International Cooperation for High-Quality Growth: The Role of the IMF at 50--Address by Michel Camdessus
December 21, 199495/1
Managing Director of the International Monetary Fund
at the Debating Club, Complutense University
Madrid, December 21, 1994
It is a great pleasure for me to return to Madrid--where, as you know, the IMF and the World Bank held their rather eventful Annual Meetings almost three months ago--and to visit this University, and to discuss with you some aspects of the recent evolution of the IMF. The Madrid Annual Meetings were special in many ways, and one was that they took place in the context of our 50th Anniversary. It was 50 years ago last July that the Bretton Woods Conference produced the agreements that led to the birth of the IMF and the World Bank. Such anniversaries provide excellent opportunities for reflection, and naturally the ministers and central bank governors from our 179 member countries, and the crowd of officials and international bankers who were also meeting in Madrid had to consider a question akin to the one that Hamlet asked: is the IMF, established by 44 countries in the very different circumstances of 1944, still relevant to our times? Their answer was a very clear "yes"--and it is my answer also--and I shall try to indicate some of the reasons why, by telling you, first, about some of the policy agreements that were reached at these Annual Meetings; second, about the Fund's work to help the countries in transition; and third, about the Fund's efforts on behalf of the poorest countries in the world.
But let me begin by reminding you why the IMF was established. Its purposes, set out 50 years ago, are, in a nutshell: to promote international monetary cooperation and exchange rate stability; to assist in the elimination of exchange restrictions which hamper the growth of world trade; by facilitating the balanced growth of international trade, to help promote high levels of employment and real income, and economic development; and to help member countries solve their balance of payments problems, including through the temporary provision of financial assistance.
These are the purposes the Fund has been serving over the past 50 years, through its policy advice to member governments and the financial and technical assistance it has provided to them. Indeed, these purposes of the Fund have become increasingly vital over the past five decades, for consider the changes the world has seen. In particular, consider the implications of globalization, one of the most striking developments of the closing decades of the 20th century. Markets have become more closely integrated internationally--partly a result of progress in technology, but also something to which the Fund has contributed by promoting an open, multilateral system of trade and payments. National economies have therefore become more closely linked and interdependent. And formerly centrally planned economies are now in the process of integrating themselves into the global market economy. The Fund's purposes have become increasingly vital because developments like these have meant that the need for international cooperation in economic and monetary matters, and for international monetary stability, has become even more essential. With the effects of each country's policies spilling over on to other countries more than ever before, international cooperation is more essential than ever to promote high levels of real income and employment, and economic development, and to promote in all countries the broader objective of what I call high-quality growth. By this I mean economic growth that is sustainable, that reduces poverty and distributional inequalities, that respects human freedom and national cultures, and protects the environment. High-quality growth is an ambitious objective indeed. But it is the only way that the world's economic and social challenges can be met. And more than ever in today's highly integrated world, it can be attained only through international cooperation.
So how does the IMF serve international cooperation and the purposes for which it was established? One way is through what we call surveillance, and another is by means of direct technical and financial assistance. Let us begin by looking at this "surveillance" by the IMF over member countries' economic policies. This responsibility for exercising "firm surveillance" over the exchange rate policies of members includes looking, in one country after another, at all policies affecting exchange rates. I would say that surveillance is at least on a par with financing as a central activity of the IMF. When the Fund is in the headlines, the story is usually about its lending to some member country. But lending is essentially a temporary activity vis-a-vis a given member undergoing a crisis, whereas surveillance continues year-in and year-out, and applies to all members. IMF surveillance is conducted through our annual consultations with individual member countries; through policy dialogue with members between consultations, as needed; and also through our consideration of policy issues in a global context, notably in our twice-yearly discussions of the world economic outlook, which continue with discussions at the level of ministers and central bank governors in the Fund's Interim Committee, which last met here in Madrid three months ago. It is important to remember that this Committee is the only forum where economic policy makers representing virtually the whole world--finance ministers and central bank governors--meet regularly to reach understandings on policies and policy cooperation. It is through the annual consultations that each member meets its obligations to subject its policies to the scrutiny of the Fund, so that the rest of the membership has an opportunity to comment on those policies and especially their effects outside the country concerned. I should note as well that these discussions are not limited to macroeconomic, balance of payments, and exchange rate policies, but more broadly touch on all policies that significantly affect the economic performance of a country, and their international repercussions. These may include labor market, social security, trade, and environmental issues, and so on, which is no mean undertaking.
The Fund has been making every effort to make surveillance more continuous, especially for the largest countries, whose policies have the greatest impact on the global economy, and more effective. The effectiveness of surveillance has become all the more important as the growth and globalization of financial markets have made the international monetary system more vulnerable to inadequate policies. The globalization of financial markets, for all the benefits it brings, also transmits the effects of weak policies among economies faster than ever before.
What was done at our Madrid Annual Meetings to strengthen surveillance? Even if the spotlights of the media concentrated on more controversial and spectacular events, one of the most important developments was that the Interim Committee issued a Declaration--it has become known as the Madrid Declaration--which sets out a framework of policies for sustaining and using wisely the current economic recovery. It refers to the main elements of the economic policy strategies that industrial, developing, and transition countries need to implement to sustain and improve their growth performance. I should point out to this audience that it even refers to the need to improve education and training as part of the efforts required to strengthen growth and reduce unemployment in the industrial countries. But what is more, the Committee agreed to establish a methodology for reviewing progress in implementing the policies set out in its Declaration, beginning at its next meeting in April; this is a significant step indeed. Together with the IMF's Executive Board, we are now putting in place this practical review process, so that the Madrid Declaration can represent a significant step forward in the Interim Committee's contribution to economic cooperation and the IMF's global surveillance.
Let me now turn to what the IMF has been doing, through its technical and financial assistance, to help the countries in central and eastern Europe and the remainder of the former Soviet Union achieve a successful transition from central planning toward market-based systems, integrated into the global market economy. There are 25 such countries, almost all of which have joined the Fund within the past five years. Helping them establish the conditions for high-quality growth has been one of the Fund's greatest challenges in its 50-year history. To achieve success, these countries have had to undertake bold policy programs of liberalization, macroeconomic stabilization, and wide-ranging structural reforms, and the Fund's advice throughout has insisted on the essential need for determined action on all these fronts. But the Fund has also held throughout that these countries' efforts must be supported by international cooperation--by open markets abroad for their exports; by substantial external financial resources; and by technical assistance.
And the Fund, at the request of its membership, has been playing a leading role itself, which has involved a considerable re-orientation of its activities. Fund staff have been engaged in intensive and virtually continuous dialogue with practically all the countries in transition since, and often before, they joined the Fund. The Fund has provided financial support for policy programs in 20 of the 25 countries I have mentioned, in amounts totaling US$20 billion since 1990. Sixteen of these countries have utilized the systemic transformation facility (STF), a financing facility that the Fund introduced early last year specially to assist countries in transition to shift to multilateral, market-based trade. The Fund has also been playing its usual role in mobilizing financial support from other creditors and donors for the programs it has supported with its own resources, which is what we refer to as its "catalyzing" role. In addition, the Fund has been making a major technical assistance effort in a range of areas that fall within its expertise, in cooperation with other international organizations and our member governments.
So how much progress have these countries managed to make, with the support of our international cooperative efforts? The answer is that progress has been mixed; but progress there has certainly been. One leading group of about ten countries--I am glad to say that the list is getting longer--have made substantial progress on all policy fronts; and in particular, they have gone far toward stabilizing their economies and bringing inflation down to moderate levels. This group includes the three Baltic countries as well as most of the countries of central Europe. And as a result of their success with policies, all ten have begun to see economic growth after several years of stagnation and decline. In fact, this group includes some of the fastest growing economies in Europe.
A second group of countries have made some progress on all policy fronts, but their efforts have been less consistent than those of the leading group, and they have as yet failed to stabilize their economies and achieve a sustained reduction in inflation to moderate rates. This group includes Russia. The control of inflation in Russia has still not been secured: it has picked up again since the summer to a monthly rate of about 15 percent. This is clearly a matter of the highest concern and priority; and in recent weeks a staff team from the Fund has again been in Moscow, continuing discussions on a program that could bring about rapid disinflation and that would be strong enough to justify the Fund's financial support. All the countries in the second group, including Russia, are continuing to suffer from stagnation and decline.
Then there is a third group of countries where, at least until recent months, little progress has been made toward macroeconomic stabilization, and inflation has been running at extremely high rates. In a number of these countries, including Ukraine--which two months ago embarked on its first Fund-supported program--the commitment to stabilization and reform has recently strengthened. But all the countries in this group have much still to do to establish the foundations of a market economy and the conditions for sustainable growth.
The experience of the countries in transition has taught a number of important lessons. Several countries--including countries of the former Soviet Union--have by now proven the feasibility of implementing policies of rapid liberalization, stabilization, and reform. And such policies have indeed been shown to provide the key to successful transition and economic recovery--the gateway to high-quality growth. International cooperation, including official financing, has also proven its importance. But with regard to external financing, I would make two points--which apply to all countries--about how it is dependent on a country's commitment to and implementation of good policies. First, private capital follows the establishment of stability and confidence: this is shown by the large inflows of private capital that have recently been seen in the successful transition economies of central Europe and the Baltics. Second, the most beneficial and constructive official assistance is assistance that is conditional on good policies. Without strong policies in place, official financing may merely encourage the postponement of adjustment, end up in capital flight, and add to the country's debt burden with no benefit to the country. This is one of the reasons why conditionality is attached to the IMF's lending, and why the Fund is able to mobilize resources from other sources parallel with its own conditional commitment.
Both the countries in transition and the industrial countries have in the past few years been looking for economic recovery--in the one case, recovery from a traumatic collapse, and in the other, recovery from what was in many industrial countries the most severe recession in recent decades. And what were the developing countries doing in the meantime? Well, something that has been quite remarkable in this period has been the strong growth seen in the developing world. This was especially striking in 1993: in spite of weak growth or recession in most industrial countries and a large drop in output in the countries in transition, world output grew by 2 1/4 percent and world trade by 4 percent. And the source of this growth was essentially the output growth of above 6 percent and import growth of above 9 percent of the developing countries. And we can narrow the source down more than that, because the economic performance of the developing countries has, of course, been very uneven. In fact, the source was about 40 developing countries in Asia, Africa, and Latin America, which provided this impetus to world growth through their sustained, self-generated economic success, something that no one would have believed possible five years earlier. And do you know what these countries have in common? It is that they have undertaken strong and persistent structural adjustment programs, with the financial support of the Fund, or otherwise with the help of our technical assistance, or continuing with strategies designed in close cooperation with the Fund. What is more, these countries include some which, just five to ten years ago, were in an economic abyss as a result of the debt crisis. Now here they are, providing the locomotive for the global economy! The destiny of nations is obviously not preordained.
And 1993 was not an exception for these countries. Their dynamism was already at work before last year, and it has continued in 1994, as it will continue beyond. They have shown that for developing countries also, the implementation of good policies, supported by international cooperation, provides the key to high-quality growth. They have shown that countries accepting the disciplines of full-fledged cooperation with the Fund and the World Bank can in fact achieve substantial autonomy from the cyclical fluctuations of activity in the industrial countries, integrate themselves into the mainstream of international trade and exchange, and contribute in the most positive way to global prosperity. The Fund is proud to have contributed to this--proud, and determined to intensify its efforts in support of this strategy. Let me give you another illustration of the contribution that successfully adjusting developing countries have been making--this time to the progress of other countries in the developing world. In 1987, the IMF introduced a new facility--the enhanced structural adjustment facility (ESAF)--to provide highly concessional assistance for low-income countries to support their adjustment and reform efforts. This has become our key instrument for help to the poorest countries of the world, especially in Africa. At the beginning of this year, when the facility was about to expire, it was refunded with the help of 45 of our member countries. And what is remarkable is that 24 of those countries are developing countries, some of which had recently benefitted from IMF financing, including through the ESAF. Is it not remarkable to see countries like not only Argentina and Mexico, but also Bangladesh, Egypt, and India, becoming creditors in this way for one of the most concessional windows of international cooperation?
But as I said, progress in the developing world has been extremely uneven. Many countries, because of inadequate policies or tragic circumstances, continue to suffer from economic stagnation or decline, with their people mired in extreme poverty. Rather than becoming integrated into the mainstream of trade and exchange in an increasingly globalized world economy, these countries face the risk of becoming increasingly marginalized. One of the Fund's greatest responsibilities today is to encourage and help these countries to lift their performance through policies of adjustment and reform. This responsibility was very much in our minds when we replenished and strengthened our ESAF this year. It was also a consideration this fall when, in response to agreements reached at the Madrid meetings, we increased the access limits on our facilities by 50 percent--a decision with considerable beneficial significance for the developing world and the countries in transition. And it is also why we are carefully considering the measures we could take to be able to support more effectively the initial recovery efforts of countries in "post-chaos" situations, such as, we hope, Rwanda, as well as Angola, Somalia, and others.
A number of other adaptations of our instruments are being considered that would be relevant to the needs of both developing and transition economies. Let me just mention the proposal that has been under consideration for some time, for the IMF to provide its member countries with a new allocation of SDRs, the Fund's unique instrument for augmenting global reserves. In my view, this would be an effective and fully justified way of relieving the shortages of reserves that form such a serious constraint on many countries' adjustment and reform efforts. You may have heard that the Fund's membership failed to reach agreement on an SDR allocation at its Annual Meetings; but discussions are continuing, and I am very hopeful of a positive outcome.
Let me also mention the fact that the Fund is fully aware of the need to address not only the needs of the poorest, marginalized countries but also the needs of marginalized people in all countries. In our programs, we have, especially in recent years, been paying considerable attention, in collaboration with World Bank, to the need for well-directed and cost-effective social safety nets that protect the poor and those who are most vulnerable to the adjustment and structural changes that countries need. Protection of the poor and vulnerable is not only an essential part of high-quality growth: it is also needed to sustain the public support required for the implementation of adjustment and reform in a free society.
I have been speaking about some of the ways in which I believe the IMF contributes to the international cooperative effort required to secure high-quality growth in today's world. But what the Fund can do depends upon the cooperation of its member countries; and they do sometimes disagree, as you saw in Madrid three months ago! And in any event, the Fund cannot do everything. It is up to countries to raise official development assistance (ODA) from its current paltry levels to the UN objective of 0.7 percent of GDP--a number that was so prominent on the demonstrators' banners here three months ago. Metaphorically speaking, I myself have been holding up that banner, in private discussions as well as public pronouncements for many years! And it is up to countries to lower their trade barriers to the exports of countries striving to raise their living standards. The Fund cannot do everything. But I hope you agree that it can do, and is doing, a lot to promote high-quality growth in the world.