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International monetary issues and the developing countries: a comment
World Development,
Vol. 3, No. 9, September
1975, pp. 633-637
International Monetary Issues and the Developing Countries: A Comment * SIDNEY
DELL
United Nutions Development Programme
reserve asset of the system, and would promote There is a school of thought according to an inequitable distribution of new liquidity. which the great international monetary issues Whether one agrees with these points or not, of the day are really issues between the monetary super-powers: the best interests of they clearly have to do with the central elethe developing countries require only that the ments of the negotiations, and not with aid. monetary super-powers resolve their conflicts as Important as the link was, there were issues quickly and as smoothly as possible. Maynard of far greater moment at stake for the develop ing countries? One of these-the need to take and Bird (henceforward referred to as M-B) do not take this view, but they do put forward a account of the interdependence of problems in closely related idea, namely that ‘the establishthe fields of trade, money and development ment of the link was the major aim of the less finance-was given much greater prominence developed countries’. In other words, the by the developing countries in UNCTAD and developing countries were concerned more with the U.N. General Assembly than in the monecreating a new channel of aid than with the tary negotiations. The representatives of develocentral issues that were at stake in the moneping-country ministries of finance are often tary negotiations. even less in touch with ministries of trade and In reality, one cannot speak of the major aim of the developing countries-their common platform was a compromise as between the . often divergent interests of the more and less * The views expressed in this comment are those of advanced countries. i Nor did the link dominate the author and do not necessarily represent those of the attention of these countries to anything like the United Nations Development Programme, of the extent that one might assume from the which he is a staff member. proportion of their total space that M-B 1. Indeed, a case could be made that what has de devote to it. It is not possible, in the context of feated the link thus far is not so much the resistance the present comment, to document the matter ‘of the major developed countries-even the two counfully, but we may, as a typical item of evidence, tries that provided the strongest opposition to the link consider the communique issued by the Group made it known informally at a certain stage of the of Twenty-four following its meeting at minidiscussions that the link was negotiable within a total sterial level on 24 March 1973. The commupackage of reform. The link was defeated partly by nique devoted just two lines out of some three the explosion of dollar liquidity in 1971-3. and uartlv pages to the link. The main emphasis of the by divisions among the developing countries, some of communique was on the need for a collectively which seem to have been persuaded by the argument put to them that link aid would not be additional, and managed system of stable exchange rates based that their share of such aid, as determined by Fund on adjustable par values expressed in SDRs. It quotas, would be smaller than their share of existing expressed opposition to recent decisions of the aid flows. Group of Ten which appeared to contemplate an indefinite period of floating by major 2. A series of analytical papers dealing with the main currencies, as well as the creation of new liquid concerns of the developma countries durine the resources through the enlargement of swap negotiations of the Committee- of Twenty v,$l be arrangements. These decisions, in the view of found in the UNCTAD publication ‘Money, finance the Twenty-four, would affect adversely the and development: papers on international monetary reform’ (UN Sales No. E.74.1LD.15). prospects of the SDR hecoming the main 633
634
WORLD DEVELOP>lEN’I
foreign affairs than are their counterparts in the developed countries. Strikingly, it was the United States that, at the outset, was most concerned to ensure that the international negotiations on money and trade, though conducted separately, should be linked at the highest level of decision-making; and one important feature of the Smithsonian agreement of December 1971 was that it combined trade and monetary concessions among the major industrial countries as the outcome of a single negotiation. The United States government believed that international monetary and trade developments had been jointly responsible for restricting the share of the United States in the growth of world trade, and considered that no solution of the currency crisis would be satisfactory if it were not accompanied by measures to improve United States opportunities for expansion of its exports. As President Nixon put it to the Board of Governors of the IMF/IBRD in September 1972: ‘We must see monetary reform as one vital part of a total reform of international economic affairs, encompassing trade and investment opportunity as well.’ The United States view was sharply contested by the European Community, which feared the use of monetary weapons to extract trade concessions, and which therefore insisted that the two sets of negotiations must proceed independently, without making the success of the monetary negotiations contingent upon that of the trade negotiations. In the end the United States virtually shelved its views on this apparently concluding that it had matter, achieved most of its initial objectives through acceptance of the floating of the dollar. For the developing countries. however, no improvement in the adjustment process was - conceivable without simultaneous action in several fields. A smoothly operating process of adjustment-for any country-requires that the flow of exports and imports should be sufficiently responsive to market forces so that any changes in exchange rates or the level of domestic expenditure required to restore equilibrium should not have to be so large as to disrupt the whole economy. At the present time developing countries have to contend with the fact that the markets for much of their export trade, whether in primary commodities or manufactures, have been insulated from price changes through controls applied by importing countries. Thus any given percentage change in exports is likely to necessitate a much larger shift in the exchange rate in developing countries than in developed countries. No
developed country would regard a system of adjustment as satisfactory if it required the major part of the burden to be assumed by a reduction in imports. Yet this is the situation typical of developing countries; and the problem is intensified in many cases by virtue of the fact that purchases abroad are already so severely rationed that further curtailment must cut into imports of raw materials, intermediates, and equipment, and hence depress domestic production and income. Thus one of the conditions for improvement of the adjustment process for developing countries is a willingness of their trading partners to ease controls on their imports from these countries. M-B suggest, without going into the matter, that it is ‘by no means clear’ that a regime of floating exchange rates for the major currencies would be inimical to the interests of developing countries: Bhagwati goes even further in saying that developing-country objections to greater flexibility should be ‘resolutely ignored-in their own interest’!3 One wonders whether the last word has yet been said on the compatibility of floating exchange rates with the interests even of the developed countries. There is no dispute about the fact that the international monetary system had become rigidified to an extent that had not been intended at Bretton Woods, and that measures were needed to overcome the rigidities. But whether this means that no system of par values will ever be restored is another matter. A large proportion of those who have resigned themselves to an unlimited period of floating have done so not because they are convinced of the optimal&y of the exchange rate patterns thereby achieved, but because they see no other feasible means of containing the massive flows of private capital across the exchanges that occur from time to time in the expectation of movements in the rates. But whether governments will be prepared to accept this kind of ftircc mujertre in the determination of exchange rate policies in the long run is far from clear. The general view appears to be that a collectively managed system will permit governments to prevent exchange rates from fluctuating
3. Jagdish N. Bhaywati, ‘The international system: issues in the symposium”, ttarional Economics. Vol. 2 (1972).
hunal
monetary of Irtfer-
INTERNATIONAL
MONETARY
ISSUES AND THE DEVELOPING COUNTRIES
excessively. If so, it is, of course, vital to find ways of distinguishing between temporary and persistent imbalances, since to the extent that imbalances are temporary, it is preferable to finance them instead of attempting to eliminate them by movements in exchange rates or alterations in the level of business activity. Will it ever be possible to do this? It is already clear, on the basis even of the limited experience thus far available, that a flexible system does not per se prevent exchange rates from moving seriously out of line with domestic price changes, so that currencies may still become markedly overvalued or undervalued-perhaps almost as much as under the old regime of fixed rates. Yet there is no reason to believe that governments have deliberately sought this result: it is much more likely that they have found it impossible to distinguish between movements towards and away from equilibrium. Thus while it is generally agreed that ‘clean’ floating would probably lead to an unacceptable degree of exchange rate instability; a reliable basis for management does not yet exist. In the longer run, moreover, the viability of any system, including a system in which the pattern of exchange rates is determined by market forces, depends on the degree of consistency of the balanceof-payments objectives of major countries. In case of serious controversy among governments as to current. account objectives, or even as to methods of financing current account surpluses or deficits, no pattern of exchange rates will be found satisfactory on all sides. Nor can disagreement of this kind be eliminated through the action of market forces. Thus the developing countries see grounds for scepticism as to the benefits of flexible exchange rates even from the standpoint of the system as a whole. From the narrower point of view of their own national interests, there are even stronger reasons for concern. The conventional wisdom, to which M-B subscribe, is that each developing country would be well advised to peg on the currency of the major country with which it does most of its trade. But for one thing such a system runs counter to the need for diversification of trade relations, and especially to the encouragement of trade among developing countries. Even more importantly for countries where significant diversification of relationships has already occurred, such a system induces exchange rate movements that result not developing alterations against one
from shifts in the balances of the countries concerned but rather from in the rates of the major currencies another. On the other hand, pegging
635
against a weighted average of currencies raises problems of great difficulty in the choice of appropriate weights, including the problem of how to weight financial as against trade flows.4 The simple fact is that most developing countries feel that they do not have the capacity to handle the complex problems of exchange rate and reserve management that arise in a system of general floating. At one time it was thought that many of these problems could be sidestepped by transactions in the forward exchange market, but experience thus far suggests that such transactions are very costly, and the types of coverage available far from adequate. A related issue which attracted a great deal of attention from developing countries was the proposal by certain industrial countries to introduce controls on the Euro-currency markets. It was pointed out that the uninhibited growth of Euro-banking had increased the international mobility of funds and had thereby added greatly to the disturbances generated by disequilibrating capital movements. Some of the more advanced developing countries, however, strongly resisted the imposition of controls on a source of finance that has, in recent years, added greatly to their capital receipts: in the first half of 1974 published Eurocurrency loans to developing countries exceeded $12 billion, at an annual rate. Developing countries also sought maximum possible freedom to diversify their reserves out of traditional reserve currencies, to switch among currencies, and to place reserves in Euro-currency markets. They considered such freedom of action essential if they were to match their holdings with expected requirements for financing in various currencies, and protect the value of their reserves. It is not possible to discuss these matters at any length in the present context, but clearly there is a conflict here between the objective of strengthening the SDR as the central reserve asset of a reformed system and
4. For
a more complete exposition of the point of view summarized in this paragraph, see Carlos ‘The post-1971 international F. Diaz-Alejandro, financial system and the less developed countries’, in G. K. Helleiner (ed.), A World Divided: the Less Developed Countries in the International Economy (Cambridge University Press, forthcoming).
636
WORLD DEVELOPMENT
the desire to avoid any restrictions upon the freedom of countries to diversify their holdings and make maximum use of Euro-banking facilities. Some confusion as to the attitude of the IMF to the points at issue results from M-B’s identification of views expressed by the Managing Director with those of the IMF itself. M-B point out that the industrial countries originally intended to create a new international reserve asset only within a limited group that would exclude the developing countries. They go on to say the ‘the IMF remained a staunch supporter of the developing countries in this respect’ and that ‘the Fund view won the day’. No such view could, however, have been held by the IMF as such since the industrial countries command the overwhelming majority of the voting power. There is no doubt that the Managing Director, Pierre-Paul Schweitzer, courageously brought his full influence to bear in favour of the principle of universality of participation by Fund members in the creation and distribution of new reserves. But the views he expressed, influential and respected as they were, were not and could not be decisive. It should be borne in mind that the negotiations on the creation of the new asset were not even taking place in the Fund. It was not until November 1966 that the deputies of the Group of Ten agreed to meet jointly with the executive directors of the IMF (including those from developing countries) and by that time the basic decisions had already been taken, including the decision to distribute the newly created reserves to all members of the Fund. Accordingly, what won the day was not ‘the Fund view’ but the strong political pressures brought to bear by the developing countries in a variety of international forums, particularly UNCTAD and the United Nations General Assembly. It is for this reason that participation in the decision-making process in the international monetary field has been a major issue between developing and developed countries during the past ten years. Developing countries have never felt that they could secure adequate consideration of needs and objectives by acting through the machinery of the ILIF alone. M-B likewise fail to point to the external influences brought to bear upon the Fund to introduce the compensatory financing facility in 1963: the impression is conveyed that this was due entirely to ‘a significant shift’ in the Fund’s attitude towards development in the late 1950s. No mention is made of the fact that the search for methods of compensating for declines in commodity prices had been pressed
forward in the United Nations, and that it was from the UN that the driving force came. Again. the liberalization of the facility in September 1966 was the direct result of a resolution adopted at UNCTAD I recommending that the amount of the facility should be increased from 25 to 50 per cent of a member country’s quota and that compensatory credits should be placed ‘entirely outside the structure of the gold and successive credit tranches’, so that compensatory drawings would not directly or indirectly prejudice a member’s ability to make ordinary drawings. The initiative for policy changes of this type generally came from agencies outside the Fund rather than from the Fund itself. This was particularly striking in the case of the link, which ‘for many years was considered to be an idea so disruptive of a sound international monetary system that the Executive Directors of the Fund could not bring themselves even to study it. A more important question concerns the impact on developing countries of a strengthening of the role of the IMF in managing the international monetary system. Such a strengthening was called for by the Committee of Twenty in its communique of ‘37 March 1973. In particular, the communique saw a need for ‘a better working of the adjustment process, in which adequate methods to assure timely and effective balance-of-payments adjustment by both surplus and deficit countries would be assisted by improved international consultation in the Fund including the use of objective indicators’. Some saw in this the danger of encroachments upon the economic independence of the weaker countries. Others felt that the developing countries had in the past been required by the IMF to accept a discipline that had not been applied to developed countries, and hoped that the new arrangements would be more even-handed. M-B’s treatment of the controversy about the link is by far the best part of the survey, and calls for little comment.5 They might, perhaps, have stated the case against higher interest rates on SDRs (with or without the link). And it would have been useful to develop the point that the link could play a key role in offsetting the international effects ot’ recession: this is a point that has, in the past. commended itself even to as orthodox an institution as the Bundesbank. The link would also be helpful in conflicting balance-of-payments reconciling objectives of the major trading countries by enlarging the total market for their exports, room for thereby creating additional manoeuvre.
INTERNATIONAL MONETARY ISSUES AND THE DEVELOPING COUNTRIES 5. It is, however, misleading to say that ‘Triftin and UNCTAD-type methods of linking aid with reserve creation’ are not relevant to a system of SDRs, in which no provision is made for currency backing. This suggests that M-B have not read their own reference (UNCTAD [92, 196911, despite the fact that the proposals by the second UNCTAD expert group which it contains were among those studied by the IMF and the Committee of Twenty. Even the proposals by the first UNCTAD expert group did not depend integrally on the concept of currency backing. Indeed, when Lord Kahn presented the proposals of the first UNCTAD expert group to the Trade and Development Board in February 1966, he was faced with the criticism by the UK delegation among others that the international community was not likely to have the requisite confidence in a new reserve asset backed ‘by a large number of currencies, many of them inconvertible and some unstable, and by claims on an international long-term lending institution’. Lord Kahn pulled out a pound note from his wallet and pro-
637
ceeded to read out the inscription thereon, observing mildly that the members of the Board might like to visit the Bank of England and invite it to make good on its promise to pay. He next produced a dollar bill and pointed to the inscription ‘In God We Trust’. Evidently, said Lord Kahn, confidence in the pound and the dollar, such as it was, depended on something other than backing. M-B appear to accept the contention by Reuss that a voluntary link would leave aid flows at the mercy of the budgetary process, Even if valid, this point presumably applies only to the United States. It has, however, been argued by two distinguished American lawyers that a voluntary link would not, in the case of the United States, require a Congressional appropriation of tax revenue but only general enabling authority. See Michael 0. Finkelstein and Martin F. Rickman, ‘Linking Special Drawing Rights and development assistance’, New York University Journal of international Law and Politics, Vol. 4, No. 1 (1971).
Vol. 3, No. 9, September
1975, pp. 633-637
International Monetary Issues and the Developing Countries: A Comment * SIDNEY
DELL
United Nutions Development Programme
reserve asset of the system, and would promote There is a school of thought according to an inequitable distribution of new liquidity. which the great international monetary issues Whether one agrees with these points or not, of the day are really issues between the monetary super-powers: the best interests of they clearly have to do with the central elethe developing countries require only that the ments of the negotiations, and not with aid. monetary super-powers resolve their conflicts as Important as the link was, there were issues quickly and as smoothly as possible. Maynard of far greater moment at stake for the develop ing countries? One of these-the need to take and Bird (henceforward referred to as M-B) do not take this view, but they do put forward a account of the interdependence of problems in closely related idea, namely that ‘the establishthe fields of trade, money and development ment of the link was the major aim of the less finance-was given much greater prominence developed countries’. In other words, the by the developing countries in UNCTAD and developing countries were concerned more with the U.N. General Assembly than in the monecreating a new channel of aid than with the tary negotiations. The representatives of develocentral issues that were at stake in the moneping-country ministries of finance are often tary negotiations. even less in touch with ministries of trade and In reality, one cannot speak of the major aim of the developing countries-their common platform was a compromise as between the . often divergent interests of the more and less * The views expressed in this comment are those of advanced countries. i Nor did the link dominate the author and do not necessarily represent those of the attention of these countries to anything like the United Nations Development Programme, of the extent that one might assume from the which he is a staff member. proportion of their total space that M-B 1. Indeed, a case could be made that what has de devote to it. It is not possible, in the context of feated the link thus far is not so much the resistance the present comment, to document the matter ‘of the major developed countries-even the two counfully, but we may, as a typical item of evidence, tries that provided the strongest opposition to the link consider the communique issued by the Group made it known informally at a certain stage of the of Twenty-four following its meeting at minidiscussions that the link was negotiable within a total sterial level on 24 March 1973. The commupackage of reform. The link was defeated partly by nique devoted just two lines out of some three the explosion of dollar liquidity in 1971-3. and uartlv pages to the link. The main emphasis of the by divisions among the developing countries, some of communique was on the need for a collectively which seem to have been persuaded by the argument put to them that link aid would not be additional, and managed system of stable exchange rates based that their share of such aid, as determined by Fund on adjustable par values expressed in SDRs. It quotas, would be smaller than their share of existing expressed opposition to recent decisions of the aid flows. Group of Ten which appeared to contemplate an indefinite period of floating by major 2. A series of analytical papers dealing with the main currencies, as well as the creation of new liquid concerns of the developma countries durine the resources through the enlargement of swap negotiations of the Committee- of Twenty v,$l be arrangements. These decisions, in the view of found in the UNCTAD publication ‘Money, finance the Twenty-four, would affect adversely the and development: papers on international monetary reform’ (UN Sales No. E.74.1LD.15). prospects of the SDR hecoming the main 633
634
WORLD DEVELOP>lEN’I
foreign affairs than are their counterparts in the developed countries. Strikingly, it was the United States that, at the outset, was most concerned to ensure that the international negotiations on money and trade, though conducted separately, should be linked at the highest level of decision-making; and one important feature of the Smithsonian agreement of December 1971 was that it combined trade and monetary concessions among the major industrial countries as the outcome of a single negotiation. The United States government believed that international monetary and trade developments had been jointly responsible for restricting the share of the United States in the growth of world trade, and considered that no solution of the currency crisis would be satisfactory if it were not accompanied by measures to improve United States opportunities for expansion of its exports. As President Nixon put it to the Board of Governors of the IMF/IBRD in September 1972: ‘We must see monetary reform as one vital part of a total reform of international economic affairs, encompassing trade and investment opportunity as well.’ The United States view was sharply contested by the European Community, which feared the use of monetary weapons to extract trade concessions, and which therefore insisted that the two sets of negotiations must proceed independently, without making the success of the monetary negotiations contingent upon that of the trade negotiations. In the end the United States virtually shelved its views on this apparently concluding that it had matter, achieved most of its initial objectives through acceptance of the floating of the dollar. For the developing countries. however, no improvement in the adjustment process was - conceivable without simultaneous action in several fields. A smoothly operating process of adjustment-for any country-requires that the flow of exports and imports should be sufficiently responsive to market forces so that any changes in exchange rates or the level of domestic expenditure required to restore equilibrium should not have to be so large as to disrupt the whole economy. At the present time developing countries have to contend with the fact that the markets for much of their export trade, whether in primary commodities or manufactures, have been insulated from price changes through controls applied by importing countries. Thus any given percentage change in exports is likely to necessitate a much larger shift in the exchange rate in developing countries than in developed countries. No
developed country would regard a system of adjustment as satisfactory if it required the major part of the burden to be assumed by a reduction in imports. Yet this is the situation typical of developing countries; and the problem is intensified in many cases by virtue of the fact that purchases abroad are already so severely rationed that further curtailment must cut into imports of raw materials, intermediates, and equipment, and hence depress domestic production and income. Thus one of the conditions for improvement of the adjustment process for developing countries is a willingness of their trading partners to ease controls on their imports from these countries. M-B suggest, without going into the matter, that it is ‘by no means clear’ that a regime of floating exchange rates for the major currencies would be inimical to the interests of developing countries: Bhagwati goes even further in saying that developing-country objections to greater flexibility should be ‘resolutely ignored-in their own interest’!3 One wonders whether the last word has yet been said on the compatibility of floating exchange rates with the interests even of the developed countries. There is no dispute about the fact that the international monetary system had become rigidified to an extent that had not been intended at Bretton Woods, and that measures were needed to overcome the rigidities. But whether this means that no system of par values will ever be restored is another matter. A large proportion of those who have resigned themselves to an unlimited period of floating have done so not because they are convinced of the optimal&y of the exchange rate patterns thereby achieved, but because they see no other feasible means of containing the massive flows of private capital across the exchanges that occur from time to time in the expectation of movements in the rates. But whether governments will be prepared to accept this kind of ftircc mujertre in the determination of exchange rate policies in the long run is far from clear. The general view appears to be that a collectively managed system will permit governments to prevent exchange rates from fluctuating
3. Jagdish N. Bhaywati, ‘The international system: issues in the symposium”, ttarional Economics. Vol. 2 (1972).
hunal
monetary of Irtfer-
INTERNATIONAL
MONETARY
ISSUES AND THE DEVELOPING COUNTRIES
excessively. If so, it is, of course, vital to find ways of distinguishing between temporary and persistent imbalances, since to the extent that imbalances are temporary, it is preferable to finance them instead of attempting to eliminate them by movements in exchange rates or alterations in the level of business activity. Will it ever be possible to do this? It is already clear, on the basis even of the limited experience thus far available, that a flexible system does not per se prevent exchange rates from moving seriously out of line with domestic price changes, so that currencies may still become markedly overvalued or undervalued-perhaps almost as much as under the old regime of fixed rates. Yet there is no reason to believe that governments have deliberately sought this result: it is much more likely that they have found it impossible to distinguish between movements towards and away from equilibrium. Thus while it is generally agreed that ‘clean’ floating would probably lead to an unacceptable degree of exchange rate instability; a reliable basis for management does not yet exist. In the longer run, moreover, the viability of any system, including a system in which the pattern of exchange rates is determined by market forces, depends on the degree of consistency of the balanceof-payments objectives of major countries. In case of serious controversy among governments as to current. account objectives, or even as to methods of financing current account surpluses or deficits, no pattern of exchange rates will be found satisfactory on all sides. Nor can disagreement of this kind be eliminated through the action of market forces. Thus the developing countries see grounds for scepticism as to the benefits of flexible exchange rates even from the standpoint of the system as a whole. From the narrower point of view of their own national interests, there are even stronger reasons for concern. The conventional wisdom, to which M-B subscribe, is that each developing country would be well advised to peg on the currency of the major country with which it does most of its trade. But for one thing such a system runs counter to the need for diversification of trade relations, and especially to the encouragement of trade among developing countries. Even more importantly for countries where significant diversification of relationships has already occurred, such a system induces exchange rate movements that result not developing alterations against one
from shifts in the balances of the countries concerned but rather from in the rates of the major currencies another. On the other hand, pegging
635
against a weighted average of currencies raises problems of great difficulty in the choice of appropriate weights, including the problem of how to weight financial as against trade flows.4 The simple fact is that most developing countries feel that they do not have the capacity to handle the complex problems of exchange rate and reserve management that arise in a system of general floating. At one time it was thought that many of these problems could be sidestepped by transactions in the forward exchange market, but experience thus far suggests that such transactions are very costly, and the types of coverage available far from adequate. A related issue which attracted a great deal of attention from developing countries was the proposal by certain industrial countries to introduce controls on the Euro-currency markets. It was pointed out that the uninhibited growth of Euro-banking had increased the international mobility of funds and had thereby added greatly to the disturbances generated by disequilibrating capital movements. Some of the more advanced developing countries, however, strongly resisted the imposition of controls on a source of finance that has, in recent years, added greatly to their capital receipts: in the first half of 1974 published Eurocurrency loans to developing countries exceeded $12 billion, at an annual rate. Developing countries also sought maximum possible freedom to diversify their reserves out of traditional reserve currencies, to switch among currencies, and to place reserves in Euro-currency markets. They considered such freedom of action essential if they were to match their holdings with expected requirements for financing in various currencies, and protect the value of their reserves. It is not possible to discuss these matters at any length in the present context, but clearly there is a conflict here between the objective of strengthening the SDR as the central reserve asset of a reformed system and
4. For
a more complete exposition of the point of view summarized in this paragraph, see Carlos ‘The post-1971 international F. Diaz-Alejandro, financial system and the less developed countries’, in G. K. Helleiner (ed.), A World Divided: the Less Developed Countries in the International Economy (Cambridge University Press, forthcoming).
636
WORLD DEVELOPMENT
the desire to avoid any restrictions upon the freedom of countries to diversify their holdings and make maximum use of Euro-banking facilities. Some confusion as to the attitude of the IMF to the points at issue results from M-B’s identification of views expressed by the Managing Director with those of the IMF itself. M-B point out that the industrial countries originally intended to create a new international reserve asset only within a limited group that would exclude the developing countries. They go on to say the ‘the IMF remained a staunch supporter of the developing countries in this respect’ and that ‘the Fund view won the day’. No such view could, however, have been held by the IMF as such since the industrial countries command the overwhelming majority of the voting power. There is no doubt that the Managing Director, Pierre-Paul Schweitzer, courageously brought his full influence to bear in favour of the principle of universality of participation by Fund members in the creation and distribution of new reserves. But the views he expressed, influential and respected as they were, were not and could not be decisive. It should be borne in mind that the negotiations on the creation of the new asset were not even taking place in the Fund. It was not until November 1966 that the deputies of the Group of Ten agreed to meet jointly with the executive directors of the IMF (including those from developing countries) and by that time the basic decisions had already been taken, including the decision to distribute the newly created reserves to all members of the Fund. Accordingly, what won the day was not ‘the Fund view’ but the strong political pressures brought to bear by the developing countries in a variety of international forums, particularly UNCTAD and the United Nations General Assembly. It is for this reason that participation in the decision-making process in the international monetary field has been a major issue between developing and developed countries during the past ten years. Developing countries have never felt that they could secure adequate consideration of needs and objectives by acting through the machinery of the ILIF alone. M-B likewise fail to point to the external influences brought to bear upon the Fund to introduce the compensatory financing facility in 1963: the impression is conveyed that this was due entirely to ‘a significant shift’ in the Fund’s attitude towards development in the late 1950s. No mention is made of the fact that the search for methods of compensating for declines in commodity prices had been pressed
forward in the United Nations, and that it was from the UN that the driving force came. Again. the liberalization of the facility in September 1966 was the direct result of a resolution adopted at UNCTAD I recommending that the amount of the facility should be increased from 25 to 50 per cent of a member country’s quota and that compensatory credits should be placed ‘entirely outside the structure of the gold and successive credit tranches’, so that compensatory drawings would not directly or indirectly prejudice a member’s ability to make ordinary drawings. The initiative for policy changes of this type generally came from agencies outside the Fund rather than from the Fund itself. This was particularly striking in the case of the link, which ‘for many years was considered to be an idea so disruptive of a sound international monetary system that the Executive Directors of the Fund could not bring themselves even to study it. A more important question concerns the impact on developing countries of a strengthening of the role of the IMF in managing the international monetary system. Such a strengthening was called for by the Committee of Twenty in its communique of ‘37 March 1973. In particular, the communique saw a need for ‘a better working of the adjustment process, in which adequate methods to assure timely and effective balance-of-payments adjustment by both surplus and deficit countries would be assisted by improved international consultation in the Fund including the use of objective indicators’. Some saw in this the danger of encroachments upon the economic independence of the weaker countries. Others felt that the developing countries had in the past been required by the IMF to accept a discipline that had not been applied to developed countries, and hoped that the new arrangements would be more even-handed. M-B’s treatment of the controversy about the link is by far the best part of the survey, and calls for little comment.5 They might, perhaps, have stated the case against higher interest rates on SDRs (with or without the link). And it would have been useful to develop the point that the link could play a key role in offsetting the international effects ot’ recession: this is a point that has, in the past. commended itself even to as orthodox an institution as the Bundesbank. The link would also be helpful in conflicting balance-of-payments reconciling objectives of the major trading countries by enlarging the total market for their exports, room for thereby creating additional manoeuvre.
INTERNATIONAL MONETARY ISSUES AND THE DEVELOPING COUNTRIES 5. It is, however, misleading to say that ‘Triftin and UNCTAD-type methods of linking aid with reserve creation’ are not relevant to a system of SDRs, in which no provision is made for currency backing. This suggests that M-B have not read their own reference (UNCTAD [92, 196911, despite the fact that the proposals by the second UNCTAD expert group which it contains were among those studied by the IMF and the Committee of Twenty. Even the proposals by the first UNCTAD expert group did not depend integrally on the concept of currency backing. Indeed, when Lord Kahn presented the proposals of the first UNCTAD expert group to the Trade and Development Board in February 1966, he was faced with the criticism by the UK delegation among others that the international community was not likely to have the requisite confidence in a new reserve asset backed ‘by a large number of currencies, many of them inconvertible and some unstable, and by claims on an international long-term lending institution’. Lord Kahn pulled out a pound note from his wallet and pro-
637
ceeded to read out the inscription thereon, observing mildly that the members of the Board might like to visit the Bank of England and invite it to make good on its promise to pay. He next produced a dollar bill and pointed to the inscription ‘In God We Trust’. Evidently, said Lord Kahn, confidence in the pound and the dollar, such as it was, depended on something other than backing. M-B appear to accept the contention by Reuss that a voluntary link would leave aid flows at the mercy of the budgetary process, Even if valid, this point presumably applies only to the United States. It has, however, been argued by two distinguished American lawyers that a voluntary link would not, in the case of the United States, require a Congressional appropriation of tax revenue but only general enabling authority. See Michael 0. Finkelstein and Martin F. Rickman, ‘Linking Special Drawing Rights and development assistance’, New York University Journal of international Law and Politics, Vol. 4, No. 1 (1971).