All quiet on the money front
CHARLES R. STAHL
In a television interview in Copenhagen on 18 September, Robert McNamara, President of the World Bank, made the sobering state- ment that the gap between the rich and poor countries is worsening. McNamara em- phasised the current shift in IDA'S policy of loan granting from mostly industrial development loans to predominantly agricultural development loans, and said : 'The international capital markets are becoming quite sophisticated in their ap- praisal of what contributed to the ability of a developing country to repay the loan. And they recognise that whereas in the past, it might not have been thought desirable to lend for agricultural purposes, in the future, unless the agricultural sector of the develop- ing countries expands, there will not be the foundation for economic advance. And hence there will not be the capacity to repay the loan.'
One of the shockers contained in McNamara's interview was that 800 million people, or approximately 32 per cent of the 1970 free world population (no statistics are available for China and the Soviet Union), are illiterate, an increase of 100 million peo- ple in the last twenty years. To digest this figure properly, one should repeat this state- ment a few times: 800 million people in the free world can't read or write ...
In his speech on the opening day of the IMF meeting, McNamara drew further from his sad bag of-statistics; in India, 12 per cent of the rural families own in excess of 50 per cent of the cultivated land; in Brazil, 10 per cent of the families own 75 per cent of the cultivated land. At present, the gap in per capita income of poor and rich countries amounts to $3,000, but by the end of the cen- tury the per capita income in the United States will be approximately $10,000 (in con- stant dollars), whereas by that time it will be only $500 in Brazil and $200 in India.
McNamara's statements caught the imagination of the participants, and the Pearson Commission recommendations (on how to aid developing countries), which had
been presented at the previous IMF annual meeting in Washington, became an im- portant topic of conversation.
McNamara estimate' the rate of growth needed for developing countries to be at least 6 per cent, whereas in the last decade 5 per cent was accepted as a high figure. In other words, a 20 per cent increase in the )early rate of growth is required.
In the last fiscal year, aid granted by the sixteen members of the Development Assistance Committee of OECD amounted to 0.36 per cent of their combined GNPS. The ob- jective is to double this rate during the 1970s. In 1969, the us aid programme was 0.3 per cent of the US GNP and less than 1 per cent of the Federal budget. This compares with the 1949 figures (when the Marshall Plan began) of us aid equivalent to 2.79 per cent of its GNP and 111 per cent of its Federal budget. The United States, with 6 per cent of the world population, consumes 40 per cent of the world's resources. Those statistics. hinted McNamara, call for an increase in us foreign aid expenditures.
Opening the meeting of the Fund on 21 September, Pierre-Paul Schweitzer, Managing Director of the new, took a few potshots at the us inflation. Mr Schweitzer's speech must have been prepared much in ad- vance of delivery, since recent us statistics clearly indicate that the rate of inflation has been slowed down, thereby proving that 'la measures applied by the Nixon Ad- ministration in its fight against inflation were successful. Milton Friedman, the Chicago professor and economic maverick, in a Lon- don speech, estimated the current rate of us inflation at between 4+ per cent and 5 per cent. My estimate is that we are closer to 4 per cent, and that the rate of inflation for 1970 as a whole will not exceed 4.2 per cent (a decline of more than 40 per cent from the inflationary growth rate of 1969). The words 'inflation' and 'aid' were the leitmotivs of all the speeches. The only other subject of animation was the question of greater exchange rate flexibility, with nobody strongly in favour of nor strongly opposed to the report which was presented by a special study group of executive direc- tors and entitled 'The Role of Exchange Rates in the Adjustment of International Payments'. The advisability of greater flex- ibility in foreign exchange rates is ques- tionable, since the-greatest increase in world trade, both in absolute terms and percen- tagewise, occurred during the last twenty-five years when rigid rates prevailed. No one at Bretton Woods dreamt that within twenty- five years the world trade would so dramatically increase as to reach the recent phenomenal growth of about 14 per cent per year. (In the twenty years between 1950 and 1970, the world trade has increased by over 400 per cent.) German Economics Minister Dr Karl Schiller and Bundesbank President Dr Karl Klasen, commenting on future rates of ex- change within the EEC, indicated that the ultimate aim to be achieved within this decade is to eliminate fluctuations between the currencies of the EEC members. This ex- periment will begin next year. As far as gold is concerned, the least mentioned subject at the conference, Dr Klasen stated that the German Bundesbank does not intend to in- crease its gold reserves because, `to put it in strictly commercial terms, we do not want more gold, it does not pay interest'. Dr Klasen also stressed that he does not see any danger in holding us dollars and keeping them as reserves, nor does he think that an upper limit on dollar acceptance is required or justifiable. Dr Schiller hinted that there will be no more unilateral revaluation of the German mark, but that he would not be opposed to a multinational revaluation, if necessary, to accommodate the us dollar. But, said he,'! do not envisage that the DM or any of the EEC currencies will ever become intervention currencies. This role is reserved for the dollar.'
In the lounges and corridors of the Bella Centre, where the IMF meetings took place last month, talks on occasion revolved around the future of the British pound and the inevitability of a devaluation to coincide with, or precede, Great Britain's admission into the EEC. Since Chancellor Barber in his speech vehemently opposed floating rates, the speculation centred on the possibility of a devaluation of the pound sterling in stages of between 3 per cent and 5 per cent each.
This writer believes that Great Britain will join the EEC by 1973 and that by that time the pound sterling parity will be between $1.80 and $2. However, it is possible that a smaller devaluation might be in order, should the members of the Common Mar- ket revalue their currencies before Great Britain's admission. Such a multinational revaluation would probably serve best our monetary system and remove any future potential pressure on the dollar. The special drawing rights provide the required discipline to prevent us balance of payments deficits. Indeed, when confidence in the dollar will be at its peak, SDRS will flow readily among central bankers in exchange for dollars, and will create an influx of SDRS into the United States. On the other hand, Whenever foreign central banks will be con- cerned about a decline in the value of the dollar, they will purchase spas from the United States, thereby creating a contraction O bank credit in the United States, because in order to exchange their dollars into SDRS the foreign central banks will have to withdraw dollar balances from commercial banks and transfer them to the Federal Reserve. Transactions in SDRS in the first six months of their existence exceeded half a billion dollars, with forty-six countries participating. Eleven countries used the full amount of their SDRS.
In the post-war years, nstr and its sister organisations have shared the credit for in- creased prosperity in various countries and helped to direct a steady flow of capital to developing countries. The Bank and IDA have a total authorised capital of $24 billion. Of this amount, $23.1 billion has been subscribed and the members have paid 1 per cent of their subscription in gold or dollars and 9 per cent in local currencies. The re- maining 90 per cent is subject to call by the Bank. During its career, the Bank approved loans totalling over $14 billion. The shareholders of the World Bank and its affiliates are the 116 member countries of the
IMF.
In previous years. IMF meetings have been concerned with questions of short-term speculative capital movements, but the implementation of important measures, such as the activation_ of SDRS, the expected quota increase of the IMF (from $21.3 billion to $28.9 billion) and the agreement with South Africa for the sale of newly-mined gold have contributed to reduce , the tension on the international money markets and have paved the way for a smoothly-run meeting. All is quiet on the money front.
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