Summary: Gottfried Haberler, “The case against the Link”

This file is a short economics chapter, first published as a 1971 journal article, on proposals to connect IMF reserve creation—especially special drawing rights, or SDRs—with development assistance to less developed countries. Haberler’s scope is narrow but consequential: he does not debate whether rich countries should give aid, but whether aid should be produced through an international monetary mechanism.

This chapter does not question the desirability of the basic objective. In fact the writer finds it wholly laudable. But it is argued that a sizeable increase in the flow of aid cannot be achieved through the Link and that the Link would be an inefficient method to provide aid.

The chapter proceeds by separating two questions that advocates of the Link tend to join: how international reserves should be created, and how development aid should be financed and distributed. Haberler’s first objection is institutional. SDRs, still new after the Rio decision and the 1970 allocation, already required delicate management. If their creation became a vehicle for aid, each reserve decision would become a distributive struggle between LDCs pressing for larger allocations and MDCs resisting them. His conceptual move is to insist that reserve allocation and aid allocation obey different logics.

This argument again mixes reserves and aid.

For Haberler, reserve needs relate to payments, trade variability, and liquidity management; aid claims relate to income, wealth, and welfare. Collapsing these criteria would neither rationalize reserves nor reliably expand aid. The next stage of the argument is macroeconomic: the Link is a form of inflationary finance. SDRs allocated as reserves need not be spent, but SDRs allocated for development assistance are designed to be spent.

With moderate allocations of SDRs and only a small portion subject to the Link, the inflationary effect may quantitatively be small, at least at first. But it is bound to increase steadily and using an essentially inflationary method of liquidity creation is bad in principle.

Haberler then turns to more sophisticated defenders of the Link, especially John R. Karlik and Tibor Scitovsky, who concede inflationary dangers and seek a non-inflationary version. Their scheme would have deficit industrial countries acquire SDRs from LDCs through tied loans or grants, supposedly sparing surplus countries from extra inflationary pressure. Haberler doubts both the clarity and the practical yield of this proposal: deficit countries are usually fighting inflation or external imbalance, and if they have unemployment, ordinary monetary policy, depreciation, or budgetary aid would be cleaner tools.

I find it very difficult, I must confess, to visualize the working of the Karlik–Scitovsky kind of link. The details have not been presented and I shall not try to spell them out. But whatever they are, I do not believe that the Karlik–Scitovsky scheme could produce much additional aid for the LDCs.

The chapter’s normative center is the comparison between aid through the Link and aid through the budget. Haberler argues that foreign aid should be visible, legislated, and appropriated through ordinary parliamentary processes, not hidden inside monetary operations or shifted by the accidental path of SDR use. He is especially critical of the claim that an “organic” Link would be painless to donor countries.

One encounters frequently, however, the statement that aid through the Link, or through the ‘organic’ link, ‘would indeed be painless’. This is a very misleading statement.

The final section develops the burden-sharing argument. Conventional aid targets, such as a common percentage of GNP, may be imperfect, but at least they express a principle of equitable distribution. The Link, by contrast, would distribute real costs through IMF quotas, balance-of-payments positions, and the unpredictable lodging of SDRs. Haberler likens this to replacing a tax system based on income and wealth with one based on a lottery.

Under the Link system the real distribution of the burden of aid, in other words the real contribution of different donors, is practically impossible to foresee.

The relevance of the chapter lies in this disciplined separation of monetary architecture from fiscal transfer policy. Haberler’s case is not anti-developmental; it is an argument that genuine aid must be financed openly and allocated deliberately. His conclusion is that the Link promises more than it can deliver, obscures the real cost of aid, risks inflationary reserve creation, and replaces accountable public finance with an arbitrary international mechanism.