High-Level Expert Group Meeting
5-6 May 1984
Wolfsberg, Switzerland
Chaired by Helmut Schmidt
Introduction
The world economy faces a daunting legacy from world-wide
inflation especially since the breakdown of the Bretton
Woods system, and from two oil price increases, and a
deterioration of terms of trade for most other commodities
and manufactured goods, enormous surpluses and deficits in
most countries, current accounts, a process of
unprecedented international financing and of integration
of financial markets by commercial banks. The world
economy also faces the consequences of past economic
policy failures of both developing and industrial
countries. It continues to be threatened by dangerous
developments resulting from shifting commitments, and by
lack of mutual understanding and insufficient
communications among the main economic powers. Cooperation
among central banks and the skillful responses of BIS and
IMF have succeeded in containing thus far the debt crisis.
The Executive Committee of the InterAction Council asked
the Working Group to think about the problems of the world
monetary system.
The Working Group has come to the conclusion that on the
way to better worldwide monetary cooperation it is
necessary to deal with some other urgent issues.
Restoration of world prosperity on a sustainable basis
will require responsible and concerted action of all:
North and South, market and socialist economies,
oil-exporting and oil-importing countries, debtor and
creditor countries, least-developed, and other developing
countries, governments, international organizations and
private sectors, banks in particular.
This report is, in the main, geared to provide advice for
economic operations in 1984 and 1985. It outlines the
political parameters that the Working Group concluded are
needed to secure a revitalization of the world economy
under the broad headings of debt, development, trade and
protectionism, policy co-ordination and international
monetary reform.
The Group believes that the InterAction Council is well
positioned to explain to government leaders and peoples of
the world:
- that economic policies should be guided not just by short-term concerns but also by its long-term consequences;
- the need to sustain and reinforce the institutions of international economic, financial and monetary co-operation;
- the economic waste involved in current global levels of military expenditure, where developing countries alone spend around six times as much on armaments as they receive in official development assistance;
- the crucial role of improving the skills and management abilities of veloping countries as a prerequisite for economic and social progress;
- the ominous long-term economic implications posed by a depletion of tural resources and by ecological deterioration;
- the recognition that the ultimate aims of economic activity should be an enhancement of welfare and the respect of human rights in order to benefit the individual.
I. DEBT CRISIS AND DEBT MANAGEMENT
Conscious that the debt problem was jointly created by the
actions of all parties, the Group emphasized the joint
responsibility of all to seek solution: the world must not
repeat the disasters that flowed from the demands for
unrealistic resource transfers in connection with
reparations and interallied war debts during the interwar
years. The Group recognized that give the gravity of the
economic situation of developing countries and of a number
of commercial banks in the developed countries, special
emphasis needs to be given to proposals for practical
action related to development and debt issues.
1. Debtor countries should seek early advice from the IMF
and pursue realistic adjustment programmes agreed with it.
Such programmes need to combine a sustained improvement in
the balance of payments with a resumption of economic
growth. Countries should create favourable conditions for
the return of flight capital, which has reached staggering
dimensions in a number of countries in recent years and
which contributes significantly to the debt problem.
Likewise they should try to attract more direct private
investment. This above all entails realistic exchange rate
policies (no overvaluation), the avoidance of
artificialities in domestic pricing and the removal of
bureaucratic restrictions on foreign investment.
On the other side it is politically intolerable that
debtor countries do not know the maximum debt service
payment that they will have to make in dollars for just
one year ahead. This would provide some degree of
protection against fluctuating interest rates.
2. The essential, even if unpopular, role of the IMF is
that of negotiating adjustment programmes with countries
confronting balance of payments or debt-servicing
problems. There must be conditionality, otherwise fresh
credits will not flow.
Given the economic situation faced by debtor countries, an
element of austerity is inevitable in effective adjustment
programmes but austerity should not be pushed beyond the
level essential for successful medium-term adjustment.
The principles and conditions of the debt rescheduling
should be listed in a new concept, a "General Agreement to
Lend".
3. The contribution of the commercial banks should be to
provide fresh money and interest relief in instances where
a debtor country is making a good faith commitment to
adhere to an IMF programme, and to devise mechanisms that
will cap the debt service payments that countries have to
transfer. These mechanisms, which will need to be tailored
to the situation of different creditors and agreed on an
individual country basis with each debtor, may include:
- the consolidation of short-term debts to medium-run fixed interest bonds;
- multi-year rescheduling instead of present-day shortest term practice;
- the restriction of debt service payments to an agreed maximum percentage of the export earnings of a debtor country;
- interest capitalization.
4. The governments of creditor countries should provide
comparable relief through the Paris Club. They also have a
duty to take account of the vital interests that
especially debtor countries have in a lowering of world
interest rates and trade expansion when they formulate
their macro-economic policies. Greater parts of deposits
of OPEC and other central banks and governments should be
consolidated into medium-term bonds. The international
financial institutions must be furnished with a level of
financial resources commensurate to their tasks. Banking
legislation should be harmonized, particularly with regard
to required capital ratios, among the major creditor
countries. Governments of creditor countries will also
expect lower tax revenues due to the losses of commercial
banks.
II. DEVELOPMENT
Policies to help promote development have to be
differentiated and tailored according to the degree of
development and the economic situation of individual
countries.
While the debt crisis is the main cause of the recent
setback to development in the middle income countries, the
terms of trade deterioration has been more critical in
many low income countries. Natural disasters and negative
climatic effects have also further aggravated the
desperate situation of many developing countries. The
continuing excessive population growth in many areas means
that per capita income has been falling even in places
where overall growth has remained positive. A resumption
of development will again demand contributions from all
the parties involved. Given the will, there is no reason
why development could not be successfully advanced during
this decade in a similar way as other success stories in
the past.
1. Developed countries, of both East and West, have a
singular responsibility to increase trade and aid and to
encourage the transfer of technology. Recent measures that
have curtailed the future magnitude of contributions by
multilateral organizations to the cause of development are
misguided and run counter to the very interests of
developed countries. The IDA replenishment should be
concluded rapidly and at the level proposed by the World
Bank management. This should be done whether or not all
countries will live up to their previously held shares.
Initiatives by the management of the World Bank Group to
strengthen and enlarge its operations should be strongly
supported. Mainly, there should be a substantial increase
in World Bank capital.
The UNDP, as the central agency for multilateral technical
assistance, deserves support in view of the critical role
of improved human skills in economic development.
2. The developing countries at all levels of development
have a high responsibility to help themselves. The
experience of a number of East Asian countries has
demonstrated the beneficial effects of policies
emphasizing human resource development, population
planning, exploitation of the possibilities offered by
international trade, and encouraging direct private
investment, which is the most efficient way of
transferring technology. In addition, developing countries
stand to gain substantial dividends from helping each
other in a more systematic way.
III. TRADE AND PROTECTIONISM
1. The resolution of the debt crisis depends to a
considerable extent on the existence of free trade
arrangements. Yet, a large proportion of world trade,
perhaps even more than 50 per cent, is now restricted by
protectionist measures or distorted by subsidies. The
observed trend towards protectionism has to be reversed.
Developed countries should reduce tariff and non-tariff
trade restrictions, particularly from developing countries
and should do so on a non-discriminatory basis. In
addition, they should reduce overproduction in certain
sectors, such as agriculture, textiles and steel, and
refrain from engaging in barter trade.
2. Efforts towards regional integration might be an
effective approach to reduce gradually the inhibiting
effects of protectionism, especially in circumstances such
as those currently prevailing in Latin America.
3. Determined efforts should be made to restore the
effectiveness of GATT and to reinforce its principle of
open markets for non-subsidized exports, which was the key
for postwar economic prosperity in many countries.
4. Since the oil crisis, the terms of trade for those
developing countries dependent on the export of one or few
commodities or raw materials have deteriorated
substantially. Such trends need to be checked through
effective international schemes, such as a widened STABEX
type arrangement.
IV. POLICY CO-ORDINATION
The beneficial effects of the recent US economy recovery
and the high levels of US budget deficits are fully
recognized, particularly in terms of increased exports to
the US, by other countries and the resulting export-lead
growth. The Group concluded, however that such recovery
has severe disadvantages and is in any event unsustainable
in the longer run. Extremely high real interest rates
magnify the debt problem and restrain productive
investment and thereby employment around the world. They
induce large amounts of capital inflows to the richest
country on earth, which are not tolerable on the present
scale over extended periods.
There is an ever-present danger that a loss of confidence
in the dollar will precipitate a depreciation that would
oblige the Federal Reserve Board to raise interest rates
further, risking renewed deep recession. Prompt action to
reduce the US budget deficit substantially is therefore
imperative for a sustainable revitalisation of the world
economy.
Present mechanism for effective co-ordination of the
economic policies of the major industrialized countries,
including summit meetings have recently proved
ineffective. Clearly, there is an urgent need to achieve
more reliable and responsive intergovernmental
co-ordination of economic policies. To help accomplish
this goal, non-governmental channels, such as the
InterAction Council might be able to impress upon present
government leaders the merits and urgency of such
systematic co-ordination and especially the prompt
adoption of responsible fiscal policies by all major
powers.
V. INTERNATIONAL MONETARY REFORM
Present monetary arrangements, embodying as they do fluid
constellations, have not proved generally satisfactory.
However, a return to the Bretton Woods system is precluded
by the fundamental changes in the world economy over the
past 15 years. Discussions of reform are in progress in
many fora; no one at present has an overview of the thrust
of all these discussions. However, there is as yet, no
sign of the emergence of a new consensus even among the
major economic powers of the West.
The Group therefore limited itself to flagging several
issues to which it attaches importance, without claiming
that these are exhaustive. Other groups could usefully
proceed similarly.
The issues identified are:
1. The need for greater stability between the dollar, ECU
and yen, without a freezing of their exchange rates. This
must, however, not be achieved at the cost of
unsatisfactory domestic performance in the countries
involved.
2. The need for an annual allocation of a limited quantity
of SDR's for several years.
3. Provisions for a future increase in IMF resources might
be achieved by arrangements for increased borrowing from
governments, so as to allow the financing of medium-term
adjustment programmes.
Given the present economic crisis and the lack of
consensus on the outlines of international monetary
reform, the Group concluded that there was currently no
chance for a constructive outcome of an international
monetary conference. On the other hand, the Group
perceived a clear need for a continuing study of all
issues involved and for constructive interim steps to be
taken so as to ameliorate the present unsatisfactory
situation. In the long run, a greater degree of stability
of exchange rates and much greater discipline of
governments in orienting their monetary and fiscal
politics by their balance of payments situation is clearly
desirable.