Opening Remarks by Anne O Krueger, First Deputy Managing Director, IMF
October 4, 2004Opening Remarks by Anne O. Krueger
First Deputy Managing Director
International Monetary Fund
At the Lunch for African Governors of the IMF
Monday, October 4, 2004
Good afternoon, Governors and colleagues: I'm honored to have been asked to make some brief opening remarks at today's lunch. I'd like to share with you two thoughts today: one is about current achievements in Africa, the other about the continent's future potential.
A strong global recovery has provided the backdrop for this year's meetings. And growth in quite a number of African countries has been encouraging, offering the hope that there can be an important transformation in the continent's economic prospects.
So the signs are promising, although much more needs to be done.
Of course, outside help is vital. But such assistance is far more productive when it accompanies home-grown reforms and sound macroeconomic policies. As growth rates have begun to accelerate in many African countries, and inflation has continued to fall, we can see the fruits of this multi-faceted approach.
It is, as I say, an encouraging picture and one we need to build on.
How do we build on that, to realize Africa's economic potential? Let me share with you some thoughts about a case where the economic potential was realized—to a degree that no one predicted at the outset. Indeed, many people believed that growth could not occur at all.
Picture a poor, largely rural peasant economy, almost wholly lacking in natural resources. So poor, in fact, that this economy is crucially dependent on foreign aid transfers—amounting to more than 10% of GDP. It is so poor and so dependent on outside help that some economists doubt it is a viable economy without those large aid inflows. It has the highest density of people on arable land anywhere in the world; the highest rate of inflation in the world; and its exports are 3% of GDP, 88% of which are primary commodities.
I am not talking about any African country. I'm talking about Korea in the late 1950s, then the third poorest country in Asia.
And I am not exaggerating the situation. There was genuine alarm when it became clear that the United States had decided to scale down the financial assistance it was providing Korea, on the grounds that Korea would not grow, so only providing support to maintain very low consumption levels was appropriate.
The American decision, though, was a catalyst. Koreans recognized that radical action was needed if the economy was to avoid stagnation and poverty, let alone prosper.
I said no one could have predicted how successful the experiment would be. Let me remind you quite how successful Korea has been. Between 1960 and 2000, real GDP per capita, expressed in 1995 dollars, grew tenfold. That is spectacular growth performance, surpassing China, Brazil, India, Malaysia, Mexico to name just a few examples.
In 1960 both Brazil and Mexico had per capita GDP higher than Korea; by 2000, Korea's per capita GDP was almost three times that of Brazil and almost three and a half times that of Mexico.
This was export-led growth, with exports growing on average by more than 30% a year over three decades or more.
Such a rapid rise in income per head brought dramatic improvements in the quality of life. Infant mortality dropped from 127 deaths per 1000 children under 5 to just 5 in the forty years to 1960. Life expectancy rose from 54 years to almost 74 years. Real wages rose by 8% a year on average between 1964 and 1994, while the unemployment rate fell from 25% to around 3%.
Korea's experience is clear evidence that high rates of growth sustained over a long period raise living standards and dramatically reduce poverty. Making the cake bigger, rather than seeking to cut it in a different way, is the best way of helping people escape poverty.
So how did Korea achieve such dramatic results? They were truly impressive, but there was no secret recipe.
The reforms embarked on from the late 1950s had the clear objective of turning Korea into a modern industrial economy. They systematically addressed fundamental problems. There was a determination to tackle structural problems in the economy, and to stick with a reform program. Sound macroeconomic policies were put in place. The economy was liberalized and the importance of foreign trade was recognized.
There was a conscious decision to rely on incentives to remove any bias towards import-competing activities—and doing so at a realistic exchange rate—thereby increasing incentives for exporters. Exporters gained access to international markets for their inputs at world prices, which helped them improve their competitiveness. The government worked hard to remove bottlenecks and to tackle the problem of poor infrastructure.
In 1960, there was a large but necessary devaluation, and export incentives were adjusted to maintain relative constancy in the real returns to exporters over time. These incentives were uniformly applied across all exports. Over the next few years, almost all quantitative restrictions on imports were converted to tariffs; these in turn were greatly reduced. In the four decades from 1960, exports rose from less than 8% of GDP to 37%.
In 1964, a major fiscal reform was introduced, which greatly reduced the government's budget deficit; at the same time interest rate ceilings were relaxed and the exchange rate regime was changed to a crawling peg.
Tax policy was reformed and tax collection improved. Public spending was brought under control. The huge budget deficits of earlier years were virtually eliminated in just a few years. At an early stage, the importance of infrastructure investment as an aid to exporters and import-competing firms was recognized-and appropriate measures taken.
Later in the reform process, greater emphasis was put on further liberalization of trade and the financial sector. And the reform process has continued as Korean policymakers have continued to adapt to deal with the problems that come with further growth. But the main thrust of economic policy has remained largely constant—an outward orientation with strong incentives for exporters, and a commitment to growth through trade. This has meant that the country has been well-placed to cope with the fresh challenges that economic success brings.
Korea's successful performance was reinforced by policymakers' ability—and willingness—to try to anticipate bottlenecks and potential crisis points. They were successful in this until the 1990s when they failed to anticipate the problems that weaknesses in the financial sector could bring for the wider economy. Korea, of course, was one of the countries most affected by the Asian financial crises of 1997-98. But once again, the economy's resilience was demonstrated: within a couple of years, GDP was back to pre-crisis levels, and growth resumed.
Korea may have been more successful than most, but I must emphasize it is not unique. Other countries have enjoyed rapid improvements in living standards and all have done so by following similar economic policies. Korea stands out not for what it did but for the degree of commitment and singlemindedness that it brought to its task.
In the 1950s, the odds seemed stacked against Korea. It was one of the world's poorest countries. In 1961, it ranked 60th on a per capita income scale at the time when there were far fewer countries in the world. Most African countries had higher per capita GDP than Korea at that time.
Economists were ready to write it off. Yet adopting sound economic policies—in particular, I would argue, shifting the focus of the economy towards trade and export growth with reliance on incentives—brought huge rewards. What started as a struggle for economic survival; turned into a remarkable success story. That is why I believe it offers an encouraging example from which African countries can take heart.
Too often we pay lip service to the benefits that trade liberalization can bring. Too often, governments are nervous about being bold. But the evidence is overwhelming—trade liberalization when accompanied by sound macroeconomic policies, including an appropriate exchnage rate and tariff reduction, is a vital spur to economic growth. Multilateral trade liberalization brings the greatest benefits, of course, which is why the Doha round is so important. But unilateral liberalization brings great rewards as well. And there is no doubt that Korea benefited enormously from its own unilateral moves towards trade liberalization.
Many of the benefits that developing countries can expect to gain from trade liberalization come from liberalizing trade among developing countries. Yes, rich countries should open their markets and reduce and eliminate trade distorting subsidies. But so should poor countries—for their own sake.
Africa is, or ought to be, a continent of economic opportunity. It is rich in natural resources. It is rich in human resources. It is making progress, both in terms of adopting sound policies and seeing the results start to materialize. Korea's example shows how much more can be achieved with vision, commitment and, above all perhaps, a clear understanding of self-interest.