People's Republic of China and the IMF
Japan and the IMF
Republic of Korea and the IMF
Mexico and the IMF
The IMF and Good Governance -- A Factsheet
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ABCDE: TENTH CONFERENCE ADDRESSStanley Fischer1
First Deputy Managing Director of the International Monetary Fund
at the World Bank's Annual Bank Conference on Developement Economics
It is a privilege to speak at this tenth ABCDE, and I would like to thank Joe Stiglitz for
inviting me to help celebrate the ninth anniversary and the tenth conference. I cannot think
the start of these conferences without reflecting on my brief and happy years in the Bank, and
hope you will excuse me if I start by straying beyond the ABCDE to say a few words of
the Bank and the people who serve in it.
When the conference series was formally evaluated in 1995, after seven conferences, the
goals were described more precisely as being:
Rather than review the ABCDE, I will instead reflect on the development consensus when I
left the Bank in 1990, and how if at all the emphasis would change today. Looking forward,
the assigned title "ABCDE: Next Ten Years" violates the fundamental rule of forecasting,
which is to forecast either an event or a date, but not both. Rather than attempt to forecast
content of future ABCDEs, I will end by speculating on the implications of globalization for
the developing countries.
The consensus within the Bank, no doubt also representative of views within a large part of the profession, was best captured in the 1991 World Development Report, The Challenge of Development,4 which summarized its preferred approach as market-friendly. WDR91 had been preceded by the 1990 WDR on Poverty, which is an essential companion to its successor, and whose message -- critical to the mission of the Bank -- is no less relevant today than it was nearly a decade ago. If I focus today on WDR91, it is because I want to examine the overall view of the strategy of development that was held in the Bank at that time, and because sustained reductions in poverty are best attained in a growing economy.
In summarizing its message (p. 11), WDR91 argued that the prime responsibility for development rests with the developing countries, which should emphasize:5
About the same time as the 1991 WDR was published, a mainstream position began to emerge on the strategy for reform in the transition countries.7 Despite agreement on the reforms needed in different sectors, issues of the speed and sequencing of reforms provided ample room for debate, especially over whether, and in what areas of reform, very rapid adjustment -- shock treatment -- might be preferable. This issue gained particular salience in light of the contrast between the negative growth of the reforming east European countries and the stellar performance of China, with its more gradualist strategy, particularly in privatization.8
The East Asian Miracle, published in 1993, sought to answer the questions about the development strategies followed in the eight high-performing Asian economies, a group that includes Japan but excluded China. These economies had succeeded not only in producing unprecedentedly high rates of growth, but also in maintaining relatively equal distributions of income. Their superb growth records had been accompanied in most, though not all of the high performing economies, by high rates of saving and investment.
The study concluded that these economies had succeeded by in the first instance getting the basics right, particularly in investment in human capital and in assuring macroeconomic stability. Further, all these economies had kept price distortions within bounds, especially in limiting the bias against agriculture found in many developing countries. They had also encouraged the import and absorption of technology. But this was not the whole story, for in some of the eight economies, government had intervened systematically and in many ways to foster development -- most importantly through various measures of export promotion, but also through significant financial sector interventions, in some cases through import protection, by subsidizing declining domestic industries, and by making investments in applied research. These interventions were more pervasive in Japan, Korea, Singapore, and Taiwan, China than in the remaining high performing Asian economies -- indeed, one of the striking results of the East Asian Miracle study is how few generalizations apply to all eight of the economies.
The answers to questions beget further questions, in this case what makes for successful interventions, and whether other countries can hope to succeed by pursuing a similar approach. Here the study emphasized the creation of institutions, including capable and reputable bureaucracies, whose procedures were shielded from political interference; and mechanisms of consultation among government, business, and others, including academics and journalists. In most cases these took the form of deliberation councils. Export promotion strategies generally keyed off world prices, and in some cases used export targets and contests among local firms to provide incentives. Although all the economies except Hong Kong went through a phase of import substitution, these policies were abandoned at a later stage. Attitudes to foreign direct investment varied, but in those cases where it was encouraged, the focus was on export promotion rather than import substitution. The study concluded that the promotion of particular industries did not generally succeed, while the repression of financial systems and directed credit had succeeded in some cases. In all cases, the Miracle study emphasized, subsidies and distortions were kept limited, and were modified or abandoned if they threatened macroeconomic stability.
The East Asian Miracle study produced mixed reactions, some believing that it had not sufficiently emphasized the positive role of the state. But no reader could have come away from the volume without a reinforced belief in the importance of getting the fundamentals right, while at the same time thinking that export promotion strategies had played an important role in development, and that the quality of institutions matters a great deal.
III. LOOKING BACK
At the same time, the experiences, reflections and research of this decade -- much of it presented in the East Asian Miracle study and in post-1991 WDRs -- should lead to some changes in emphasis and views. What are they? The experience of the transition economies, some of it studied in WDR96 as well as in the excellent Transition Reports of the EBRD, by and large supports the consensus view of WDR91. Some controversy might remain over the speed of adjustment: I believe that should be very fast for bringing macroeconomic stability, and price and trade liberalization, and that other reforms, which are bound to take longer, should proceed as fast as possible.
We will need in coming years also to draw lessons from the Asian crisis for the development consensus. It is far too early at this stage to tell what they will be. But some elements are clear, none of them clearer than the need for a robust banking and financial system. The Basle Committee's Core Principles go a long way towards summarizing what is needed, and more details are provided in the IMF's Framework for Financial Stability.11 In this area, weak supervision and regulation sow the seeds of future crises, reemphasizing the point that government needs not only to get out of certain areas of regulation, but also to strengthen regulations and their efficiency in others. The importance of the financial sector is not a new theme for the World Bank, for it was the subject matter of the 1989 World Development Report. But the devastation that has been propagated through weak banking systems in the Asian crisis -- and we should include in this the Japanese banking system -- would surely strengthen the emphasis on the need for healthy financial systems in any future WDR on development strategies.
It is an interesting question whether the current crisis would lead to a modification of the agnostic views on financial repression expressed in the East Asian Miracle study. The answer should be related to the conclusions to be drawn from the East Asian experience for capital account liberalization. Recent experience should reinforce the widely-held view that capital accounts should not be liberalized until domestic financial systems, including their regulation, are strengthened. It should also reinforce the urgency of strengthening domestic financial systems. Given that, I doubt that there remains a strong case for financial repression. But vulnerability to short-term capital outflows should be controlled through strong prudential regulations for the financial system, and close monitoring of corporate borrowing from abroad; there is also a case for countries to use market-based measures to control the pace and volume of short-term capital inflows, as is now done in several countries.
The role of the exchange rate regime is another topic that will be intensively examined in the wake of the East Asian crisis. One striking fact needs to be emphasized. Countries that chose to defend their exchange rates through the active use of monetary (and in some cases also fiscal) policy did not experience extreme crises. This should reinforce the view that there is no easy way out when a currency is attacked: although a floating rate provides a safety valve, a country that shows no willingness to defend any particular value or range of values of the currency will face greater difficulties than one that demonstrates that policy will react to defend the value of the currency.
Beyond the financial system, the East Asian crisis will lead to a reexamination of the benefits of the close relations among government, business, and the financial sector that have been practiced in several of the East Asian countries. We are likely to conclude that the opacity of financial relations within the corporate sector and among the three sectors that has become so apparent during this crisis should not survive. That does not necessarily rule out a continuation of processes of close consultation among the three sectors, and labor as well.
Let me now list a few other topics that would deserve more attention in a future WDR on development strategies: efficient regulation; institutional development; governance; environmental regulation; urbanization; and income distribution.
At the same time, the pace of globalization of international capital markets has accelerated at an extraordinary pace in this decade. Provided Korea and Thailand stay on their present reform tracks, even the East Asian financial crisis -- like the Mexican crisis before it -- is likely to have only a passing effect on the volume of international capital flows. However, increases in interest rates in the advanced countries, which should not be ruled out, will probably cause a pullback of funds from emerging markets.
The Mexican and East Asian crises have demonstrated the power of the international capital markets. While some countries will conclude that they want to stay out, most will not. Two of the countries hardest hit in the tequila crisis, Mexico and Argentina, have continued to open their markets to foreign capital. Similarly, Korea and Thailand will be more, not less, open to international capital flows after this crisis than before.
Countries that want to participate in the international capital markets will have to strengthen both their macroeconomic policies and their financial systems. Capital market liberalization should be gradual, and should take place only as the domestic financial system is strengthened and prudential and other controls put in place -- but most countries will liberalize, more or less gradually.
To deal with the risks posed by the globalization of capital markets, actions will be needed by advanced and developing country governments, not only to strengthen the international economic system, but also in their respective domestic economies. I would like to focus on one aspect of the recent discussions about the strengthening of the international economic system: the notion that a variety of standards should be developed and put in place.
The Basle core principles provide an agreed standard for banking system behavior and supervision. Similarly, the IMF's Special Data Dissemination Standard constitutes an agreed international standard for statistical data. Codes of good practice can be envisaged for accounting standards, for corporate governance, for securities markets, and for other aspects of private sector behavior. The IMF has recently produced a code of good practices on fiscal transparency,14 and has been asked to develop a code of good practices with respect to monetary policies.
Such codes will constitute a comprehensive set of standards or rules15 that countries could implement to improve the performance of their own economies, and that could also serve to guide international capital flows. If the bank regulators in creditor countries cooperate, a system of risk weighting for investments in developing countries could emerge, based on the extent to which such standards are observed. This would of course require that the implementation of the standards be monitored and certified. In a rational world, observance of the standards would also help determine the terms on which corporations and governments would have access to the international capital markets. In this way, the performance of macroeconomic policy, corporate transparency, and financial market regulation in developing countries could be improved, using the discipline of the international capital markets.
As globalization proceeds, the question of the optimal exchange rate arrangement and of the desirability of maintaining a national money will again come to the fore. The arguments on these issues are well-known. To cut them short, let me simply predict that if the Euro succeeds -- and I expect it to succeed -- we are likely to see the development of several large currency blocs, associated with large trading areas. These in turn could eventually -- in the Keynesian long run -- coalesce into a single currency.
The ongoing globalization of goods and capital markets promises to bring profound changes to the global economy and to individual economies. Although most of the advanced economies will be well equipped to deal with these changes, even some of them will have to improve institutions and policies to meet international standards. Most developing economies will need to take actions on a wide front to meet international standards. They will need help to strengthen their institutions and their human capital. Some that may not have access to the international capital markets will need financial assistance. Here one thinks most of the needs of many Sub-Saharan African countries.
These are early days yet for the international economy that, spurred on by the liberalization of trade and capital flows, as well as technological change in the financial sector, is continuing to emerge from the destruction wrought by the Great Depression and World War II. The system is accident-prone, and lacks a regulatory authority and lender of last resort. We need to work both on the international architecture and in individual economies to make it safer. But at the same time, we should not forget that this is the system that has brought an era of unprecedented and sustained, though not uniformly shared, economic growth and prosperity -- and that it will continue to do so for countries that follow the right policies.
1First Deputy Managing Director, International Monetary Fund. This paper was prepared for the World Bank's Annual Bank Conference on Development Economics, April 20, 1998. I am grateful to Boris Pleskovic and Vinod Thomas for helpful discussions.
2From the Introduction to Proceedings of the World Bank Annual Conference on Development Economics, 1989, p. 1.
3John Williamson (editor), Latin American Adjustment: How Much Has Happened?, Washington, DC: Institute of International Economics, 1990.
4This WDR was carried out under the general direction of Larry Summers, with Vinod Thomas as team leader.
5WDR91 also analyzed the contributions to the growth of developing countries that could be made by the industrialized countries and international financial agencies.
6Alice Amsden, in Asia's Next Giant: South Korea and Late Industrialization, New York: Oxford University Press (1989), challenged the IFIs' views by arguing that in South Korea, the government had contributed to fast growth by systematically distorting market incentives ("getting prices wrong "); see also Roger Wade, Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization, Princeton: Princeton University Press (1990).
7See for example David Lipton and Jeffrey Sachs, "Creating a Market Economy in Eastern Europe: The Case of Poland", Brookings Papers on Economic Activity, (1,1990), 75-134; and Stanley Fischer and Alan Gelb, "The Process of Socialist Economic Transformation", Journal of Economic Perspectives, (Fall 1991), 91-106.
8See Jeffrey Sachs and Wing Thye Woo, "Structural factors in the economic reforms of China, Eastern Europe, and the Former Soviet Union", Economic Policy, 18 (April 1994). See also the World Development Report for 1996, From Plan to Market, for a sophisticated interim appraisal of the process of transition, including lessons drawn for East Asian transition countries.
9Although Adam Smith and other founding fathers of economics can be thought of as fundamentally concerned with problems of economic growth and development, and although development economics draws on other branches of economics, especially trade theory, development economics as a field should probably be dated to the 1940s. Systematic empirical work had to wait for the development of a data base, which began in the 1950s.
10Michael Bruno, "Development Issues in a Changing World: New Lessons, Old Debates, Open Questions", Proceedings of the World Bank Conference on Development Economics, 1994, p. 17.
11David Folkerts-Landau and Carl Lindgren, "Toward a Framework for Financial Stability", International Monetary Fund, World Economic and Financial Survey series, January 1998.
12Some of these issues are taken up by Joe Stiglitz in his 1996 ABCDE keynote address, "The Role of Government in Economic Development", Annual World Bank Conference on Development Economics, 1996, 11-23.
13These issues are discussed in WDR97, which emphasizes focusing on the basics when the capacity of the state is limited.
14Both Australia and New Zealand have introduced their own codes of fiscal transparency.
15The idea that such a set of rules would improve economic performance is part of the German notion of ordnungspolitik, associated primarily with Walter Eucken in the 1940s.
IMF EXTERNAL RELATIONS DEPARTMENT