STATEMENT OF SIDNEY DELL, DIRECTOR, NEW YORK OFFICE OF UNCTAD

Mr. DELL. Mr. Chairman, among the indispensable conditions for a healthier world economy is a willingness on the part of the industrial countries to assist in the development of the less-developed countries.

It is generally recognized that, as the World Bank has lately reaffirmed, the current flow of capital to the less-developed countries is well below the capacity of these countries to make effective use of it. Among the reasons frequently cited by donor countries for curtailment of aid programs is the fear of losing reserves, and if action is taken to increase the world level of reserves, it is to be presumed that one of the deterrents to an enlargement of aid would be pro tanto reremoved.

It cannot, however, be taken for granted that restrictions on aid, once imposed, will be readily relaxed. Such limitations on aid have by now acquired a life of their own, and all kinds of reasons have been found to justify them. There is therefore no assurance that an easing of the world's liquidity position will be accompanied by an increase in the flow of resources to the less-developed countries, unless specific steps are taken to insure that this occurs.

This is the basic rationale for a link between liquidity creation and the provision of aid to less-developed countries. Such a link would enable donor countries to respond to the need for more aid, without running the risk of incurring any loss of reserves, and without having to increase taxes for this purpose, although not of course without increasing the transfer of real resources.

One contention commonly advanced against the link is that liquidity creation is not designed to effect a permanent transfer of real resources from one group of countries to another, a contention that would apparently rule out the gold standard as well, since countries acquiring gold for their reserves have always had to transfer real resources to the gold producing countries in exchange. This argument would also rule out the newly established system of SDR's, which allows participating countries to maintain as little as 30 percent of their net cumulative allocation of SDR's, and use the balance to acquire real resources from other participants.

Another objection is that linking liquidity creation with the provision of assistance to less-developed countries may tend to generate pressures for excessively large amounts of SDR creation in relation to world liquidity needs.

It is important to note, however, that throughout the discussion of this matter by both industrial and less-developed countries in UNCTAD, the point has never been questioned that the amount of any new reserve creation should be determined by the monetary requirements of the world economy, and not by the need for development finance.

In any case, there is very little risk of excessive creation of SDR's in circumstances in which a mere 15 percent of the total vote in the International Monetary Fund suffices to prevent a proposed act of liquidity creation.

Finally, it has been suggested that if the industrial countries are not prepared to expand their aid by direct means, that is by direct contributions to bilateral and multilateral aid programs, they are not likely to be willing to do the same thing indirectly, that is through the link.

Now although the real burden of aid is the same, whether the transfer takes place by conventional methods or through such methods as the link, governments may see some advantages in the latter method. As I have already mentioned, two advantages of this method are that it avoids any risk of reserve losses, and that it makes it possible to expand aid programs without having to increase taxes.

The possibility that introduction of the link would tempt governments to reduce other forms of aid cannot be entirely dismissed. It is, however, unlikely that the opening up of new channels of aid adds nothing at all to the total flow. The net increase in the total level of aid resulting from the link may turn out to be less than the direct allocations of SDR's or their equivalents in national currencies for lending to less-developed countries, but there would probably be some net increase, and my own impression is that the net increase would be considerable.

We come finally to the question of the most suitable form for the link. Although there are important advantages in establishing the link as an integral part of the mechanism through which SDR's are distributed, we have to face the fact that in the immediate future this has been ruled out by the terms of the new amendment to the articles of agreement of the International Monetary Fund, which preclude the holding of SDR's by any such agency as the World Bank group.

There is therefore a strong case for considering a voluntary form of the link, as suggested by Professor Triffin, and by Dr. I. G. Patel, economic adviser to the Ministry of Finance of India and one of the members of the UNCTAD expert group on international monetary issues. The full text of the proposal in Dr. Patel's version will be found in the annex to my paper submitted to the subcommittee. (See p. 12.) What Dr. Patel suggests is that every act of international liquidity creation should be accompanied by voluntary contributions to IDA by all the Part One member countries of IDA, the size of the voluntary contribution being a certain uniform proportion of the share of every Part One country in international liquidity creation.

Most of the objections to the link in its organic form do not apply to this alternative version. From a legal standpoint, there is nothing in the amendment to the articles of agreement of the IMF that would preclude such an arrangement, and from the standpoint of economic and banking policy, this alternative version of the link would provide for a clear separation between liquidity creation and development assistance as recommended by the critics of the organic link.

The proposal in this form not only commands widespread approval among the less developed countries, but has received the specific endorsement of a member of the Group of Ten, namely Minister Colombo of Italy. It might also win the approval of France, whose representative in UNCTAD at one time suggested the need for a link as, in his words, "a relation in time between various measures rather than a functional relation between them."

As to the possible ratio of IDA contributions to the newly created reserves, this is a matter for discussion and negotiation just as the obligation to reconstitute 30 percent of cumulative SDR allocations was a matter for discussion and negotiation.

Ideally one would like to see IDA contributions equal to the value of the newly created reserves, but one might have to settle for less than this.

In United Nations circles the proportion 50 percent has been considered as a serious possibility, but I cannot say that there is any particular virtue in that proportion as against some other. It is simply a question of how much additional aid one wants to provide.

If, for example, total SDR allocations to all countries were at the rate of $2 billion a year, and if the Part One member countries of IDA contributed to IDA in an amount equivalent to 50 percent of their SDR allocations, were adopted, this would add $680 million to the total annual flow of aid, of which $243 million would be supplied by the United States.

This compares with the total public and private flow, according to OECD sources, of $11.3 billion in 1967, and with $7 billion in official flows alone. It is of course a much more significant figure in relation to the total flow to multilateral agencies, which amounted to just over $1 billion in 1967.

The additional aid would be modest, but it would represent a useful supplement to other channels of aid. Moreover, as experience is gained, that ratio of aid allocations to new reserve creation might be raised. All in all, the link would significantly increase the efficiency of new reserve creation in improving the international economic environment. Thank you, Mr. Chairman.

(The prepared statement of Mr. Dell follows:)

PREPARED STATEMENT OF SIDNEY DELL

THE CASE FOR THE "LINK"1

If all goes well, an important step forward is about to be taken in the evolution of international monetary cooperation. For the first time, an attempt is to be made to regulate the supply of international reserves through a deliberate collective decision. If the new approach is successful, the total supply of world reserves will henceforward be adjusted to world requirements for reserves and not to such haphazard factors as the current flow of newly mined gold into official coffers or the deficits in the balances of payments of the reserve currency countries.

The creation of a new form of international liquidity is obviously not an end in itself, but one means among others of establishing a better framework for international economic cooperation within which countries may pursue rational economic policies, particularly policies for promoting higher living standards.

A key element in any improvement in the international environment must necessarily be an increase in the flow of assistance to the less developed countries. It is now generally accepted at the national level that the community as a whole has a responsibility towards every one of its members, and that active measures are required to provide all members of society with minimum standards of social security and even, perhaps, of income.

Although it is not yet generally accepted that similar considerations apply on a world-wide basis, and that the logical next step after the welfare state is the welfare world, most people in the industrial countries would now recognize the need to provide assistance to the less developed parts of the world

1 This paper is presented by Mr. Sidney Dell in his personal capacity and does not necessarily represent the views of the United Nations secretariat, in which he serves.

as well as the importance of seeking to narrow the growing gulf between incomes in the richer countries and in the poorer countries.

At the second United Nations Conference on Trade and Development held in New Delhi in 1968, the industrial countries accepted a commitment to provide assistance to the less developed countries equivalent to one per cent of their gross national product. It proved impossible, however, to agree on a date for the achievement of this target largely because certain countries under balance of payments pressure did not feel able to commit themselves to an early expansion of foreign aid. The result is that the current flow of resources to the less developed countries averages only seven-tenths of one per cent of the gross national product of the developed countries as a whole; and in the case of the United States the latest available figure is two-thirds of one per cent of the gross national product. We nevertheless have it on the authority of the World Bank that "the developing countries could now absorb productively new external resources at least equal to what would correspond to the one per cent of gross national product of the developed countries as a group". In other words, the current flow of resources to the less developed countries is considerably below the amount which they could utilize effectively for increasing productive capacity and growth potential.

If the creation of a new type of international reserve takes place side by side with action to secure a better adjustment in international transactions, and if countries are thereby encouraged to liberalize their trade and aid policies, we might expect the flow of aid to increase without the need for providing a specific "link" between liquidity creation and the flow of assistance. It is not at all clear, however, that action will indeed be taken to remove the various obstacles to aid that have arisen during the past few years. Concern over the balance of payments and over the war in Vietnam have led to a questioning of the fundamental validity of aid programs as such; and many have sought to rationalize their doubts by pointing to cases in which aid has been wasted or misused. It is therefore no accident that we are now going through a period of profound disillusionment with aid programs, in the course of which much of the perspective has been lost, and impatience for quick results has caused people to forget that centuries of economic backwardness cannot be overcome within the span of a single decade.

Given the current mood of pessimism regarding aid prospects, it cannot be taken for granted by any means that an improvement in balance of payments positions, and a reversal of the factors which led originally to the curtailment of aid programs will necessarily be accompanied by a revival in such programs. Restrictions on aid once applied tend to perpetuate themselves and it is therefore only through a deliberate effort that an increase in the flow of resources to the less developed countries will be achieved. It is for this reason that the possibility of a deliberate "link" between reserve creation and development assistance is worthy of consideration.

The principal advantage of the "link" is that it makes it possible to step up the flow of assistance to developing countries without involving individual developed countries in any risk of losing reserves. The fact that potential loss of reserves has become a major factor affecting the volume, terms and conditions of aid programs is clear from the progressive increases that have taken place in the tying of bilateral aid as well as from the efforts made to introduce elements of tying into the operations of the International Development Association (IDA) in connection with the current replenishment. The "link" would relieve governments of the anxiety that resources supplied to less developed countries might result in a weakening of their reserve positions.

A number of governments, while not necessarily concerned about their balance of payments or reserve positions, have found it difficult at a time of generally high taxes to propose increases in taxes for the purpose of expanding foreign assistance. On the other hand, at a given level of government revenue, it may be equally difficult to reorder social priorities in such a way as to make more room within the budget for an enlarged program of foreign aid. Since governments have accepted the one per cent assistance target, it is to be presumed that they would welcome a way out of this impasse, and the advantage of the "link" is that it may enable them to respond to the need for more aid without having to raise taxes for this purpose."

2 United Nations, Comments by Member States and Organizations Concerning International Development Strategy for the Nineteen Seventies, document E/AC.56/L.1, page 13. 3 This would not, of course, relieve the countries concerned of the need to make larger transfers of real resources.

But the "link" might well also make a significant contribution to an improved international monetary system. It is a characteristic feature of the present situation that all developed countries would like to maintain surpluses in their balances of payments. Yet the only way in which all these countries could simultaneously succeed in achieving such surpluses would arise if, as a group, they maintained a sufficiently large export surplus with the less developed countries. As matters now stand, the sum total of the surpluses which the industrial countries would like to maintain in their external accounts is considerably larger than the aggregate surplus with the less developed countries which they are currently prepared to finance through the flow of public and private capital. This means that in so far as any particular developed country succeeds in its objective with respect to its own externl surplus, it does so only by frustrating the corresponding objectives of other developed countries. This conflict in turn tends to generate growing competition for available reserves as well as a serious danger of competitive protectionism and exchange depreciation.

The problem is therefore to find a means whereby the industrial countries as a group could finance an adequate surplus with the less developed countries as a group. The conditions for a satisfactory equilibrium in this respect are first that the aggregate surplus with the less developed world as a whole should be large enough in relation to the sum of the individual surpluses that each developed country would consider desirable in its own particular circumstances; and that the method of financing the surplus should be such as to contribute to an improvement in the international monetary situation and not to a deterioration. From this standpoint, if the developed-countries give away the surpluses in the form of grants, this does not yield any benefit to the balances of payments of those donor countries that are currently in deficit. If they provide the resources in the form of loans, they acquire long-term claims on the developing countries, but these too are not generally regarded as providing a source of strength for the balance of payments, at any rate in the short run.

There would therefore be great advantages in an arrangement whereby export surpluses with less developed countries would be made to yield usable assets in the form of internationally accepted reserves. If it were possible for developed countries to earn additional reserves by enlarging their export balances with developing countries, they would probably be inclined to take a quite different view of such surpluses from the view which they take at the present time. In that case, they would see the same advantage in transferring real resources to less developed countries in exchange for additional reserves as in the traditional exchange of real resources for additional gold.

The question may be asked why the industrial countries should saddle themselves with the burden of having to earn the new reserves through transfers of real resources to the less developed countries: under the new arrangements for Special Drawing Rights (SDRs) as they stand, they can obtain additional reserves without any cost at all.

This point is well grounded: there is no compulsion at all on the industrial countries to adopt a "link" between liquidity creation and development assistance. If they did accept the idea of a "link," it would be an entirely voluntary act of economic statesmanship. Indeed, it might even be suggested that once the industrial countries find that they are able to acquire SDRS costlessly, they will no longer be as concerned about running balance of payments surpluses as they

are now.

It may, however, be doubted whether countries would in fact lose their proclavity for balance of payments surpluses even if they were able to add to reserves by other means. For one thing, the employment-creating effect of such surpluses should not be overlooked. But even aside from that, it is doubtful whether a country could for long command confidence in the stability of its currency if it were adding to its reserves solely by virtue of the periodic receipt of SDRS, and was otherwise in balance of payments deficit. Rightly or wrongly, the currency of a country in such a position would probably be regarded as vulnerable and hence would be subject to speculative attack.

But even if this were not so, it would remain an important advantage of the "link" that it provides a unique method of tying together and reconciling a number of objectives which might otherwise tend to conflict. Since the industrial countries do, at the presnt time, all prefer to run balance of payments surpluses, the advantageous way of dealing with the potential inconsistency of these aims is not to find methods of doing away with the surpluses or making them unnecessary; but rather to channel the surplus resources thereby generated to the coun