The Political Dimensions of Economic Reforms: Conditions for Successful Adjustment--Address by Mr. Alassane D. Ouattara

June 9, 1999

Keynote Address by Mr. Alassane D. Ouattara
Deputy Managing Director International Monetary Fund

Berlin, Federal Republic of Germany
June 9, 1999

I. Introduction

Let me first say how pleased I am to be back in Berlin at the invitation of the Foundation for International Development, and to participate in another policy dialogue on a matter of critical importance for Africa’s future. Our first dialogue on Africa last December provided for a stimulating exchange of experience and ideas on how Africa could best face the challenges of globalization. Judging by our discussions thus far, this present dialogue will be just as successful. I hope I can prevail on our German friends to continue in this vein, and to build these dialogues into a regular forum for the exchange of views on issues of importance to Africa as it moves into the 21st century.

As I come to the end of my tenure as Deputy Managing Director of the International Monetary Fund, I can look back on more than thirty years of professional experience in the field of economic policy. I have had countless discussions during that time, with Heads of State and Ministers of government, with colleagues in international institutions, representatives of civil society and with ordinary people around the world. As I reflect on these discussions, I come to the view that development rests on three pillars: good economic policy; a conducive legal and political environment; and attention to equitable social development.

None of these pillars can guarantee development on its own. Apparent economic progress may be built on feet of clay, if one or both of the other elements are neglected— economic success can often paper over political fault lines that could erupt into strife if the economic momentum falters; it can also hide social inequalities and mounting frustrations that become glaringly evident if growth should slow. In fact, this may be a part of what we are seeing in East Asia in the wake of the financial crisis there—social and political issues that will have to be resolved, regardless of how quickly the economies of these countries recover from the crisis.

I will touch only briefly on the first of the three pillars, economic policy, because I think there is little disagreement among us as to what is required. I will then share with you some of my thoughts on the theme of our dialogue here in Berlin — the political aspects of economic reform — and the various elements that contribute to building the type of legal political environment that is so important for economic success. I will say relatively little here about social development, which is the final objective of all our efforts, and for which we would need an entire policy dialogue all on its own. Suffice to say at this stage that the mark of successful development in any country, in my eyes, is a sense among its citizens of having a personal stake in their nation’s development, and a shared responsibility to contribute actively toward that development.

Finally, I will mention briefly the international environment in which Africa will be seeking to accelerate its development—the various reflections that are under way on how to improve the architecture of the international monetary and financial system, and how these reflections are of direct relevance to the topic of our discussions here in Berlin.

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II. Economic policy—the foundation of development

I think we all agree that there can be no successful development without good economic policies. A broad consensus has developed among policy makers over the past few years on the basic elements of such policies. First, macroeconomic stability (sound fiscal policies, a prudent monetary stance, and appropriate exchange rates) aimed at achieving low inflation and facilitating growth. Second structural reforms to remove bottlenecks and enhance the efficiency of resource allocation, liberalize market access, foster trade and investment, and create a propitious environment for private sector development as the principal vehicle of growth.

Most African countries have made much progress in improving the quality of their economic policies over the past ten years, after many years of disappointment and stagnation, and the results are evident. Macroeconomic performance has improved considerably — growth is up, inflation is down, and external and fiscal imbalances have narrowed. But there is clearly a need to do more. Growth must be raised to achieve a significant reduction in poverty and offer Africa’s rapidly rising population a chance for a better life. One area where African countries are lagging behind is in integrating their economies into the global marketplace. The risks of not doing so are much too high for a continent which is struggling to narrow the income gap and catch up with other developing regions. The advantages of integration are substantial — access to a wider range of goods and services at competitive prices; the benefits of exposure to international competition on the efficiency of domestic producers; and the ability to tap into the ever-expanding pool of international private capital to finance the investment that Africa needs so desperately to accelerate growth.

But the crisis in East Asia has also highlighted two important points. First, no country conducts its economic policy in a vacuum. In our increasingly integrated world, the policies of one country are affected by those of other countries. The degree of this interdependence varies and it is certainly not symmetrical. But it does put a premium on policy coordination and economic cooperation. For Africa, with its generally small economies, this underscores the importance of regional cooperation, which I see as an effective stepping stone to global integration. Second, in a world of interwoven markets, free exchange of goods, services, andideas, and highly mobile capital, good economic policy can be much more effective, but the market’s sanctions of poor policy have also been sharpened. Appropriate, consistent, and predictable policies are rewarded, but policy slippages and institutional shortcomings are punished, quickly and harshly.

Therefore, it is in every country’s interest to ensure that the formulation and implementation of economic policy is as good as it can be. This leads me to three conclusions: First, governments must recognize the importance of the right institutional and political framework for policymaking and work constantly toward improving it, so as to limit the scope for potentially damaging policy mistakes. Second, just as countries increasingly cooperate as equal partners, working together and learning from each other to strengthen their economic performance, so too should the state nurture the partnership with its citizens, cooperating with them in setting out the objectives of policy, and involving them as directly as possible in the process of their action. These first two issues are the subject of our dialogue.

And finally, since economic policy is not an end to itself, since it is but one of the pillars of successful development, policymakers must always ask themselves whether their decisions advance social development. This question must guide the debate over the objectives of policy, and decision makers must never lose sight of the social dimensions of the policies they advocate.

III. The political dimensions of economic reform

The "new" economic policy debate revolves around issues like transparency, accountability, governance, consensus and participation. Five or six years ago, these concepts were not at the center of our reflections, but they have always applied. In fact, the countries that have developed successfully over sustained periods of time are those that have achieved transparency, accountability, governance, consensus and participation, or at the least, have prevented shortcomings in these areas from gaining the upper hand. What the Asian crisis has also shown is that if such shortcomings do gain the upper hand, economic decline can occur, even after long periods of success.

I believe that strengthening transparency, accountability, governance, consensus and participation requires finding the right answers to the following questions:

  • what is the proper role of the state in the modern world?

  • what is the necessary institutional framework for proper policy formulation and implementation?

  • does the capacity to formulate and implement policy exist, and if not, how can it be created? and

  • what is the proper role of other groups in the society?

a. The role of the state

One of the reasons for the disappointments of the 1970s and 1980s in Africa (as in some other developing regions) is that too much was expected of the state. It was to be a producer and employer, as well as an educator and healer. It was to protect the infant economy from the harsh world outside the borders, and also protect the "essential industry" from destabilizing competition within the borders. This role was too widely drawn, given the limited resources and administrative capacities of African governments, and the pervasive presence of the state in all areas of economic activity stifled private initiative.

So what is the proper role of the state in modern society? There is now a growing consensus on this issue: the state must establish a set of mutually agreed, fair ground rules for private activity and enforce them equitably and consistently; it must provide internal and external security for its citizens; and it must focus its limited resources on fostering the development of human capital (health and education spending) and basic infrastructure. If the state limits itself to these objectives and combines them with a credible and predictable policymaking environment, it will have made the best possible contribution to the development of the economy.

But when I say that the state should set and enforce the ground rules, I also mean that it must set the moral tone for social and economic activity. Private individuals and enterprises will take an example from their leaders. The state must therefore hold itself to the highest standards of ethical behavior — more than any other part of the society, the government must respect the rule of law that it is charged to uphold. There must be no tolerance for corrupt or inequitable behavior within the ranks of the government; and the state must be perceived to be guarding against abuses of power in any form. Only then will the government be seen by its citizens as a credible guardian of their freedom, and a true partner in development.

b. The necessary framework for policy formulation and implementation

This leads me to my second question — what is the necessary institutional framework for successful policy making? All who are engaged in the conduct of public policy know that a government must have some scope for flexibility, in order to respond to exceptional circumstances, or to deal with challenges not anticipated in advance. But such discretion must be exceptional indeed, and strictly limited in its scope. A rules-based approach is the best guarantee of the impartiality, consistency, and predictability of government action.

This underscores the critical importance of the right framework for policy formulation and execution. On the one hand, this includes the regulations and legislation governing economic activity and all other areas of human interaction. On the other, it refers to the institutions of government, which must have clearly defined responsibilities and competencies, as well as the necessary human and financial resources to carry them out. Where the rules and regulations are clear, and where institutions apply them predictably and impartially, economic security will flourish, and social justice becomes possible.

What are some of these institutions? A competent and politically independent judiciary, particularly in the area of commercial law. An autonomous central bank charged with the conduct of monetary policy. Independent regulatory agencies charged with the supervision and prudential oversight of key sectors, such as financial institutions, insurance companies, public utilities, health. Agencies that guard against anti-competitive practices in private industry, banking and trade. A parliament that has access to all the information needed to exercise oversight and control over the executive branch, and the resources necessary to do so effectively.

Creating all these institutions is a major challenge. But a start can be made on as basic a level as the government budget. It should be programmed following established rules and open, transparent procedures; it should be submitted for discussion and approval by the parliament; it should be carried out as approved, with no recourse to extrabudgetary spending or unapproved taxation, under continuous internal supervision and control; and its execution should be subject to ex-post verification and supervision. If these principles are followed, there will be transparency and accountability in government action, and predictability and consistency in the implementation of policy. This is what we mean by good governance in public affairs, and we will find it easier to demand good governance also in private corporate affairs.

c. Building the necessary capacity

We have made considerable progress in Africa toward improving the institutional setting of policy in recent years, but we are still at the beginning of a long process. We must make impartial and competent institutions the backbone of our society, and our reliance on them and trust in them must become second nature to us. But of course, institutions are only as good as the people that run them. The question is therefore, does the necessary capacity for formulating and implementing good policies exist in Africa? Here we must clearly make a concerted effort to improve the situation.

In all my visits to African countries, I am consistently impressed by the quality and commitment of the younger generation of civil servants, trade unionists, bankers and entrepreneurs. There is no lack of African talent. But we need to do more to encourage these bright young people to engage their efforts on behalf of their nation’s development, in the civil service and in public institutions.

Civil service reform is the key to this. African civil services are too large. Remuneration levels are woefully inadequate, and consequently civil servants are demotivated, and susceptible to the temptation to earn a little on the side. Under such conditions, it will remain difficult to attract and retain the best and the brightest. Most countries have made progress in controlling the civil service wage bill — now it is time to extend those efforts to the reform of remuneration and advancement systems, so that merit is justly rewarded, and to achieve a closer matching of skills and competencies with the requirements of the administrations and institutions. One area that I would like to underscore is commercial jurisprudence — the respect of contracts and property rights and all other aspects of economic security need an independent and qualified judiciary.

Another way to strengthen capacity is through exchange. There are many highly skilled Africans abroad, in private enterprise and international organizations. These citizens need not be completely lost to their home countries--they should be thought of as a resource that could be tapped. Governments should try to reverse the brain drain by making attractive offers to these skilled citizens to come back home and bring their skills into the public administration, if only for two or three years.

The international community can and must help in this capacity-building effort, though technical assistance, and financial resources where necessary. At the Fund we are making a concerted effort to intensify our technical assistance to African countries, as shown by the recent establishment of a Joint Training Institute. I am also very encouraged by the clear recognition on the part of African leaders that technical assistance has to be tailored to the specific requirements of the recipient country, and better coordinated and focused than it has been in the past.

d. The role of civil society - participation and consensus-building

The final aspect of the political dimension that I would like to raise this evening is the proper role of civil society. It is clear that reforms are most likely to succeed when the population is involved in setting the priorities of the reforms, and is kept fully informed of progress. This creates the necessary consensus for reform, and a sense of participation in the nation-building process. Consensus and participation, as well as open access to information about government actions, are also necessary to cement transparency and accountability in public affairs, because they create the basis of the regular oversight, supervision and control of government actions.

Parliaments, trade unions, confessional groups, professional associations, nongovernment organizations of all sorts — they all have a very important role to play in identifying development priorities, helping to formulate policies to achieve them, and ensuring that these policies are indeed carried out. Independent and autonomous domestic institutions, civil and professional associations, and NGOs can all act as "agencies of restraint" to government action. The same can be true of membership in regional or international organizations and adherence to their common objectives.

The most fundamental agency of restraint, however, is the institution of free and fair elections, and their corollary, the smooth and peaceful transfer of political power. These are the outward manifestations of a firmly anchored democracy — they translate the social consensus into political choices and represent the population’s most effective sanction of the actions of government.

With time, these institutional and other agencies of restraint will become an accepted part of the social fabric in Africa, but we are still at the stageof building them up. We must thus be aware of how fragile they still are, and we must protect and nurture them. In particular, most African countries are only at the start of the arduous process of developing a tradition of democracy, and establishing the institutions that safeguard it. Only when these institutions function well and automatically will Africa’s people be assured that their interests are being represented and actively promoted by their regents. And only on this basis will there be any guarantee that government policy does indeed serve the fundamental objective of equitable and sustainable social development.

IV. Social development — the ultimate objective of public policy

I have spoken of consensus and participation as essential to successful reform, and to achieving broad agreement on the priorities of policy. These will, of course, vary from country to country, depending on the particular situation, history, culture, and requirements of each population. But certain key principles seem to be common to social development in any country:

  • the rule of law, and the establishment of a system of checks and balances;

  • participatory and representative systems of government;

  • freedom from repression and the right to express preferences for all citizens; and

  • an institutionalized sharing of power.

In the last decade, most African countries have recognized the importance of these principles, and are moving away from systems of autocratic leadership, however enlightened, towards rules-based institutions which guarantee the place of each citizen and where all have equal rights and privileges under the law. But let us not underestimate how difficult a task this will be. There will be formidable opposition from those that have a vested interest in the status quo. Developing these new institutions will take human and financial resources that are in short supply in many African countries. And focussing on the objectives of social development will require the willingness to break with old ways and embrace far-reaching economic, political, and social reforms.

V. The new international environment

Africa’s development will take place in a new international context — one of globalized and integrated markets for goods and services. The international financial crisis of 1997-99 has raised challenges for the international financial and monetary system that must be met, if future crises are to be prevented and our ability to deal with shocks enhanced.

As you all know, the International Monetary Fund and a host of other multilateral institutions and governments have been reflecting on ways to improve what we call the architecture of the international financial system. At issue is not the radical reform of the system, but adapting it to the new realities. And the instruments chosen are transparency, norms of surveillance and supervision, partnership of public and private sector in crisis prevention and resolution; confidence building through open discussion and information; universally accepted rules and standards for international transactions.

One may ask how this affects Africa, which is not as closely integrated into the global economy, and was thus able to escape the worst of the international financial crisis. The answer is, in the words of our Managing Director, that "[t]he standards and principles now being formulated at the international level must be turned into more precise standards in individual countries and implemented systematically." Like every other region, Africa will have to implement these standards and principles. And not surprisingly, these standards and principles are those that Africa would have to achieve in any event, to promote its own development.

And so we see that transparency, accountability, governance, consensus and participation not only are needed for social development at home, but will facilitate the integration of our African economies into the global marketplace. Africa has the advantage that, in many cases, these standards,codes, and institutions are being set up for the first time, and can be made to correspond to international best practices from the outset. This is always easier than reforming existing institutions and overcoming entrenched practices.

As you know, the IMF has made the strengthening of transparency, accountability and good governance in economic affairs an integral part of our policy advice to member countries. Our membership has validated this concern by giving the staff the mandate to examine issues of economic governance. On occasion in recent years, we have even interrupted programs where there were serious misgivings about governance issues. The international community is also paying increased attention to such issues. More and more we will find that donors distinguish in their lending decisions between "good" and "bad" regimes, between governments that foster the active participation of the citizenry in the policy debate, and those that practice policies of exclusion. This may sound like "political" conditionality — but in fact it is the recognition that donor assistance will be most effective where all three pillars of development are in place.

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I have spoken relatively little today about purely economic policy. As I said at the outset, this is only one of the pillars of successful development, and the grand debates about what constitutes successful economic policy, have for the most part already been held. We now need to be as frank on the need for accompanying political and institutional reforms as we are on the need for macroeconomic stability. We also need to recognize that reaching the necessary standards of governance, transparency and accountability will be an arduous process, full of potential pitfalls. Africa has made a solid start toward this objective. We now need to maintain and intensify this effort. And I think African policymakers will find, as they continue this struggle, the support and encouragement not only of their external development partners, but of their own citizens. There is no better foundation for lasting success.

Thank you for your kind attention.


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