TNAG-2515-FCO40-3669-Future-of-Hong-Kong-International-Rights-and-Obligations-Sub-1992 — Page 166

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therefore supported the continued link to the dollar. He particularly

disagreed with Bonzom's suggestion of a single step appreciation. After the

initial change in the exchange rate, there would be no greater control over monetary policy than existed now. This point was also made by Al Tuwaijri

(Saudi Arabia), who also supported the Hong Kong authorities' commitment to

maintaining the current exchange rate.

7.

De Groote (Belgium) said that it was important to weigh up properly

the costs and benefits of current policy, which implied a continuing steady rate of uncomfortably high inflation, against the potential costs and benefits

associated with the possible alternatives. He wondered whether it was

really feasible to control property sector inflation while negative real

interest rates prevailed, and how much room there was in practice to increase

the supply of imported labour without incurring social problems and other

potential difficulties associated with changing wage structures. He did not

favour introducing a consumption tax at this stage because, in his view, it

could aggravate the inflationary pressures. In addition, he suggested that

introducing a broadly based income tax might simply lead to greater 'fiscal

emigration'. In these circumstances, he thought that the authorities might

ultimately have to consider an adjustment to the exchange rate. After

mentioning various possible ways that this could be carried out, he finally

suggested that, in general, it was easier to implement a discrete revaluation

or devaluation, when it is accompanied by another more conspicuous policy

change, like for example a shift to using the SDR as the peg instead of the US

dollar.

8.

Vegh (Argentina) agreed with the assertion in my Buff statement that

the linked exchange rate system built in discipline to the monetary system,

under which money supply adjusted to the balance of payments pressure and the

government had little discretion to pursue an expansionary monetary policy

which would aggravate inflationary pressure. Recent real appreciation of the

exchange rate was acting as an automatic stabiliser. On fiscal policy, he

agreed with the position of Wei in his Buff who had warned of the risks

associated with excessive growth of government spending. However, he noted

that the whole world was now trying to implement the sort of free market, low

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it.