Speech

Making Globalization Work for All--Remarks by Eduardo Aninat

March 14, 2000

español 

Ladies and gentlemen, I am honored to join you in your reflections on economic policy and poverty reduction, and thankful for the opportunity to comment on the role of the IMF in social issues and how this will evolve. Our dialogue today is one of a number of exchanges taking place on this topic, exchanges that are being increasingly enriched by the voices of a broad cross-section of humanity, including those of the poor themselves.

From Copenhagen to Libreville, from Beijing to Cancun, we are hearing calls to dramatically reduce poverty and make globalization work for all.¹ Yes, global per capita output has risen by 90 percent since 1970. But in Africa, the level of real per capita income today is lower than 30 years ago, while in the Middle East and Latin America, the real income of developing countries has risen but at a slower pace than in industrial countries. Overall, the number of very poor—those living at less than $1 per day—has stayed roughly the same over the past decade; only limited progress has been made in reducing the share of the world population living in poverty.

What can we do to alleviate this unnecessary human suffering and end this squandering of human potential? A new spirit seems to be alive in the international community. African leaders meeting in Libreville in January committed themselves to confront poverty head-on, with the help of their development partners. In fact I must lend testimony—having been an active participant in the African summit—that I had not seen before that date such a strong and deeply felt commitment of African leaders to embrace change. Their resolution echoed pledges made at UN conferences, notably the 1995 Copenhagen pledge to reduce by half the proportion of people living in extreme poverty by 2015.

Fortunately, the world economic outlook offers a hospitable backdrop. After two years of slowdown related to the crises in Asia and other emerging market countries, worldwide growth will now approach 4 percent this year and could well continue at around that rate into the coming years.

Moreover, we have a promising confluence of events.

• The revolution in communications is changing the way we interact and do business, opening up unprecedented opportunities and boosting growth of factor productivity and incomes;
• The increasing globalization of markets offers a very potent force to raise living standards through quickening the pace of investment, job creation, and growth; and
• By the end of the 1990s we witnessed a widespread convergence and meeting of minds on the virtuous connections between democracy and market forces, and between political freedom and economic freedom, giving us a much-needed basis for economic and human development in more sustainable ways.

We must take advantage of these favorable developments to craft economic and social policies that are mutually reinforcing. In this, all of us have a role to play.

In my remarks today, I would like to focus on the IMF's role and how we can all work together to once and for all deliver on our pledges.

The IMF's role

So how does the IMF fit into the picture? A key element of the IMF's mandate, as laid out in the Articles of Agreement, is to contribute to the promotion and maintenance of high levels of employment and real income. To this end, the IMF promotes conditions for what is called "high-quality growth." This concept was explained last month in Bangkok by then-IMF Managing Director Michel Camdessus at UNCTAD X who defined it as:

• growth that can be sustained over time without causing domestic and external financial imbalances;
• growth that is people-centered—that is accompanied by adequate human capital investment, particularly in education and health, to take full advantage of the tremendous leverage of human development on growth and welfare;
• 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 respect for national and local cultural values.

We have long known that sound macroeconomic policies—policies that promote low inflation, realistic and stable exchange rates, and reasonable fiscal burdens—all do favor growth. We have also long known that sound macroeconomic policies and growth-enhancing structural reforms are pro poor since growth is the single most important source of poverty reduction and, also, an important source of financing for targeted social expenditure. For instance, in Chile during the 1990s, four-fifths of the achieved 50% increase in real per capita social expenditure was accounted for by accelerated growth².

In addition, low inflation enhances income equality and benefits directly and in particular the poor. Inflation is, in fact, the most unfair of taxes as it falls heavily on those deprived of bargaining powers and formal compensation mechanisms such as indexation.

At this stage, many developing countries have successfully tackled the "first generation" reforms, aimed at establishing macroeconomic stability and rekindling growth. These include removing distortions in exchange rate systems; opening up trade and payments systems; removing price controls; and liberalizing production and marketing systems, especially in agriculture.

However, despite some progress most developing countries have not yet made enough headway with "second generation" reforms, aimed at truly positioning countries to take better advantage of globalization. These include reforming the financial sector, privatizing state enterprises, improving the quality and delivery of social services, rethinking the role of the state, and establishing good governance (including transparency and accountability).

One reason for this delay in "second generation" reforms now appears to be the concomitant need to tackle head on their social implications. What is the new element here? There is the increasing acceptance that causation between growth and poverty reduction also runs in the other direction. That is, poverty reduction and social equity feed back into growth. Without poverty reduction, it is difficult to sustain sound macroeconomic policies and structural reforms long enough to eradicate inflation and increase the rate of growth—there is unlikely to be the political will to persevere. Also, policies that help the poor directly, such as investing in primary education and basic health, boost their potential to contribute to collective wealth and to benefit from faster economic growth itself.

Thus, what is needed is a virtuous cycle of poverty alleviation, sustained growth, and higher saving, investment, and productivity. All this does not happen overnight, of course. But it can happen in a reasonably limited period of time. If I might be permitted to offer another example from my own country: in about a decade, poverty in Chile has fallen drastically, from 45 percent of the population in 1987 to 23 percent in 1998. This was achieved in an environment of strong economic growth and price stability—which led to real wage growth of more than 3% per year and the rapid expansion of employment. Social outlays were increased and carefully targeted, and protected and inefficient sectors opened up to competition and mobility.

Social safety nets and public social expenditures

But while essential growth-oriented reforms generally benefit the poor, some poor and vulnerable groups can be hurt in the transition process. To guard against this, the IMF works hand-in-hand with policymakers to ensure that cost-effective social safety nets are in place. Indeed, these are needed to protect against temporary surges in unemployment and income loss, whether it be from the transition effects of these reforms, cyclical downturn, or even crisis. The importance of this was brought home by the 1997-98 financial crises, which saw many of the affected economies unprepared to deal with the social fallout. With encouragement from the Bretton Woods institutions, Indonesia adopted a rice subsidy program and a public works program, and Korea broadened and strengthened its unemployment insurance—a critical prerequisite for labor market flexibility. But valuable time was lost as policymakers scrambled to identify those hardest hit there, and to put together the institutions needed to implement adequate social safety nets.

What steps can be taken to avoid a repeat of this situation? A recent review of IMF involvement in social issues suggests:³

• more up front analysis of the likely social impact of key macroeconomic and structural reform measures—this needs to be done before the adjustment and reform programs are being formulated;
• introducing appropriate social policy instruments before the onset of crises and with economic reforms; and
• adequate follow-up of performance and monitoring of safety nets.

Along this line, Mexico, for example, has launched an innovative anti-poverty initiative called PROGRESA, the integrated Program for Education, Health, and Nutrition. It represents a significant break from the past in two key ways. First, it targets rural areas, instead of focusing merely on urban areas. Second, it makes cash transfers—which are conditional upon school attendance and preventive health care guidelines—instead of relying on the often cumbersome direct provision of goods by public sector entities. Early studies suggest that PROGRESA is helping to boost household consumption where needed and encouraging demand for schooling and health services from the targeted population.

A second area where the IMF works with policymakers to cushion the impact of reforms is protecting public social expenditures, particularly for health, education and housing. Indeed, education has proved to be the single most important factor explaining differences in long-term growth performance, poverty reduction, and social equity across countries and regions. What is the IMF's record in this area? A recent survey of 66 countries from 1985-98 found that education and health care spending rose by an average of 2.1 percent a year in real per capita terms. Moreover, these increases have, on average, gone hand-in-hand with improvements in the most critical social indicators.

Some added IMF initiatives

But, of course, much more needs to be done, especially in the poorest countries, which is why two new initiatives are now well under way. First, the IMF, together with the World Bank, agreed at its September 1999 Annual Meetings to put poverty reduction at the heart of the programs supported by the two institutions in the 75 poorest member countries. The key innovation in this new approach is to derive programs from a comprehensive strategy for poverty reduction drawn up by governments, with the involvement of a broad range of key stakeholders, including civil society and the donor community.

The strategy, which is laid out in the so-called Poverty Reduction Strategy Paper (PRSP), provides a focused policy agenda and promotes government accountability by fostering a national dialogue on economic and social policies. There is added hope that this will result in programs that command a greater degree of public support than in the past—the key here being the emphasis on "ownership" of the major economic choices by civil society. The PRSP will identify those priorities for public action that can achieve the greatest impact on poverty reduction, with concrete monitorable goals. It also addresses the critical and complex issues related to enhancing good governance and supporting transparency in policymaking. Moreover, since this process now forms the basis for the financial support of the IMF and World Bank (and, we hope, other creditors and donors) it should help achieve better coordination of external assistance (aid) and more effective use of debt relief.

What does this mean in practice for the division of labor between the Bank and the IMF? The Bank—along with the regional development banks and UN agencies—will take the lead on discussions with authorities on the design of policies aimed at poverty reduction. The IMF will seek to ensure that these social and sectoral programs aimed at poverty reduction can be accommodated and coherently financed within a supportive, growth-enhancing, low inflation, macroeconomic and budgetary framework.

This does not at all mean that the IMF will now determine, for example, how many clinics a government should build, or what student/teacher ratio is appropriate for a country's schools. But the IMF will help governments focus their attention on key spending priorities and, where appropriate, make the case for greater financial assistance.

To further help the heavily indebted poor countries (HIPCs), several of which are in Africa, the international community has agreed to provide deeper and faster debt relief, which is expected to be gradually available to more countries (36 instead of 29). The external debt burdens of the beneficiary countries, in aggregate, will be cut by more than half, reducing their debt to sustainable levels and freeing up more resources for the fight for poverty reduction. This is an opportunity that no eligible country can afford to miss!

But the poorest countries cannot rebuild themselves in an environment where the richest countries give with one hand while holding back with the other. The industrial countries must move quickly to eliminate all trade barriers to the exports of goods and services of the poorest countries. They must also join others to launch a new round of multilateral trade negotiations, with better trade (and growth) opportunities for developing countries into the medium term. They should boost aid flows from their current low levels, make medium-term commitments to aid provision, channel help to countries pursuing the right policies, encourage long-term flows of private capital, and ensure that debt relief is truly additional in the net financing sense.

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In closing, let me express a final remark on the present momentum. As the international community works together to craft sound economic and social policies we must remain aware that we are being graced with a rare window of opportunity to really make a difference now. Of course, all the initiatives and lofty pledges are bound to raise hopes and expectations, and if they are not to be dashed, policymakers will have to act quickly and decisively.

First, they need to keep the momentum for change alive. This means truly delivering on the promised international initiatives. And then reinforcing and broadening the results—for example by continuing to open up the global trading system. Complementary efforts will be clearly needed at the national level, with pro-poor policies well implemented and sustained in time.

Second, we need to curtail the notion of our abstract, pervasive, and totally anonymous notion of the state and the public sector, and make it more attuned to the needs of civil society, NGOs, and society generally. But we must also maintain stability and order to assure the predictability and the certainty produced by the rules of the game in a democracy. Thus, policymakers need to be prepared to manage the tensions and contradictions that will inevitably arise, at the regional and local levels, from structural reforms and the ongoing process of globalization. This means, at a minimum, good governance, supplying basic public social goods, and fostering solidarity. The latter implies a sense of moral justice. One that ensures that disparities are reduced, and those hardest hit compensated by the society at large.

There is a bias for hope: together, we can and will make globalization work for the poor, so as to channel the conflicts, the tensions, and the hard impacts on dispossessed and marginalized groupings (amongst them the poor) in modern societies. After all, history has proven it is not the elites or the powerful that bear the main costs of disarray, lack of stability, inflation, unemployment, and social shock.