The IMF's Views and Actions in Dealing with its Poorest Member Countries, Remarks by Flemming Larsen, Director of IMF's Offices in Europe

September 11, 2003

Flemming Larsen
Director of IMF's Offices in Europe
Introductory Remarks at World Council of Churches - World Bank - IMF Meeting
Geneva, September 11, 2003

I would like to focus my introductory remarks on how the institution I represent should be viewed from the perspective of the concerns you all have about sustainable development, poverty alleviation, and social justice. These concerns are very much shared by the IMF's member governments, management, and staff.

It is not an easy task to convince critics of the Fund that the IMF's views and actions are driven by ethical considerations and concerns about people's welfare. When thinking about the IMF, our critics tend to associate concepts such as social injustice, austerity, violation of human rights, protection of the interests of financial speculators and transnational enterprises, and of course dominance of U.S. views. That we are often labeled neo-liberal is clearly not meant as a tribute to a compassionate institution.

But before taking a closer look at our policies and actions, remember that the IMF emerged from the ashes of the second world war as one of the corner stones of a strong economic and financial global economic system, based on cooperation, solidarity, the "rule-of-law" in international economic relations, and instruments to help countries in financial distress. The objective was to help members achieve high living standards, and sustainable economic growth and development, while eschewing the beggar-thy-neighbor policies that had contributed to the Great Depression. The language of our Articles of Agreement, or the IMF's constitution, is somewhat technical, but there can be no doubt that ethical considerations were overarching among the IMF's founding fathers who had all seen the devastating effects of the Great Depression and the two world wars.

Since then the Fund has evolved, and so has the language you will typically find in Fund policy statements. But the objectives of our work have not changed. If anything, our policy statements have become much more precise about the Fund's responsibility to guide member countries on some — but certainly not all — of the essential prerequisites for economic progress, namely macroeconomic and financial stability. This is because economic and financial stability have proven again and again to be absolutely necessary conditions for sustained improvements in living standards. And because economic and financial instability and crises are almost always felt disproportionately by the poor. And finally, with respect to the Fund's important but less than all-encompassing responsibilities, because the membership considers that the Fund is most effective if it concentrates on the core issues that form its mandate.

Safeguarding macroeconomic and financial stability, and restoring it as rapidly as possible after economic crises, are clearly the dominant concerns of the Fund. We in the Fund consider that by fulfilling these responsibilities we are contributing to a better world. We also consider that we are contributing in a major way to protecting those who are the most vulnerable, to reducing poverty, and to enhancing social justice — within countries and across the world. We also help to protect the vulnerable and reduce poverty through advice on the allocation of public spending and the design of social safety nets. While we do not usually frame our objectives in terms of human rights, in my view the IMF's work clearly is geared toward protecting what I consider basic human rights: the right to work, save, invest, engage in enterprise, and secure the future of ones family in a reasonably predictable economic and financial environment characterized by low and stable inflation, and respect for property rights.

It is true of course that there is not a single bridge, road, school or hospital to point to as something the IMF has financed. What we can point to as a success is when a country manages to reduce an unsustainable fiscal deficit and therefore avoids a fiscal crisis. Or when a country rapidly tackles the root causes of a financial crisis and thereby can emerge from a recession relatively quickly and resume solid economic growth. But even in such cases, what we will be remembered for, and blamed for, is typically the fiscal belt-tightening or structural adjustments we are perceived to have "imposed" as a condition for financial assistance. And it does sometimes happen that the government of a country we have assisted is happy joining the chorus blaming the Fund for the "harsh" measures that had to be adopted—overlooking conveniently that it was the government's own policy mistakes or mismanagement that may have contributed importantly to the crisis in the first place.

This is indeed our key public relations challenge: we find it sometimes difficult to get across that the work of the IMF represents a cooperative effort by the world community to assist countries in difficulty. And that we provide this assistance through the best possible advice our professional knowledge and experience suggest is appropriate in a given case, together with short-term financial assistance at much easier terms than the market would provide in a crisis situation. And that our efforts thereby allow the crisis-struck country to recover much faster, and at much lower economic and social costs, than if it had to act on its own. For all of that the IMF is seldom given credit.

Not that we do not make mistakes. We did not sufficiently warn emerging market countries in the 1980s and early 1990s about the requirements for a successful liberalization of short-term capital flows; and we underestimated the fragility of financial systems in some countries—partly because information about the levels of non-performing loans that had been accumulating in the booms preceding the crises, were only revealed — reluctantly — by the authorities after the panics had started. But we also have the capacity to recognize that we have made mistakes, to take into account differences among countries, and to suggest alternative policies-based on a constant effort of research and evaluation. The image of the Fund as a static, dogmatic bureaucracy that always prescribes the same medicine to everybody is totally misplaced.

The IMF is also criticized for what is viewed as our unreserved promotion of globalization. We look at globalization as a trend being propelled by technological progress and the desires of consumers, workers, and holders of financial assets with predominantly, though not only, positive consequences. There is strong evidence, for example, that trade liberalization can be a powerful driving force for economic development, but that the process of liberalization involves adjustment costs for some groups that countries need to deal with. There is nothing new in this: economic progress has always meant economic change with gainers as well as losers. As with other types of economic change, each country needs to face up to the challenges arising from globalization to maximize its benefits and minimize its adverse effects. And countries need to act together, cooperatively, to tackle those challenges that are common but beyond the capacity of any country to deal with on its own. The Fund sees itself as particularly well placed to advise members on some of the conditions necessary for a country to reduce its vulnerability to external shocks as a result of growing economic and financial integration. And we are of course also working with the entire membership to strengthen the global financial architecture, to make it less crisis prone, and to address abuses such as money laundering and financing of terrorism.

The IMF's role in low income countries

Some critics have gone as far as calling for the IMF to get out of Africa, to stop assisting (the critics would say to stop harming) the poorest countries. The fact is that these countries strongly disagree, as do virtually all of our member countries: they all see a vital role for the Fund in supporting our poorest members. Needless to say, IMF management and staff remain deeply committed to fulfilling this mandate.

But it is important to be clear about the Fund's role, what we reasonably can be expected to accomplish, and what lies beyond our mandate and competencies.

Again, the principal areas in which we provide assistance to low-income countries are fiscal, monetary and exchange rate policies, the stability and soundness of the financial system, and macroeconomic governance and institutions — through policy advice, technical assistance, capacity building, and concessional financial assistance.

In recent years, the World Bank and the IMF have jointly been helping countries develop a framework to make choices about their development strategies—as formulated in the Poverty Reduction Strategy Paper (PRSP). The IMF's principal role is to help ensure that the PRSP is consistent with macroeconomic and financial stability to help justify the Fund's own financial support and also help mobilize financial support from the broader international community. We also offer technical assistance to help establish and strengthen policy-making institutions, in particular to translate medium-term development priorities and action plans into budget allocations and to help establish systems to track execution of expenditures in priority sectors. For the most heavily indebted countries, the IMF and the World Bank are helping to reduce external debt burdens in a durable way through the HIPC initiative; this initiative has already helped to increase the share of public expenditures that can be allocated to education, health spending, and other policies that benefit the poor. But it is not the IMF's business to intervene in defining countries' development strategies. That is beyond our mandate and our competencies. Instead, this task is up to each country in cooperation with its development partners (especially the World Bank) and domestic stakeholders such as the legislature, trade unions, business, religious groups, and NGOs, including representatives of the poor. In this way, by fostering greater transparency around the development strategy and openness in the debate, the PRSP can help to empower advocates for the poor. In the most successful cases, the PRSP can thus become a framework for social cohesion.

There are in fact encouraging signs that many years' efforts to strengthen countries' macroeconomic foundations are beginning to pay off. In the countries that have pursued policies consistent with our advice, economic growth is generally up, inflation is increasingly under control, budget deficits have shrunk, and foreign exchange reserves have increased. All very good, you will probably say, but too little to make a sufficient difference, and far too little progress to allow the Millennium Development Goals—the MDGs—including deep reductions in poverty, to be achieved.

That is absolutely correct. Much more is needed to stimulate private sector development, raise living standards, and improve the quality of life.

Let me focus on one particular dimension, which also appears in the title for this session, which was labeled Wealth Creation and Social Justice.

In fact wealth creation is at the heart of economic development. Without wealth creation there can be no development, no growth in the tax base and therefore in social expenditures, and no social justice. To accelerate wealth creation requires high rates of investment in physical and human capital and increased efficiency in the production process. Strengthening human capital is critical, and the prevalence of diseases such as malaria and HIV/AIDS and inadequate education not only represent formidable challenges to improving the human condition, but also have severe consequences by limiting production capacity. Most PRSPs rightly try to address the severe shortcomings in the supply of public goods and human capital protection and formation. The IMF supports this emphasis by helping countries design their budgets with the objective of increasing the share of public resources allocated to poverty-reducing programs. The World Bank and the IMF are also helping countries strengthen their public expenditure management — to make sure that budgeted resources do in fact reach the recipients.

Physical capital formation represents an equally formidable challenge. Only countries able to stimulate domestic private sector savings and investment and entrepreneurship will achieve the rates of growth in output and employment needed to achieve the MDGs. Even substantial amounts of foreign aid and investment cannot have a lasting effect in the absence of greater private sector dynamism. For this, it should not surprise you that a representative of the IMF will insist that macroeconomic stability is a sine qua non. But so are political stability, an absence of corruption, a growth-friendly regulatory and institutional environment, respect for property rights, and a stable, efficient financial system that can channel countries' financial resources toward productive investment projects. Much remains to be done in these areas across most of the developing world and the economies in transition from central planning. It is encouraging that many PRSPs are being used to start addressing governance problems. The Fund's role in this area is mainly to help build capacity and strengthen countries' institutions. In Africa, for example, we have recently established two technical assistance centers to better coordinate and target the considerable amount of technical assistance the Fund is providing in the areas of our core competencies—often with the help of funds and experts made available by advanced member countries.

In the Fund, with our traditional focus on (you might say obsession with) sustainability, we are also paying a great deal of attention to the fact that many low-income countries remain highly vulnerable to natural disasters and external shocks beyond their control, including falling commodity prices. In too many cases, the progress a country has been making can be reversed almost overnight. Much of our advice therefore is geared toward helping countries strengthen their resilience, including by providing temporary financial assistance to assist the country's adjustment effort. These efforts very much benefit the poor since poverty often increases during periods of economic instability.

The Fund's financial assistance to low-income countries is in the form of adjustment financing—typically at concessional terms and with a longer reimbursement period than for middle- and high-income members. Such adjustment financing helps countries stabilize after crises and assists them when they need to adjust their policies to strengthen their fundamentals and hence their growth potential. The Fund also provides financial assistance to countries experiencing temporary export shortfalls or increased import bills for cereals, or facing urgent balance of payments needs in the wake of natural disasters or armed conflicts. In addition, the Executive Board of the IMF is currently considering providing assistance to countries that may face temporary adjustment costs as a result of meeting obligations under the Doha round. However, all of the Fund's assistance is temporary and cannot serve as long-term development finance; this needs to come from bilateral donors and multilateral development banks. Eventually, and hopefully in the foreseeable future, as some low-income countries reach a more mature stage and establish a record of consistent policy formulation and execution, foreign direct investment and other types of private capital flows are expected to begin to supplement, and eventually replace, such official flows.

Finally, I want to emphasize the Fund's advocacy role. We are working closely with the official aid community to encourage debt forgiveness for highly-indebted low-income countries. We are also working to promote higher aid levels, grants instead of loans, untied assistance rather than tied to specific purchases, harmonization of donor practices to reduce the burden for recipient countries, and greater aid predictability. To illustrate how the Fund liaises with donors, I can mention that one of my staff in Paris is a permanent observer to the OECD's Development Assistance Committee. We also remain a strong critic of the industrial countries' agricultural policies and an unwavering proponent for the developing countries' interests in the Doha trade round. There is no better illustration of the IMF's views in this area than the statement issued last week by our Managing Director together with the Heads of the World Bank and the OECD.


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