Second Generation Reforms: Reflections and New Challenges -- by Michel Camdessus

IMF News, November 8, 1999

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Second Generation Reforms: Reflections and New Challenges -- by Michel Camdessus

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Bibliographic details

• Published: November 8, 1999

Overview and purpose

• Opening Remarks to IMF Conference on Second Generation Reforms by Michel Camdessus, Managing Director of the International Monetary Fund, Washington, D.C., November 8, 1999.
• Conference organized by the IMF Institute and the Fiscal Affairs Department; conference papers previewed as a stimulus for "two days of stimulating, indeed provocative, exchange."
• Context: recent emerging markets crises, strengthened focus on poverty reduction, and acceleration of globalization placed second generation reforms "center stage."

Historical framing and lessons from first-generation reforms

• Prior to the 1980s: policy formulation proceeded in a compartmentalized fashion—development policies pursued growth; stabilization seen as interruptions.
• Early 1980s: recognition that macroeconomic stability, though necessary, was not sufficient; first generation reforms targeted market distortions via:
  • pricing, exchange rate and interest rate reforms
  • tax and expenditure reforms
  • establishment of rudimentary market institutions
• Final demise of central planning reinforced the need for market reorientation; transition economies varied widely (examples cited in text: Russia and China, Poland and Vietnam, the Baltics and Central Asia).
• Parallel development: acceleration of globalization increased the need for economies, markets, institutions, and organizations to evolve and adapt.

Definition and role of second-generation reforms

• Proposed definition: "the set of measures needed to enable a country to attain, in a sustained way, high-quality growth."
• Clarifications:
  • First and second generation reforms are not necessarily sequential; institution-building associated with second generation reforms can and should occur in parallel with first generation reforms.
  • Second generation reforms aim to enable economies to function more efficiently in—and to derive greater welfare from—the globalized economy and to contribute to a stronger international financial architecture.
• Core emphasis across conference papers: the importance of frameworks and institutions (formal and informal constraints within which markets operate).

Why some countries remained vulnerable in the late 1990s

• The emerging markets crisis (notably beginning in Thailand in mid-1997) had complex origins, but a major factor was slowness to implement second generation reforms.
• Contagion was contained in part because other countries, including many in Latin America, had already initiated such reforms, drawing lessons from the "lost decade" of the 1980s and the Mexican financial crisis.

Four guiding questions posed for conference deliberations

• First: How to resolve the tension between unique national institutions (social, cultural, political) and globalization's demands for harmonization of standards and norms?
  • Standards, codes, and practices developed for the international financial architecture represent major contributions to implementing second generation reforms.
  • Emphasis on voluntary, market-based adoption while respecting sovereignty.
• Second: How to strengthen countries' "ownership" of reform policies?
  • Ownership tied to political and social commitment; effective reforms require commitment from national authorities and the people.
  • Mechanisms for engaging civil society—labor organizations, employers, domestic NGOs, religious groups, and other local bodies—are essential for a participatory approach.
• Third: What are the implications for international organizations collaborating with member governments to foster second generation reforms?
  • Key word: collaboration.
  • Fund has engaged with the World Bank and Basle-based institutions, especially in the financial sector.
  • Fund considering assistance to monitor standards and codes of good practice developed by other international agencies.
  • Collaboration in social policy and poverty reduction is being strengthened between the Fund and the World Bank; the United Nations and the World Bank are leading work on principles and good practices for social policy (linked to the 1995 Copenhagen Declaration).
• Fourth: What are the likely pitfalls in implementing second generation reforms?
  • Risk that institutional reform could be portrayed negatively or as contrary to the interests of the poor.
  • Need to ensure institutional reform acquires a positive connotation and robust support, including in the poorest countries.

Policy implications and recommendations emphasized

• Integrate key social goals, especially poverty reduction, as integral to the policy agenda and a key objective of second generation reforms.
• Elements of successful poverty reduction strategies (as described):
  • cost-effective expenditure programs aimed at human development and reducing poverty
  • a well-targeted safety net
  • a tax system that ensures a fair distribution of the tax burden
  • labor market policies aimed at ensuring high levels of productive employment
• Fund-supported programs increasingly incorporate assessment of social impact and use safety nets and social policies to minimize adverse effects, but this was "plainly not enough"; stronger links between economic objectives and social needs are required.
• Sound macroeconomic policy and determined implementation of first and second generation reforms are indispensable for growth; growth is presented as "ultimately the best way to reduce poverty."
• Broad-based support (public understanding and visible progress on poverty reduction) is critical to sustainable reform.

Institutional and global collaboration priorities

• International agencies must collaborate while pursuing their primary mandates, given issue complexity.
• Strengthen Fund-Bank collaboration on poverty reduction strategies for the poorest countries.
• Support monitoring and development of internationally recognized standards, codes, and practices to improve governance and transparency.
• Encourage voluntary, market-based adoption of standards that respect national sovereignty.

Closing reflections and forward-looking questions

• The global economy is continually evolving—more complex and interdependent—requiring frequent revisiting of development models and policy premises.
• New policies and adapted institutions are essential to respond to rapid and unpredictable global change.
• Conference participants urged to review experience with second generation reforms and consider strengthening implementation.
• Provocative forward question posed: Can we conceive of the content of a third or fourth generation of reforms?

Opening Remarks to IMF Conference on Second Generation Reforms by Michel Camdessus, November 8, 1999.

References

• People's Republic of China and the IMF
• Indonesia and the IMF
• Republic of Korea and the IMF
• Republic of Poland and the IMF
• Russian Federation and the IMF
• Thailand and the IMF
• Vietnam and the IMF
• Speeches
• Biography
• Conference on Second Generation Reforms
• PRESS CENTER
• lists of authors
• Partnership for Sustainable Global Growth
• www.imf.org
• IMF-Supported Programs in Indonesia, Korea, and Thailand-A Preliminary Assessment
• https://www.imf.org/en/home