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Tuesday, 23 October 1973
Page: 2533

Mr CREAN (Melbourne Ports) (Treasurer) by leave - I have recently returned from Nairobi where I attended the twenty-eighth annual meeting of the World Bank and the International Monetary Fund, as the Governor of those institutions for Australia. Of the 126 countries represented at Nairobi, over 100 were developing countries. They had a particular interest, of course, in the discussions on the work of the World Bank group.

The President of the World Bank, Mr McNamara, was able to report that the financial institutions for which he is responsible had achieved the goal which he had set in 1968 of doubling the Bank group's operations in the course of the ensuing 5 years. In the 5 years to March 1968 financial commitments totalled $US5.8 billion. In the 5 years to March 1973, financial commitments totalled $US13.4 billion. In real terms, the increase was 100 per cent. Mr McNamara has recently been reappointed President of the Bank for a further 5 years and over this period he plans to expand the group's financial commitments by another 40 per cent in real terms. This would bring new commitments over the 1974- 78 period to $US22 billion a truly prodigious figure. Whether or not such a figure will be achieved remains to be seen. The number of donor countries in the Bank group is few and the support of some of the larger donors is uncertain. The World Bank, however, is clearly destined to continue to dominate the international scene in terms of financial flows from multilateral institutions to developing countries.

What the World Bank will be paying particular attention to over the period ahead, however, is not so much the quantity of its disbursements, as the quality. There is now a belated recognition that one cannot measure progress solely by the rate of growth of gross national product. It has been estimated that 40 per cent of the population of the developing countries of the world is living in absolute poverty. It is important that the benefits of financial flows to developing countries should reach that lower 40 per cent of the income earning population. Henceforth the Bank will be identifying the concentrations of poverty in developing countries and directing investments in such a way as to bring some direct relief to the poorest people. In particular, there will be more emphasis on improving the productivity of small scale farmers. All this is to the good.

However, there are critical problems ahead for the developing world. Three of these problems were highlighted in Nairobi. They are:

1.   The growing burden of external debt

2.   The impediments to the development of export earnings

3.   The inadequacy of development assistance.

It was a matter of some satisfaction to me that I was able in Nairobi to point to Australia's efforts to be helpful in these matters. I was able to say, for instance, that virtually the whole of Australia's official aid has been given on a grant basis and that we are not therefore adding to the debt burden of the developing countries.

I was able to remind other governors of the steps we were taking to facilitate imports from developing countries. I referred to improvements made to the preferential scheme involving periodic cuts in duties on imports from developing countries. I also pointed out that these cuts were superimposed on the recent 25 per cent cut in general tariff rates on imports from all countries. Finally, on the matter of official aid, I was in a position to say that, notwithstanding what was happening in some other donor countries, there was no slackening in Australia's official aid effort and we remained in the top three or four in the world aid tables.

That Australia has a favourable record in understanding the problems of developing countries and taking action to assist them must be a matter for satisfaction to the whole House.

I recognise that the Government which preceded us laid a good foundation for Australia's aid efforts. The present Government has built upon that basis and moved further along the road. Whatever is done to assist developing countries, however, the fact remains that die vital contribution has to be made by the developing countries themselves. In this respect, if there is one firm impression I could bring back from Nairobi, it is that the people of Africa have all the qualities necessary to make a success of their future development. They deserve support.

I turn now to what was the major subject of discussion at Nairobi - the issue of international monetary reform. Honourable members will recall that I made a statement to the House on this subject on 12 April 1973. At that time I gave honourable members some of the background to the establishment of the Committee of Twenty, of which Australia is a member, and I outlined some of the main issues as they then stood. At the subsequent meeting of the Committee of Twenty held in Washington on 30-31 July, the general atmosphere was favourable and some progress was made.

In contrast, however, the most recent Committee of Twenty meeting held in Nairobi on 23 September did not advance matters a great deal further. The Committee of Twenty was able to refer to Governors a 'First Outline of Reform*. After this speech I propose to table the full text of it. However that outline is clearly not a complete blue-print for a reformed monetary system. There are many major issues yet to be resolved. Of course it would be wrong to be too disappointed at this apparent lack of progress in the September discussions on reform. For one thing, I have never been over-impressed with the notion that some re-writing of the rules of the International Monetary Fund would suddenly solve all our international financial problems. Assuming that the rules are good rules, the question still remains whether countries when they are under pressure will abide by the rules. Recent history is not too comforting on that point. The essential thing, as I see it, is to establish the fact that observance of certain codes of behaviour in the international financial field are in the interests of all. Cooperation, not coercion, should be the basis of the monetary system of the future. If the will is not there, the rules will not help a great deal.

Another thing to bear in mind is that financial crises, dramatic as they are, and important as they are, are not the whole story. Dr Witteveen, for instance, the new Managing Director, was able to record a strong economic recovery in the main industrial countries of the world after a 2-year period of economic slowdown. Notwithstanding recurrent financial crises, world production and world trade have been growing strongly over the past 12 or 18 months. The output of industrial countries was more than 7 per cent higher in real terms in the first half of 1973 than in the second half of 1972, and world trade was no less than 12 per cent higher in real terms in the first half of 1973 than it had been a year earlier. Developing countries have benefited from this increase in world economic activity, along with developed countries.

Nevertheless, international financial problems are important in their own right and have implications for other areas of economic policy. For instance, the continued growth of international liquidity has had consequences for domestic liquidity in member countries and for the battle against inflation - an issue which concerns all of us. It is desirable therefore that we should press ahead with the program of monetary reform as fast as possible. It is for this reason that the Committee of Twenty, in referring the First Outline of Monetary Reform to Governors, placed a time limit of 31 July 1974 for the settlement of remaining issues on monetary reform. Whether such a time limit will prove to be realistic only time will tell. What are these outstanding issues? The basic issue is how to achieve a greater degree of equilibrium in the balance of payments between industrial countries. If there is one single reason why the monetary system has failed it is because individual countries, confronted with persistent surpluses or deficits, have not taken early and sufficient action to correct those surpluses and deficits. This is a simple point, and yet it is fundamental, and quite critical, to the reform discussion.

Australia has stressed the importance of individual action to correct balance of payments disequilibria. It has been able to do so in the knowledge that the present Government's policy is impeccable in this respect. The exchange rate actions and the tariff actions which this Government has taken have been noted and commended throughout the world. However, the United States and the Europeans tend to look to new rules to bring about this quicker adjustment. The monetary reform discussions to date have, to some extent, been a debate between the United States on the one hand and Europe on the other as to what rules would best achieve this result. The United States, for its part, places emphasis on what it calls 'objective indicators'.

The United States believes that the present system is one-sided in that there will always be pressure on deficit countries to devalue because they run out of reserves. As they see it there is no equivalent pressure on surplus countries to revalue. The United States system of objective indicators would essentially involve establishing a normal range within which each country's reserve figures would be permitted to move. If reserves rose above or fell below those limits, the country concerned would be required to take action to restore reserves to a figure within the permitted range. The Europeans, for their part, would place more emphasis in monetary reform on restoring the principle of convertibility or, as it is sometimes called, asset settlement. They see the monetary crises of recent years as having their origins in the failure of a large persistent deficit country - the United States - to take action to correct that deficit. The United States has been able to continue financing this deficit because other countries - either willingly or because they could not acquire a more preferred asset - have held more and more United States dollars in their reserves. Unlike most other deficit countries, the United States has not run out of reserves.

The Europeans would put an end to this by reducing the role of reserve currencies in the monetary system. They would replace reserve currencies with special drawing rights as the major asset of the future. They would impose upon the United States an obligation to convert other countries' holdings of dollars into special drawing rights whenever the United States ran into deficit. It has been agreed that objective indicators should have a role to play in the future system. But it has also been agreed that considerations other than reserve movements would need to be taken into account in determining whether or not a country should take action to correct balance of payments surpluses or deficits. What all this amounts to is that a good deal of the automaticity has been taken out of the original United States proposals for objective indicators. Australia welcomes that development, which has been in accordance with our own view of the matter throughout. What has not been agreed is whether pressures should be put upon countries if they do not take balance of payments action which reserve indicators suggest they should have taken. There has been less of a convergence of views on the issue of assets settlement. It has been agreed in principle that the role of reserve currencies should be reduced and that the SDR, as appropriately modified, should become the primary reserve asset of the future. It has been agreed in principle that countries maintaining par values should settle in reserve assets those official balances of their currencies which other countries present to them. But it has not been agreed whether this process should be mandatory so far as the countries holding the balances are concerned or whether it should be voluntary. Australia, for its part, has indicated its willingness to consider participation in any agreed system but has expressed a strong preference for the principle of voluntarism. In other words, if Australia earns United States dollars it should be up to Australia to decide whether it wishes to convert those dollars into SDR or whether it wishes to continue to hold the dollars. We have taken the same attitude in respect of both existing holdings of reserve currencies and new receipts of reserve currencies. This is all consistent with our overriding view that we wish to see a maximum of flexibility and co-operation in the system and a minimum of compulsion and coercion.

A second basic issue of major importance is the volume and quality of the SDR. If the SDR is to be the primary reserve asset of the future then it must be a strong and not a weak asset. This means that it must not be in over-supply. It must be as attractive as, if not more attractive than, any alternative reserve asset in terms of its ability to maintain its value and in terms of the interest rate it yields. Countries tend to take positions on this issue depending on what role they see themselves playing in the period ahead. If they see themselves as prospective debtors they tend to favour a 'soft' SDR. If they see themselves as prospective creditors they tend to favour a 'hard' SDR. This matter is still under discussion. But it is my firm view that if the SDR is not fully accepted and firmly held, the reformed monetary system will fail.

I have been speaking in terms of differences of view on basic issues between some of the major industrial countries or groups of industrial countries. There is one particular issue which has been raised by the developing countries. They believe that monetary reform should operate to increase the flow of resources in their direction. To this end they have suggested there should be a direct link between the issue of SDR and aid to developing countries. The problem some developed countries and, I might add, some developing countries also see in this proposal is that the SDR has to be accepted by the world as a whole as a reserve asset of the first quality. There are legitimate fears that such a link may introduce other than monetary considerations into the question of the volume of issue of SDR and the valuation and rate of interest of SDR. Australia has an open mind on this matter. We are anxious that the operational aspects of the link should be examined thoroughly, along with monetary reform proper, in order to ascertain whether some form of link can be devised which can safely be accepted from the point of view of monetary reform. It has occurred to us that it may be better to establish the SDR as the centre of the monetary system, and when the SDR is working effectively, to consider then whether or not there should be a link. In the end this may well be the most productive approach for all concerned.

Monetary reform is a complex matter and has many aspects. I have touched on only a few of the main issues here. However, should honourable members wish to pursue these issues further I present to them the first outline of reform which has been referred to governors of the International Monetary Fund by the Committee of Twenty and which contains a more complete account of the state of discussion at this point of time. I also present to the House a revised version of the glossary of terms which I previously provided to honourable members on the occasion of an earlier statement to the House on these matters. I present the following paper:

Twenty-eighth Annual Meeting of the World Bank and the International Monetary Fund Ministerial Statement, 23 October 1973.

Motion (by Mr Stewart) proposed:

That the House take note of the paper.

Mr Lynch - I have indicated to the Treasurer (Mr Crean) that we would wish to debate this statement in detail during the week after next. I understand that is acceptable to the Government. I simply mention that questions upon notice No. 755, dealing with the adoption by the International Monetary Fund of an auto matic exchange rate adjustment process based on objective indicators, and No. 756, concerning the desirability of allocating any general issue of IMF special drawing rights initially to underdeveloped countries, have not yet been answered. They were placed on the notice paper on 22 August. I seek the concurrence of the Treasurer in providing information on those questions before his statement comes on for debate so that the information provided can be taken into account.

Debate (on motion by Mr Lynch) adjourned.

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