Challenges Facing the Transition Economies of Central Asia--Address by Michel Camdessus
IMF News, May 27, 1998
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- Published: May 27, 1998
Context and purpose
- Address given at a conference on "Challenges to Economies in Transition", Bishkek, Kyrgyz Republic - May 27, 1998.
- Speaker: Michel Camdessus, Managing Director of the International Monetary Fund.
- Purpose: Review the Kyrgyz Republic’s five-year experience with the som, assess opportunities and risks from the global economy, and draw lessons for Central Asian transition economies from broader IMF membership experience.
Globalization — opportunities and risks
- Opportunities:
- Over fifty years of increasing integration in trade and capital flows; telecommunication and information technology have expanded markets.
- 1996 private capital flows to developing and transition economies reached $235 billion, of which nearly half went to Asia.
- Examples of human development gains associated with integration:
- Malaysia: share of population below the poverty line declined from almost 50 percent in 1970 to less than 10 percent in 1995.
- Korea: literacy rate increased from around 30 percent in the mid–1950s to over 95 percent today.
- Vietnam example: went from being a net importer of about half a million tons of food annually in 1986–88 to being the world’s third largest rice exporter in 1989 following sweeping agricultural reforms.
- Risks:
- Sudden reversals of investor confidence can turn large capital inflows into massive outflows (illustrated by crises in Thailand, Korea, and Indonesia).
- Countries unable to participate in trade or attract capital risk marginalization, stagnation, and increasing poverty.
- Commodity price weakening and less favorable international capital market conditions can transmit shocks across regions.
Ingredients of economic success (three key requirements)
- Allow market forces to set prices and allocate resources:
- Cited uneven progress in Central Asia, especially in agriculture, leading to lower private investment, labor productivity, output, and rural incomes.
- Need to open the economy to foreign trade, unify exchange rate, and remove restrictions on current transactions to benefit from international price signals and competition.
- Stable macroeconomic environment:
- Low single-digit inflation is presented as a necessary condition for sustained and equitable growth.
- Necessary policies include disciplined fiscal policy aligned with revenues, satisfactory public investment in infrastructure and human capital, and well-targeted social safety nets.
- Scope for strengthening fiscal management: improving tax systems and tax administration, establishing effective treasury systems, prioritizing public expenditure, and putting pension systems on a sustainable footing.
- Manage external debt wisely; excessive or inappropriately timed borrowing can compromise financial stability and growth.
- Suitable institutional framework for the private sector:
- Need for simple and transparent regulatory systems to reduce compliance costs and encourage market entry and foreign investment.
- Effective legal and judiciary systems to protect property rights, enforce contracts, and provide law, order, and personal security.
- Tax systems that are simple and broad-based, with limited exemptions and reasonable and uniform rates to improve compliance and revenue collection.
- Importance of coherent, sufficiently deep reform to convince investors that reforms are irreversible; partial reform may not elicit significant private-sector response.
- Redefined role of the State: disengage from market functions the private sector can perform; concentrate on rule of law, reliable public services, prudent macroeconomic policies, and fair regulatory frameworks; stamp out corruption as part of "good governance."
Lessons from East Asia and implications for Central Asia
- Root causes of recent East Asian crises:
- Domestic institutions not strong enough; policies not flexible enough to handle demands of rapid economic success.
- Specific manifestations:
- Failure to address overheating pressures and insufficient exchange rate flexibility; implicit guarantees leading to excessive external borrowing and short-maturity exchange rate exposure.
- Inappropriate government intervention including lending based on personal connections and government directive, causing inefficient investment and deteriorating bank balance sheets; lax prudential rules and weak banking supervision.
- Lack of data and transparency concealing problems, leading to complacency and later market panic.
- Three points highlighted for Central Asia and other countries entering international capital markets:
- Maintain sound macroeconomic policies, correct macroeconomic imbalances promptly, and continue necessary structural changes.
- Strengthen domestic financial systems; delaying banking-sector reforms is costly. Historical examples:
- Cost of the banking crisis in Chile, with indirect costs, exceeded 30 percent of GDP.
- The one in Venezuela, certainly more than 20 percent of GDP.
- Promote transparency: regular, full information for the public reduces incentive for policy mistakes and lowers spillover risk; reliable data helps markets distinguish policy soundness and reduces opportunities for corruption.
- Caution against "crony capitalism" style relationships among enterprises, banks, and government; lack of transparent ownership, uneven regulation, ad hoc decisions, and impeded market discipline can build serious imbalances that provoke abrupt market corrections.
- Positive note: a strong and stable currency is beneficial only when underpinned by quality macroeconomic and structural policies; hope expressed that future anniversaries will celebrate Central Asia’s successes—what other countries can learn from the "snow leopards" of Central Asia.
Specific Kyrgyz Republic observations
- The som, introduced five years earlier, contributed to economic progress under President Akayev’s leadership.
- Reversal of dramatic decline in output: "for two years in a row growth of output has been around 7 percent."
- Inflation reduction: from "the destructive hyperinflation level of 1,259 percent, where it was in 1992, to the single digit level where it stands now."
- Government’s new program aims to consolidate achievements, reverse trends toward increased poverty, and ensure the poorest benefit from future expansion.
- IMF expresses full determination to support the program and to mobilize international community assistance.
Challenges Facing the Transition Economies of Central Asia--Address by Michel Camdessus, May 27, 1998.