demonstrate that the obligation to contribute to an approved buffer stock would create difficulties for its balance of payments. The "gold tranche" must be drawn before a drawing can be made under this facility. Otherwise the conditions are the same as for compensatory finance drawings. The limit on total drawings under both facilities together is set at 75 per cent of the quota. 6. Little use is currently being made of the buffer stock financing facility. Only one drawing of 5.2 million special drawing rights (SDR) is outstanding. On the other hand 18 countries have outstanding drawings under the compensatory financing scheme totalling SDR 524.6 million. In January the IMF Interim Committee, following a proposal from the Indonesian Minister of Finance, asked the Executive Board to consider possible improvements in both facilities. THE LOMÉ CONVENTION COMMODITY SCHEME 7. The STABEX scheme approved at the Lomé Convention differs from the IMF Compensatory Finance Facility in that instead of covering the total of exports to all destinations it is limited to certain products and, for most of the benefitting countries, related only to their exports to the EEC. On the other hand the scheme is more concessionary in that in most cases the benefits, though limited in quantity, do not have to be repaid. The aim of the scheme is to offer some compensation to exporters when, through no fault of their own, their earnings from exporting certain products to the EEC fall below the levels they have become used to. 8. Beneficiary countries. All the 46 ACP countries that have signed the Convention of Lomé are in principle eligible to draw on the scheme. Whether they do so, and the amount of their drawing, depends on whether they export any of the products in question in the minimum quantities, and on whether export earnings from the product (s) in a particular year fall compared to recent trends. Thus the fund is not pre-allocated by country and it is difficult to predict how the aid will flow. 9. Size of fund. The Convention allocates a maximum of 375 million units of account (mua) to the STABEX fund in 5 annual installments over the life of the Convention. Most of the money is expected to be disbursed by the end of the period. 10. Eligible products. The fund is open to countries exporting one or more of the following products: ground nuts and their products; cocoa products; coffee products; cotton products; coconut products; palm oil; nuts and kernels, oil and cake thereof; hides, skins and leather; wood products (except plywood); bananas; tea; sisal; iron ore. 11. Mechanism. To become eligible, exporting countries have to show that the product in question accounts for at least a certain proportion of their total exports to all destinations. This "threshold of dependence" is fixed at 7.5 per cent for all countries other than sisal exporters (5 per cent) and the "least favoured", landlocked, and island countries (2.5 per cent).3 12. Exporters are entitled to draw on the fund whenever the f.o.b. value of their exports to the EEC of an eligible product (see paragraph 10) falls sufficiently in relation to past trends. The trend is defined as average earnings from the export of the product to the EEC market in the four years prior to the year in question (the "reference level" of earnings). Small fluctuations are ignored, but the basis of a claim exists whenever exports fall by 7.5 per cent or more against the reference level (2.5 per cent or more in the case of the "least favoured”, landlocked and island countries). This is the "trigger threshold". 13. The resulting shortfall creates a "basis for transfer". There is no guarantee that the whole of this amount will be covered by compensation from STABEX since the fund is not open-ended. If total claims in any one year (allowing for carry-over of unused funds from the previous year and if necessary the calling forward of funds from the next year to meet very heavy claims) exceed the funds available for that year (one-fifth of 375 mua, or 75 mua plus any repayments) all claims would have to be scaled down. 14. Administration. Whenever an ACP member puts in a claim this will be processed by the Commission and a report sent to the STABEX management com 3 These are as follows: The Bahamas, Barbados, Botswana, Burundi, Central African Republic. Chad. Dahomey, Equatorial Guinea, Ethiopia, Fiji, the Gambia. Grenada, Guinea Guinea-Bissau, Jamaica. Lesotho, Madagascar, Malawi, Mali, Mauritania. Mauritius, Niger, Rwanda. Somli. Sudan. Swaziland Tanzania, Togo, Tonga, Trinidad and Tobago, Uganda, Upper Volta, Western Samoa and Zambia. mittee. This committee, containing representatives from the EEC and ACP, will meet at least once annually and will have to balance total claims on the scheme with the funds available. The scheme does not rule out interim payments being made in advance of a definitive settlement, but the details of this, and numerous other parts of the scheme, have yet to be worked out at the official level. 15. Conditions of finance. The transfers are interest free. There is some, limited, provision for repayment into the fund by countries whose exports rise in relation to the reference level. However, this only counts when the rise is due to a price increase over that in the reference period (and does not apply unless the quantitiy exported is at least as great as that in the reference period). Nor would any repayment ever exceed the amount of transfers already received: Finally, more than half the beneficiary countries-those who are "least favoured" in the list above-are exempted from the repayment obligation. The use of the transfers is left entirely to the discretion of the recipient country-there is no obligation to compensate the producers, for example. OTHER SCHEMES FOR STABILIZING EARNINGS 16. There is a wide range of possibilities for further schemes for the stabilisation of earnings. One fundamental question is whether to base them on earnings from certain commodities only, as in STABEX, or on the total exports of the developing countries, as under the IMF scheme. Questions also arise on the references levels of earnings from which short-falls would be measured, on the terms of the finance, on the repayability of benefits, on financial limits and on whether payments should be automatic or discretionary. These questions are discussed in Annex XIX. ECONOMIC EFFECTS OF EARNINGS STABILISING SCHEMES 17. The remaining paragraphs in this note analyse the effects of earnings stabilisation schemes that are not based on concessional finance. The use of such schemes for transferring resources to the poorer countries raises separate issues. 18. Producing countries. In the absence of price or earnings stabilisation schemes primary product exporters are vulnerable to sudden up and downs in their export earnings as prices rise and fall. Upswings are obviously better than downswings but can result in increases in money supply and imports which are difficult to reverse in subsequent years. Downswings, if not cushioned by foreign exchange reserves, require dislocating cuts in imports-usually of investment goods because of the political difficulty of cutting consumer imports, particularly of food-and/or emergency borrowing-short term and at high interest rates. Primary product exports are also usually a major source of tax revenue and a drop in prices cuts government revenues directly as well as indirectly if imports and therefore import duty revenue decline. Not all primary product exporters suffer to the same degree, some have a more diversified range of exports than others and some products' prices fluctuate more than other. The worst affected are commodity producing countries such as Ghana, Chile and Zambia which are (or have been) heavily dependent on one commodity (cocoa or copper) whose price fluctuates widely. Annex XVIII on the main commodity exporters shows what proportion of their total exports is formed by the given commodities and gives an indication of the degree to which price fluctuations affect their economies. 19. Effective price or earnings stabilisation schemes would reduce these problems but earnings stabilisation schemes have two additional advantages. First, they come into force if a country's problem is due not only to falling prices but also to crop failure or mining disaster, for example. In this respect earnings schemes are definitely superior to price schemes which, by keeping prices lower in times of scarcity, exacerbate the fall in export earnings due to loss of output. Second, if a country is heavily dependent on more than one export commodity, some of which are not suitable for commodity agreements, earnings stabilisation linked to total exports will provide more comprehensive assistance. The major disadvantages of earnings schemes for exporters is that, in most cases, the funds will have to be repaid whereas with price stabilisation schemes, if the target prices are well-judged, the exports' contribution will be limited to rare downward adjustments in prices and initial contributions to stockpiling facilities. Questions would no doubt arise as to the criteria for eligibility under any scheme. 56-944 - 75 15 20. Export earnings stabilisation schemes based on individual commodities will benefit chiefly those countries for which the particular commodity forms a large share of total exports (see Appendix XVIII). The spread of benefits will be similar to that achieved by commodity price stabilisation schemes except that producers of commodities for which for some reason price stabilisation is impracticable could be included, and that developed country exporters could be excluded. Schemes based on total export earnings could benefit a wider range of countries, depending on what criteria for eligibility were agreed. 21. Consuming countries. The cost to importers would be the financial contribution they had to make to the operation of a scheme. The existing IMF scheme contains an element of concessionality deriving mainly from its favourable position in the world's financial structure rather than from subsidisation. Any new scheme would have to be able to operate at least as advantageously as this. 22. To the extent that any scheme succeeds in stabilising earnings, consumer countries can expect to benefit from a higher level of exports to producer countries than would otherwise be possible. Stability of earnings should also help to maintain investment in producer countries, thereby reducing the risk of future capacity shortages. PRESG DEPARTMENT OF STATI May 13, 1975 • No. 250 As Prepared for EMBARGOED UNTIL DELIVERY, SCHEDULED FOR 1:00 P.M. CDT (2:00 P.M. EDT) TUESDAY ADDRESS BY THE HONORABLE HENRY A. KISSINGER before the KANSAS CITY INTERNATIONAL RELATIONS COUNCIL MISSOURI May 13, 1975 STRENGTHENING THE WORLD ECONOMIC STRUCTURE Yesterday I spoke of the political challenges facing us in foreign Our challenges in the economic field are no less urgent and impor- The paramount necessity of our time is the preservation of peace. For further information contact: -2 PR #250 output and 8 percent of our manufactures. We import far more raw materials than we export; oil from abroad is critical to our welfare. American enterprise overseas constitutes an economy the size of Japan's. America's prosperity could not continue in a chaotic world economy. - - Conversely, what the United States does or fails to do has an enormous impact on the rest of the world. With one third of the output of the non-communist world, the American economy is still the great engine of world prosperity. Our technology, our food, our resources, our managerial genius and financial expertise, our experience of leadership, are unmatched. Without us, there is no prospect of solution. When we are in recession, it spreads; without American expansion, the world economy tends to stagnate. For thirty years, the modern economic system created at the Bretton Woods Conference in 1944 has served us well. Its basic goals open, equitable and expanding trade, the stability and orderly adjustment of currencies, coordination in combatting inflation and recession have largely been achieved. World growth has surpassed any prior period of history. - But the system is now under serious stress. It faces shortages and disputes over new issues, such as energy, raw materials, and food. And many of its fundamental premises are challenged by the nations of the developing world. Obvious crises are the easiest to meet; the deepest challenges to men are those that emerge imperceptibly, that derive from fundamental changes which, if not addressed, portend upheavals in the future. These contemporary challenges to the world economic structure must be overcome, or we face not only an end to the growth of the last thirty years, but the shattering of the hopes of all of mankind for a better future. Our economic strength is unmistakable. But what is tested now is our vision and our will and that of the other nations of the world. - The Existing System The international economic system has been built on these central elements: |