The crisis that is upon us cannot be overcome by realignment of exchange rates alone, although this will be a crucial ingredient of any settlement. Beyond it there is need for re-thinking the reserve settlement mechanism and for a greater coordination of monetary policies among the developed countries. As for the developing countries what is needed most is the restoration of the primacy of rules of conduct in international economic relations that are generally accepted and effectively enforced. In particular, there is an urgent need for restoring the elements of stability that are basic to the par value system, possibly qualified by permission for temporary deviations from par valuc obligations. Even a brief floating of rates, however, has dangers and should be permitted only under international supervision through the granting of additional powers of surveillance to the fund. Moreover, once a currency has settled down to a per value, fluctuations around per should remain within specified limits and preferably within the limits prescribed under the Articles of Agreement. There is also an important need for elaborating the reserve creating and reserve settling functions of the Fund, which now exist in an embryonic form in the special drawing rights.
Until solutions along these lines are negotiated, the prospects of development financing are seriously in jeopardy. The 10 per cent cut in U. S. aid a portent which might affect the willingness of other donors until a proper burden-sharing formula is evolved. The progress toward untying aid, which was being pursued under OECD auspices, has reportedly slowed down. The improvement in terms of aid, which is so desperately necessary if debt service problems are to be contained, may receive a setback, it is disturbing to find that, while foreign aid experts emphasize the developing of new relationships among donors and recipients and deciding aid matters on strictly economic criteria, non-economic considerations are increasingly applied. Hence, it is incumbent on us that as we move toward major innovations in the functioning of the international monetary system we also take a closer look at the assumptions and working of the international development financing arrangements which are focused in the World Bank Group.
The assumptions on which the World Bank was established are increasingly called into question by the growing burden of debt. We welcome the bank staff study on the external debt problems of developing countries, as well as the work done in the past year on the experience of countries that have gone through multilateral rescheduling of debt. While we have now a much better knowledge of the complex factors that lead to situations of excessive indebtedness, there is not yet a disposition to act upon the recommendations of the Pearson Commission and other expert groups both in the UN system and outside for realistic longer-term arrangements. In their continuing work on this subject, we expect that our institutions will focus urgently on both the financial and organizational contributions that they can make in this vital area.
The concept of the Bank as a development lender to creditworthy nations is perhaps tending to deviate from the reality as we know and find it. A stage has been reached where some of the largest developing countries are unlikely to be eligible to borrow from the Bank and where the Bank can, at best, stabilize its loan portfolio. Even a stable portfolio must mean a transfer of resources form these countries to the World Bank. This
