INTERNATIONAL MONETARY REFORM: SUMMIT COUNTRY PERSPECTIVES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85S00316R000100130005-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 21
• Document Creation Date: December 21, 2016
• Document Release Date: January 5, 2009
• Sequence Number: 5
• Publication Date: May 1, 1984
• Content Type: REPORT

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Directorate of Secret
Intelligence
Summit Country Perspectives
International Monetary Reform:
Secret
EUR 84-10112
May 1984
Copy 290
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Directorate of Secret
Intelligence '
International Monetary Reform:
Summit Country Perspectives
An Intelligence Assessment
This paper was prepared b
Office of European Analysis. Comments and queries
are welcome and may be directed to the Chief,
Economic Issues Branch, EURA,
Secret
EUR 84-10112
May 1984
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International Monetary Reform:
Summit Country Perspectives F 25X1
Key Judgments Reform of the international monetary system should not be a divisive issue
Information available at the summit, but US economic policies that affect the operation of the
as of 22 May 1984 system will be criticized. No major reform initiatives are planned by the
was used in this report.
other summit participants; specific topics that probably will be raised at
the summit include:
? Exchange Rate Uncertainty and Economic Convergence. Most summit
countries argue that the US deficit is affecting interest rates and is a
source of uncertainty-along with the US trade deficit-in the exchange
markets. Strong support for a general statement in the communique
about improving economic convergence to help stabilize exchange rates
can be expected. Also, France will likely seek to extend the Williamsburg
consensus on foreign exchange market intervention by central banks to
reflect its more activist approach.
? Special Drawing Right (SDR) Allocation. France will push hard for a
consensus supporting a new SDR allocation. Italy also supports a new
allocation, and Canada has publicly called for a modest increase of
SDRs. Japan and West Germany, which have opposed the allocation up
until now, may opt for the Canadian proposal as a compromise.
? LDC Debt Situation. France or Canada may want to include a statement
in the communique that the summit countries support a "medium-term
solution" to LDC debt problems. French proposals call for increased
cooperation between the IMF and World Bank, boosting of World Bank
lending and softening of loan terms, and making the World Bank "aid co-
ordinator" for multilateral and bilateral aid. While most summit coun-
tries, including West Germany, believe that the supply side-growth and
investment-should be emphasized more in LDC adjustment programs
and demand restraint less, they are unlikely to support major institution-
al reforms or a statement in the communique that might lock them into a
specific proposal.
At the summit, the biggest problem for the United States in the interna-
tional monetary area may be that opposing a new SDR allocation,
combined with the present size of the US budget deficit, may make the
United States appear insensitive to international monetary difficulties.
Increasingly the other summit countries view an SDR allocation as a
necessary gesture to the LDCs. While they realize that reducing the US
budget deficit will take years to accomplish, the other summit countries
believe some positive steps in this direction must be taken soon if exchange
rate stability and economic convergence are to be achieved.
Secret
EUR 84-10112
May 1984
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International monetary reform is certain to remain an important issue at
future summits, although we do not expect other summit countries-with
the exception of France-to suggest fundamental reforms any time soon.
Paris, in addition to its institutional proposals, will continue to advocate a
tripolar exchange rate system among the dollar, yen, and ECU, but support
from the other major West European countries probably will remain weak.
Most of the other summit countries agree that the present international
monetary system has a high degree of flexibility built into it and, as a re-
sult, they are likely to propose only measures intended to fine-tune the
system. Moreover, most probably would like LDCs to undertake additional
steps on their own that would ease debt financing problems. For example,
LDCs have yet to begin implementing domestic measures that would
encourage foreign direct investment and lessen the need for debt financing.
The issues surrounding international liquidity-its determination, currency
denomination, and distribution-probably will be the most contentious to
resolve; SDR allocations are internationally negotiated, and significant
legal barriers remain to the internationalization of nondollar currencies as
reserve assets. Recent US-Japanese efforts to further expand the use of the
yen for international investments are a positive step, but additional
measures will be needed to significantly increase the yen's role as a reserve
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Key Judgments
Exchange Rate System: Near Consensus
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International Liquidity: Fundamental Problems
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Institutional Reform: Myriad of Views
5
Greater Complementarity
5
Outlook for the Summit
6
Outlook for the Longer Term
7
International Monetary Reform: Country Briefs
9
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International Monetary Reform:
Summit Country Perspectives
Reform of the international monetary system has
been under almost constant review since December
1971, when the fixed exchange rate system agreed to
at Bretton Woods in 1944 began to crumble. In
March 1973, after 15 months of experimentation with
the Smithsonian central rate system keyed to the
dollar and after several crises in the exchange mar-
kets, a de facto flexible exchange rate system
emerged. Sharp fluctuations in exchange rates fol-
lowed and prompted the major governments at the
first economic summit in 1975 at Rambouillet to
address the problem of international monetary re-
form. A consensus developed that stability in the
exchange market can stem only from the harmoniza-
tion of economic policies and performance; agreement
that some coordination of exchange market interven-
tion to "counter disorderly market conditions or errat-
ic fluctuations in exchange rates" also was reached.
The International Monetary Fund (IMF) built on the
Rambouillet consensus to develop a broad system of
bilateral surveillance over member exchange rates
and economic policies. In the wake of the two major
oil price increases and subsequent world economic
recessions, however, convergence of economic policies
proved difficult. As a result, problems in exchange
markets persisted. The summit countries again took
up monetary reform issues at the Versailles Summit
in 1982 and reaffirmed the Rambouillet consensus.
An annex to the Versailles communique provided for
strengthening IMF bilateral surveillance of member
countries by incorporating multilateral surveillance of
the G-5, or countries whose currencies make up the
special drawing right (SDR): the United States, Ja-
pan, West Germany, France, and the United King-
dom. The first multilateral surveillance review was
held in Toronto in September 1982; they are now held
twice a year
meetings have since dealt with problems relating to
the functioning and structure of the system.
Many of the G-10 countries now apparently want to
consider international monetary problems in a broad-
er context by going beyond the discussion of measures
aimed at limiting exchange rate movements. The
Williamsburg Summit produced a consensus to study
the range of issues and to consider at some point
convening an international conference. This approach
was prompted by the problems that have plagued the
monetary system over the last couple of years:
? Divergent economic policies among the major
countries have contributed to exchange rate fluctua-
tions, precipitating harsh criticism among the major
countries about the management of their respective
economies.
? Capital flows have complicated efforts to stabilize
exchange rates as investors, and speculators adjust-
ed their portfolios based on changes in expectations
about economic performance in the major countries.
? Dependence on the dollar as the primary interna-
tional reserve asset and major denominator of inter-
national trade and debt has resulted in higher real
costs for net debtor countries during the last few
years when the dollar strengthened. Significant
barriers still remain in West European countries
and Japan to the internationalization of their re-
spective currencies as reserve assets, and SDRs are
determined by a political process, not directly by
economic factors.
? The LDC and East European debt crises have
highlighted the individual limitations of, and lack of
coordination among, international institutions. Re-
sources have been strained at times, and the demand
restraint programs of the IMF have not always fully
taken into account the impact on World Bank
development programs.
Discussions of international monetary reform have
continued among the finance ministers of the 10
industrial countries called the Group of Ten (G-10).
Formed in Paris in 1962, the ad hoc ministerial
? Protectionism has negatively affected the level of
world trade and restricted the ability of the LDCs to
earn funds to service their debt.
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International Monetary System:
Major Events
1944
July
1962
January
dollar.
Bretton Woods Agreement: IMF and
IBRD established along with a system
affixed exchange rates; dollar fixed in
terms of gold-$35 an ounce-and oth-
er countries' currencies fixed to the
ments problems.
1973
January Italy establishes two-tier foreign ex-
change market, and Swiss let franc
float.
February Foreign exchange markets closed on
the 12th. US devalues dollar by 10
percent, and Japan, Italy, and Switzer-
land adopt floating exchange rates. F_
General Agreement to Borrow (GAB):
G-10 agree to make available SDR 6.4 March
billion to the IMFfor lending to G-10
countries experiencing balance-of-pay-
EC ministers announce joint float
against the dollar of six currencies;
Britain, Italy. and Ireland float inde-
pendentl,;U~ - --~
January First allocation of SDRs: $3.4 billion.
(Two more allocations of $3 billion
each made at the beginning Qf'the next
two succeeding years.)
1971
May
January Committee of Twenty decide in Rome
to adopt evolutionary approach to re-
form and issue final report in June. F_
its first meeting.
October New Interim Committee of IMF holds
West Germany and Netherlands let
their currencies float. 1975
August US suspends convertibility of dollar
into gold.
November Rambouillet Economic Summit: lead-
ers agree that exchange rate stability is
determined by convergence in underly-
ing economic policies and trends. F_
December Smithsonian Agreement: G-10 minis-
ters meet at Smithsonian Institution in 1976
Washington, D.C., and agree to realign January
currency rates. Dollar devalued and
the exchange support margins widened
to 2.25 percent around parity. F__1
1972
March EC narrows margins offluctuations for 1977
their currencies to 1.125 percent, there- April
by creating the EC "snake" within the
Smithsonian "tunnel.'
July Committee of Twenty formed to study
reform of the system-substantive
work undertaken in November.)
Interim Committee meeting in Kings-
ton, Jamaica: members agree on IMF
quota increase, exchange rate system,
and sale of gold for IMF Trust Fund.
IMF Executive Board announces prin-
ciples and procedures for exercise of
Fund surveillance over exchange rate
policies of members.
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1979
January SDR allocation of $4.033 billion. (Two
more allocations 4f$4.0 billion each
made in 1980 and 1981.)
March European Monetary System begins to
operate
1980
April
Interim Committee meeting in Ham-
burg fails to agree on "substitution
account" that would reduce the dol-
lar's share. 4f international reserves.
1981
April
US Treasury announces policy of not
intervening regularly in foreign ex-
change markets
1982
June
Versailles Summit: reaffirms Ram-
bouillet consensus and provides for
multilateral surveillance of the G-5
economies.
of G-5, Toronto.
December US Treasury Secretary makes initia-
tive at G-5 meeting in Frankfurt to
enhance the effectiveness 4f existing
international monetary system by im-
proving coordination among institu-
tions.
1983
May
Williamsburg Summit: invites minis-
ters 4ffinance to look at international
monetary reform and to consider what
part of this review process might be
played by an international monetary
conference.
September ECfinance ministers meet in Greece
and exchange views on monetary re-
form. France remains committed to
Bretton Woods-type conference but 25X1
states it is a number of years off G-10
and Interim Committee meeting in
Washington, D. C.: France proposes 25X1
studies on key international monetary
reform issues.
November G-5 and G-10 meeting in Paris: finance
ministers agree that three issues need
further study: causes of exchange rate 25X1
volatility, how to strengthen the role of
the IMF, and how to determine inter-
national liquidity requirements.
December G-10 expands GAB resources to SDR
$17 billion and extends GAB lending to
countries outside the G-10.
1984
March
the IMF.
G-5 and G-10 meeting in which various
countries submit reports on operation
of exchange rate system and the role of
May G-10 meeting, Rome: finance ministers
agree to submit in the first half of 1985
a final report covering four areas of
study:
? The functioning of floating exchange
rates.
? Ways to strengthen multilateral
surveillance.
? Management of international
liquidity.
? Future role of the IMF.
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The G-10 finance ministers now are studying three
international monetary problem areas: the functioning
of the exchange rate system, the level of international
liquidity, and the role of international institutions,
particularly the IMF and the World Bank Group.
Thus far, work has focused on exchange rates and the
related area of the Fund's role in the surveillance of
the G-5 economies. Discussions also have addressed
how the Fund's surveillance role can be strengthened
as well as how to make it more symmetrical by
requiring policy adjustments not only of the net users
of Fund resources, mostly the LDCs, but also the net
contributors.
Some G-10 countries also are urging that more steps
be taken for the development of a medium-term
approach to the debt crisis, a difficult exercise be-
cause of the large number of issues ?involved and the
different country positions involved. Moreover, LDCs
have a large stake in the outcome and will advance
their own initiatives.
Views on Reform
Exchange Rate System: Near Consensus
All the summit countries except France have extolled
the virtues of flexible exchange rates, agreeing that a
flexible rate system was the only viable alternative
over the past economically troubled decade. While the
French agree that exchange rates should respond to
underlying economic trends, they have argued public-
ly and in G-10 meetings that central banks should
intervene regularly to ensure that exchange rates
move appropriately. The French position stems from
their belief that international capital flows-which
can exert strong influence on exchange rates-do not
always reflect the underlying economic trends and
lead to perverse exchange rate movements. Japan and
West Germany, in contrast, maintain that interven-
tion should be utilized only when markets are disor-
derly. They have concluded in studies presented to the
G-10 that capital movements usually precede changes
in economic fundamentals. Capital movements, they
argue, are based on investors' expectations about
future government policies and the performance of the
respective economies and cannot be systematically
countered by official intervention.
All the summit countries, including France, believe
the best way to improve the exchange rate system in
the short run is to coordinate monetary and fiscal
policies through the forum provided by the multilater-
al surveillance process. Opinions vary considerably
among the.G-5 countries concerning the effectiveness
of multilateral surveillance, but all agree that the
forum is useful because it provides a regular and
focused opportunity for the G-5 to exchange views on
economic policies and performance. The managing
director of the Fund attends the meetings and pro-
vides background and data supplied by the IMF staff
but does not make any formal IMF recommendations.
Members are limited to moral suasion when proposing
changes to economies other than their own. Both
Japan and West Germany see the Fund's role in this
exercise as an educator; Canada and the United
Kingdom have expressed similar views, though Otta-
wa believes some improvements should be made.
France and Italy are not satisfied with the current
surveillance process and would like it strengthened
and broadened. France wants the process to include
all European Monetary System (EMS) countries and
generally to have the Fund play a more direct role in
the policy review sessions. Italy and Canada, not
members of the G-5, want surveillance expanded to
the G-10. Rome would like stronger IMF participa-
tion and would prefer to have the meetings held prior
to the formulation of domestic policy. In addition,
Rome has suggested that the results of the surveil-
lance meetings be made public
For the medium term, the French are continuing to
push a proposal first launched by President Giscard in
the 1970s calling for a tripolar managed exchange
rate system among the US dollar, the Japanese yen,
and the European Currency Unit (ECU). All other
countries would either peg their currencies to one of
these three or to the SDR
International Liquidity: Fundamental Problems
The summit countries are divided over the immediate
question of a new SDR allocation by the IMF. The
longer term issues of reserve creation and composition
are even more contentious. France, Italy, and Canada
have gone on public record supporting a new alloca-
tion of SDRs, though none has given support to the
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LDC proposal of a $45 billion equivalent over the next
three years. The SDR share of international reserves
has fallen since the 1970s, and these countries gener-
ally favor restoring that share. Moreover, both France
and Canada have supported LDC calls to increase the,
flow of resources to the Third World. French Finance
Minister Jacques Delors has frequently said that a
new allocation is needed, though he has not specified
any amount. Canadian Finance Minister Marc La-
londe has suggested a. range of $8 billion and $14
billion over the next two years, an amount that would
raise the SDR share of world reserves to that of the
1970s. Although Japan, West Germany, and the
United Kingdom have opposed a new allocation at
this time, both Japan and West Germany at the April
Interim Committee meeting gave some indication
they might accept a compromise figure, according to
press reports. Both probably believe that some gesture
is needed and would have little inflationary impact.
on institutional reform at some point will have to
involve the LDCs, further widening the national '
The longer term problems of determining internation-
al liquidity needs and the structure of international
reserves are more difficult than the SDR issue. Some
initial work by the G-10 countries and the Bank for
International Settlements (BIS) has been done in this
area, but generally the summit countries do not yet
Recent negotiations be-
tween the United States and Japan to internationalize
the yen will enhance the Japanese currency's use in
Euroyen investments, particularly certificates of de-
posits and bonds. Nonetheless, the number of institu-
tions that can issue Euroyen bonds will be controlled
and yen reflows to Japan will remain restricted, thus
limiting the attractiveness of the yen as a reserve
currency.
Institutional Reform: Myriad of Views
The G-10 countries generally agree that the interna-
tional institutions need strengthening, but national
interests and differing views on how to best foster
LDC development will work against any speedy
agreement on specific changes. Moreover, G-10 work
Bilateral Surveillance. The other summit partici-
pants all give strong support to the role of the IMF in
bilateral surveillance of economies that are net users
of Fund resources-mostly the LDCs. The summit
countries have generally supported traditional IMF
recommendations aimed at the short-term improve-
ment of key economic variables in LDCs: the money
supply, the government deficit, international reserves,
and the current account in the balance of payments.
The classic IMF program, however, has been ques-
international institutions.
tioned by several major countries-West Germany,
France, and Canada-because of its strong reliance
on demand restraint. The G-10 will reevaluate this
approach as it addresses the problem of medium-term
solutions to the debt crisis and complementarity of
Greater Complementarity. Agreement is building
among some G-10 countries-notably West Germa-
ny, France, and Canada-that the demand restraint
measures of the IMF have to be emphasized less and
the longer term, supply-oriented, World Bank lending
programs emphasized more. The current 15-month
adjustment period for IMF standby programs is be- 25X1
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restraint demanded is harming the long-term growth
prospects of the countries. Some informally men-
tioned steps to improve coordination among the two
institutions include:
? Joint staff country visits.
? Joint country assessments, taking into consideration
each institution's program.
? Joint board meetings.
The potential effect of joint programs under present
Fund and World Bank operations would be an expan-
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would strongly resist. Already there is some condition-
ality attached to a small proportion of World Bank
lending; structural adjustment loans carry a require-
ment that the recipient country must be in compliance
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with an IMF program. France, along with its proposal
to extend World Bank lending up to 20 years and
soften loan rates, has proposed a five- to seven-year
adjustment period for countries undertaking and ad-
hering to an IMF program.
A number of summit countries believe greater com-
plementarity will also have to involve the GATT and
other trade organizations, possibly the International
Trade Organization and the UNCTAD Common
Fund for LDC commodity support. The need to
increase the linkage between trade and financial
problems has been widely acknowledged and is cur-
rently under study by the OECD. Canada favors a
new trade round by "mid-decade," and all major
countries acknowledge that there are serious trade
problems. Preparations for a trade round would be
lengthy, however, because extensive prior consulta-
tions would be required to establish a consensus.
Ironically perhaps, LDCs are not in favor of a trade
round at this time and are seeking the resolution of
current trade issues, which they believe are in viola-
tion of GATT rules, and those left over from the 1982
GATT Ministerial.
Institutional Resources. Among the summit coun-
tries, only France and Canada support a general
increase in resources of the World Bank. Motivated in
part by its large number of former colonies, Paris has
traditionally favored increasing multilateral develop-
ment aid and lending. In addition to softening the
terms of World Bank loans, Paris would like to
increase Bank lending by raising the current 1:1
capital-to-lending ratio. It also is advocating increas-
ing the Bank's sectoral loan share of total lending
above the current 10-percent ceiling. The French
envision the World Bank as world "aid coordinator"
for multilateral as well as bilateral aid. While gener-
ally supportive of French proposals, Canada has yet to
formulate a clear position. Other summit countries do
not at this time su port the French proposals.
International monetary reform is not expected by any
of the other six countries to be a divisive issue at the
summit, although a number of sensitive issues, such as
the impact of US economic policy on the international
monetary system, will be raised in the discussions. No
country, including France, is expected to make a
major proposal concerning international monetary
reform. In general, we expect the other governments
to strike a positive chord on the work in progress,
particularly the studies undertaken by the individual
G-10 countries, as well as by the IMF,, BIS, and
OECD. Some countries-notably France, Italy, and
Canada-will point out that, despite the overall im-
proved outlook, progress on reform has been moving
too slowly. They may propose that the communique
include a statement calling for continuing the momen-
tum developed at Williamsburg. Specifically, we be-
lieve the following issues will be raised:
? Foreign exchange market intervention. France can
be expected to suggest extending the Williamsburg
consensus regarding the need to smooth exchange
rate changes through coordinated intervention.
There is still a considerable uncertainty in the
exchange markets, and observers still believe that
the US trade deficit may eventually trigger a rapid
change in rates. Although Paris is virtually alone in
its desire for active central bank intervention in the
markets, other West European countries may pas-
sively accept a French initiative so long as the
wording remains vague.
? Multilateral surveillance. Most summit countries
are unhappy over the lack of results of multilateral
surveillance in achieving economic convergence, and
a few will seek to strengthen its structural process.
France and Italy in particular, and possibly Canada,
can be expected to cite the inadequate 'structure of
the system and to call for firmer and more formal
procedures. Probably all the other participants will
once again criticize US fiscal policy. US efforts to
reduce the deficit may be cited as a positive develop-
ment, but recent increases in US interest rates will
be condemned for hurting the Western recovery and
making the plight of LDCs much worse. The sum-
mit countries will almost certainly want a general
statement in the communique to the effect that the
Big-7 will seek to pursue sound, outward-looking
internationally compatible policies.
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? SDR allocation. France will push ardently for a
consensus supporting a new allocation of SDRs.
Italy and Canada will support France, and Japan
and West Germany may opt for the Canadian
Finance Minister's proposal for a modest allocation
as a suitable compromise.
? LDC debt issue and the reform agenda. France
probably will mention its list of possible improve-
ments in the monetary system aimed at helping debt
troubled LDCs. Paris will likely make the following
points in addition to the SDR allocation:
Dependence on the dollar should be reduced by
expanding the number of currencies which
make up total international reserves.
World Bank resources, including those of the
International Development Agency (IDA),
should be increased and the terms on World
Bank loans made softer.
LDC adjustment should be considered in a five-
to seven-year time frame, not the current one to
three years.
France is not seeking any new major initiatives on
these points but will want a.general statement in
the communique that the work on the debt crisis
has to continue; Paris also wants to maintain its
out-in-front image concerning the needs of LDCs.
A major attempt by the United States to block a new
allocation of SDRs would draw criticism from France,
Italy, and Canada, and possibly from Japan and West
Germany. Such a move also could make the other
summit countries less receptive to US proposals on
monetary reform, such as encouraging LDCs to open
up their economies to direct investment and rely less
on debt to finance their economic development.
Concerns at the Summit about US fiscal policy and
its implications for the multilateral surveillance proc-
ess probably would be assuaged by assurances that
the current efforts to reduce the US deficit will
continue, and that Washington supports the goal of
economic convergence. The other summit countries
are grappling with the problems of deficits in their
own countries and realize the exercise can be a
Outlook for the Longer Term
Discussions on the current set of international mone
tary problems probably will go on for several years,
but we believe they are unlikely to result in any
fundamental changes to the system. Discussions about
international liquidity have the greatest potential for
major changes. Most summit countries believe the
present system has a high degree of flexibility, and as
a result we expect most efforts to reform the system to
be aimed at fine-tuning.
We do not expect the multilateral surveillance process
to change much over the next few years. The ex-
change of views among the Big-5 and moral suasion
are about as far as any of the major countries, except
France, want to go. As the West Germans have
pointed out in their G-10 reports, no country wants to
give up its sovereign right to set its own economic
policy, an argument that favors adhering to a flexible
exchange rate regime. Economic convergence and
intervention, however, will continue to be political
footballs among the major countries when exchange
markets become unsettled.
We believe that the issues concerning international
liquidity-the determination, denomination, and dis-
tribution of reserve assets-will remain contentious
for some time to come, given the national interests at
stake. The determination of SDR allocations is a
cumbersome process because it requires approval of
the IMF Board of Directors, and critics point out even
increasing the use of the SDR or the ECU does not
meet the needs of all countries. Ideally, a country,
private firm, or individual engaged in international
transactions wants to protL ' if from exchange
risk. Probably the best way to accomplish this is to
diversify assets in the same currency mix as the
denomination of lia'Wlities. SDRs or ECUs are limited
by their currency composition and do not, therefore,
meet all the needs in the market. Major countries
other than the United States have been reluctant to
make their currencies more available as reserve as-
sets, and if they do ease restrictions probably will do
so along the lines of the Japanese measures-step by
step, paced out over several years.
lengthy one.
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Proposals to change the international monetary sys-
tem to develop medium-term solutions for the LDC
debt crisis are likely to be few:
? Greater complementarity. Formal joint country as-
sessments and board meetings between the IMF and
World Bank, we believe, will not be adopted. LDCs
fear conditionality creeping further into Bank lend-
ing, and most of the major countries generally do
not want to weaken the discipline of the IMF's
programs. Nonetheless, existing IMF and World
Bank programs could be made more complementary
without major alterations to the institutions.
? Protectionism. Most summit countries agree that
the trade-finance links are important, but little
movement on a new multilateral trade round is
likely soon. While Japan, West Germany, and Can-
ada support new trade talks, the other major coun-
tries prefer such negotiations be delayed until the
economic recovery is firmly established.
? Resources of the World Bank and IMF. Major
countries, France and possibly Canada excepted, are
unlikely to support new initiatives for significant
changes. in funding or in the Bank's current capital-
to-lending ratio. Budgetary constraints among all
the major countries will limit the sources of public
funds for LDCs. Also, without a larger effort on the
part of LDCs to attract private direct investment,
their one-sided call for more lending on softer terms
will not have much resonances
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Appendix
International Monetary Reform:
Country Briefs
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aCLTCL
Exchange Rate Regime Fundamental View: Exchange rates should move gradually in response to underly-
ing economic trends. Active intervention should be used to keep. foreign exchange
markets stable
Evaluation: Flexible exchange rate system has been unstable at times, and
currency movements have not always reflected underlying economic trends. Major
countries have not adequately coordinated their economic policies.
Recommendations: For the medium term, seeks establishment of tripolar currency
system among dollar-yen-ECU with other countries pegging to one of these or the
SDR. Wants the major countries to bolster currency swap arrangements and to in-
tervene more actively in the markets. Also wants to strengthen IMF surveillance of
and cooperation with EMS countries.
International Liquidity Favors a new SDR allocation. Seeks greater diversification of international
reserves away from the dollar to reduce the impact of currency fluctuations.
Institutional Reform Activities of IMF and World Bank Group need greater complementarity-joint
IMF and World Bank country assessments are needed. Believes IMF surveillance
recommendations and adjustment programs should be coordinated with World
Bank project and sectoral lending activity. Argues that positive effects of World
Bank lending would help minimize risks of IMF short-term demand restraint
measures. Seeks to extend IMF adjustment time horizon from current one to three
years to five- to seven-year period. Wants World Bank loans lengthened up to 20
years and with lower interest rates, particularly for countries willing to implement
an adjustment program. Capital-to-lending ratio of Bank should be increased, as
well as share of Bank's sectoral loans over project loans. Wants Bank to be the
world "aid coordinator" for multilateral and bilateral aid.
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Italy
Exchange Rate Regime Fundamental View: Exchange rates should move gradually according to underly-
ing economic trends and not be a destabilizing force.
Evaluation: Flexible exchange rate regime is the only viable system in turbulent
economic environment.
Recommendations: Major countries need to harmonize domestic policies; smaller
countries need to adopt incomes policies to offset effects of exchange rate
movements.
International Liquidity Favors a new allocation of SDRs.
Institutional Reform IMF should play more incisive role in multilateral surveillance; process should be
expanded to include all G-10 countries. Multilateral discussions among countries
and IMF amount to little more than an exchange of views. Multilateral
surveillance process can be improved by having (1) meetings twice a year, (2)
discussions based on analytical papers prepared by the IMF, (3) meetings held
prior to formulation of policy in major countries, and (4) results made public in of-
ficial documents. IMF needs to utilize fully instruments at its disposal: Article IV
consultations, special consultations with countries, and development of a broad set
of comparative economic indicators.
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