India and the IMF
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Opening Remarks by Agustín Carstens
It is my pleasure to welcome you all to this forum. We have the opportunity today to discuss an important topic, which is the focus of a new book edited by George Kopits, Rules-Based Fiscal Policy in Emerging Markets: Background, Analysis and Prospects. This book is the latest in a long list of contributions that George has made to the literature and debate on fiscal rules—much of this research taking place during his almost 30-year tenure at the IMF. Regrettably—from our point of view—he left his position as Assistant Director of the Fund's Fiscal Affairs Department at the end of last year in order to accept a position on the Monetary Council of the National Bank of Hungary. We are very pleased to have him back here today.
Although George wrote chapters for this book and provided editorial expertise, I believe that his most important contribution was in designing the incentives for the book's creation. By organizing seminars on fiscal policy rules in many countries world-wide, he provided the motivation for the contributing authors to write chapters. In my previous position as Under-Secretary of Finance in Mexico, I had the pleasure of participating in an IMF-World Bank seminar—which was largely organized by George—in Oaxaca, Mexico. Experts came from across Latin America, and the discussions were extensive and very fruitful.
One of the things that was apparent there, as in the chapters of this book, is that "fiscal policy rules" means different things in different countries. What rules have in common is that they seek to define a permanent constraint on fiscal policy—to limit discretionary intervention, and thereby confer credibility on the conduct of policy. But the form of fiscal policy rules varies considerably across countries. Rules may place limits on the government budget deficit, public borrowing, or public debt—and each of these concepts can be defined in a myriad of ways. They may target the federal government, subnational governments, or both. Rules may be imposed as a constitutional amendment, a legal provision, or a policy guideline. There may or may not be judicial or financial sanctions for non-compliance.
Such variation is inevitable, and in fact welcome. What works in one country may not work in another. In particular, what works in developed economies may not work in emerging market economies, which often face considerably greater macroeconomic volatility. As we have seen in recent years, this inherent volatility, combined with poor macroeconomic management, can have devastating consequences—for activity, employment, and overall welfare.
I think that the studies collected in this book show that fiscal policy rules can be helpful in addressing the deficit bias that has been at the heart of recent crises in many emerging market economies. But, as the authors point out, effective rules must take into account country-specific cultural, political, and economic considerations. They must be well designed. They must be supported by a robust institutional infrastructure, including a high degree of transparency in public finances. And they must be fully supported by the governing authorities and their constituents.
In my opinion, fiscal policy rules succeed when they serve as an instrument for gathering public support for a responsible fiscal policy. Fiscal rules can be thought of as a social agreement that fiscal discipline is a critical element of a country's good governance—and this is really the heart of what we call "institutional infrastructure." We have seen it emerge with regard to monetary policy—it is now widely agreed that price stability is desirable and, consequently, the institutional infrastructure was created: most central banks have been granted fuller autonomy from the political process. It is encouraging that we are moving in the same direction with regard to fiscal policy by creating the "institutional infrastructure" that will protect fiscal discipline through time.
With these thoughts, I would like to turn the floor over to our eminent panelists:
· Joaquim Levy is Secretary of the National Treasury in Brazil. Joaquim spent six years at the IMF earlier in his career, and has also held a number of economic posts in the Brazilian Federal Government, including Deputy Secretary of Economic Policy at the Ministry of Finance and Chief Economist at the Ministry of Planning, Budget and Management.
· Bhabani Misra is the IMF's Executive Director representing Bangladesh, Bhutan, India, and Sri Lanka. Before taking up his post here a year ago, he was Special Secretary for Economic Affairs in India's Ministry of Finance. Prior to that, he held several high-level positions in state and municipal-level governments in India.
· I regret that Ngozi Okonjo-Iweala is unable to join us today. However, we are privileged to have in her stead Ismaila Usman, who is the IMF Executive Director representing 21 African countries. This constituency includes his own country of Nigeria, where he served as Minister of Finance and, for a decade before that, as Deputy Governor of the Central Bank of Nigeria. We are very pleased that he is able to join us.
· And, of course, our fourth panelist is George Kopits.
The forum will begin with ten-to-fifteen minute opening remarks by each of the panelists. At the end of these initial statements, questions from the audience will be welcome. The proceedings are being recorded so that a transcript can be posted on the IMF website, and so I will ask the panelists and the questioners to please use the microphones. Finally, while we do not have copies of George's book available for sale today, order forms are available just outside the room
IMF EXTERNAL RELATIONS DEPARTMENT