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Uganda and the IMF

IMF Surveillance -- A Factsheet

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INTERNATIONAL MONETARY FUND
PRESS CONFERENCE
ON
EXTERNAL EVALUATION OF
IMF'S ENHANCED STRUCTURAL ADJUSTMENT FACILITY

Friday, March 13, 1998, 1:00 p.m.
IMF Headquarters
Meeting Hall A
 

MR. ANJARIA: Good afternoon, ladies and gentlemen. I would like to welcome you to the press briefing on External Evaluation of the IMF's Enhanced Structural Adjustment Facility, known as ESAF. We like to develop acronyms here.

Dr. Kwesi Botchwey
I would just like to make a few housekeeping announcements, the most important of which is that the contents of the documentation and the press conference are under embargo for all purposes until 12 noon on Sunday, March 15th. You have received the main documentation for the press conference today. You can see the IMF is being very transparent, and we are quite pleased that we are able to hold this event just a day after the Executive Board concluded its consideration of the report of the External Evaluators.

It is a great honor to introduce the gentlemen to my right. To my immediate right is Mr. Bernd Esdar, who is the chairman of the Evaluation Group of IMF Executive Directors, and the Executive Director representing Germany. To his right is Dr. Kwesi Botchwey, of the Harvard Institute for International Development. Dr. Botchwey is one of the evaluators and also the convener of the group of evaluators. To his right, Professor Paul Collier, of Oxford University, one of the External Evaluators, and to his right, at the end, Professor Jan Willem Gunning, of the Free University of Amsterdam.

I am very pleased that three of the four evaluators who participated in the External Evaluation could be with us today, and before I turn over the floor to Mr. Esdar for some introductory comments, I would like to make one or two other points.

Mr. Bernd Esdar
There is an updated fact sheet on the ESAF at the back of the room which you will find useful. Also, as you will hear shortly from Mr. Esdar and the Evaluators, we consider that this is the beginning of a process of internal and external debate in which we welcome views from not only those within the building but also those outside and the public. So we plan to post this documentation and, I hope, the transcript of this press conference on the IMF's web site on Monday. In addition, as part of the ongoing public debate, we plan to have what we call an Economic Forum here in Fund Headquarters on April 13th, and we hope to be able to invite and to have present with us one or more of the External Evaluators who are with us today.

The only other point I would like to make is that this external evaluation complements an internal evaluation which has now been published, and published copies of that evaluation, Occasional Paper Number 156, published in December 1997, are available in the back of the room.

So, with that introduction, I would like to invite Mr. Esdar to make some comments.

MR. ESDAR: Thank you very much. I will not take much of your time, because you are certainly much more interested in hearing directly from Dr. Botchwey, Professor Collier and Professor Gunning about the results of the evaluation of the Enhanced Structural Adjustment Facility.

Let me just give you some background information on the study and on the external evaluation policy of the Fund and some procedural follow-up issues.

The very interesting and stimulating evaluation report of the Enhanced Structural Adjustment Facility is the first concrete outcome of the Fund's uni-developed approach to external evaluation which was agreed upon in the Executive Board in 1996. Therefore, also again in the names of my colleagues on the Executive Board, I would like to express my deep gratitude to Dr. Botchwey, Professor Collier, Professor Gunning and also Professor Hamada, who could not be here today due to other obligations.

The external evaluation instrument was adopted for an initial period in order to build upon and complement our in-house evaluation with the view of obtaining an independent and fresh outside perspective on crucial Fund policies.

The Executive Board was of the view that it would be enlightening as well as prudent to ask for a view that is not clouded by routine or limited by institutional constraints.

l to r: Professor Jan Willem Gunning,
Professor Paul Collier, Dr. Kwesi Botchwey, Mr. Bernd Esdar, Shailendra J. Anjaria
The Executive Board agreed that the Enhanced Structural Adjustment Facility should be the first item for an External evaluation. As you are aware, ESAF was established in 1987 with the objective to support the adjustment and reform programs of the Fund's low-income member countries with financial resources on highly concessional terms.

As its name suggests, ESAF is intended to back fundamental reform in the structures and institutions of the economies concerned, as well as strong macroeconomic policies, with the objective of promoting higher economic growth and external viability in a balanced manner.

The Executive Board was aware that an evaluation of this topic was complex and challenging. While there can be no doubt that the macroeconomic and structural reform framework agreed upon under the ESAF arrangement is one important development and determinant for the success and the process of the development process in individual countries, it is still only one element. Crucial factors in this regard are certainly also the role of government, its policies, and the political, institutional and social environment in the countries themselves.

But there are also close interactions with structural reform and development support with the World Bank and the regional development banks and with bilateral development assistance, as well as private NGO-led efforts, not to mention the critical role of private economic agents and investors. It is also not easy to clearly differentiate between the influence of policy design and policy implementation.

But I am sure the External Evaluators will come back in their statements. Anyway, there can be no doubt that they were confronted with extremely complex problems when the Board asked them to review this Facility.

The Executive Board of the International Monetary Fund discussed the External evaluation Report on Wednesday and yesterday evening. You will find the Summing Up of this discussion also in the document which has been distributed today. Most importantly, you will find that the Executive Board very much welcomed this report and expressed its appreciation to Dr. Botchwey, Professors Collier, Gunning and Hamada for their very stimulating work.

This External evaluation complements well the Fund's latest internal ESAF Review, which was discussed in 1997 and subsequently published as an IMF Occasional Paper which was mentioned before.

The members of the Executive Board were especially reassured by the fundamental view underlying the Evaluators' finding that ESAF was and will be a valuable instrument to assist low-income countries while agreeing also that we should continue to work to further improve the efficiency of this instrument.

Our joint objective continues to be to target the Enhanced Structural Adjustment Facility with the objective of improving the living conditions in the poorest countries to better integrate them into the world economy based on a viable growth and development process in which all groups of the population can participate.

Both the internal evaluation and the external evaluation present some very interesting suggestions how to further improve ESAF in this regard. However, as you can imagine, some proposals from both the internal as well as from the external evaluation got some differentiated reception. There were also follow-up questions.

The Executive Board has asked Management of the Fund to prepare specific proposals on operational steps to draw lessons from these evaluations for the future work of the Fund in assisting low-income member countries. The Board also suggested that the findings of these two evaluations should be further discussed in a constructive dialogue with interested outside parties. The first opportunity will be the Economic Forum which will take place here in Washington on April 13th.

But I have already taken too much of your time and would like to ask Dr. Botchwey to take over.

Thank you very much.

MR. BOTCHWEY: Thank you very much, Mr. Esdar.

Ladies and gentlemen, this is really your day. The purpose of this press conference is to enable you to ask as many questions and seek as many clarifications as time will allow us, so we will all try to be brief.

Mr. Esdar has explained the context and the purpose of the external review which we had the privilege to conduct at the request of the Board. We adopted a method that was dominated mainly by case studies. We looked both at the available documentation in the Fund, the internal documents in the Fund, Staff Reports among them, and then we visited a significant number of countries considering the time frame within which this work was done. We visited between us about eight countries, mainly in Africa, but also in Asia, where we visited Vietnam, Bangladesh, and in Latin America, where we visited Bolivia.

So we visited a sampling of countries that was pretty large, and then we studied the results of our interviews. In each of these countries, we talked with a very broad cross-section of stakeholders. We talked to government officials, ministers, staff of various ministries, NGOs, workers, trade union leaders, workers themselves, and so on. So that in every country, we talked to a fairly significant cross-section of people.

So we based our work mainly on a case study approach, although we had--and I must stress--unfettered access to all available documents in the Fund, as well as the full cooperation of staff and those members of the Board who were on the evaluation group.

We looked at three aspects of the ESAF experience as our terms of reference required us to do. We looked at the issues of the social impact of these programs in these countries. Obviously, this is a very important test of the effectiveness of these programs. We looked at the issues of the external viability gains from these programs. And then we looked at the issues of ownership and those of governance.

I will speak briefly about the issues of ownership, which I addressed directly. Professors Collier and Gunning will speak about the issues of social impact which they addressed. Professor Hamada, who was the fourth member of our group--and who unfortunately could not be with us today, rather unavoidably--dealt with the issues of external viability. And if there is any interest in these matters, we will try to address them to the best of our ability.

In the area of ownership, just very briefly, we noted the most prevalent perceptions in the countries and the concerns of governments as well as the public, generally. We noted that there is a general recognition in each one of the countries we visited of the need for reforms, reforms intended to provide the best possible incentive framework for increased production and recognition that it is only through sustainable growth that we can alleviate poverty sustainably.

We noted that there is a sea change in attitudes of government and even the public to the need for reform. We noted widespread acknowledgment of the need for reform. We noted, however, that among many, many governments and "publics," there was some concern that ways should be found to better anchor these programs in national consensus and ownership as a way of ensuring the sustainability of these programs.

There was some recognition in all of the countries that there has been significant progress on the part of the Fund in the way these programs are negotiated, that there has been some progress in dealing with a larger cross-section of people in the countries than just governments and ministers of finance. Nevertheless, we also noted that there was widespread concern that greater flexibility should be introduced into the whole negotiations regime. Many countries felt that there was some loss of control over the setting of the agenda and over the negotiation process.

We captured many of these sentiments, and then we also noted that in many countries, the image of the Fund tends to be negative, and this undeservedly in some countries, as the Fund sometimes tends get blamed for the sins of others, including some UN agencies and so on.

We tried to be very balanced in our work, balanced and constructive, objective and constructive--constructive because we believe that the ESAF instrument is an important vehicle for the channeling of resources directly from the Fund to these countries, as well as an important trigger for resources from both the donor community and the private sector.

On the basis of the perceptions that we gathered as well as our reading and understanding of Fund practice from the documents, we made some recommendations. They are all set out here. We recognize that you have not had the chance to read them, but I will just highlight the most important ones.

Our recommendations focused both on what we thought the countries themselves must do to deepen ownership and what the Fund must do. We recognized that without the country itself taking steps first to define its own vision of what it needs to do and then developing a sufficient body of national consensus behind this, and finally, conversing, continuing to educate people on what these objectives are--without that, we clearly recognized that ownership wouldn't be possible.

Accordingly, we made conclusions as to how countries might deepen national ownership and take leadership in the setting of the agenda and the negotiation of the reforms themselves. These we thought should include the formation of Economic Management Teams that would include not just the minister of finance but a broader membership of cabinet and other members of government, so that the minister of finance doesn't carry the can alone and get very quickly isolated as the program gets more difficult. We also recommended the holding of national conferences where the aims and objectives and methods of the programs would be openly debated among a large cross-section of people, including civil society organizations.

On the side of the Fund, we recommend a number of things--that steps be taken through better information, education and so on, to improve the image of the Fund. But more importantly, we recommended that to the fullest extent possible, some flexibility should be built into the negotiation framework in mandates and also that wherever possible, the Fund should endeavor in close consultation with the authorities in any negotiation to develop alternative paths to recovery so as to enable the countries then to decide which path and sequencing of the fiscal adjustment especially would best suit their political purposes and space.

The Board for the most part accepted the recommendations that we made in the area of ownership, and we found this very gratifying. You will see this in the Board Summing Up, which you have. And we hope very much that there will be follow-up action, and we stand ready to join staff and members of the Board to do the further work that this process has begun.

I would be very happy to answer any specific questions that you may have in the area of ownership.

MR. GUNNING: Thank you. Let me give you a few of the highlights of what the Report says on the topic of social impact. I should preface that by saying, as many of you will know, that that is one of the most controversial aspects of adjustment programs, not just what the Fund does, but the adjustment programs in general. And many people have argued that these adjustment programs are necessary but often have very grave consequences for the poorest people in society.

That controversy has raged for about a decade now, and something of a consensus seems to be emerging, and the consensus, broadly, says that adjustment leads to growth and that growth is good for both poverty alleviation and distribution. That is not to say that nobody in society loses--far from it--but that the people who tend to lose are typically the better-off in society.

Now, certainly, all is not well, because adjustment typically involves very big changes in society, very big changes in relative prices and, as a result, very big redistributions of income. And while many of the people who suffer from that are not poor, some are. Our Report focuses on that subset, and asks in our sample countries to what extent was it the case that the reforms actually hurt people who are poor.

We do find cases of that, and notable cases are Zambia, where maize farmers were suddenly cut off by early agricultural marketing liberalization; in Malawi, where estate workers were very adversely affected by a sudden change in the price level. These examples we use as an illustration for a point we argue very forcefully, namely, that it is possible to identify the distributional impact of these programs ex ante, that is, before implementation begins.

So the argument is that it is possible, once a series of policy changes have been agreed, to identify in obviously a rough manner which groups will be affected and to what extent those groups are poor. That is important, because that means that action can be taken early on rather than what is often the practice at the moment, namely, putting social safety nets in place, which are often pretty weak and not very clearly targeted.

So the recommendation there, a recommendation to which the Board has been very sympathetic, is that at this stage of program design, there is an explicit analysis of the distributional impact of the program. That doesn't happen sufficiently at the moment. It is feasible and, from what we heard yesterday, it will be done.

Now, the complement of that, the complement of the identification, is--during implementation--to monitor what happens to the incomes of the vulnerable groups--that is, identify beforehand who might suffer, and then make sure that in the course of the program, you follow to the extent possible--it's not always easy--what happens to the incomes of those groups.

Now, let me say that that would be a radical change for the Fund, going beyond the traditional set of variables to be monitored. There has been a debate in the Board to what extent that is feasible, to what extent data exist which make that possible, and we are moderately optimistic on that score--it is certainly not possible everywhere, but certainly it is possible in many countries, and we show it for our sample countries that the possibilities are there.

The Fund doesn't have a specific expertise in that area, and we argue it shouldn't try to acquire that, because the expertise does exist in the World Bank. So another part of the Report addresses the issue of Fund-Bank collaboration very much focused on this point of social impact. The recommendation here is that the Bank indicates the likely social impact beforehand and gives the data needed for the monitoring to the Fund. The Bank was represented at the Board yesterday and indicated that it would be feasible and that the Bank would be willing to take that role.

These two recommendations--identifying distributional impact beforehand and monitoring the incomes of the poor during implementation--are in our view very important. There will be major changes in how the programs are run, and we are very pleased by the positive reaction we have received.

A more technical point, on which I will be very brief. But I will touch upon it because there has been a lot of controversy. That is the topic of social spending, government spending on health and education. The controversy is that people have alleged that very often during adjustment programs, the spending on these social categories has suffered. The technical point we make is that that is a highly ambiguous statement. It may be well be true or it may not be true. People use a lot of different measures for it, highly confusing measures. Very often, they simply look at social spending as a percentage of GDP, and we point out that that is likely to be a very misleading indicator. It may understate spending, it may overstate spending. The error can go either way, and in our sample case studies, we give examples of that.

What we argue for, then, is a unified, systematic presentation which disaggregates changes in social spending by various sources, including changes in relative prices, which is the most important one. So we hope that we get a unified treatment and thereby more clarity in what has really happened to public spending in that area.

I turn to the issue of program design, and I have already mentioned that the distributional impact will have to be assessed at that stage. That sounds very obvious. Less obvious in the report is the point we make that issues of sequencing of reforms, the order in which reforms are done, can have very serious social consequences, and not only is that possible, but it has actually happened several times in the cases we have looked at.

I will give you two examples which illustrate, I think well, where the problem might be. One is a sequencing problem involving early financial liberalization, and by "early," I mean liberalization at the stage when the budget is still completely out of control. That has happened in several African countries in our sample; Zimbabwe and Zambia are very good examples. And it tends to feed back onto inflation, thereby making the stabilization effort very protracted, so that what is intended to be a short, sharp stabilization phase becomes a protracted phase, and it tends to have very serious social consequences.

It is avoidable in our view--we are obviously not arguing that financial liberalization should not take place--it should--but we are arguing that it should take place only once the budget is sufficiently under control. That is the one type of sequencing issue where reforms may have come too early, and the other case is where reforms may have come to late. And a good example of that is rural development. Structural reforms, which are really important for reaching the poor--and the poor in Africa are typically the rural population--tend to take a very long time indeed and involve investment in agriculture, they involve road-building. Those things take a very, very long time. What the Report illustrates is that these reforms have often been pushed to the back. Quite understandably, people have focused in the early years on the stabilization effort, and once that was achieved, they started in some cases on the structure of reforms. We argue that that is a highly problematic order, that front-loading of the rural reforms is necessary.

Let me summarize and sum up. This part of the Report has three recommendations identifying the social impact during program design and subsequently, the monitoring of the vulnerable groups; secondly, the following of what happens to social spending in a more systematic way; and thirdly, possibly most importantly, the greater attention, greater analysis, of sequencing issues at the time of program design.

Our feeling so far has been that the Report has made a real impact and that these recommendations have been very favorably received by the Board. We are very gratified, because this is a very important area of the Fund's operations, and this would involve very significant change. Now, obviously, as has already been indicated, this is only a first step. Implementation has yet to start, but we think it is a very big and important step.

MR. COLLIER: Thank you. ESAF was conceived in 1987, and that was a very different world. It was a world in which Africa was in crisis. The original function of ESAF was essentially to fix that crisis. There was a demarcation, if you like, between the IMF on the one hand and the development finance institutions on the other. The IMF would be there for the short-term fixing of crises; then, once that was fixed, we would get back to the long-term business of the development finance institutions financing long-term growth.

The original purpose of ESAF as described by the Board in 1987 was to promote balance of payments stability and growth in a balanced manner. Those were sensible objectives. And in the first 5, or perhaps even the first 10 years of ESAF, the emphasis quite properly was on balance of payments viability, really fixing the crisis. What we have to say is that the world is entering a new phase. In particular, Africa is entering a new phase in which the emphasis can now shift from just fixing the crisis, from just balance of payments viability, to the emphasis on growth which was in the original conception of the ESAF mandate.

Now, what are those new circumstances? Well, they arise partly by the very success of ESAF in fixing the crises in some African countries, and partly, to be honest, this would have happened without ESAF, because the climate of world opinion has changed. Obviously, the world of the late 1990s is very different as a climate for economic policy formation than the world of the 1980s. And African governments reflect that changed climate.

There is now a class of African governments which have implemented serious policy reforms. They are the new reform environments. Currently, that group of countries--and I should say that in our sample, Uganda was the leading example of that--currently, these countries are experiencing quite high growth rates. In fact, their average growth rate is equal to the East Asian growth rate prior to the East Asian crisis. They are the new East Asia.

They are doing that growth rate with very much lower investment rates than East Asia. In fact, their investment rates-to-GDP are about 10 percentage points below East Asia. So we have this conjunction of high growth in the reformed African economies with low investment. That sounds great, but it is obviously not sustainable. The phase of policy reform delivers a phase of growth without investment.

What is going to happen next, over the next 5 years, is either that growth will decelerate, or investment will rise. If the growth decelerates, we have missed an extremely important window of opportunity. This is the first time in a generation that we have fast-growing African economies. We need to seize that opportunity, and all the international institutions have a role to play in seizing that opportunity.

So if growth is not to decelerate over the next 5 years, investment must rise in these environments. How is that to come about? Well, it is not going to come about primarily through higher domestic savings, and that is because these countries are very poor. We are not going to get an extra 10 percentage points of GDP in investment over 5 years or so with higher domestic savings. It is simply not feasible. So it has got to come from enhanced foreign savings, both public capital inflows and private capital inflows. If that doesn't happen, growth rates will decelerate, the private sector, which is just starting to take notice of Africa because of these high growth rates, will switch off again.

An implication of these rising foreign savings, increased public inflows and increased private inflows, is that the external and indeed budget deficits which have been narrowed in reforming Africa during the crisis management phase are going to have to widen again in the post-crisis phase, but now widen in an orderly manner that produces investment, instead of their previous widening in a disorderly manner that produced inflation and crisis.

In order for investment to be attracted into Africa, the current perception of African as very high-risk has got to be changed. At the moment, survey evidence shows that the single biggest impediment to private investment is the perception that Africa is very high-risk. It is rated as the riskiest continent in the world. I should say that some of those risk ratings exaggerate the risks of Africa. Recent research by the IMF shows that the commercial risk ratings--institutional investor, Euromoney, Economist Intelligent Unit--are systematically biased against Africa. That is, they come out with risk ratings which show the risks as higher than are warranted by the fundamentals.

The risk ratings of the newly reformed economies are improving, but they started from disastrously low levels. For example, in the last year, Uganda improved its risk ratings by four percentage points. That was the biggest improvement in Africa, one of the biggest improvements in the world. On a scale of zero to 100, with 100 as safe and zero as risky, Uganda has now reached 20. Five years ago, it was at 5.

Where does it need to get to before it will really attract capital inflows? Well, the bottom edge of the mix is in the low 40s. Uganda will reach those low 40s, but even at the present, very fast rate of improvement in the risk ratings, it will take something between 5 and 10 years. It is that period, the next 5 years, where investors need all the reassurance they can get.

This gives two roles for ESAF in these post-stabilization, newly-reformed environments, and that is what I want to turn to now. I am going to contrast ESAF in the past with ESAF in the future. ESAF in the past I think suffered from four weaknesses. I say they are weaknesses--they are weaknesses not in the circumstances that prevailed at the time; they will become weaknesses in the circumstances which prevail now.

Firstly, there was no role for ESAF in post-stabilization situations. In practice, the Fund sometimes stayed in the field in these post-stabilization situations--for example, it has stayed around in Uganda; a very good thing--but there has been no clear signal that we have moved in Uganda from a crisis phase to a post-stabilization phase. Clearly, the presence of the Fund during a crisis is a signal that there is a crisis. The presence of the Fund in a post-stabilization world needs to be a signal that we are now in an environment which investors can take seriously.

The second weakness of ESAF is that during the crisis adjustment phase, it sees the need to taper both external and internal deficits. That psychology is in danger of carrying over into the post-stabilization phase. In the post-stabilization phase, total public resources need to increase; total public resources need to taper in. We now know that it is in the good policy environments that aid resources are most effective in inducing growth, and also, they are most effective in inducing private investment. In the good policy environments, one dollar of aid raises private investment by $1.80, so you get a big bonus over and above the direct effect of the aid. So in the post-stabilization environments, ESAF needs to be framed in such a way as to encourage and to factor into the programs these widening deficits, the tapering in of total development financing. That doesn't necessarily mean the tapering in of ESAF financing.

The third weakness of ESAF is that consistent with the need to control deficits in a crisis phase, the Fund has tended, if anything, to exaggerate the magnitude of budget deficits--partly, I suppose, to concentrate the minds of governments with the need to get those budget deficits reduced. Obviously, in a post-stabilization phase, that is quite dysfunctional. In particular, the proper way to define a budget deficit is to do it having included all the grants and the grant element of aid that the country is receiving. At the moment, that is not done. Budget deficits are reported by the Fund excluding any grants and grant equivalent that the government is receiving. That gives the appearance of massive and unmanageable budget deficits, when those budget deficits are often small or even budget surpluses.

A final feature of ESAF which would need to change in a post-stabilization environment is that in the pre-stabilization environment, obviously, the emphasis is upon negotiation--negotiation between a Fund team and a recalcitrant government. In the post-stabilization phase, the emphasis needs to shift from negotiation for further policy change to surveillance and accreditation of the level of policy reform which has been achieved already and which is being maintained. The Fund needs to be reassuring the investment community through surveillance and accreditation that the policy environment is staying satisfactory. So the emphasis can shift from negotiation to surveillance and accreditation.

We made in effect in this area two proposals. The first of these, the Board has accepted, and that is that there is to be a post-stabilization environment with a new role for ESAF as an instrument, quite possibly as a precautionary ESAF. That will be a temporary phase. It is not turning the IMF into a development finance institution; it is specifically addressing this transitional phase of high-risk, low-investment, but rising investment, and we are very encouraged by that.

The corollary of that, that negotiation will gradually give way to surveillance and accreditation, is I think still a matter for debate. We are very encouraged by the fact that the Fund has initiated a process of gradual evolution of ESAF, and we are confident that over the next 2 to 3 years, the ESAF instrument will be refined to be useful in this new post-stabilization environment.

QUESTION: I was just curious--you talked about the gains in external viability. Can somebody just address that as well?

MR. COLLIER: Yes. To an extent, what I have said has in fact addressed external viability. That is to say that one moves from a phase in which external deficits are reduced to a post-stabilization phase in which they are increased again. Now, it is very important that the phase of rising external deficit in the post-stabilization world be in an orderly fashion where the Fund is satisfied that these widening deficits are consistent with external viability. An analogy would be what happened in North and South America in the late 19th century when, at times, very large capital inflows were coming into North America. In the late 19th century, that was in the range 5 to 10 percentage points of GDP financing the high level of investment in your society.

Where we make recommendations here is not just that these external deficits should widen in an orderly fashion, but that they can be monitored not just looking at exports-to-debt, which has been the traditional measure, but also to include total debt-to-GDP. This would give a more balanced view of the extent to which debts are viable.

QUESTION: Mr. Collier and everybody else, if it is true that the nature of the ESAF has to change because the world has changed, as you have said, and there is a new generation of leaders, the emphasis should be more on growth than on balance of payments stabilization in these post-stabilization programs, what does this mean for the program as such and the cooperation and collaboration with the World Bank. Because then if ESAF is really going into a very distinct change in its emphasis from stabilization into growth programs, this could lead to a controversy, with people saying, well, where is the difference between the Fund and the Bank? So why do we have this, and shouldn't there be, then, a pooling of reserves and whatnot, and is it really necessary to have the ESAF?

MR. BOTCHWEY: I think it's important to appreciate that we are not saying that all the low-income countries are in this stage that we call a post-stabilization phase that must, deservedly, emphasize growth. What we are saying is that there are still a large number of these low-income countries in Africa and elsewhere which are grappling with the problems of stabilization, and clearly, there, the role of the ESAF in this traditional mold, as it were, is clearly warranted.

I guess the question is most pertinent in those countries that have achieved stabilization, or a fair measure of stabilization, and which therefore need to emphasize accelerated growth and with all of its implications for the roles of the Bank and the Fund.

MR. COLLIER: Dr. Botchwey has said just what I wanted to emphasize, namely that it is still appropriate to think of most African economies in the old ESAF phase; but there are some economies which have moved out of that phase. These are the particularly important economies, because it is these economies where we can begin to see really rapid growth. They can become the successes off which the other countries learn. So that the process of transformation across Africa will be one of emulation of star performers. That is why we place such emphasis upon the newly-reformed environments.

You asked about the demarcation between the Fund and the Bank in these post-stabilization environments. I don't think it is as problematic as you sketch. Firstly, the Fund's role is still not a permanent role; it is a role of providing enough scrutiny, accreditation and investor reassurance during the phase in which, if you like, these risk ratings are rising from 20 to the mid-40s.

The focus of Fund scrutiny and accreditation should be on the key macroeconomic variables. We would definitely not want the Fund to become over-extended into a wide range of structural issues. The structural policy issues are important in the growth phase, obviously. They are not the comparative advantage of the Fund; they are the comparative advantage of the Bank.

MR. ESDAR: One small point. I think you will find that this aspect was discussed in very much detail in the Board on Wednesday, and you will find it on page 4 of the Chairman’s Summing Up. But I would just refer to another point. This is a more general problem the Fund is confronted with, and which we are looking for appropriate ways and means. Whenever we have provided support to a country after a balance of payments crisis, there is a problem to try to get a kind of certificate to these countries if the reform measures are implemented, to get them into a sustainable policy implementation course which is accepted and appreciated by markets or, in the case of poorest countries, by bilateral and multilateral donors. I think the question is which way such a certificate of good policy could be provided--I say best way; it is a very important one for this institution as well--there are different ways, and we can discuss whether Article IV consultations, the classical surveillance process--is sufficient or should be improved; whether what we have done in other countries sometimes, precautionary arrangements, would help; or if we should establish precautionary ESAF arrangements--we have not done this up to this time, but this is an issue which has to be discussed.

QUESTION: I think Mr. Botchwey mentioned that the Fund still has a negative image in many countries and that it often gets blamed for the sins of others. Is this negative image increasing all the time, do you think, or is there a way of turning it around? In that context, I was interested--I think you had a recommendation that rather than having some experts fly in, that there should be more emphasis on residents staying in the area.

MR. BOTCHWEY: Yes. Thank you. We didn't find that the incidence of this negative perception, so to speak, was rising so much. There is a bit of a correlation between the performance of the economy and the image that the Fund has. In many countries that are doing better--for instance, in Uganda--we found that the Fund's image turned out to be a lot better than it was in other countries. It is not rising.

We were concerned that it is a serious enough problem to be addressed in its own right for two reasons. In order not to deter governments from dealing with the Fund and availing themselves first of the Fund's technical capabilities as well as, obviously, the Fund's resources, we were concerned that the Fund's image in the eyes of the public should be so negative that governments worry about the political costs of dealing with the Fund. Obviously, this is not going to help ownership very much; it is not going to help countries' own reform programs that are designed to enable them to grow. And it is also obviously important for the Fund's own credibility and the continued pursuit of its obviously important objectives in a changing world.

So no, the negative perception is not rising, but we thought it was serious enough to address. And just to explain a little bit what I meant by the Fund sort of getting blamed on occasion for the sins of others, obviously, we are in a very difficult world. In the low-income countries, the world is going very, very fast. The world economy has become globalized, as everybody says. These are countries that have been marginalized in this process and where the incidence of poverty hasn't fallen as rapidly and as steeply as it has in Indonesia and the East Asian countries. "Rapidly" might be in everybody's imagination. It hasn't happened in these other countries, and therefore, there is a lot of yearning for higher growth and some searching, some disposition to find scapegoats, if you like, for these problems. So it is important in our view that the role of the Fund be understood. We thought it was important that the Fund itself should interact with people more and better in these countries so that they understand what the Fund does.

And just very quickly, we went to one country where businessmen were particularly upset about labor regulations, for instance, which somehow made it a regime for strikes that they thought really were inimical to the development of sound industrial relations in the country. This particular proposal had come from the ILO, not from the Fund, but they were upset with the Fund nevertheless. I went to ask them why, and they said, well, the guys are in charge of everything anyway. So it's that kind of thing.

That is not to say that the image problems are not real. It is not to say that the Fund is entirely without blame. But clearly, there are instances where the problems lie elsewhere, including the countries themselves.

QUESTION: A question for Mr. Esdar. You mentioned earlier that this was the first use of the external evaluation. I take it from that that the Board has plans for future ones. Could you tell us what to look forward to, and if this was the first choice, were there other contenders for this honor?

MR. ESDAR: I think in the beginning there was broad agreement that the first issue should be ESAF, not the least because of the broad interest in this facility. We are now in the process of preparing the second project. There hasn't been a final decision on that, but it will probably be in the area of the Fund's surveillance role.

[Edited transcript]


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