Economic Report of the President

Japanese trade performance in volume terms, and also perhaps theability of the Japanese authorities to attract OPEC funds. Again, thecontinued strength of sterling during 1980 was only in part the resultof high nominal interest rates. Oil independence, the strengtheningcurrent-account position, and the general credibility of the Britishgovernment's commitment to policies of restraint were also important.To sum up, it appears that even with broad consistency in monetarypolicy objectives, problems can sometimes arise from the potentialflow of funds across borders in response to differences in nominalinterest rates. While the threat of such flows can complicate theconduct of monetary policy, this threat need not be so severe as todeprive carefully managed monetary policies of the flexibility theyneed to meet domestic objectives. Flexibility in monetary policy may,of course, occasionally require somewhat greater fluctuations in exchangerates than would otherwise be the case, but if fundamentaleconomic conditions are such as to promote stability, such movementsshould not pose major problems.CHALLENGES TO THE INTERNATIONAL FINANCIAL SYSTEMThe international community possesses a marvelously articulatedset of private and public financial institutions through which fundsare channeled from short-term lenders to long-term borrowers, fromsurplus to deficit countries, from one currency to another, and fromcapital-rich countries to capital-poor developing ones. The smoothfunctioning of this financial system has helped to make possible arapid expansion of international trade and a relatively sizable transferof resources to developing countries, both of which have contributedimportantly to postwar economic growth and development. While thesystem has periodically required attention to keep it up to date withchanging financial conditions, it has adapted and performed its criticalfunctions well over the last three-and-a-half decades.The huge increase in the volume of international financial flowsoccasioned by the recent oil-price rise, following upon a similar increaseonly 5 years earlier, has placed a major strain upon internationalfinancial institutions. Making sure that these institutions cancontinue to conduct vitally needed financial transfers soundly and efficientlyis a second major challenge to economic policymaking in theyears immediately ahead. If the needed transfers of resources fromsurplus to deficit countries are not made, or if they occur in waysthat permit countries to avoid the painful adjustment to higher oilprices, the prospects for sustainable world economic growth and developmentwill be seriously harmed.201