Remarks by Michel Camdessus
January 9, 199595/3 Managing Director of the International Monetary Fund
at the Opening Dinner of the 1995 Pew Economic Freedom Fellows Program
Georgetown University, Washington, D.C., January 9, 1995
It is a great pleasure for me to be with you this evening, as you begin this most interesting and challenging program. And I welcome this opportunity to share some thoughts with you about the transition to market-based economic systems, from the perspective of the IMF. All your countries are members of the IMF: only two or three years ago, I could not have said that. I know that a number of you have had direct contact with the IMF in the course of your work, and that several of you will be visiting the Fund during your stay in Washington. Out of the Fund's 179 member countries, about 30 are in the process of transition from central planning to market-based economic systems. There are 10 in central Europe; 15 among the Baltic countries, Russia, and the other states of the former Soviet Union; and 5 in Asia, including China. Helping these countries--your countries--to reorient their economies toward market-based systems and to integrate themselves into the global market economy has been one of the Fund's greatest challenges in its 50-year history. The IMF has been given particular responsibilities by its membership to help this transition process, and by now significant experience has been gained. This is therefore a good time to consider with you a few questions: What has been the basic approach? What has been achieved? What has been learned? And what are the challenges ahead?
First, the basic, central approach. In spite of large differences from country to country, after decades of central planning these economies suffered in common from massive problems with which you are familiar, and in the large majority of cases it was well recognized that a reorientation toward market-based systems was the only option for achieving economic progress. While the IMF has of course adapted its policy advice pragmatically to the circumstances of individual countries, we have held throughout that successful transition would require extraordinary resolution to take policy actions on three fronts:
- the first requirement is to free the economy, decentralize decision
making, and let individuals and enterprises shoulder their responsibilities.
This means, in particular, bringing price controls to an end, and liberalizing
the exchange and trade system to ensure that the domestic economy is subject
to the discipline of international competition;
- the second requirement is to stabilize the economy: to ensure, essentially
through appropriately tight fiscal and monetary policies, that decisive,
early progress is made toward low inflation, together with sustainable
external and budgetary balances;
- and the third essential component of the strategy: the restructuring, and creation where necessary, of the institutions and markets that are needed for a competitive market economy to function effectively. This encompasses a whole range of structural reforms--new tax systems; new or reformed central banks; the commercialization and privatization of state-owned enterprises; the break-up or regulation of monopolies; new legal frameworks governing property ownership; well-targeted and cost-effective social safety nets to protect the poor and vulnerable; and so on. Such changes necessarily take time to implement. Our advice has therefore been to proceed as quickly as possible.
In fact, we have recommended that all three courses of action--liberalization, stabilization, and restructuring--be pursued simultaneously with all reasonable speed.
All this relates to policies in the transition countries themselves. But there is another crucial element in the IMF's approach: we have held throughout that these countries' efforts must be supported by international cooperation--by open markets, especially in the industrial countries, and by substantial contributions of technical and financial assistance. And commensurate with its leadership role, the IMF itself has undertaken a major reorientation of its activities so that it could make its contribution. We have been engaged in intensive and virtually continuous dialogue with most of the countries in transition since, and often before, they joined the Fund. Perhaps some of you have taken part in these discussions. The Fund is providing financial support for 24 of the 30 countries in transition. Only last month, Armenia and Georgia were added to the list. This month, I hope it will be the turn of Uzbekistan, and soon, Azerbaijan. Eighteen of the 30 countries have utilized our systemic transformation facility (STF), introduced last year specially to assist countries in the initial stages of transition. The Fund has also been playing its usual catalytic role in mobilizing financial support from other creditors and donors for the programs it has supported with its own resources, and it has been making a major technical assistance effort in areas that fall within its expertise, in cooperation with other international organization and member governments.
Let me now turn to my second question: what has been achieved with this basic approach? I would summarize it this way: progress has been mixed, but encouraging results have been recorded everywhere the approach has been followed. At the present time, we can roughly distinguish three groups of countries; I think that there are Pew Fellows here from countries in each of the three groups.
First, there are about 15 countries--and I am pleased to say the number is continuing to grow--where most of the work of freeing prices and the exchange and trade system has been done, where significant progress has been made toward macroeconomic stabilization, and where substantial structural reforms have been implemented in a number of areas. I would include here, for example, Albania, the three Baltic countries, China, Hungary, Poland, Slovakia, and Viet Nam. Other countries in this group, not represented in the audience here, are Cambodia, Croatia, the Czech Republic, Lao P.D.R., Mongolia, and Slovenia. Of course even within this group there is a wide range of achievement, reflecting different national circumstances as well as the strength of policies, and the fact some countries began their transition earlier than others. And in all these countries there is much remaining to be done. In the macroeconomic area, although inflation in all these countries has been brought down substantially from rates that once bordered on hyperinflation in many cases, it still ranges up to about 30 percent a year in Poland, and higher in Mongolia; and severe fiscal pressures remain virtually everywhere. Nevertheless, all these countries may be said to have put the essential foundations of a market economy securely in place. And the results, in terms of growth, are clear. Most of these countries initially suffered severe output declines, with the collapse of central planning. But all the countries in this group saw positive growth in 1994, and extremely vigorous growth in some cases. Not only have they established the foundations for a market economy, but they are growing!
A second group of countries have made considerable progress with liberalization and some progress toward stabilization, but have as yet failed to achieve a sustained reduction in inflation to below, say, 50 percent a year because of lack of consistent fiscal and monetary discipline. At the present time, I would put seven countries in this group, including, for example, Bulgaria, the Kyrgyz Republic (which has made impressive progress toward stabilization since the middle of last year), Romania, and Russia. The other countries in this group, not represented here this evening, are Kazakhstan, the former Yugoslav Republic of Macedonia, and Moldova. Let me say a word about Russia. The control of inflation there has still not been secured: in recent months it has picked up again to about 15 percent a month. This is a matter of the highest concern and priority; and a team from the Fund will shortly be returning to Moscow to continue discussions on a program that could bring about rapid disinflation and that would be strong enough to be supported by a stand-by arrangement. This second group of countries have achieved various degrees of progress with structural reform; and in the area of privatization, for example, Russia is the clear leader. But in none of these countries have adjustment and reform efforts been pursued as consistently as in the first group, and I am afraid that one of the results has been still continuing stagnation or decline.
The remaining, third group of about eight countries have not, at least until recent months, made much progress toward macroeconomic stabilization, and all seem to have registered inflation of around 1,000 percent or higher in 1994. Ukraine must for now be included in this group; but two months ago it embarked on its first Fund-supported program, and it has now taken its first substantial steps toward comprehensive adjustment and reform. Also in this group is Georgia, where last month, as I indicated earlier, the Fund provided financial support for a first comprehensive policy program. In Belarus, the desire for stabilization and reform appears recently to have strengthened, and I hope that the Fund's Executive Board will soon be able to approve further financial assistance under a stand-by arrangement. So you see that there have recently been signs of progress in a number of the countries in this group, and this is also true of Armenia and Uzbekistan, which are not represented in this audience. But in most cases, economic decline has continued; and all the countries in this group--the others not represented here are Azerbaijan, Tajikistan, and Turkmenistan--have much still to do to establish the conditions for sustainable growth.
So you can see what I meant when I said that there has been progress, but mixed progress. A year ago, my first group would have been much smaller than it is today, and my third group considerably larger: this is progress. And in 1995, I am confident that we shall see more successes.
Let me now turn to my third question: what lessons have been learned? We have all learned a great deal from this unprecedented process; but there are three particular lessons I would like to highlight.
First, and most important, the most appropriate course of action is to adopt a bold strategy. Many countries, including countries of the former Soviet Union, have by now proven the feasibility of implementing policies of rapid--and I stress rapid--liberalization, stabilization, and structural reform; and such policies have indeed been shown to provide the key to successful transition and economic recovery--more so than a country's starting conditions, natural resources, or external assistance. The countries that have moved fastest and furthest on all three policy fronts have come out best. This choice of a bold rather than gradual approach was for some time a matter of controversy. But the controversy is now over: "gradualism" has not been found to be an effective prescription in any of the three major policy areas. At first glance, of course, it may appear to be the prudent approach; but in practice it carries great risks. A better principle is to seize every opportunity to make progress. This is the best way to transmit clear signals about the long-term course of policy, and the best way to build confidence.
The second lesson is the need for flexibility as well as boldness. Within the overall framework I have recommended, policies may indeed need to be adjusted pragmatically in light of circumstances and developments. The IMF has supported such flexibility. For example, in the area of fiscal policy the Fund has agreed in many cases to the modification of fiscal targets in the light of unforeseen developments. And regarding the choice of exchange rate arrangement, the Fund has supported programs with pegged exchange rates in a number of countries--for instance, the Czech Republic, Estonia, Lithuania, Poland, and Slovakia--programs that have had very positive results. But where conditions have not been conducive to such arrangements, the Fund has supported programs with flexible exchange rates--in Albania, Latvia, Russia, and several other FSU states. As Albania and Latvia have shown very clearly, a flexible exchange rate does not imply any complacency about stabilization. And of course all these countries have shown that monetary and fiscal discipline is the key to stabilization, whatever the exchange rate arrangement.
The third lesson relates to external assistance and financing. All the forms of international cooperation to which I referred at the beginning have proved essential. But I would emphasize the close correlation between a country's implementation of good policies and the external financing received in return. In one way, this is shown by the large inflows of private capital into the successful transition economies not only in Asia but also recently in central Europe and the Baltics. But it is also true of official financing. Of course, official financial assistance can help speed up the transition process: it has played an important role in almost all the successful transition economies. But such assistance cannot be a substitute for stabilization and reform. Without adequate policies in place, the availability of external financing might actually 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 the conditionality attached to the IMF's lending is so necessary and important. And of course it is this conditionality that underlies the catalytic role the Fund is able to play in mobilizing assistance from other sources.
These, then, are some of the lessons that are in the forefront of our minds as we continue our efforts in these countries.
And now my final question: what are the challenges these countries face today and tomorrow? It is clear that the old order of central planning is dead and buried. But immense problems remain, and they must be addressed in an environment that is in many cases more difficult than when the process began. The celebrations are over; the enthusiasm with which the initial steps were taken has in many cases been lost; and the consensus in support of building a future based on freedom has tended to give way to disputes among political factions looking to the next elections. What, then, are the challenges? I will mention just three.
First, further progress must be made toward stability and reform. Why? Because this is the way to enhance economic efficiency and achieve sustainable economic growth, and to reach the position where these countries can undertake the immense tasks that still lie before them in the areas of investment in human capital and infrastructure, and social progress. This challenge is faced by all the transition countries--whether it is Russia, striving to reduce inflation below 10 percent a month; or the Czech Republic, trying to reduce inflation below 10 percent a year in the face of strong capital inflows; or any of the countries which still have so much to do in the area of structural reform.
Second, further progress must be made toward rebuilding the state and building a new approach to citizenship. The "invisible hand" of the market alone cannot ensure economic growth that truly serves human needs. The state does have a role to play, and assigning it is no small task at a time when at the same time efforts must be made to dismantle all kinds of suffocating government controls. Everywhere, the effort to ensure that government is efficient, leaner, and yet also better equipped to carry out its core functions will be crucial to the success of the transition process. If this good governance is not achieved, if the benefits of economic growth are monopolized by a handful of individuals, if the state is not firmly established on the rule of law, and if the law is not uniformly and transparently applied, then we have been building on sand. In addition, this reconstruction of the state makes no sense unless it is placed in the service of a meaningful form of citizenship, which is intimately bound up with the capacity of the government to foster dialogue concerning the major policy options and to decentralize power.
Third, there is the challenge for the international community: we must intensify our solidarity. "Adjustment fatigue" in countries in transition can go hand in hand with "solidarity fatigue" in the countries contributing to international cooperative efforts. Fatigue is understandable enough at a time when these countries are engaged, rather belatedly I must say, in fiscal consolidation; and the conjunction of these two kinds of fatigue can be lethal for the transition process here or there, if not in a broad area. So perseverance in their efforts--in all our efforts--will be crucial to the success of transition in all these countries. As for ourselves at the IMF, we are forging ahead in our efforts to support the policies that these countries need for success. We have recently increased the limits on access to our credit facilities by 50 percent. We are currently examining the possibility of creating a new financing instrument in the form of "currency stabilization funds": this would make sizable resources potentially available in the context of vigorous stabilization programs, for the purpose of supporting a pegged exchange rate in the face of short-term destabilizing pressures. Another proposal under consideration is to supplement global reserves through a moderate allocation of the Fund's special drawing rights (SDRs). This would be of particular benefit to the countries in transition, both because of the low levels of reserves from which many of them suffer, and because almost all of them have never received an SDR allocation because they have joined the Fund since the last allocation in 1981. I hope that the continuing consultations on this issue will lead to a positive outcome in the coming months.
So this is where we stand: not at the end of history, nor at the end of the transition, but with the transition now well under way in most of the countries involved. We have witnessed extraordinary efforts. Something irreversible has been accomplished, to the extent that this can be said about any development in human affairs. We have had the good fortune, each in our own way, to be associated with this transition. I welcome for all of you this time of reflection and exchanges in this university. It will certainly strengthen your contribution to this watershed in the history of our time. And let me express my appreciation to all those who, together with Georgetown University, have made it possible.
I welcome your questions.