Remarks at the Annual Meeting of the Boards of Governors of the International Monetary Fund and World Bank Group

 

September 30, 1986

 

Well, Mr. Chairman, Managing Director de Larosiere, President Conable, Governors of the International Monetary Fund, of the World Bank Group, and distinguished guests: Before I begin, I want to share with you an announcement that I made only an hour ago at the White House.

 

Ten days ago, Soviet General Secretary Gorbachev proposed to me that we hold a preliminary meeting to make concrete preparations for his coming visit to the United States. And now that Nicholas Daniloff has been released as we insisted, an important obstacle has been removed, and I have accepted Mr. Gorbachev's proposal. We have agreed to meet in Iceland on October 11th and 12th, and it will be to prepare the ground for a productive summit, covering all the issues on our agenda: arms reductions, human rights, regional conflicts, and bilateral relations.

 

And now, for all the American people, I'm pleased to welcome you once more to the 41st annual meeting -- an honor to address you once again. Let me note at the outset that both the IMF and the World Bank are in the year of changes at the helm. At the IMF, Managing Director de Larosiere has announced his intention to resign after 8 years of service -- 8 of the most challenging years in the Fund's history, I might add. And he has met those challenges with strong leadership, a skillful negotiating style, and complete dedication to the mission of the institution he leads and serves. He has enhanced the prospects of the world economy for all of us, and we salute him for his service.

 

At the World Bank, one of this century's most distinguished Members of the U.S. House of Representatives, Barber Conable, has taken the tiller. And in the United States, President Conable has been known for his extensive grasp of national finance. He had a profound influence on the development of American economic policy in the last decade. And now, those same enormous talents will be guiding the Bank. He's also a good friend. And Barber, congratulations!

 

If this is a time of changes for the Fund and for the Bank, these are even more dramatic times for the world economy. These last 5 years, we have seen men and women begin to challenge old dogmas and rediscover timeless truths. We've seen that nations that have embraced the enduring principles of economic growth have become more prosperous and secure. And those that have not, have weakened, faltered, and fallen behind. We've heard many names given to these rediscovered economic insights -- names describing policies of taxation, regulation, government spending, monetary management, and trade. But all those names and the many theories with which they are associated come down in the end to one name, one theory, one word. The word is ``freedom,'' in this case economic freedom.

 

In so many addresses to so many international forums during the past 5\1/2\ years, I have repeated America's vision of the future. It rests on that word -- a word that means trust in the people more than in governments, trust in what the people can achieve when they are able to reach and climb as far as their natural talents and native abilities will take them. And each time I've spoken about this vision I've said that, as with political freedom, economic freedom is not just a question of absolutes, not just a case of an open economy or a totalitarian one, but also of degree. Even in free market economies, high taxes make people less free to work, save, and invest. Excessive regulation makes them less able to experiment and innovate. Too much government spending can rob those on the receiving end of a reason to labor, and those who must pay of their incentive to strive. And restrictions on trade rob every worker of the opportunity to have the markets for his products grow to reach all mankind and rob every consumer of a better way of life. In the last 5\1/2\ years now, we in the United States have done our best to be faithful to this economic creed. When our administration came into office, we found the American economy on the brink of disaster. A decade of rising inflation and soaring taxes had taken its toll. Our economy was stagnating and threatening to fall, dragging the entire world economy down with it. The sources of our problems weren't hard to find. The noted British historian Paul Johnson commented on the various studies of them this way: ``The most detailed analysis of this stagnation and decline suggested the causes were failure to control the money supply, excessive tax burdens, and above all government intervention and regulation.''

 

And so, in 1981 America took a new course. We cut all forms of intervention in the economy, we cut the scope of regulation, we brought down tax rates, and we lowered the rate of increase in government spending. And by early 1983 we began to see the results as America entered what is now one of our longest lived expansions in the postwar era, an expansion that has been accompanied by falling inflation and falling interest rates. Today a greater percentage of our people are at work than at any time in our history. And in the last 4 days we have just taken another great step on the road to sustained growth with the passage of historic tax reform legislation. We will never forget that our growth has been, and remains, important not only to Americans but to people everywhere. Our growth has fueled the growth of the entire world economy.

 

And 2 years ago when I last addressed this body, I suggested that the lessons of freedom, the marketplace, and growth were ones that all nations could embrace. I suggested that if the world economy were to grow as all of us hoped it would, we needed to turn away from small-minded calculators in big state bureaus and look, instead, to large-minded entrepreneurs in small private enterprises -- whether industrial, commercial, or agricultural -- for these people know secrets more profound than those revealed in all the charts and analyses produced by all the agencies and bureaus put together. Again, a statistic from our own situation comes to mind. According to the MIT program on neighborhood and regional change, between 1981 and 1985 businesses that were less than 5 years old, and businesses that had fewer than 20 employees, created more jobs than America as a whole. And if we had had no entrepreneurs, we in America would have lost more than 3 million jobs in that time, instead of the large gains that we, in fact, enjoyed.

 

All of us here today can take great satisfaction knowing that this message of economic freedom is at last being heard and acted upon in Europe and Africa, in Asia, and in Latin America. Only a few years ago in Western Europe, for example, capital markets were, to a large extent, closed to entrepreneurs. In part, because steep taxation sapped Europe's risktakers of any reason to take a chance on a new company or a new idea. And with labor regulations that made it more difficult to lose a job than to get divorced, entrepreneurial activity was at a low ebb. Now, however, this is changing. As inflation and interest rates have fallen and new policies have been adopted to encourage growth and entrepreneurship, Europe has begun to put behind it a decade in which not one net new job was created and once more is seeing new growth, new jobs, new companies, new opportunities, and new hope.

 

And this progress has not been confined to the industrial world alone. Less developed countries have also caught the spirit of freedom and enterprise. In India we have seen -- within just a few harvests -- a country that imported agricultural products turn into a food exporter -- this, after incentives were introduced and controls removed. In China, too, we have heard the same story of incentive and bounty. And in famine-stricken Africa, we've seen some countries free their markets and give their farmers incentives to produce. And those countries did not suffer the devastation of their neighbors. Some, in fact, exported food to those who were starving around them. As I mentioned in my address to the United Nations of a week ago, we welcome the resolution of the Special Session on Africa that calls for more free market incentives. We in the United States are looking at ways the assistance we provide to African countries can best support development of free markets, especially in agriculture. And America hopes that other donors will do the same.

 

All in all, we've made great progress toward a stronger world economy since I last addressed you, and yet problems remain. I would like to turn now to some of those problems and see what we can do to solve them. And let me look at them from three vantage points: that of the United States and the industrial world; that of the developing nations; and finally, that of international organizations such as the IMF and the World Bank.

 

As President of the United States, I'm particularly aware of the tasks that we in America have before us. Highest among these is curbing the growth of our government's spending. No nation can survive if government becomes like the man who in winter began to burn the wallboards of his house to keep warm until he had no house left and froze. We've made progress against those who would condemn future generations of Americans to lives of pauperdom. The Gramm-Rudman-Hollings legislation is evidence of this, but we can and must do more. I pledge to you that I will do all in my power to stop this fiscal death march. And I believe the American people will support me in this effort.

 

We have other items of unfinished business in America. Bringing interest rates down even further while keeping inflation under control is one. Reducing our trade imbalances while resisting protectionist pressures at home and abroad is another. We know the role our recovery has played in the world. We know how much rides, not only for ourselves but for much of mankind, in the completion of the work that we began 5\1/2\ years ago. But while America's expansion is beneficial, other industrial nations must also contribute their fair share to world recovery and adopt more growth-oriented policies. Now, of course, some dislocations may come in the process, but we must recognize that if we're all to prosper together, then we must all work together toward that end. Every nation must contribute to world economic growth. And we must do more than repeat this high sounding sentiment; we must take practical steps.

 

We've come a long way since I last spoke to you. The Plaza agreement, concluded last September among five industrial nations, was a beginning toward correcting the excessive volatility in our exchange rates. Since then we have also coordinated the reduction of interest rates. And at the economic summit in Tokyo earlier this year, we agreed to new mechanisms for closer economic cooperation. All of this helps foster world growth, not only for the major nations of the world but for everyone. The industrial countries have much more to do. So, too, do the developing countries. Let me take up now the second great vantage point in the question of world economic growth, that of the developing nations. As I said, many of these nations have adopted policies that promote growth. These include lowering taxes, privatizing public enterprises, liberalizing trade and investment policies, and moving in general to more market-oriented economies. All this is important, not just for the developing countries but for all nations and people who will invest in their businesses, buy their products, sell them goods, and work with them to live in peace and brotherhood on our planet.

 

As Secretary [of the Treasury James A.] Baker stressed in presenting the Program for Sustained Growth in Seoul last year, growth-oriented reforms are particularly important in the debtor countries. History has shown that when nations have rising populations and do not give their people the freedom that fulfills their aspirations, those nations try to buy peace in their restless and unproductive populations by borrowing themselves into bankruptcy. Either that or they turn to oppression. So, let us remember that growth is the key to repaying debt while fulfilling the dreams of the people. Several debtor nations have taken long steps up the path to renewed economic strength. Countries like Colombia and Argentina have brought inflation down, opened their markets. Other countries like Senegal and Ivory Coast have made progress in liberalizing their economies. And Mexico and the Philippines both recently agreed to comprehensive, growth-oriented economic programs supported by the IMF and the World Bank. It is important that these programs, as well as the comprehensive programs of other debtor nations, be fully supported by commercial banks.

 

The IMF, of course, plays a central role in the drama of growth in debtor nations. The United States wants to see that role continue. We welcome the increased emphasis in the IMF on growth-oriented reform packages even while continuing the focus on financial stability. For the same reason, we welcome the recent establishment of the structural adjustment facility, and we urge the IMF to put even more emphasis on market-oriented structural reforms. The World Bank also has a critical role to play in promoting growth in less developed nations, whether troubled debtor nations or not. And we welcome an increase in the practice of lending contingent on countries turning to more market-oriented policies. We also support the early completion of negotiations for refunding of the International Development Association, and we support the implementation of the convention that establishes the Multilateral Investment Guarantee Agency.

 

The future of world economic growth depends on choices made all over the world -- in industrial countries, in developing countries, in the IMF, and the World Bank. The question is: Will we turn toward uplands of freedom and growth or toward the swamp of state control and stagnation? This is the question every nation and every institution must ask itself. The world growth depends on our answers, and on something else closely related to those choices. This is the last area of problems I wish to discuss with you. This is the one area that can most easily jeopardize all we've achieved and hope to achieve. It might be said that since the end of the Second World War, we -- all the nations represented here -- have lived under an economic constitution. In the two decades before the adoption of that constitution, our people suffered the horrifying consequences of a collapse in international trade and monetary flows. And since its adoption, we've had 40 years of a prosperity more widely shared and more generous than the world has ever known. I call the postwar arrangement a constitution, but it has been in fact not one constitution, but three. I'm speaking of the collection of postwar international economic agreements that created the IMF, the World Bank, and, yes, the GATT.

 

Today each of those agreements and institutions has come to a turning point. Each is grappling with new challenges such as debt restructuring, financial instability, trade in new products and new industries, and the rise of worldwide protectionist pressures. Collectively, these turning points represent a culmination of the policies that the nations of the free world established right after the war. Those nations -- our nations -- saw that the best way to ensure a just and lasting peace, was to build an open, growing, and prosperous world economy. The same era that produced the noble proposal of the United Nations, has also produced the IMF, the World Bank, and GATT. And these institutions gave us a growing and prosperous world economy, but many of the arrangements originally incorporated into them presumed America's singular strength. And for more than a decade now, Europe and Japan combined have had a role equivalent to that of the United States in world trade and an increasingly important role in finance. Many other countries, those with open markets and low taxes, are growing rapidly and may soon become fully industrialized and can expect to play more prominent parts as well.

 

These have been healthy developments and ones that reflect the success of our postwar vision. But they have led to strains in the postwar agreements, and these strains have given rise to a new round of significant questions about how the world economy should develop from here. Questions such as: How can we coordinate our policies to restore stability to exchange rates? How can we resist protectionist pressures as our nations become more nearly equal competitors and world trade grows? How can we manage our financial responsibilities without sacrificing growth? And how should we expand our international constitutions so that the hopes and opportunities of the last generation can also be the hopes and opportunities of the next?

 

The recent GATT ministerial was a good first step toward answering some of these questions. The ministers decided on comprehensive negotiations that would include trade and agriculture, services, investment, and intellectual property. But we needed more steps. First of all, we need to resolve that a further opening of the world economy is a goal worth working for. I know I believe it is. I lived through the Great Depression back in the thirties. I saw what so-called protectionism brought the world. Nothing was protected; everything was destroyed. And today the stakes are even higher. In my country, for example, up to 10 million jobs are tied to international trade, as is 20 percent of our gross national product, compared to 12 percent in 1929. The choice is simple: We can go forward or backward. I believe that we must move to a more open world economy.

 

And this is why I have vetoed protectionist legislation. It's why I have supported strong and growing roles for the IMF and the World Bank. It's why Secretary Baker presented his plan to strengthen our multilateral strategy for dealing with the debt crisis. And it's why we've pressed for a new GATT round. It is why, also, we have moved and will continue to move aggressively against unfair trading practices in other nations. No trading system among equals can survive if some feel they're being discriminated against, and if there are enormous imbalances in trade flows. The only ways to resolve the external imbalances are through increased growth abroad, a greater competitiveness for the U.S. dollar, or both -- coupled with the opening of markets.

 

My friends, I believe that the challenge before us is to develop a truly global economy, one that celebrates the diversity of our nations while it opens us to uninhibited trade and investment among our peoples. We've traveled a vast distance toward such a world in the last 40 years. We've come so far. And now, it's time for stock-taking, for planning with open minds the next leg of the journey, and for beginning it. Let us look with open minds at ways of promoting stable exchange rates and assuring sound money. Let us approach with open minds the next round of trade talks and push them as far as we can to our goal of eliminating all trade barriers.

 

We are, my friends, on a great journey of exploration. And as on all such journeys, from time to time we tire. But if we're strong and if we continue onward, I believe we will find that a more bountiful land lies before us. Let us all join together on this great journey. Let us reaffirm our commitment to the institutions that have brought us this far. And let us reaffirm our commitment to strengthening them for the adventure that lies ahead.

 

Thank you, and God bless you all.

 

Note: The President spoke at 11:21 a.m. in the International Ballroom at the Sheraton-Washington Hotel at the meeting of the International Monetary Fund, the International Bank for Reconstruction and Development (World Bank), the International Development Association, and the International Finance Corporation.