Speech

Trade and Development - Address by Shigemitsu Sugisaki

March 17, 1999

Indeed, one of the great disappointments of the last two decades has been the failure of living standards in the world's poorest countries to converge toward those of the richer countries. Over this period, average per capita incomes in the Least Developed Countries (LDCs)¹ have stagnated. Despite recent progress, per capita income in these countries averaged only $228 in 1996, the same level, in real terms, as in 1980. This disappointing performance, despite all the efforts so far, underscores the urgent need to look for far reaching bold solutions to enhance the growth prospects of the LDCs. There must, I believe, be three critical components of such a strategy:

• action by the LDCs themselves to sustain and strengthen their own policies for growth and development;
• action by the international community to improve the external financial environment, particularly through appropriate debt relief and concessional assistance; and
• perhaps the most important in this forum in view of the close links between trade and economic growth, improved access to industrial countries' markets that would increase incentives for trade and investment activities in the LDCs.

Despite the setbacks of the past two decades, recent economic performance of the LDCs has been encouraging. Real GDP growth improved markedly during 1995-98, compared with the first half of the decade, allowing for an increase in real per capita incomes of almost 2 percent a year. Moreover, average inflation has declined and other indicators of macroeconomic performance have also shown marked improvement. This improved performance, including in the context of IMF-supported programs, enhances the scope for further progress. Sustained growth with low inflation is central to addressing poverty and improving living standards. The events of the past 20 months have clouded the external environment: commodity prices are depressed, economic growth has slowed and has reduced demand for LDC exports, and external financing conditions have tightened. In these circumstances, it is essential that countries not turn away from open markets, but further invigorate market-oriented reforms. Only by embracing openness and liberal market-oriented policies will these countries share in the benefits of globalization.

To sustain and strengthen the improved economic performance of the last few years, the policy framework needs to be reinforced. LDCs must continue the momentum of policy reform aimed at high-quality growth. This entails:

• prudent fiscal and monetary policies, and an appropriate and sustainable exchange rate regime that contributes to price stability and to a sustainable external current account position. These are essential elements of an environment that encourages productive economic activity. But they are not sufficient in themselves.
• supporting structural policies, which are critical to the development of a strong supply response to export opportunities. Although the design of these must, obviously, be country-specific, policies that are particularly important include a liberal open trade regime, the removal of subsidies and excessive regulations, appropriate government spending on the infrastructure, financial sector reforms, privatization, and institutional reforms to ensure property rights. Of these, open trade policies are particularly important to promote exports, remove anti-export bias, and attract investment.
• a high quality of governance and strict accountability in policymaking, which is needed to make economic reforms successful in promoting long-run prosperity. Lack of transparency and accountability in public policymaking invites rent-seeking behavior and corruption. The impact of weak governance can also undermine macroeconomic policymaking and implementation, and deter both domestic and foreign direct investment. A weak rule of law and failure to protect property rights also substantially undermines productive activity.

Efforts of the LDCs to implement the kind of policies outlined above need to be supported by concessional assistance and debt relief. These are also critical inputs to achieving sustainable growth and development, and for poverty reduction. On the part of the IMF, the adjustment efforts of many LDCs are being supported in the context of ESAF programs. This, however, is not enough.

Debt Relief

Enhanced debt relief is a much-discussed topic. Whatever the outcome of these discussions, enhanced relief--including debt forgiveness--will only be effective if it complements and reinforces the reform policies of debtor countries and leads to an increase in resource flows. It should augment, not replace, other concessional inflows and be linked to efforts to enhance domestic savings and investment. For this reason, strong policy reform has been central to the Initiative for Heavily Indebted Poor Countries (HIPC), which the international community has been implementing for 2 1/2 years. Thus far, 12 countries have been reviewed for assistance under the Initiative; US$6 billion has been committed to seven countries, and assistance has been released to Uganda and Bolivia. Moreover, the Initiative has been implemented flexibly: the track-record requirements for six out of the seven early cases have been shortened; programs supported by post-conflict emergency assistance can now be included as part of the track record; and in all cases targets have been set in the lower half of the debt-to-export target range.

The IMF, together with our colleagues at the World Bank, welcomes recent calls by the Group of Seven (G7) countries for a reassessment of the HIPC framework with a view to further strengthening the Initiative. We have begun consultations with interested stakeholders--member countries, other multilateral creditors, NGOs, religious groups, and other interested institutions. We will report to our respective Executive Boards shortly on this consultative process, and the issue is to be considered at the June G-7 Summit in Cologne.

I should reiterate that the fundamental objective remains sustained poverty reduction. The experience of successful reformers shows that sustained policy implementation is required to attain this objective. This also requires strengthening the incentives to undertake the needed reforms. While we agree that debt relief should be provided to more countries, a general undifferentiated shortening of the required track record would not by itself strengthen the incentives to implement policies that promote growth and raise social spending. We do the people of the heavily indebted poor countries no favors by agreeing to earlier debt relief without the necessary supporting policies. In our view a better way of broadening eligibility for debt relief would be to reconsider some of the existing debt sustainability targets.

In discussing the possible enlargement of the HIPC Initiative, the constraints on resource availability must be taken into account.² Debt reduction competes with other elements of development assistance, and it is a major concern that the Initiative in its current form is still not fully funded. The IMF welcomes the growing consensus in favor of limited gold sales as proposed by the Managing Director. However, even with such gold sales, further bilateral contributions by governments will be required to secure full funding of the IMF's contribution to the Initiative. There is also a shortfall in the funding of the contribution of some other multilateral creditors, including the African Development Bank. This brings me to the subject of official development assistance (ODA).

Official Development Assistance

The declining trend in ODA flows over the past several years is a major cause of concern. These flows have fallen steadily to a historically low level of about 0.22 percent of GNP--well below the United Nations target of 0.7 percent of GNP. Action is required to reverse this declining trend and increase ODA to support countries' efforts to strengthen development prospects and raise the very low living standards prevailing in the poorest countries. The impact of declining flows of concessional assistance partly offsets the beneficial impact of the HIPC Initiative.

Strengthening private capital inflows is, of course, critical and will be greatly enhanced by the adoption of the type of policy framework discussed above. But for the poorest countries in particular, it will be some time before private flows increase sufficiently to effectively complement ODA. Private capital flows tend to be concentrated in a limited range of sectors in the relatively more advanced developing countries. They do not reach countries with the poorest infrastructure and the most difficult social conditions. The need for reviving ODA flows has been reinforced by the financial crisis, which has underscored the challenges of sustainable development and of reducing potential vulnerabilities of LDCs.

Official assistance is effective only when it complements locally-led efforts. Aid flows must be supported by a transparent policy framework aimed at achieving quality sustainable growth. The need is for an integrated approach to economic policy design, combining international financial support with better targeting of resources to priority development goals. Improving infrastructure, basic health and education, and governance, as well as environmental sustainability, have emerged as key areas requiring donor assistance. Donors must improve coordination with the authorities and strengthen their bilateral assistance to countries that have demonstrated a commitment to reform.

The third critical element of efforts to improve the growth performance and prospects of the poorest countries concerns trade. A growing body of empirical evidence and analysis demonstrates the close links between export performance and economic growth. Thus, enhancing export potential and incentives for productive trade and investment in the LDCs is an essential element of a growth-oriented strategy for those countries. Here, the rules and operation of the global trading system have a key part to play.

The marginalization of the LDCs in world trade justifies extraordinary efforts and actions on the part of the major beneficiaries of the global trading system. Moreover, the circumstances of the LDCs warrants exceptional treatment. Existing preference schemes have not been effective because they are complex, temporary in nature, and contain numerous exemptions and exclusions in areas of key interest to the LDCs. In the United States, for example, only some 1 percent of imports entering under the Generalized System of Preferences come from the LDCs.

In view of the above, WTO Director-General Ruggiero has made a bold proposal in advocating across-the-board, duty-free access for the exports of the LDCs to the markets of the industrial countries. We endorse Mr. Ruggiero's proposal. Enhanced access to industrial country markets for goods and services from the LDCs would substantially encourage them to undertake the domestic reforms necessary to exploit new opportunities. In this regard, the enhanced duty-free access should be bound in the WTO to give the necessary security to domestic and external investors. Such exceptional actions by the industrial countries to enhance export and investment incentives in the LDCs should, in our view, be matched by appropriately ambitious trade reforms in the LDCs, also bound in the WTO.

Reform of the global trading rules should also include a review of the "special and different treatment" accorded the LDCs in the Uruguay Round, which exempts them from certain trade rules and allows them to postpone the implementation of others. If certain rules, and the economic policies underlying them, are considered beneficial, then the LDCs should meet the same standards for these policies as other countries. Special and differential treatment for the LDCs should instead be a positive force. For example, the LDCs need special access to technical and financial assistance to raise their capacity to implement reforms, including multilateral obligations from which they may now be exempted. Here, I would note that the Fund and five other agencies are working together to strengthen our trade-related technical assistance to LDCs within the process agreed at the High-Level Meeting held here in Geneva in October 1997. Moreover, ways should be found for the LDCs to have better access to the dispute-settlement provisions of the WTO through lowering the costs involved.

Another key reform is to liberalize domestic policies and reduce barriers to trade against those products in which LDCs have the potentially greatest comparative advantage. Markets for agriculture in the world's richest economies remain highly distorted by import restrictions and export and production subsidies. Indeed, subsidies to agriculture in OECD countries average about 1.5 percent of GDP. The Uruguay Round made important advances in this area, and these should be followed by further ambitious reforms. This would enhance LDC export potential. It would also be a significant benefit to the industrial countries themselves, through more efficient resource allocation, reduced budgetary costs, lower prices, and generally enhanced consumer welfare. Textiles is another area of LDC comparative advantage that remains subject to restrictive trade policies. Here again the Uruguay Round made important advances on the removal of quantitative restrictions, but implementation has so far been substantially backloaded.

Lastly, the continued strengthening of the WTO and the rules-based system is also important to the LDCs. The WTO provides transparent and enforceable multilateral rules, broadly based on sound economic principles, that help ensure a level playing field for traders from all countries, rich and poor.

In concluding, let me again stress the need for extraordinary efforts to address the plight of the world's poorest countries, in order to raise significantly their living standards. We must encourage and facilitate the adoption of appropriate policies, and also ensure that when the countries concerned make the necessary efforts to integrate with the international financial and trade systems, these systems will work in their favor. This latter is an essential complement to actions by the international community to improve the external financing environment.

Together with debt relief and enhanced official development assistance, reforms of the multilateral trading system aimed at the integration of the LDCs would be important components of an international environment that would help ensure the success of domestic reforms in the countries concerned. Moreover, the trade reforms discussed in this paper would not be costly; the LDCs account for less than one half of one percent of world trade. In our view, appropriate actions by all concerned in the areas outlined here would be the clearest example of policy coherence between the IMF, the World Bank, the WTO, and our member countries.

¹The term Least Developed Countries refers to a group of 48 countries classified by the United Nations as the world's poorest countries. However many of the problems discussed in this paper are shared by a somewhat broader group of relatively poor developing countries.

²A paper on "Tentative Costing of Illustrative Alternatives to the HIPC Initiative Framework" is available on the Fund website (/external/np/hipc/cost/cost.htm).