proved an effective instrument in combating inflation, fiscal measures to reduce deficits and interest rates had to supplement it and play a greater role in the adjustment process.
The need for a continued effort against inflation was strongly emphasized, particularly, but not exclusively, by Governors from industrial countries. As one Governor put it, “generalized expansionary policies offer no lasting solution to our problems.”
Even those speakers, including some outside the Group of Twenty-Four, who felt that it was desirable for industrial nations to place more emphasis on growth-oriented policies, argued that this should be accomplished without fueling inflation—control of inflation “remains mandatory in order to create the necessary conditions for the resumption of balanced growth,” one Governor noted. However, unless growth in the industrial countries picked up again, they feared that the position of the developing countries would only continue to worsen.
A detailed account of the Annual Meetings and related events is available in the IMF Survey of September 20 and October 4, 1982.
Governors from all countries expressed deep concern about the rise of protectionism, especially as it affected the developing countries. It was illogical, more than one speaker pointed out, to urge adjustment on the developing countries yet deny them a major pathway to adjustment—increased exports—by intensifying tariff and nontariff barriers. Several speakers emphasized the need to avoid the kind of beggar-thy-neighbor policies of the 1930s which would do little, if any, good to the protectionist country while undermining the whole fabric of international cooperation on which the global economic system ultimately depended.
The Fund’s role
The role of the Fund in the adjustment process was seen as critical by most delegates. A few Governors argued that a full-scale review of the international financial system should be conducted, but the overwhelming emphasis was on strengthening the existing institutions. In the words of one Governor: “the Fund remains the centerpiece of international monetary cooperation.”
Governors recognized that this implied that the Fund had to be able to assist its members in a meaningful way in meeting their needs for external finance. It was also recognized that conditionality was an essential element of its adjustment programs, although some felt that there should be greater flexibility in the application of conditionality to take into account the circumstances of individual members. There was widespread support for the view that effective adjustment programs were more easily designed when members approached the Fund before a problem had become acute, rather than looking to it in a crisis as a lender of last resort.
In that context, the amount of resources the Fund would have available to assist members was the single most important operational topic discussed by the delegates. Two days before the Annual Meeting opened, the Interim Committee had met and had reiterated its view that quotas must remain the primary source of finance for the Fund’s operations. The Eighth General Review now in progress should therefore “result in an increase in quotas that would be large enough to enable the Fund to perform its functions in an effective manner in the 1980s,” the Committee’s communiqué stated.
Like “an appropriate mix of policies,” the Committee’s phraseology covered a diversity of views which were made known during the Annual Meeting itself. There was widespread agreement that the required overall increase in Fund quotas would have to be “substantial” and, while that is itself an elastic term, no Governor who mentioned a specific figure suggested less than a 50 per cent increase and many went on record as supporting a doubling or more of quotas. Despite the fact that there had clearly been a narrowing of views since the Committee’s previous meeting in Helsinki in May, it could not be said that a consensus had quite emerged on the precise amount that would eventually be acceptable to all, with some countries not yet ready to define their position in specific terms.
On the distribution of the quota increase among member countries, the Interim Committee concluded that the Review “should be used to bring the quotas of members more in line with their relative positions in the world economy, taking account of the case for maintaining a proper balance between the different groups of countries.” This was a repetition of the formula used in the Helsinki communiqué, and reflected the fact that there were still differences among countries on how the balance between “equiproportional” and “selective” increases should be struck. In general, a large equiproportional element would come close to preserving the existing quota structure, whereas the larger the selective element, the more scope there would be for adjusting shares to reflect changes in members’ relative economic positions. Broadly speaking, Governors from the industrial countries stressed the need for adjusting shares, while Governors from developing countries emphasized maintaining or increasing the share of developing countries, whether by large equiproportional increases or by other means.
Of considerable significance was the fact that the Interim Committee urged the Executive Board to pursue its work on the Quota Review as a matter of high priority, so that the remaining issues on the size and distribution of the increase could be resolved by the time of the Committee’s next meeting in April 1983. The urgency attached to the Review was emphasized by many individual Governors during the Meeting, and could be seen as confirmation of the importance they placed on the Fund’s role in the international monetary system.
There was a lack of consensus on the question of a possible further allocation of Special Drawing Rights (SDKs) in the immediate future. The representatives of developing countries were virtually unanimous in calling for such an allocation and regretted that the Managing Director had been unable to submit a proposal because of the lack of the broad support required by the Fund’s Articles of Agreement. Several industrial countries expressed a similar view. (However, a positive decision would have required an 85 per cent majority of the total voting power in the Fund.) The Executive Board was asked to continue its efforts to bring about a convergence of views that would permit the Managing Director to submit a proposal concerning SDR allocations as soon as possible.
The financial system
As noted earlier, the Annual Meeting took place against a backdrop of rising concern about the external payments positions, and, in particular, the debt service burden of some major borrowers in the international capital markets and the implications these developments might have for the international banking system. The Managing Director noted in his concluding address that the Executive Board had been requested to assess the adequacy of existing arrangements to deal with major strains in the international financial system. In doing so, the Board would take up a proposal put forward by the Governor for the United States that “consideration should be given to establishment of an additional permanent borrowing arrangement, which would be available to the IMF on a contingency basis for use in extraordinary circumstances.”
With regard to the position of private banks within the system, there was a good deal of agreement among Governors that bankers’ responsibilities would have to be commensurate with the increased role they now played in financing external payments imbalances. This would almost inevitably mean a more selective lending policy than in the recent past and acceptance of the fact that adequate and coordinated supervision by banking authorities as well as prudent individual risk assessments by bankers themselves were essential components of a stable system. At the same time, it was pointed out, bankers should avoid a precipitous change of direction vis-à-vis individual countries or groups of countries and should take into account the seriousness of the adjustment efforts a given country was taking, bearing in mind, in the Managing Director’s words, “that a cooperative international effort will best serve the interests of all parties involved and, ultimately, the financial system itself.”
Despite the seriousness of the problems still facing the world economy, the positive developments now visible formed the basis of hopes for a restoration of confidence and a return to sustainable growth. Success was attainable, Mr. de Larosiere observed, “provided that the adjustment effort is kept up; provided that the international financial community maintains a responsible attitude by supporting those borrowers endeavoring to implement necessary adjustments; and provided that the spirit of international cooperation is maintained and the IMF is equipped to handle the situation.”