The IMF and Good Governance -- A Factsheet
Heavily Indebted Poor Countries -- A Factsheet
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Addressing Concerns for the Poor and Social Justice in
Address by Michel Camdessus
Debt Relief and Adjustment Programs
Managing Director of the International Monetary Fund
at the Conference on the Ethical Dimensions of International Debt
Seton Hall University,
South Orange, New Jersey, October 22, 1998
This is a truly valuable and welcome invitation, in the midst of the present global financial
and economic turmoil, to concentrate on the most persistent crisis of our time, the continuing
poverty of too large a proportion of our global community, and to send through you to these
people the message that their plight is no less on our agenda in spite of the heavy demands
that the immediate crisis places on all of us.
You have suggested that I speak to you on how concerns for the poor and social justice
could be taken into account in debt relief—and let me add adjustment programs. In other
words, what does it mean for the IMF to serve the poor? As you can imagine, debt relief and
poverty alleviation will be central, but let me make two initial points:
First, strategically speaking, it is important to have this twin focus—debt
relief and poverty alleviation—as they can be mutually reinforcing, particularly to utilize
the Jubilee occasion to put more leverage on debt relief. But let us indeed focus on
both because if we exclusively stress debt relief, we might perhaps win a battle, but
we would lose the war. And we are losing the war! Even if I do not imply any causal
relationship here, I must observe that since we started, at the end of 1995, talking about an
initiative for the heavily indebted poor countries (HIPC), overseas development assistance has
fallen from the already very low ratio of more than 0.3 percent of GDP to just over 0.2
percent—the lowest rate recorded in the past half century! Let this number galvanize us
further, not only to have an effective HIPC Initiative, but to make a real universal effort of
multifaceted solidarity for poverty alleviation.
Second, I shall draw a distinction between strategies for poor countries and
strategies for poor people. As you in the churches and the NGOs have been quick to observe,
very often it seems that poor people do not benefit from well-intentioned adjustment
programs, or that they can even be hurt by them. So let us take in turn strategies for poor
countries and strategies to reach poor people through the positive effects of adjustment and
* * * * *
Strategies for poor countries
As the IMF is a monetary—not a development—institution, how do
we bring these poverty concerns to the heart of our program design? Well, first by
progressively convincing our membership that our ultimate goal must be high-quality growth.
What do we mean by this concept? Briefly, it is:
- growth that can be sustained over time without causing domestic and external
- growth that is accompanied by adequate investment, particularly human investment
through education and health, to take full advantage of the tremendous leverage of human
capital for future growth;
- growth that, to be sustainable, is based on a continuous effort for more equity,
poverty alleviation, and empowerment of poor people; and
- growth that promotes protection of the environment, and—why
not?—respect for national cultural values.
High-quality growth is of the essence. Without it, debt relief efforts would be
"seeds on rocky ground."
Even if the IMF is not a "development" institution in the classic sense of that
term, I can state, without reservation, that we are always motivated by the objective
of establishing this high-quality growth. All our assistance—policy advice, financial
support, technical assistance, and training—seeks this end.
But, to design programs for the poorest countries we must first understand the reasons
for their poverty and indebtedness. Why are incomes so low? Why is external debt so high?
Many factors have been identified:
- some that are outside the authorities’ control: a harsh external environment,
weak commodity prices, civil conflict, and adverse climatic conditions;
- some that are the direct result of national policies: poor macroeconomic management,
severe structural distortions, poor governance in both public and private sectors; and
- some that reflect conditions in creditor countries: declining ODA flows and pressure
towards nonconcessional borrowing.
These factors meant that borrowed resources were not used productively: income growth
was retarded, and external debt rose to very high levels. In other words, low income and high
debt may have many causes in common.
Debt relief on its own, without responses to all the other causes of poverty will not
resolve the problem in a lasting fashion. At best, some temporary relief might be found, but
without fundamental changes in policy, the problems will recur. Each case may be seen as a
quest for a well-judged blend of (I) policy adjustment—including adequate social support
mechanisms—and (ii) external financing, including the possibility, in many cases, of
indispensable debt relief. We have been doing that for 11 years through our enhanced
structural adjustment facility (ESAF), the IMF’s concessional facility, which has
become—with its interest rate of 0.5 percent—the centerpiece of the Fund’s
support for the poorest countries. The ESAF recognizes that short-term stabilization
programs supported by nonconcessional finance are not appropriate for most poor countries.
The ESAF has been the most actively used of the IMF’s facilities; to date 58 of the 79
eligible countries have used its resources for three-year adjustment programs, several of them
on more than one occasion because, realistically speaking, deep-rooted problems require many
years of continuing efforts. You will not eradicate poverty without eradicating its causes, and
that takes time.
But some countries face exceptional problems. Time has shown, and the international
community has finally acknowledged, that countries’ own efforts were just not enough
even when supported by the ESAF and by existing debt relief mechanisms and aid flows.
Therefore, owing a great deal to your inspiration, the HIPC Initiative was launched by the
World Bank and the IMF. Mr. Wolfensohn has already briefed you on latest developments.
The Bank and the Fund are actively encouraging all potentially eligible countries to pursue
their adjustment efforts so as to qualify for assistance as soon as possible. A recent staff
estimate suggests that total relief available under the initiative could be as much as $20 billion
(in nominal values). This is in addition to what the countries receive under existing debt relief
This initiative is often portrayed as being too slow. I like, even if I do not always share,
this generous impatience. If you had twenty years of involvement in international cooperation,
you would recognize that within only two years we have made a great deal of progress both in
assisting countries to adopt programs, and also in refining the modalities of the initiative. It
has been recognized that debt relief can, and at times should, be applied to alleviating poverty.
A real breakthrough, of course. But such debt relief should not be seen as a universal panacea
for the problems of the poorest countries. Instead it cannot but be just one—at times
essential—component of a package of policy change and financial support available to
any eligible country determined to enter into a partnership with the international community to
pull itself out of poverty.
Ultimately—I think we all now agree—the best path for alleviating poverty is
broad-based, sustainable economic development with responsive social policies.
Should there be an outright cancellation of poor countries’ external debt? This, of
course, is an appealing suggestion, but I believe it is most unlikely to be realized. First, a
pragmatic observation. It took a tremendous effort to reach consensus on the HIPC Initiative.
Indeed, the task is still not complete, since many creditors have yet to make their contributions
to enable the IMF to play its full part. It is not plausible that this group of countries will be
convinced of the need for a new round of debt forgiveness. Second, as we are well aware,
ODA budgets are increasingly constrained. This has created the strong risk—which is
already materializing—that more debt relief could lead to lower aid flows to other,
equally needy countries.
A third observation takes us into the realm of ethics—the question of moral hazard.
Do debt relief and concessional aid flows encourage less than optimal policy by debtor
governments, or reckless behavior by investors—public or private? It is very hard for you
and me to admit that. But, for instance, what guarantees are there that the resources released
by debt relief would be used for social programs or poverty alleviation? Or that post-conflict
countries would not return to war even before reconstruction is completed? You are only too
aware of how difficult it is to make sure that ODA and NGO resources reach the target
groups, especially if the resources must be channeled through government budgets. All of that
tells us to be very prudent in this domain, and invites us to ask ourselves from time to time
fundamental questions about how best to use scarce ODA resources. Is it debt relief? Is it
strengthening the UN arm for peace promoting, peace keeping, institution building, and
national or regional development? Is there any other better task to perform?
Now, recognizing that relief under the HIPC is conditional upon policy implementation, it
is valid to ask the question: is structural adjustment working in these poor countries? Should
they persevere? There is no doubt that economic reform—structural
adjustment—can be painful. But the experience of the past five years, as many countries
have implemented IMF-supported adjustment programs, is striking. Two decades of
distressingly weak performance have been followed in most sub-Saharan African countries by
a return to positive per capita income growth. In 1997, about 40 countries in this region saw
real GDP growth rates of 3 percent or more, and inflation down to about 10 percent, even
before any special impact could be attributed to HIPC.
As this strong record of policy implementation continued into 1998, hopes were high that
economic performance would continue to be strong. But the global financial crisis now
threatens these countries with a weaker external environment. Commodity prices are falling,
export demand is weaker, and private capital sources, already very limited, are drying up. This
is not a time for relaxing adjustment and reform efforts, but certainly it is a time for us to be
ready to take extra steps to help these countries maintain their own efforts, objectives, and
momentum for continuous progress.
Finally, let me repeat, the situation is worsened by the long-term trend decline in ODA
flows. As the external environment for the poorest countries is weakening, it is high time for
industrial countries to reconsider the long-term retreat from the United Nations’ target
for ODA of 0.7 percent of GDP; by 1997 it had fallen to 0.22 percent. In line with their
potential role as engine of growth in the current weak global economy—in line with their
enlightened self-interest in being it!—this is a further tangible way in which industrial
countries can contribute. At the same time, we should appreciate that one reason for the
"aid fatigue" of the last decade was the widespread perception that the assistance
was not well used. Aid flows must occur in parallel with policy frameworks that are
transparent and are designed to achieve the goal of quality growth in all its dimensions. Again
we see the need for an integrated approach to policy design and international financial
support, provided we make sure that the poorest will benefit. The IMF wants increasingly to
use its influence to this end. So let us consider our strategies to ensure that poor people
benefit more from these national and international efforts.
Strategies for reaching poor people
In the past decade, the IMF has seen itself increasingly confronted with this issue: in the
poorest countries struggling to create the conditions for sustainable growth; in the economies
in transition; and most recently in the Asian countries in crisis where the social costs were so
high. In each case we had to confront very basic questions. Who are the poor? What
assistance should be provided? What level of resources is available to be raised for that
assistance? What do we mean by social justice, or by equity? Of course, we try to find
guidance for answering them. A first principle was clearly articulated for us by Amartya Sen
on the occasion of a recent IMF conference on "Economic Policy and Equity." He
noted that "the greatest relevance of ideas of justice lies in the identification of
patent injustice, on which reasoned agreement is possible, rather than in the derivation
of some precise formula for determining how the world should be run." With limited
resources, assistance should be targeted at the most seriously disadvantaged. For the rest of
the population, the goal of government policy should be to provide equitable access to
opportunities for education, health care, and nutrition.
"Alleviating patent injustice" must be the first order of priority; but
more precisely the five following guiding principles were particularly emphasized during that
- Priority should be concentrated on improving the prospects of the least fortunate in
society. How? By improved access to education, health services, credit, and justice.
- Social safety nets that are cost-effective and well-targeted are essential to shelter the
most vulnerable during difficult times.
- Sound macroeconomic policies are essential for promoting equity and growth in the
medium to long term. The pursuit of equity need not hamper growth. It enhances growth.
Certainly equitable policies will reinforce public support for economic reform and adjustment.
- Equity must be seen as an essential condition for economic sustainability. It is not
simply a question of income distribution. It is a multidimensional concept that encourages
distribution of opportunity, wealth, consumption, and availability of employment
- Equity does not have the same definition everywhere. It is not a rigid concept: each
society must decide through consultation with its citizens and civil institutions at what pace
inequality must be reduced.
Let me add that these five points can appear quite unambitious at first; in fact, they
require from governments a degree of commitment, rigor, and courage infrequent in our
These issues emerged clearly also from the recent internal and external reviews of the
ESAF and were echoed in the review of the HIPC Initiative. The external evaluators of the
ESAF observed that structural adjustment generally has positive effects on income growth and
poverty reduction; and they also noted that the cost of reforms often falls more heavily on the
better-off than on the poor. Nevertheless, the dominant theme of the ESAF review was the
need to protect vulnerable social groups better. Some clear messages emerged from these
reviews that generally supported our approach to social policy, but also showed where we can
reinforce our efforts:
- Strong monetary policy to fight high inflation is an integral and indispensable part of
the effort on behalf of the poorest;
- Strong fiscal policy is crucial for long-term development, by increasing total national
saving and making more investible resources available;
- Where public resources are constrained, it means always that the quality of
fiscal adjustment is an essential ingredient for successful programs; and
- To achieve lasting benefit, programs need to consider a third dimension of policies,
beyond stabilization, beyond "traditional" structural
Let us start with this last point. Good governance will increase the prospects of
the success of all other government policies. It requires robust and publicly accountable
institutions to formulate and implement all aspects of economic policy. It implies the
establishment of a sound financial system with prudent bank supervision, efficient tax
administration and public expenditure management, demonopolization, transparent foreign
trade and exchange regimes, and a fair and transparent legal and regulatory framework. What
a formidable agenda! These policies clearly serve the greater interest of social justice. They
help to make adjustment and reform a participative process, one in which there is a greater
chance of partnership among all the key interest groups or stakeholders in the society.
Ultimately, in a climate of good governance, transparency, and fight against corruption, the
poor are more confident in public policy and more likely to benefit from it.
Turning to the design of economic policy, I need not dwell on fiscal adjustment itself, but
the other points, especially the quality of fiscal adjustment, are critical to the design and
implementation of equitable social and economic policies.
On the revenue side, a primary concern is to increase the efficiency of the tax
system while attempting to preserve progressiveness. However, in low-income countries, the
poor are largely outside the tax net. In such situations, we generally advise governments to
aim for a system that is easily administered, is relatively broad based, and has moderate tax
rates. Especially important for transparent implementation is that the number of tax
exemptions should be minimized.
On the expenditure side, a central ingredient for equitable or quality fiscal reform is the
containment of unproductive expenditures. By this I mean spending that can be
reduced without affecting the governments’ main functions such as the provision of law
and order, health and education services, and environmental protection. Some of the targets
for reductions include:
- inefficient public sector employment;
- untargeted social spending, for instance subsidies or benefits for the whole population
or large portions of it who are not truly needy;
- transfers to inefficient public enterprises; and
- inefficient procurement practices and poor cash management.
Perhaps the most evident—and also the most sensitive—unproductive outlay is
on military spending. Progress has been made: in low-income countries with IMF-supported
programs, military spending fell by about 1 « percent of GDP during the 1990s. But military
outlays remain high throughout much of the world, and there is clearly scope for more action.
It is not just the level, but the composition of expenditure that counts. Universal
access to basic education, health care, and nutrition is essential for poverty alleviation and for
economic growth more generally. These are areas that have received growing attention in
IMF-supported programs. But more can be done. More attention could be paid to the
composition and effectiveness of spending within priority sectors. For instance,
primary education should not be underfunded relative to higher education. Public health
spending should not be skewed toward large urban hospitals rather than rural health
When reform measures are taken, almost inevitably some social group loses
out. Sometimes it is the higher income groups, in which case governments need not intervene.
But where "patent injustice" arises, social safety nets are needed not as
an afterthought, but from the outset. And here much progress is needed. This is easier said
than done. The task is made very difficult by severe emergency conditions with poor data
availability and administrative capacity, weak political commitment, vested interests, and
limited foreign aid. As generalized subsidies or transfers to large sections of the population are
inefficient at achieving social goals, and too costly, a variety of measures have been tried:
targeted subsidies, cash payments in lieu of subsidies, improved distribution of essentials (like
medicine), employment through targeted public works, and even temporary measures to hold
down the prices of commodities consumed primarily by the poor. We are still, indeed, in a
learning process, but the recent decision of the World Bank to double its contribution to
emergency social loans eloquently demonstrates how seriously the issue is taken by the
Bretton Woods institutions.
You will note, as a matter of fact, that many of the issues that I have raised require action
that lies far outside the IMF’s traditional mandate. Generally, the IMF recognizes that
the programs it implements have far-reaching consequences in the economies and societies of
its members. We accept an obligation to ensure that the adverse consequences are minimized,
and that our advice is consistent with all aspects of reform programs. But we cannot do that
alone. We must rely on the expertise of other agencies, such as the World Bank, regional
development banks, bilateral donors, and yes, NGOs, to ensure that the diverse elements of
these complex programs are implemented. This is especially true in areas such as public
expenditure and social policy. That is why, for instance, the mechanism of the Policy
Framework Paper is so valuable, ensuring that all parties understand the broad framework for
action. In short, to ensure that all the pieces fit together. And this is why you will see that the
next generation of ESAF programs will entail deeply integrated work by the World Bank and
IMF, for which we will launch the first pilot cases this autumn.
In collaboration with the World Bank, social impact assessments of adjustment policies in
particular, will be more effectively integrated into the design of programs. And in designing
programs for support under the HIPC Initiative, countries are being expected to agree to
concrete social development targets, especially in education and health. HIPC documents will
endeavor to map out links between these targets and the OECD/DAC human development
targets for 2015.
* * * * *
In concluding, let us emphasize some of the ingredients for an improved strategy for the
poorest countries, a strategy which would lead us to win the war and not only heroic battles.
They are all well known:
- appropriate policies for adjustment and structural reform;
- progress toward participatory democracy and good governance;
- conflict prevention and resolution to ensure peace and security;
- international economic and financial solidarity; and
- debt relief.
But let me insist on several elements critical for their success:
First, they must be designed and, as much as possible, implemented,
with the permanent objective of regional integration as part of the process of broader
integration in the world economy.
Second, "ownership" of the programs by the authorities is vital.
This was a major theme in the external ESAF evaluation, one which underscored IMF
experience in countless cases over the years. Programs work only where the authorities are
fully committed to their objectives and are willing and able to implement them with
determination and with the broad-based support of the public. But when authorities are only
mildly committed to social change, where do we draw the line in pushing our social or
governance agenda? All of us—churches, NGOs, and ourselves—an important role
to play. Yes, I believe there is great scope for the churches and the NGOs to engage with us in
constructive dialogue to reconcile human needs and policy frameworks. This can take place
on the global level, and, even more convincingly, in individual countries. I would hope that, as
a first step, you can use your influence to encourage eligible poor countries to seize the
opportunity of the Bank/Fund HIPC Initiative.
Third, you can also join us in urging the donor community to fulfil—and
to go beyond—its pledges. Specifically, we need to ensure that the ESAF and the HIPC
Initiative are fully funded. More generally, the donors should be encouraged to give urgent
attention to reversing the relative decline in ODA flows, and to see as sacrosanct the
Development Assistance Committee target of reducing by one half the proportion of the
world’s population living in extreme poverty by 2015. To help effective progress in this
direction, we should all press for the adoption and effective monitoring in international and
national basis indicators of progress in adhering to the corresponding detailed target. Similar
suggestions have just been made on the occasion of the second Tokyo International
Conference of African Development (TICAD II).
As to the Fund, as I have outlined today, we recognize a need to continue to deepen our
attention to social policies in partnership with the authorities, and with other official agencies
and the NGOs. But we, in the Fund, are mainly economists, particularly attentive to
macroeconomic realities. You have on your side a unique wealth of grass-roots experience.
Please help us to perceive the message of the voiceless; continue to help us by your
questioning, your friendly criticism to stay alert on the impact of our actions; help us to know
better what is going on at our door; make us attentive to the claim of Lazarus and help us to
read our priorities in his eyes.
Let us continue to work together.
IMF EXTERNAL RELATIONS DEPARTMENT