Journal Issue

The Development Committee Adjustment and growth: a cooperative approach

International Monetary Fund. External Relations Dept.
Published Date:
June 1985
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Ghulam Ishaq Khan

Prospects Of developing Countries. It is increasingly realized that there is no such thing as the prospects of developing countries distinct and apart from the prospects of the world economy at large. Countries, both developed and developing, are so interdependent that I cannot visualize better prospects for one set of countries at the expense of, or compared to, another. So, if we have to register progress, and if we have to help improve the economic environment globally, then I think both developed and developing countries will have to march in step. There will have to be a great deal of coordination in their fiscal, economic, and monetary policies. This is going to be one of the major themes that we shall discuss in this extended meeting of the Committee. The aim of this meeting is to contribute to restoring dynamism to all parts of the global economy. In that context a number of interrelated issues will have to be discussed. These issues are in the field of trade, finance, and investment. The Development Committee is a unique institution in the sense that we are not bound by a rigid franchise or charter as is usual for other institutions. We can discuss disparate but related topics without fear of transgressing jurisdictional boundaries.

Burden of adjustment. I subscribe to the view that the burden of adjustment has fallen disproportionately on the developing countries so far. This asymmetry in global adjustment has existed for quite a number of years and it is one of the elements about which the developing countries have been voicing concern. When they press for a new economic order, it is really with the objective of bringing about a more symmetrical adjustment. Certain statistics highlight the extent of the adjustment that developing countries have been able to carry out over a period of years. The total payments deficit of developing countries was reduced from something like $105 billion in 1981-82 to $57 billion in 1983. The figures for 1984 are not yet available but it is estimated that the deficit has been further reduced to about $36 billion.

This has all been done by a tremendous sacrifice and at tremendous social and economic cost. As I have said on a number of earlier occasions, many developing countries are already at the threshold of political and social tolerance. I would not like to quote the examples of countries by name but in a number of countries the severity of adjustments led to consequences that I don’t think are satisfactory from anyone’s point of view.

At the time of the Jamaica Accord (on the Second Amendment of the Fund’s Articles), the role of the Fund with regard to surveillance, in particular within the context of the need for symmetrical adjustment, was emphasized. But for want of practical means, it has not been possible to achieve that. I am hoping the Committee will convey a strong message to the effect that adjustment has to be symmetrical; it cannot be limited to the developing countries but must also encompass a corresponding effort by the developed countries. Here again I think it would be invidious to single out countries. However, many of the difficulties that the developing countries today face stem from the type of policies that the developed countries, or at least some of them, are following. The adjustment process in the developing countries would have been easier with a different set of policies pursued by major industrial countries. It is, for example, being increasingly recognized that the very strong dollar, the large fiscal deficits in a number of industrial countries, high interest rates directing world savings toward U S markets, and the rise in protectionist sentiment—that each of these creates a particular type of difficulty for developing countries. Yet the developing countries, without any influence on the policies of the developed countries that affect the international environment in which they have to operate, are required to adjust to whatever is the current situation. This I don’t think is fair.

The strong dollar. In the real world there is no such thing as an unmitigated good or an unmitigated evil. Each action has its own counterpart. The strong dollar certainly helps the rest of the world to export more to the United States. But I don’t think the rest of the world has been able to prepare a balance sheet of how much it has earned by way of these increased exports and how much it has lost by way of the costly raw material imports in more expensive dollars, and by way of the higher debt service burden. Most developing countries are net importers of petroleum, the price of which has been affected by the strong dollar. In my own country, Pakistan, we are spending something like $1.7-1.8 billion on oil imports each year. The real cost of importing this oil is going up because of the dollar exchange rate. Our debt is largely denominated in dollars and the debt-servicing liability is affected by the exchange rate of the dollar.

The strengthened dollar actually creates a chain reaction. True, it encourages exports to the United States. At the same time, by discouraging US exports to the rest of the world, it creates an unprecedented trade imbalance and pressures for protection. And significantly, the strong dollar allows the fiscal deficit to be financed by the inflow of capital from the rest of the world. The very robust growth of the US economy that has started lately, therefore, is supported by overseas savings.

The debt Situation. The debt problem is no longer an immediate crisis thanks to the efforts made by the Fund and its Managing Director. But to say that the debt problem is behind us would not be realistic. The debt problem is very much there and the world has to take some initiative in dealing with it. Now that we are no longer in a crisis situation, the time has come to think about the whole thing coolly and dispassionately and to determine what is required. Let me state my ideas on debt, which I think are the views of the developing countries on the whole. First, debt is a contractual obligation and it must be paid. But it must be paid in a manner that would not hurt the growth prospects of the countries concerned. Second, the countries concerned must also adjust. They must follow appropriate domestic economic and financial policies. At the same time the rest of the world has an obligation to enable them to do that by lifting protectionism and allowing trade to grow faster, and by increasing the flow of resources to these countries, both bilaterally, as well as through commercial banks and multilateral institutions. Without such policies the solution will be very difficult. If countries have to service debt, they have to be able to produce and export, and for that to happen, the rest of the world has to provide facilities. Circumstances differ greatly from country to country, and I don’t think there can be one global solution. I am also not a believer in setting up new institutions to take over the debt burden. The debt problem will have to be tackled on a case-by-case basis, as has been done so far. But it has to be done within a more enlightened environment of growth and stability.

Financial flows. It is very difficult to look into a crystal ball and forecast with any degree of certainty what’s going to happen. But in the light of the history of the last few years, if that is any guide, I personally do not believe that the prospects of increased flows, of any kind, are very good. But the world economic situation, and even political situation, can change dramatically.

The most realistic picture that I see is that there is not going to be a significant increase in bilateral flows or ODA. With the restoration of creditworthiness to developing countries, which should be the outcome of the adjustment policies that they have been pursuing, there should be some increase in the flow of commercial bank lending. But that again is not going to reach the levels of the past, if for no other reason than the fact that OPEC no longer has the same surpluses. So we are left with multilateral financing institutions. We strongly believe that these institutions should be strengthened, that their capital base should be increased, and that they have a role to play both in their own right, and as catalysts, to attract capital from other sources.

With regard to equity investment, I think that is not going to be a substitute for official flows for the simple reason that such investments are country-selective and sector-selective. I don’t think anybody would be prepared to invest in drinking water supplies, in hospitals, in schools and colleges, or in rural roads. It is just not done. So, when we talk of equity investment, we have in mind only industrial or commercial enterprises. There also, we do not yet have a code of conduct for people who invest in other countries. We, the developing countries, are asked to provide guarantees to protect foreign investors. We are quite willing to do that. The one initiative taken by the World Bank with regard to this—MIGA [the Multilateral Investment Guarantee Agency]—is a very good one. On the other hand there is a responsibility on those who invest in these countries also. They must have respect for the development priorities of the host countries. Their investment should not be solely for the purpose of maximizing profits regardless of what happens in the process to the country itself. Legitimate profits are perfectly normal. I think nobody would invest in another country unless he has a fairly satisfactory profit. But profits must not be regardless of the cost to the country, and investments should be governed by a code of conduct.

IDA. I think we have another bridge to cross before we can talk of the future of IDA. That is the mid-term review of IDA that we had agreed upon in the past. That review is due sometime later this year and in that context I am proposing personally that the review should also work out the requirements of individual countries on the basis of a certain assumed rate of growth, and how that growth can be sustained. What type of investments would be needed to achieve that growth rate? Some estimates would have to be made for that exercise: how much of the resources Can come from commercial lending, how much from the multilateral institutions on commercial terms, how much would have to be concessional assistance and whether IDA should continue in its present form or assume a different form?

The need for concessional assistance will be there for a number of countries for quite some time. These countries have made efforts to be self-reliant. But concessional assistance is needed to make up for the backlog of neglect and the deprivation they have suffered. IDA, over the years, has proved its effectiveness.

Role Of the Committee. Over the last few years, we have made steady progress in improving the effectiveness of this Committee. One result of that is the convergence of views that many global problems that have defied solutions so far, and have remained stalled in a number of other forums, should be entrusted to the Development Committee. That is an encouraging sign, but again the results would depend on the political sagacity that we can bring to bear on the problems that are before the Committee. If we make reasonable progress from one meeting to another, I think the faith and confidence that for the time being has been reposed in the Committee will be maintained. Otherwise the Committee would become yet another forum for continually debating issues. As the Persian saying goes, “You sit, you talk, and then you disperse.” I am hoping that this Committee will not be overtaken by that fate. The reason is that the Committee is unique. First, membership is confined to finance ministers, who are down-to-earth and realistic. Second, it is a relatively compact body. Third, it usually does not engage in rhetoric. It deals in matters of substance. It has no power to take final decisions but it certainly can influence political will. It can provide the political impetus, which can then be worked out or translated into effective programs of action in the relevant forums.

For example, for the first time we have introduced the topic of trade in the Development Committee, and this is one of the issues that has attracted a good deal of attention. I think there is a growing recognition now of the indissoluble link between trade, development, and finance. This is the only forum in which, as I said before, you can cross topical frontiers and deal with all these issues in one go. No other institution enjoys that sort of flexibility. The Committee also has the advantage of links with both the Fund and the Bank, which again places it in a unique position.

I hope that we will be able, from one meeting to another, to make progress. The extended meeting of the next few days is intended to help promote dynamism in the world economy. But all this cannot be done in one go. There will have to be gradual, steady, progress from one meeting to another. The principal aim will be to start a meaningful dialogue within the framework of the Committee on most of the issues that are affecting global development and that have proved intractable so far.

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