{
  "title": "Bismarck's Warning: The Challenge of Economic Policy Reform in the Twenty-First Century, Anne O. Krueger, IMF First Deputy Managing Director",
  "publication": "IMF News, April 5, 2005",
  "sourceUrl": "https://www.imf.org/en/news/articles/2015/09/28/04/53/sp040505a",
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  "summary": "Lecture Given to the University Philosophical Society, Trinity College, Dublin",
  "publishDate": "2005-04-05",
  "sections": [
    {
      "heading": "Overview",
      "content": "- Lecture given to the University Philosophical Society, Trinity College, Dublin; delivered April 5, 2005.\n- Central thesis: economic policy reform must be continuous; \"politics is the art of the possible\" (Bismarck) frames the tension between economically desirable and politically feasible reforms.\n- Context: global environment \"unusually favorable\" after strong global growth in 2004, low incidence of international financial crises, but persistent risks (higher energy prices, geopolitical uncertainty, global imbalances)."
    },
    {
      "heading": "The case for reform — objectives and payoffs",
      "content": "- Primary objectives:\n  - Promote growth and improve citizens' well-being.\n  - Permit rising living standards and poverty reduction.\n- Historical examples of payoffs:\n  - Korea: transformation from one of the world's poorest in 1960 to a rich Asian economy over four decades starting in the late 1950s.\n  - China and India: rapid growth in the 1990s lifted \"around 200 million\" people out of poverty.\n  - Ireland: GDP growth averaging 10% a year between 1995 and 2000; unemployment fell from 16% in the early 1990s to 4% by the end of the decade.\n- Key macroeconomic achievement cited:\n  - Large and widespread reduction in inflation worldwide.\n  - Latin America: average inflation in the 1980s and 1990s far exceeded 100%; at the end of the 1980s it was \"almost 500%\"; by the 2000s inflation rates in excess of 10% are \"very much the exception.\""
    },
    {
      "heading": "Categories of reform and country priorities",
      "content": "- Four categories of reforms by level:\n  - International level: reduce global imbalances; further trade liberalization (Doha round emphasized; estimate: \"about two thirds\" of benefits to developing countries).\n  - Industrial countries: pension system reform to ensure long-term viability amid demographic change.\n  - Emerging market economies: fiscal and financial sector reforms to deliver debt sustainability.\n  - Low income countries: rule of law, institutional strengthening, combat corruption, improve public expenditure efficiency, and trade openness among developing countries."
    },
    {
      "heading": "Why reform is politically difficult (political economy)",
      "content": "- Core tension: reconciling what is economically desirable with what is politically feasible; uncertainty about reform outcomes increases reluctance.\n- Sources of political resistance:\n  - Opposition from groups that perceive they will lose from reforms.\n  - Short-term political pressures (e.g., election cycles, poverty alleviation demands, unemployment concerns).\n  - Tendency to relax policies during good times, reducing resilience for the next downturn.\n- Consequences of postponing or weakening reforms:\n  - Slower growth in both good times and bad.\n  - Reduced ability to withstand downturns and shocks.\n  - Erosion of policy credibility; markets respond to perceived future loosening (Brazil 2002 example)."
    },
    {
      "heading": "Country examples illustrating reform dynamics and outcomes",
      "content": "- Ireland\n  - GDP growth averaged 10% a year between 1995 and 2000.\n  - Unemployment fell from 16% in the early 1990s to 4% by the end of the decade.\n  - Ongoing challenges: signs competitiveness may have deteriorated; large infrastructure needs; rising demand for high-quality public services.\n- Brazil (crisis and recovery, early 2000s)\n  - IMF-supported program during 2002 pre-election period reassured markets.\n  - Government primary surplus: 4.6% in 2004.\n  - Growth accelerated to \"over 5%\" in 2004 and \"is expected to be around 4%\" in 2005.\n  - Inflation fell from 12.5% in 2002 to 7.6% at the end of 2004 and was targeted to be at 5.1% by the end of 2005.\n  - Government decided not to renew its loan agreement after seven years of IMF support, while committing to the policy framework.\n- Turkey (reform and stabilization)\n  - Government primary surplus was \"almost 7% of GNP\" in the year prior to the lecture, slightly above target.\n  - Growth: 9.9% in the most recent year; average growth close to 8% over the past three years.\n  - Inflation: had been above 60% since the mid-1980s and was 70% three years earlier; \"today it is below 10%.\"\n  - Remaining vulnerabilities: external debt at 60% of GNP; total public debt nearly 70%; large fraction indexed to foreign currencies or linked to very short term interest rates.\n- Asian financial crisis lessons\n  - Rapid growth increased the financial sector's role; credit rationing and misdirected lending produced rising non-performing loans.\n  - Fixed exchange rate pegs and currency mismatches magnified problems when investor sentiment shifted."
    },
    {
      "heading": "Key statistics and exact fiscal/macro figures preserved from the lecture",
      "content": "- Ireland: GDP growth averaged 10% a year between 1995 and 2000; unemployment fell from 16% to 4%.\n- Korea: transformed from third poorest in Asia in 1960 to one of Asia's richest economies (no numeric GDP figures provided).\n- China/India: \"around 200 million\" people lifted out of poverty during the 1990s.\n- Latin America inflation: \"in excess of 100%\" in much of the 1980s and 1990s; \"almost 500%\" at the end of the 1980s; inflation rates in excess of 10% are now \"very much the exception.\"\n- Brazil:\n  - Government primary surplus: 4.6% in 2004.\n  - Growth \"accelerated to over 5%\" in 2004; \"is expected to be around 4%\" in the current year.\n  - Inflation: 12.5% in 2002 → 7.6% at end-2004 → target 5.1% by end of current year.\n- Turkey:\n  - Government primary surplus \"almost 7% of GNP\" last year.\n  - Growth: 9.9% last year; average growth close to 8% over past three years.\n  - Inflation: above 60% since mid-1980s; 70% three years prior; \"today it is below 10%.\"\n  - External debt: 60% of GNP; total public debt: nearly 70%."
    },
    {
      "heading": "Policy recommendations and implementation strategies",
      "content": "- Timing and sequencing:\n  - Seize opportunities during buoyant growth periods to implement reforms.\n  - Fiscal consolidation is easier in favorable environments and creates room for counter-cyclical policy later.\n- Breadth and speed:\n  - Pursue reforms on a broad front (citing Roger Douglas and examples of New Zealand, Korea, Chile).\n  - Speed matters; structural reforms may take years to deliver full impact.\n- Early priorities:\n  - Trade and exchange rate reforms early: more openness increases economic benefits and makes reversals politically harder.\n- Political tactics:\n  - Identify potential winners to build coalitions.\n  - Identify and mitigate impacts on potential losers to reduce opposition.\n  - Be prepared to confront opponents strategically—pick winnable fights and commit to seeing reforms through.\n- Communication and transparency:\n  - Clear communication of aims, costs, and benefits to citizens is critical to build support.\n- Specific policy areas highlighted:\n  - Monetary policy: central bank independence, inflation targeting to secure price stability.\n  - Fiscal policy: prudent fiscal stance, reduce deficits, ensure sustainable public debt levels, efficient and equitable public spending.\n  - Pension reform: early modest adjustments to contributions, benefits, and retirement ages to avoid larger future costs.\n  - Financial sector: deal with non-performing loans, strengthen banking regulation, ensure well-capitalized banks.\n  - Rule of law and institutions: enforce property rights, commercial codes, reduce corruption, foster competition and enterprise.\n  - Trade liberalization: complete Doha round; reduce tariff and non-tariff barriers; promote south-south trade liberalization."
    },
    {
      "heading": "The IMF's role in reform",
      "content": "- Core mission: maintenance of international financial stability; crisis prevention and resolution.\n- Tools and functions:\n  - Article IV surveillance: annual assessments and reform recommendations for member countries.\n  - Financial assistance: Fund-supported programs with payments in installments against agreed benchmarks; Fund endorsement signals credibility to markets.\n  - Technical assistance: advice on tax administration, budget accounting, financial sector regulation, commercial codes, and other implementation support.\n- Nature of engagement: advisory respect for sovereignty, combined with conditional financial support when requested by governments."
    },
    {
      "heading": "Conclusion — tradeoffs and long-term stakes",
      "content": "- Reform is necessary for sustained, rapid economic growth; without it, countries and the world will grow more slowly.\n- Policymakers face choices to postpone or abandon reforms—short-run gains may appear, but long-run costs include slower growth, reduced resilience, and diminished poverty reduction.\n- Rewards of reform: higher sustainable growth, higher living standards, poverty reduction; success can be politically reinforcing and make further reform more feasible.\n- Closing observation: persistent, steadfast pursuit of reforms can alter political possibilities and remove excuses for postponement, consistent with Bismarck's maxim that \"politics is the art of the possible.\"\n\nInternational Monetary Fund\n\n---\n\n\n References\n\n- Brazil and the IMF\n- Germany and the IMF\n- France and the IMF\n- India and the IMF\n- Ireland and the IMF\n- Republic of Korea and the IMF\n- Republic of Türkiye and the IMF\n- New Zealand and the IMF\n- IMF Policy Advice -- A Factsheet\n- Speeches\n- Anne O. Krueger\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2015/09/28/04/53/sp040505a"
    }
  ],
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    "[Markdown version](/en/news/articles/2015/09/28/04/53/sp040505a/index.md)",
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    "Published: April 5, 2005",
    "Lecture given to the University Philosophical Society, Trinity College, Dublin; delivered April 5, 2005.",
    "Central thesis: economic policy reform must be continuous; \"politics is the art of the possible\" (Bismarck) frames the tension between economically desirable and politically feasible reforms.",
    "Context: global environment \"unusually favorable\" after strong global growth in 2004, low incidence of international financial crises, but persistent risks (higher energy prices, geopolitical uncertainty, global imbalances).",
    "Primary objectives:",
    "Historical examples of payoffs:",
    "Key macroeconomic achievement cited:",
    "Four categories of reforms by level:",
    "Core tension: reconciling what is economically desirable with what is politically feasible; uncertainty about reform outcomes increases reluctance.",
    "Sources of political resistance:",
    "Consequences of postponing or weakening reforms:",
    "Ireland",
    "Brazil (crisis and recovery, early 2000s)",
    "Turkey (reform and stabilization)",
    "Asian financial crisis lessons",
    "Ireland: GDP growth averaged 10% a year between 1995 and 2000; unemployment fell from 16% to 4%.",
    "Korea: transformed from third poorest in Asia in 1960 to one of Asia's richest economies (no numeric GDP figures provided).",
    "China/India: \"around 200 million\" people lifted out of poverty during the 1990s.",
    "Latin America inflation: \"in excess of 100%\" in much of the 1980s and 1990s; \"almost 500%\" at the end of the 1980s; inflation rates in excess of 10% are now \"very much the exception.\"",
    "Brazil:",
    "Turkey:",
    "Timing and sequencing:",
    "Breadth and speed:",
    "Early priorities:",
    "Political tactics:",
    "Communication and transparency:",
    "Specific policy areas highlighted:",
    "Core mission: maintenance of international financial stability; crisis prevention and resolution.",
    "Tools and functions:",
    "Nature of engagement: advisory respect for sovereignty, combined with conditional financial support when requested by governments.",
    "Reform is necessary for sustained, rapid economic growth; without it, countries and the world will grow more slowly.",
    "Policymakers face choices to postpone or abandon reforms—short-run gains may appear, but long-run costs include slower growth, reduced resilience, and diminished poverty reduction.",
    "Rewards of reform: higher sustainable growth, higher living standards, poverty reduction; success can be politically reinforcing and make further reform more feasible.",
    "Closing observation: persistent, steadfast pursuit of reforms can alter political possibilities and remove excuses for postponement, consistent with Bismarck's maxim that \"politics is the art of the possible.\"",
    "[Brazil and the IMF](http://www.imf.org/external/country/BRA/index.htm)",
    "[Germany and the IMF](http://www.imf.org/external/country/DEU/index.htm)",
    "[France and the IMF](http://www.imf.org/external/country/FRA/index.htm)",
    "[India and the IMF](http://www.imf.org/external/country/IND/index.htm)",
    "[Ireland and the IMF](http://www.imf.org/external/country/IRL/index.htm)",
    "[Republic of Korea and the IMF](http://www.imf.org/external/country/KOR/index.htm)",
    "[Republic of Türkiye and the IMF](http://www.imf.org/external/country/TUR/index.htm)",
    "[New Zealand and the IMF](http://www.imf.org/external/country/NZL/index.htm)",
    "[IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)",
    "[Speeches](https://www.imf.org/en/news/searchnews)",
    "[Anne O. Krueger](https://www.imf.org/external/np/omd/bios/ak.htm)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
  ],
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