Speech

96/7 Speech by Mr. Michel Camdessus
Managing Director of the International Monetary Fund
before the National Assembly
Antananarivo, Madagascar, May 3, 1996

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My dear friends,

I cannot begin to tell you how eagerly I have awaited this day. It was here that I said, 8 years ago, that in coming to Madagascar I was fulfilling one of my childhood dreams: an opportunity to get to know this great island. My dream became a reality in December 1988. And even as this was taking place, I brought with me another dream, one inspired by my new responsibilities at the IMF: to help your country in its efforts to get back on its feet and achieve the speediest possible transition toward growth, toward what I like to call high-quality growth. In all honesty, however, after three years (1988-1990) of the program we had outlined and during which (for the first time in many years) Madagascar's per capita income growth became modestly positive, your economy slipped backward once more. The five years that followed were to be characterized by worsening poverty for the Malagasy people.

We cannot stand by as Madagascar slips into decline and marginalization. Madagascar owes its people growth, improved living standards (particularly among the poorest), and the prospect of a better life for all its children. But saying this will not make it so. No crucial turnaround will be generated by mere words, by some magic formula, or by a miracle of international cooperation. What is needed instead is your own realistic grasp of the situation, the courage with which each and every one of you turns or returns energetically to the task at hand. Rest assured that you will be able to count on the assistance of the international community, which is as eager as I am to see you succeed, to contribute to your success, just as we have with many other countries starting from situations no worse than your own.

I spoke of having a realistic grasp of the situation. Allow me to observe, by way of exorcizing the demons of self-deprecation and despair, that it is hardly a foregone conclusion that Africa or Madagascar is doomed to failure;

- Africa is, in fact, on the move, and is enjoying considerably greater success than is generally recognized;

- Countries in your general geographical area or that have disadvantages similar to your own are registering impressive growth and steadily improving the lot of their people.

There is too stark a contrast between their progress and your ongoing problems for us not to try drawing some lessons, picking up some pointers, from their experiences, however diverse those experiences may be.

Accordingly, however convinced we may be that Madagascar needs to find its own way, let us try to identify the components of a development strategy that will rapidly (and this time permanently) return your country to the path of growth.

Allow me to address each of these points with all the candor one expects a friend to display.

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I. First, it is encouraging to note that Africa is again on the move. Last year, for the first time in many years, economic growth in sub- Saharan Africa (excluding Nigeria and South Africa) exceeded 5 percent, while inflation slowed. We expect this year's growth to be just as strong. Of the 46 countries of sub-Saharan Africa, only 20 recorded positive per capita growth in 1991; this year, as many as 40 may do so. We must also tip our hats to the recovery of countries such as Ethiopia or Mozambique, which have recorded substantial growth after long periods of strife, to say nothing of the impressive progress of Uganda and Lesotho, or the success of the CFA franc zone in meeting the formidable but inescapable challenge of devaluation.

What intrigues me about these figures is that they are but the tip of the iceberg; they point to deeper transformations within the economies of the African continent, to a clearly focused and deliberately sought transformation that opens up opportunities for private enterprise and takes account of the social dimensions of the adjustment process. I refer here to the reform of agricultural systems, the increasing emphasis on health and education, and the efforts being made to simplify tax systems across the continent.

What also intrigues me is that these figures were not just happenstance, but the outcome of deliberate policies. I am thinking in particular of the successful efforts to curb inflation in Uganda, Kenya, and Malawi, and yes, even here in Madagascar, although, once again, the results have yet to be fully recognized. Inflation has been curbed without artificial price controls, through the steadfast pursuit of consistent monetary policies. More generally, throughout the continent we are witnessing the formation of expert teams that are giving careful thought to the economic policies of their respective countries. Rather than giving free rein to liberalization without regard to the consequences, these specialists are committed to providing greater opportunity to the most disadvantaged members of their societies.

When all of these ingredients are combined, you have what I call "high-quality" growth: economic growth that is planned, sustainable, and equitable.

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II. What is the driving force behind this revitalization? No two cases are the same, and there are no cut-and-dried solutions; each country can follow its own individual path, shaped by its history and culture. This said, however, there are three critical decisions that must be made if a country is to be put back on the road to sustainable growth: exchange rate correction, the eradication of inflation, and institutional reform. Success or failure are determined by how boldly and steadfastly these three issues are addressed.

First, the exchange rate. It is the key to ensuring that prices reflect economic realities. Nothing is more damaging than an over-valued exchange rate. Conversely, a correct exchange rate affords the opportunity to reach out to the outside world, and holds the key to ensuring appropriate income levels for farmers. Here, the adjustment process has been most impressive: in 1990, 20 of the roughly 40 African countries showed signs of having over-valued exchange rates; today, this is true of only three.

Next, inflation must be curbed without resorting to price controls. The key here is to reduce the budget deficit and the deficits of public enterprises, and to ensure appropriate budgetary decision-making. Budgetary choices that favor meaningful investment in human needs, such as health and education, as well as in roads in areas where producer access to markets is a chronic problem. But real choices have to be made; it is not simply a question of heaping well-intentioned investments atop wasteful spending that can bring a country to financial ruin by its printing more and more money to pay the bills. This difficult but essential fiscal consolidation process smooths the transition to an indirect system of credit control and ensuring adequate returns on savings. Many countries have acknowledged the importance of such measures; but I know better than anyone how difficult--yet how essential--it is to persevere. This is a task to which government must bend at every level.

Third, institution-building. The successes we are witnessing all involve tax reform and the strengthening of tax administration, the restructuring of banking systems, and public enterprise reform. I would also strongly emphasize the importance of bolstering the authority of the legal system. The main lesson of the 1980s with regard to development economics is the importance of institutional reform: it requires both a carefully crafted strategy and support from the grass roots level. Developing such support is a critical task befalling the political leadership. This is the crux of the matter.

The aim of these reforms, of course, is not solely to create an economic climate that is objectively more efficient; it is also to inspire confidence and enhance credibility. A critical prerequisite is political consensus, a common vision, which must be adhered to for as long as it takes to get the job done, with the most urgent reforms being implemented straight away rather than putting them off for some brighter tomorrow. Many more such reforms will be needed as the years go by. Uganda, which has constantly refined its policies, has transformed its image as a nation while transforming the fate of its people. Bold and timely measures are essential; Kenya won the battle against inflation the day the Central Bank decided not to bail out banks in distress.

In a word, the formula for success is perseverance: perseverance in financial discipline and perseverance in reform, for therein lies the key to credibility. The IMF stands ready to contribute to this process.

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III. Is high-quality growth for Madagascar even conceivable? Of course it is. Indeed, the progress to date is significant, despite the fact that the mixed signals about it have muddled the issue. Therefore, progress that is both steady and clearly focused is of the utmost importance. After numerous high-level discussions, here is my assessment of the situation.

Accurate price levels first of all: here, things are largely on track. The exchange rate is freely determined by the market--a prerequisite for avoiding shortages and rationing. The prices of petroleum products have been adjusted--an essential and courageous step. Interest rates are within an appropriate range. The prices of agricultural products have been deregulated; I understand that the producer price for paddy during the last harvest (up to FMG 900 per kilo) was the highest ever in terms of real purchasing power. Furthermore, the Central Bank has reined in inflation with clearsightedness and perseverance. Stable and decontrolled prices are thus within reach. However, this monetary policy should be maintained and care taken not to lower interest rates too soon. Rate reductions should be postponed until inflation has been largely eradicated, and not be triggered by the first signs of its slowing down.

Institution-building comes next. In all likelihood, there is a great deal to be done in this area. The tax system has been overhauled with the decline in external protection, the introduction of the VAT, and the increase in the TUPP, but less progress has been made in reforming tax administration, and the efforts to rationalize the budget process have yet to bear significant fruit. The reform of the financial sector is well underway, but much remains to be done, and the deregulation of transportation and telecommunications still lies ahead. Lastly, the whole question of privatization must be actively addressed.

This is not, I hasten to add, to detract in any way from the achievements made. So why, you may ask, have these achievements yet to be rewarded by a vigorous upturn in investment? Probably because the progress made still seems a bit tenuous, as price and exchange rate liberalization in particular do not seem to be firmly established. The risk that these gains might be short-lived worries investors, be they Malagasy or foreign. Indeed, notwithstanding the progress to date, few of Madagascar's friends believe these reforms to be irreversible, which indeed they must be. My own view is that such doubts are harmful, and that they can and must be dispelled. This will happen in Madagascar only when political consensus is achieved on a number of fundamental points:

- The chosen strategy--an outward-looking market economy--is the surest way to achieve economic, social, and human progress in Madagascar;

- The strategy should reflect the core values of Malagasy culture: personal and corporate responsibility and an all-embracing sense of community;

- The strategy should be consistent throughout;

- The chosen strategy--an outward-looking market economy--is the one best suited to Madagascar, given its determination to protect vulnerable social groups and preserve its national identity;

- The necessary decisions must be made to implement the strategy both now and in the future, with the support of the international community.

To what can we look forward if such consensus is ultimately achieved? First, and most importantly, national saving and investment will improve: after all, it is the Malagasy people's own efforts that are undermined by this crisis of confidence. Second, there will be an influx of investment from abroad, with the associated benefits in terms of technology and trade flows. And finally, accompanying the arrangement that may be concluded with the Fund, external debt relief. But let us be clear: however substantial such external assistance may be, the fact remains that, in Madagascar just as everywhere else, your ability to be part of a forward- looking economy, an economy that offers improved prospects for the young people of your country, will be determined first and foremost by your own efforts. The crux of the matter, therefore, is to provide the Malagasy people with the means to mobilize their own resources, and not to pin all hopes on inflows of resources from abroad, which all too often arrive too late, and are unpredictable all too frequently.

The IMF stands ready to assist you in your efforts, both financially and in helping to restore international confidence. But the initiative must continue to come from Madagascar itself. It is you who must demonstrate that you are building the necessary consensus. You must not allow everything to be called into question once more, now that success is within reach. Help us to help you at this critical turning point in Madagascar's economic history.

This, my friends, is the way I see things: the ball is in your court. There can be economic progress in Madagascar, and indeed there must be. However, without in any way wishing to downplay the external support we shall strive to muster on your behalf, we must all recognize that this support depends on you, on Madagascar itself. It is not, should not, and cannot be something coming from or imposed from without. Nor, however, is it realistic to expect that progress can be achieved in isolation from the outside world. Rest assured that if you too have the conviction that a new day is dawning in Madagascar, the IMF and I will spread the word with every bit as much candor and determination as you do.