Speech

Strengthening the Link Between Economic and Social Policies Within the Framework of a Globalized Economy -- Remarks by Michel Camdessus

October 26, 1999

spanish   french

I am most pleased at your invitation to reflect on the linkages between economic and social policies against the backdrop of globalization, for this coincides with the renewed emphasis that the international community is placing on this issue. I come here humbly to bring up the curtain on these proceedings, to get things started so to speak, since the high point of your meeting will obviously be the arrival of my friend Juan Somavia, who was so instrumental in helping the world to define its objectives for the poor in the Copenhagen Declaration four years ago and who is now at the helm of the ILO. We are all counting on him to help us advance the cause of workers and the very poor, so that we may achieve a better balance in the world. But the reason why I was so determined to be with you today is that I wanted to take this opportunity to join with you personally-and as representative of the IMF--in your homage to Willy Peirens.¹ At a time when he is looking back at his life's journey, at the turns his life has taken, at his courageous and humanist contributions to the trade union movement, and at the vision of the future that he has helped create, he will certainly realize that the world today is not the world he dreamed of, but he can nonetheless be assured that he has helped workers take charge of their own destinies and thus has contributed to the creation of a more fraternal world.

To my mind the most pressing global issue that faces us as we approach the end of the century is poverty. In fact, the waning 20^th century is not looking as well as it might: at the end of a century of affluence and globalization that has benefited billions of people, four billion more are living in unacceptable conditions that are scarcely better than when the century began. I salute the effort that the WCL is making to address this situation, as expressed in the resolutions of your 24^th Congress in Bangkok in 1997 and more recently in your statement prior to the Annual Meetings of the IMF and the World Bank a few weeks ago, which highlighted the importance you attach to the "social fundamentals." I hope to have a chance to come back to this and to respond to it today.

For several years, international economic policy debate has been preoccupied with the series of major crises in emerging market economies: first Mexico, then South East Asia and Russia, and finally Brazil. These were much more than severe national crises: we faced the possibility of the most serious global crisis since the second world war. But the "worst-case scenarios" did not come about, thanks to the clear focus and collaborative effort of policymakers around the world. Now, in an effort to make sure that the risk and cost of such crises in the future is diminished, new solutions are being formulated, and in many cases implemented. I will touch briefly on the issues relating to the architecture of the international financial system today--how the world is adapting to globalization. But my main focus, given that the emerging market crisis has abated, will be on the opportunity that we now have to extend the benefits of globalization, turning our attention to that much deeper, more persistent crisis, poverty, and the implication it has for economic and social policies.

Adapting to globalization: international and financial reform

Let me first briefly review where we stand with global financial and monetary reform. What are the objectives? What sort of system do we wish to create? Clearly international financial stability must rest upon sound national financial systems and efficient, stable international capital markets. Such a system demands transparency--in policymaking and in the conduct of business activity--through internationally recognized standards and codes of good practice. Building on this golden rule of transparency, the new system would seek to develop sound relations between the private and public sectors in the so-called mature economies, with risks and benefits shared equitably and voluntarily through market-based mechanisms and government regulation. And, it would aim to develop open, integrated capital markets, with progress toward liberalizing capital movements being undertaken by individual countries in an orderly and well-sequenced fashion.

Where do we stand with all these efforts? The international community received a progress report a month ago in the form of the communiqué of the Interim Committee--its last before being reconstituted as the International Monetary and Financial Committee. It pointed to major progress in several key areas: broad agreement on the primacy of prevention, on the importance of transparency and accountability, on the definition of internationally recognized standards, and on the need for financial sector stability. In each of these areas, the emphasis has shifted from defining broad principles to the specific issues of reform and implementation.

Allow me to pause for a moment to emphasize the importance of prevention and transparency. Clearly, even in these areas, a great deal remains to be done, including the definition of codes or broad principles of good conduct, such as in the social area, where the United Nations and the World Bank are responsible for developing principles and best practices in liaison with other organizations. The consultations are making progress.

However, there are two broad areas where full consensus has yet to emerge although progress can be expected in the coming months: first, with respect to involving the private sector in crisis prevention and resolution, and second, considering proposals for a gradual, country-specific approach to liberalizing capital movements that explicitly recognizes a country's individual circumstances. There is a third issue, the choice of exchange rate regimes, which will continue to be debated, even though it is clear that, for the time being, the diversity of regimes will continue to exist.

The solutions that are emerging to the key vulnerabilities faced by the global community all point in one direction, the need for a higher order of international consultation and collaboration. There are responsibilities for all constituencies of the international community--the advanced countries, the emerging markets, and the international financial institutions:

• The advanced countries must contribute by an exemplary approach to the new standards, and by considering ways in which to strengthen their regulation and supervision of institutions engaged in international capital transactions. And they can offer technical and financial cooperation as emerging markets and developing countries face the challenging multiyear task of strengthening financial systems and introducing new standards.

• The emerging market and developing countries face a tall agenda: to continue their reform effort, to manage their economies more prudently and more boldly from a social point of view, and to integrate with the global economy. It is essential that--in common with all countries around the world--they be able to signal their determination to operate their economies according to the highest standards of transparency and good governance and to combat corruption, bringing their national laws, regulatory frameworks, and policymaking into conformity with internationally accepted standards. For the Fund this means pushing ahead with changes in our surveillance--our open and uncompromising policy dialogue with our member countries.

• And we, in the international institutions, as we implement our basic mandates, should continue to adapt our practices to the changing and increasingly complex global financial environment. We must also attain a new level of collaboration to maximize the effectiveness of this policy dialogue. For the Fund this clearly means fostering an ever-deeper working relationship with the World Bank--I will come back to this. But also, we need to reach out beyond our traditional interlocutors, to deepen our dialogue with the business sectors, labor organizations--this is nothing new, as you well know--NGOs, and civil society as a whole. In this we look to organizations such as the WCL, and its national constituents, to reciprocate by deepening the ongoing dialogue.

Extending the benefits of globalization to all countries, particularly the poorest: linking macroeconomic and social policies

Mr. Chairman, in the WCL you have long recognized that globalization is not necessarily a bad thing, but something that has the potential for improving living standards around the world. That potential is being realized, but alas, not fast enough nor widely enough. The poor have not benefited and the world's response is still not up to the fundamental challenge of harmonizing globalization. In conference after conference, we--advanced countries and developing and transition economies--have made pledges to promote development for the benefit of the very poor. Look at the small gray cards that have been distributed. Central among the seven pledges is one--from the Copenhagen Declaration--to reduce by one-half the level of extreme poverty by the year 2015. This, and all the other goals, will not be achieved through piecemeal measures, but through comprehensive collaborative action.

Nowhere is this collaboration more significant than in the linkage of macroeconomic and social policies. Let me therefore address several broad questions. What is the rationale for this link? What framework has been established by the international community to build on this link? Given that the primary mandate of the IMF is macroeconomic policy advice, what are the issues in the social domain that can and should legitimately form part of the IMF's policy dialogue with its members, not only the poorest but also the rest of the membership--emerging market, developing, transition, and advanced economies? And can the world's concerns for social justice be encapsulated in a set of principles and codes of practice that would parallel the standards and codes that are being prepared in the economic and financial spheres? I would stress that many of these issues are part of a lively debate within the membership of the IMF and the international community at large. And while it certainly is a stimulating debate, it is also a deeply serious one given that the livelihood of so many people will be affected. Therefore, it is a debate where consensus is urgently needed.

First, what is the rationale for the link between social and macroeconomic policies? As I have said, poverty is for many, including myself, the more important and deeper crisis for the world at present. Persistent widespread poverty entails systemic risks that I need hardly elaborate, and calls for urgent and decisive action. The renewed emphasis given to these issues by the Fund is, contrary to the views of some, an initiative which remains very close to our core mandate and basic experience. After all, we have only to recall that one of the six purposes of the IMF articulated in Article 1 reads as follows:

"to facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy." (Italics added.)

From its experience as a monetary institution, the IMF has learned much about the connections among sound monetary and economic policies, high quality growth, and poverty reduction. This experience may be summarized in a few propositions:

• One, it is now solidly demonstrated that price stability, fiscal discipline and structural reform promote economic growth.

• Two, economic growth is a sine qua non and the most significant single factor that contributes to poverty reduction.

• Three, there is increasing evidence that lower inflation also enhances income equality.

In other words, yes, macroeconomic adjustment ultimately benefits the poor. And structural policies also: dismantling product and factor market rigidities helps reduce poverty by increasing not only the supply of essential goods, but also the poor's access to them.

All of this is now abundantly documented.² We now are better able to recognize the interconnections among these various elements. Sound macroeconomic policies can promote poverty reduction. But now it is also much better understood that the effect also runs in the other direction. The relation here is not linear but circular. To maintain the discipline of strong economic and financial policy long enough to eradicate inflation and to contribute to sustainable growth, it must be implemented in a context in which integral parts of government policies include the fight against poverty, the adoption of appropriate social safety nets, and a recognizable effort to reduce severe inequalities in income distribution over time. This point is essential as far as I am concerned and we must see to it that it is universally understood. By giving legitimacy to and fostering broad-based support for sustained reform, these social policies help to create the political environment in which sound economic policies can take effect.

In a word, it is clear that sustained poverty reduction will not be achieved without sound macroeconomic policy. But equally, sound economic policies cannot be sustained if "patent inequity" is left unaddressed.

This brings us to the second question: what framework should the international community establish to build on the link between economic and social policies? Following an in-depth analysis of our experience thus far we reached agreement at our Annual Meetings last month to resolutely elevate the fight against poverty to center-stage in the IMF's programs for the poorest countries. To our mind, the fight against poverty is an essential component of the reform of the international monetary and financial architecture. The efforts on these two fronts are mutually supportive. Strengthening one improves the effectiveness of the other, and vice versa. Social and economic policies go hand in hand. This is evident in a new strategy for the poorest countries--78 in all--including the 41 most heavily indebted, which emphasizes:

• taking advantage of the readiness of key creditor countries to expand debt reduction for the heavily indebted poor countries (HIPCs) so as to encourage and help them to allocate the resources thus freed up to poverty reduction and human development;

• organizing much closer cooperation in this domain between the two Bretton Woods institutions so that we may more effectively serve the heavily indebted poor countries. As you know, of the two institutions, it is the Bank, not the Fund that has developed the expertise to help countries develop their social policies. The poverty reduction strategies that will be a central feature of our new facility will allow coordinated input from international agencies--the World Bank, the United Nations, other donors--and civil society in the interested countries to assist governments in implementing the broad social objectives, while allowing the IMF to stay in the domain of macroeconomic policy and its coordination with social priorities; and

• to this end--this is the third component--establishing a new, highly concessional lending instrument whose name describes its purpose: the Poverty Reduction and Growth Facility (PRGF).

What does this specifically mean for the IMF? For many years, IMF-supported programs have explicitly incorporated social considerations but the interrelationship between growth and social development now needs to be more precisely defined. That is where the gray cards will have their role to play. I believe that if we are able to convince the governments to seriously pursue these seven objectives, the result should be abundant growth and a strengthening of the virtuous circle that I mentioned earlier.

We can achieve this only by continuing and deepening our dialogue with the ILO. Hence the importance that I attach to the initiatives that Juan Somavia will certainly undertake.

* * * * * *

Mr. Chairman, your letter of invitation suggested that I focus mainly on the problems of reconciling economic and social policy in the world's poorest countries.

I could certainly say a great deal more on that subject, but I have already more than exhausted, if not my audience, then at least my allotted speaking time. And yet there are many other subjects that ought to be addressed, particularly the role of the IMF in the dialogue with member countries outside the context of programs or the great debate on the international monetary and financial architecture. These are subjects on which the world is still divided. I am counting on your questions to give me the opportunity to shed light on some aspects.

But in concluding--and thinking of the great trade unionist and humanist that Willy Peirens has been--let me recall the values behind this effort, the values that seek to humanize a world in search of unity, the values in which people can find common ground. Three are closely interrelated: responsibility, solidarity, and citizenship

Responsibility because now more than ever every country, no matter what its size, is responsible not only for its own destiny but for that of the other countries of the world; solidarity because it is clear that we will not make progress in reducing poverty without a large-scale effort of international solidarity; and citizenship because it is urgent that we broaden our citizenship to cover the new dimensions of problems that have become global problems.