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The IMF and Good Governance -- A Factsheet

Heavily Indebted Poor Countries -- A Factsheet

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98/20

Final version

Addressing Concerns for the Poor and Social Justice in
Debt Relief and Adjustment Programs

Address by Michel Camdessus
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 reform.

* * * * *

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 financial imbalance;

  • 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 programs.

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 conference:

  1. 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.

  2. Social safety nets that are cost-effective and well-targeted are essential to shelter the most vulnerable during difficult times.

  3. 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.

  4. 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 opportunities.

  5. 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 world.

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 adjustment—governance.

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 programs.

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

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