Nairobi, reform and the Euromarkets


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This year's annual meetings of the International Monetary Fund and World Bank will again concentrate on the long quest for a new monetary order and, since they are being held, for the first time, in the world's poorest continent, they will be concentrating also on aid to developing countries.

No doubt, great efforts will be made to give an appearance of progress. 

The finance ministers may try to re-create the optimism for reform which they generated in Washington in July. But the disappointing meeting of their deputies in Paris at the beginning of this month showed once more that the negotiations have a tendency to become bogged down whenever they descend from high principles to awkward details. There is the additional complication that the negotiations of trade and monetary reform hang together and that the trade negotiations got off to a distinctly unpromising formal start in Tokyo this month. 

The fact is that only a single important modification of the world's monetary system has been achieved by international agreement over the past generation, namely the decision to create SDRs, a process that has now been suspended after only three years. Apart from that, the world's monetary system has been modified by events rather than by deliberation and those who are prepared for a continuing evolution may avoid the disappointment of those who hope for the emergence of some grand plan, 'next spring', or whenever.


The question of aid to developing countries has followed much the same pattern. There will doubtless be talk at Nairobi about the 'progress' that has been made towards the creation of a 'link' between reserve creation and aid in the monetary reform negotiations. The mere fact that this 'link' is now firmly on the agenda of the IMF's Committee of Twenty is a step forward, and so is the fact that a majority of industrial countries have swung to the view that there need not be an insuperable obstacle to the allocation of additional SDRs for aid, either directly or through international institutions like the World Bank. 

But even if this were agreed, it would still remain to be seen whether such a 'link' would indeed provide additional aid or merely replace other forms of providing it. Meanwhile, the net flow of financial resources to developing countries actually declined in real terms last year, although the money total (in dollars) rose slightly.

Here, too, events have been more decisive than international deliberations. Since the end of 1971, the industrial countries have been strongly stimulating their economies, partly to counter the shock to business confidence of the breakdown of the Bretton Woods system, and this has been one of the factors in the commodities boom which primary producers have been enjoying ever since the past year. Moreover, since it is now expected that the industrial countries may make a 'soft landing' into slower though still appreciable expansion, primary producers might benefit from good (if not bonanza) earnings for a while longer.


Meanwhile, like everyone else, developing countries have been adapting their monetary behaviour to events without waiting for the grand reform. They have done this, above all, in the Euromarkets, where a surge in their longer and medium-term borrowing has attracted growing attention and some misgivings. 

Far less noticed, but more important, is the increasing extent to which they have very sensibly been using the Euromarkets for the placement of their growing reserves and, indeed, in the markets as a whole they are net creditors rather than borrowers. In the four years to 1972, the Eurobalances of developing and partly industrialized countries rose almost six-fold to over $40 billion or about 30% of gross funds in the Euromarkets while their liabilities rose about sevenfold to $35 billion or about a quarter of gross liabilities in the markets. 

Here is an odd reversal of financial flows between poor and rich, very much larger than the $5 billion-odd of Eurobond and medium-term Eurocurrency bank financing advanced to developing countries last year amidst so much public fretting. But there is also evidence here that life, for developing countries and others, has a habit of going on, international meetings notwithstanding.