## Bismarck's Warning: The Challenge of Economic Policy Reform in the Twenty-First Century, Anne O. Krueger, IMF First Deputy Managing Director

_IMF News, April 5, 2005_

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## Bibliographic details
- Published: April 5, 2005

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### Overview
- 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).

### The case for reform — objectives and payoffs
- Primary objectives:
  - Promote growth and improve citizens' well-being.
  - Permit rising living standards and poverty reduction.
- Historical examples of payoffs:
  - Korea: transformation from one of the world's poorest in 1960 to a rich Asian economy over four decades starting in the late 1950s.
  - China and India: rapid growth in the 1990s lifted "around 200 million" people out of poverty.
  - 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.
- Key macroeconomic achievement cited:
  - Large and widespread reduction in inflation worldwide.
  - 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."

### Categories of reform and country priorities
- Four categories of reforms by level:
  - International level: reduce global imbalances; further trade liberalization (Doha round emphasized; estimate: "about two thirds" of benefits to developing countries).
  - Industrial countries: pension system reform to ensure long-term viability amid demographic change.
  - Emerging market economies: fiscal and financial sector reforms to deliver debt sustainability.
  - Low income countries: rule of law, institutional strengthening, combat corruption, improve public expenditure efficiency, and trade openness among developing countries.

### Why reform is politically difficult (political economy)
- Core tension: reconciling what is economically desirable with what is politically feasible; uncertainty about reform outcomes increases reluctance.
- Sources of political resistance:
  - Opposition from groups that perceive they will lose from reforms.
  - Short-term political pressures (e.g., election cycles, poverty alleviation demands, unemployment concerns).
  - Tendency to relax policies during good times, reducing resilience for the next downturn.
- Consequences of postponing or weakening reforms:
  - Slower growth in both good times and bad.
  - Reduced ability to withstand downturns and shocks.
  - Erosion of policy credibility; markets respond to perceived future loosening (Brazil 2002 example).

### Country examples illustrating reform dynamics and outcomes
- Ireland
  - GDP growth averaged 10% a year between 1995 and 2000.
  - Unemployment fell from 16% in the early 1990s to 4% by the end of the decade.
  - Ongoing challenges: signs competitiveness may have deteriorated; large infrastructure needs; rising demand for high-quality public services.
- Brazil (crisis and recovery, early 2000s)
  - IMF-supported program during 2002 pre-election period reassured markets.
  - Government primary surplus: 4.6% in 2004.
  - Growth accelerated to "over 5%" in 2004 and "is expected to be around 4%" in 2005.
  - 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.
  - Government decided not to renew its loan agreement after seven years of IMF support, while committing to the policy framework.
- Turkey (reform and stabilization)
  - Government primary surplus was "almost 7% of GNP" in the year prior to the lecture, slightly above target.
  - Growth: 9.9% in the most recent year; average growth close to 8% over the past three years.
  - Inflation: had been above 60% since the mid-1980s and was 70% three years earlier; "today it is below 10%."
  - 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.
- Asian financial crisis lessons
  - Rapid growth increased the financial sector's role; credit rationing and misdirected lending produced rising non-performing loans.
  - Fixed exchange rate pegs and currency mismatches magnified problems when investor sentiment shifted.

### Key statistics and exact fiscal/macro figures preserved from the lecture
- 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:
  - Government primary surplus: 4.6% in 2004.
  - Growth "accelerated to over 5%" in 2004; "is expected to be around 4%" in the current year.
  - Inflation: 12.5% in 2002 → 7.6% at end-2004 → target 5.1% by end of current year.
- Turkey:
  - Government primary surplus "almost 7% of GNP" last year.
  - Growth: 9.9% last year; average growth close to 8% over past three years.
  - Inflation: above 60% since mid-1980s; 70% three years prior; "today it is below 10%."
  - External debt: 60% of GNP; total public debt: nearly 70%.

### Policy recommendations and implementation strategies
- Timing and sequencing:
  - Seize opportunities during buoyant growth periods to implement reforms.
  - Fiscal consolidation is easier in favorable environments and creates room for counter-cyclical policy later.
- Breadth and speed:
  - Pursue reforms on a broad front (citing Roger Douglas and examples of New Zealand, Korea, Chile).
  - Speed matters; structural reforms may take years to deliver full impact.
- Early priorities:
  - Trade and exchange rate reforms early: more openness increases economic benefits and makes reversals politically harder.
- Political tactics:
  - Identify potential winners to build coalitions.
  - Identify and mitigate impacts on potential losers to reduce opposition.
  - Be prepared to confront opponents strategically—pick winnable fights and commit to seeing reforms through.
- Communication and transparency:
  - Clear communication of aims, costs, and benefits to citizens is critical to build support.
- Specific policy areas highlighted:
  - Monetary policy: central bank independence, inflation targeting to secure price stability.
  - Fiscal policy: prudent fiscal stance, reduce deficits, ensure sustainable public debt levels, efficient and equitable public spending.
  - Pension reform: early modest adjustments to contributions, benefits, and retirement ages to avoid larger future costs.
  - Financial sector: deal with non-performing loans, strengthen banking regulation, ensure well-capitalized banks.
  - Rule of law and institutions: enforce property rights, commercial codes, reduce corruption, foster competition and enterprise.
  - Trade liberalization: complete Doha round; reduce tariff and non-tariff barriers; promote south-south trade liberalization.

### The IMF's role in reform
- Core mission: maintenance of international financial stability; crisis prevention and resolution.
- Tools and functions:
  - Article IV surveillance: annual assessments and reform recommendations for member countries.
  - Financial assistance: Fund-supported programs with payments in installments against agreed benchmarks; Fund endorsement signals credibility to markets.
  - Technical assistance: advice on tax administration, budget accounting, financial sector regulation, commercial codes, and other implementation support.
- Nature of engagement: advisory respect for sovereignty, combined with conditional financial support when requested by governments.

### Conclusion — tradeoffs and long-term stakes
- 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."

*International Monetary Fund*

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## References

- [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)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sp040505a_