Speech

99/18

As prepared for delivery

Address by Michel Camdessus
Managing Director of the International Monetary Fund
During the High-Level Segment of the
1999 Substantive Session of the UN Economic and Social Council
Geneva, July 5, 1999

Mr. Chairman, what we have witnessed during the last few years -- the most severe economic crisis of the last fifty years, unconvincing progress in fighting poverty in the world, and war undermining the prospects for development in Africa and elsewhere—has reminded us of the fragility of the progress accomplished and the magnitude of the challenges we face as we approach the millennium. All of us have been working in coping with them, striving to find:

- how to overcome crises and avoid them for the future;

- how to focus on fighting poverty; and

- how to serve peace as "the other name for development".

Work is in progress on all these fronts. While endorsing the thrust of the excellent background document prepared by the ILO, let me share with you the experience of the IMF in these three domains.

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I. Overcoming and avoiding crisis

The global economy has just passed through a perilous period. Less than a year ago, a worldwide recession was a distinct possibility and many observers had jumped to the conclusion that our forms of cooperation were ineffective, that the process of globalization, which had brought such clear benefits to many economies, was fundamentally flawed and should be reversed. None of these predictions has come to pass. Although growth rates are still below the long-term averages, and although the performance has not been evenly distributed, the global economy has quickly overcome the risk of recession. And despite the still difficult external situation faced by many countries, almost universally the governments of the world have resisted the temptations of retreating behind protectionist barriers, of restricting capital movements, and of financial isolation.

This outcome owes a lot to the courageous policy action on the part of many countries. I am convinced that a major contribution to the cause of long-term global stability and progress has come from the efforts of the emerging markets in Asia and Latin America to adopt right away the reforms called for. We should salute these governments and people who have been on the front-line in fighting this crisis. They have shown that resolute policy implementation, with appropriate international support, does prevail. Their experience offers hope to the other countries that remain in difficult circumstances or may face challenges in the future. Let us not blur this outstanding message from Thailand, Indonesia, Korea, the Philippines, Brazil and others out of nostalgia for some "different consensus" or "alternative strategy" that we have not yet seen to succeed. We in the IMF have been proud to be with these countries in their search for solutions for these unprecedented crises, and we are most encouraged by the brighter prospects they have helped to create.

In Asia, the countries most severely affected by crisis have arrived at their turning points earlier than generally expected. In the case of Korea, growth of 5 to 6 percent is now expected by the government. Indonesia is now showing early signs of recovery, aided by the peaceful conduct of free elections. The financial markets of Asia have strengthened across the region, and the countries are regaining access to the international capital markets; foreign reserves have risen in Korea and Thailand to levels far higher than before the crisis while interest rates are lower. In Latin America, even though its difficulties began a year after the start of the Asian crisis, the past few months have witnessed a spectacular rebound in investor confidence. There are convincing signs that the slump in the region has been less severe than expected and, in particular, that economic activity in Brazil is recovering.

But, Mr. Chairman, the cost of this crisis remains enormous, giving us a terrifying illustration of the risks which accompany the opportunities of the new century. What lessons should we draw from it for all countries? In fact, many familiar recommendations:

First: excellence in macroeconomic policy is a must in international markets where complacency is invitation to speculation; firmness here goes indeed hand in hand with flexibility to adapt the approach to promptly changing circumstances.

Monetary policy has to be actively used: it has been decisive in containing the crises at their most virulent stage. Once a credible monetary policy had been established, exchange rates began to stabilize and financial variables strengthened.

• Sound fiscal policy, well tailored to the specific situation and properly centered on human development priorities, is equally essential. In the Asian countries where a relatively prudent fiscal policy had existed before the crisis, it quickly became possible and desirable to relax fiscal policy to stimulate the economy and to build up social safety nets. But in Russia especially, and also Brazil, where fiscal problems were the root cause of much of the loss of confidence in the economy, our unequivocal advice has been to rebalance the policy mix by tightening fiscal policy while taking the strain off monetary policy. Brazil's early response and its adoption of credible fiscal measures are a major part of the reason that its crisis was less severe than seemed likely in late 1998, and the turnaround is coming earlier.

Second, the health of corporate and financial sector must be kept under much stronger surveillance than has been the case so far and, once crisis has struck, a comprehensive strategy of strengthening and/or restructuring must be put in place without delay. All the countries have taken vital steps to strengthen the operation and supervision of their financial systems and to restructure their corporate sectors. Debt is being restructured, regulatory and supervisory systems are being overhauled, and the needed decisions are being made to restructure and restore soundness of banks and corporations. These processes have highlighted the need for a good legal system—including a transparent bankruptcy law—and a strong, independent judicial system. A strong start has been made on these issues, but clearly if the recoveries are to be sustained the countries in crisis still face a long agenda of financial system and corporate reform.

Third, exchange rate regimes and the conduct of exchange rate policy have to be adapted to the economic fundamentals. It has been widely noted that each of the countries in crisis had operated some form of pegged arrangement or tightly managed float. Were such arrangements defective either in principle or in the way that they were managed? Do they have limited relevance, being suitable only for countries at certain stages of economic development? Ultimately does it matter what exchange regime is adopted as long as domestic economic policies are right? These questions are being revisited by the IMF in the light of recent experience. The answers are in no way straightforward.

Fourth, one of the most striking lessons of this crisis, transparency and governance, must be seen as essential components of sustainability of policies. Failures in this domain and particularly the kind of too cozy relationships which had developed between enterprises, banks and governments, dramatically contributed to the collapse of several of these economies. Already the Asian countries have begun to adopt new standards for the timely dissemination of accurate and comprehensive data—especially reserves—which if they had been in effect before the crisis began would have given clearer early warning of pending trouble. More broadly it became clear from "day one" that the programs would work only if they promoted transparent policymaking and an arm's length relationship between the public and private sectors. Well, an important change has taken place, and I can imagine that countries emerging from this crisis will be prompt in adopting the internationally recognized standards and codes of good practice that are being elaborated to promote a better worldwide environment for data dissemination, transparency in fiscal, monetary and financial polices, securities, accounting, auditing and corporate governance.

Fifth, countries must act—before crisis strikes—to set up social safety nets adapted to the needs of vulnerable groups, and, as Mr. Tarrin Nimmanahaeminda, Thailand's Minister of Finance, stressed at an ECOSOC gathering in April 1999, implement social policies that are consistent with a country's values and culture, and sustainable after crisis.

Sixth, only participatory decision-making systems can guarantee the needed durable popular support for in-depth reform. This is a principle that the Fund has often stressed over the years: a program of economic stabilization or reform will not work unless it is effectively "owned" by the authorities of the country. In Asia, the programs are working because of three crucial factors: first that the authorities themselves have designed or endorsed the policies. Second, they have sought the backing of the people's representatives in legislatures. And third, they have adopted a participatory approach by involving key interest groups, especially labor unions. In Indonesia and Korea, the Fund actively encouraged the authorities to pursue a tripartite consultative approach with labor unions and employers. I am convinced that this approach improved the chances of peaceful implementation of the ambitious programs that were needed.

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These six lessons of experience tell us why the countries in Asia are beginning to emerge from crisis, with strong prospects for the future. But it must also be recognized that the crisis was not entirely of their own making. Significant too were poor investment decisions by external creditors and the deficiencies in international monitoring and supervision that allowed exposure to risk to accumulate to the extent that it threatened global financial stability. That is why the international community has been intensively debating how to strengthen the architecture of the international monetary and financial system. The avoidance of crises in the future, or at least the reduction in their frequency or intensity, hinges on the success of these efforts.

These proposals are essential for establishing a stable world financial environment without which any development policy may be in permanent jeopardy. They may be summarized in a very few words as building a sound international financial system conducive to free but orderly international capital movements, based on sound national systems and equitable, transparent policymaking. It would be a system:

• that aims eventually to develop open, integrated capital markets, with progress by individual countries being undertaken in an orderly fashion;
• that promotes transparency through internationally recognized standards and codes of good practice;
• that fosters financial sector soundness, based on strong regulatory and supervisory practices;
• that promotes orderly and well sequenced capital account liberalization, reducing vulnerability to short-term shocks and facilitating mobilization of long-term resources;
• that seeks to develop a mature relationship between the private and public sector such that each plays an appropriate role, including in forestalling and resolving financial crisis;
• that ensures that the international financial institutions and other agencies must be adapted and strengthened to enable them to play their full part in an evolving world;
• and that, underlying all this, is committed to pursue growth and equity, including through the elaboration of equitable social and human development policies.

Substantial progress has been achieved in recent months, as reflected in the communiqué of the Interim Committee in April, strongly endorsed by the G-8 Heads of Government. Now it is time for concrete implementation and this may well stretch over a number of years, often lacking "news appeal", but involving a great deal of hard work by country authorities and international organizations around the world.

Mr. Chairman, the efforts of the past two years to contain this virulent contagion that spread through global capital markets, and the steps to reform the international financial system to minimize the risks for the future, help to create some of the conditions of a more favorable environment. It is now high time to bring our full attention to bear on the challenge of poverty.

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II. Two dimensions in the struggle against poverty

I believe that all three issues on which you want to focus this meeting—employment creation, poverty alleviation, and the empowerment and advancement of women—equally require an environment characterized by economic and financial stability, growth, equity, transparency, good governance, and full government commitment to human and political rights and social justice. The operations of the IMF support these goals with due attention, of course, to the diversity of local conditions. Where it goes beyond our mandate or our expertise, we look to our fellow United Nations agencies, to non-governmental organizations and other agencies to make sure that our actions are mutually supportive and jointly promote broad-based economic and social advancement.

In our fight against poverty, I see two dimensions, one national, the other international. I shall start at the national level, for the final responsibility for the well-being of a country's population rests in its own hands. Ultimately, the key to generating employment, alleviating poverty, and narrowing gender differences is growth--high-quality growth. And the most indispensable ingredient in promoting growth is investment: investment first in countries— human resources, especially education, health and infrastructure, and in the many other elements of a strategy to expand opportunity and broaden participation; and investment—especially private investment—to promote productive activity. Without investment in the productive capacity of the country, there will be no growth.

How can the level of investment, especially of private investment, be raised? Here, of course, the six lessons of the recent crisis, about which I have just reminded you, are particularly applicable, with particular emphasis on a stable macroeconomic foundation. As demonstrated by many African countries—which were able during the 1990s to reverse a decade and a half of declining per capita growth, high inflation and external imbalances—achieving real income growth, declining poverty, and eliminating the inflation that can be seen as the most cynical form of taxation of the poorest in society. But an enabling environment that fosters confidence in investors--both domestic and foreign, small and large--is also of the essence. It draws on all the issues that I have mentioned already as lessons of the emerging markets crisis. And there are practical, institutional policies that can be adopted to improve access to opportunity for households—especially women—to promote their investment. A leading example is microcredit and financing, which gets now a well deserved recognition for its importance in empowering women and creating employment.

In addition to these issues, which are already on the agenda in many of the poorest countries, let me highlight some other essential foundations of the environment for investment. One is respect for the rule of law and a judicial system that enforces property rights and honors contracts. A second is special attention to correcting the distorted incentives—farmers' incomes that are held too low or costs that are pushed too high by inappropriate policies—in the key productive sectors, especially agriculture, that have resulted from often well-intentioned, but misguided, efforts to create cheap food for certain other parts of the population. What better way of alleviating poverty, of raising the income of women—who often perform the lion's share of agricultural labor—than ensuring that households have secure tenure of their land and are receiving adequate market-based prices for agricultural production?

Another quite far-reaching contribution would come from trade liberalization. Individual countries can take a leaf from the book of many countries in Asia and Latin America that have achieved accelerated growth through outwardly oriented economic policies, including progressive trade liberalization. But the international community can make a major contribution. The industrial countries could open their economies to all exports of the poorest countries, not only encouraging existing primary commodity exports, but, more important for long-term growth, creating the potential for new, more diversified, export production. This highly significant step for the poorest countries, can be achieved with minimal cost to the more advanced economies, and thus need not await progress on the so-called Millennium Round of trade negotiations that is likely to be launched later this year. I cannot here but repeat my full endorsement of Renato Ruggiero's inspiring suggestions.

This brings us to the international dimension of the fight against poverty. It starts, of course, with an effort to optimize the macroeconomic policies of industrial countries so as to bring their growth to full potential and to generate there the external demand indispensable for developing countries. Beyond that, the recent and welcome renewal of emphasis on social issues in international fora provides a golden opportunity to press forward with a major offensive on poverty alleviation.

I see three tangible elements of what might be called an enabling international environment for poverty alleviation and investment in human resources. The first, of course, is debt relief. The poorest countries cannot face a globalized world unless the millstone of unsustainable debt is removed from around their necks. We in the IMF see with immense satisfaction that a broader part of the package we suggested in 1996--with our friends at the World Bank--in launching the Heavily Indebted Poor Country (HIPC) Initiative is now endorsed by the G-8. The Cologne initiative is a major step forward in this respect and I hope that the necessary actions can be taken well before the end of this year by all creditors to bring the proposal to fruition, including the financing. The significance of the revised HIPC Initiative is reflected in its estimated cost, now projected to more than double—in net present value terms—to about $28 billion dollars. To meet this cost we will make the best use of the resources at our disposal, and we are ready, if agreement is reached among our membership, to play our part, including through use of our gold, as we first proposed three years ago. Fully aware of the potential impact of such sales on gold markets we will, as you can imagine, proceed in a careful and orderly manner. But the amount of resources likely to be mobilized in this way would still need to be supplemented by additional resources from official bilateral contributions.

The second element is, in fact, also part of the Cologne initiative. It is its most promising element, namely the fact that a tighter link between debt relief and social spending, especially for education and health has been established. I warmly welcome the determination of governments to ensure that the resources freed by debt reduction are directly used for alleviating poverty. This link can help to make structural adjustment programs much more effective in setting the priority of human investment and development. I am very happy to reaffirm our commitment to these objectives, and I can tell you that in the coming weeks and months we will be considering how to adapt the way we design our policy advice, and programs to achieve these goals and accelerate their delivery in the poorest countries.

The third element should be the most straightforward. We know that good national policies in the poorest countries, openness to their exports, and debt relief will not suffice. To accelerate the alleviation of poverty, a supplement of official development assistance is necessary. But here let us stop lamenting about our failure to reach by the year 2000 our pledge of devoting 0.7 percent of industrial GNP to ODA. Of course, we must reverse this deplorable trend, but we should also remember the seven pledges industrial and developing countries have together adopted on the occasion of these memorable conferences of the 1990s. They include not only a commitment to reduce extreme poverty by half, but also to achieve universal primary education, reduce infant and child mortality by two thirds, maternal mortality by three-fourths, achieve universal access to reproductive health service, ensure that current trends in the loss of environmental resources are reversed—all of that by the year 2015. And they include this essential precondition for the durable empowerment of women: elimination of gender disparities in primary and secondary education by 2005. Taken together, and steadily implemented, they could lead to a formidable change for the better for all the poorest people of the world.

Instead of lamenting, instead of adopting new pledges, let us implement the existing ones and take precise steps in a North-South partnership, to make sure that we identify, demanding as it may be, the proper track for their implementation and verifying, year after year, that we effectively stay the course. This is one of the suggestions I made to the G8 Heads of States and governments before their Summit and I was delighted to see that section 28 of their communiqué reflects just this intention when it states:

"We reaffirm our commitment to contribute to the achievement of economic and social development in Africa, Asia and Latin America. We will review the situation in that regard every year, on the basis of reports by the IFIs and the relevant regional development banks, on the alleviation of poverty."

Mr. Chairman, let's make the next decade, the decade of implemented pledges.

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III. Serving peace

Finally, we, as human beings, we, as heads of institutions, striving for improving economic conditions around the world, cannot accept the fact that time and again the efforts of so many countries, the efforts of the world community for economic progress are just annihilated by new armed conflicts with all their consequences of human suffering, destruction of property, jobs and opportunities not least for women and their children. Indeed after a promising and all too brief a period, Africa's progress has dimmed within the past year, basically due to the resurgence of armed conflict, so much so that fully one-third of the countries of sub-Saharan Africa are affected directly or indirectly. Mr. Chairman, war and military expenditure are the most tragic calamities of Africa and elsewhere. Let me mention on this issue the striking report that the International Committee of the Red Cross has just issued.

I believe the global community has a sacred duty to address this issue. And I dare to raise this sensitive matter, which is much more of your business as diplomats than mine as the head of a financial institution, because it is not purely political, but is an economic and social issue too. Excessive military expenditure diverts resources from human development. It is tragic that military conflicts in many of the poorest corners of the world are creating new pressures for increased military spending. Accordingly, as you certainly recognize that the sales of military equipment, beyond what can reasonably be justified, severely undermines peace and development, I suggest we revisit again four suggestions which are not that new:

• Adopting agreements that would restrain sales of military equipment in sensitive regions well in advance of any open belligerence; the register of the UN now involves a hundred countries. It would be important to take steps to involve many more countries and to broaden it to small arms and ammunition. After all, wars in Africa are waged essentially with small weapons and only with conventional arms. Small arms are also those with which so many children now serve as soldiers in frequent violent operations. We must counter such things. The efforts we develop in other fields for transparency and the rule of law can contribute, but greater steps are needed to bring off-shore center transactions under internationally agreed standards; and to watch more closely the activities of criminal intermediaries.
• As we strive to reduce debt frequently accumulated for unproductive purposes, pledging to banish any export credit for military purposes;
• African nations, indeed poor nations everywhere, to accept the two important recommendations by the Secretary General one year ago to reduce military expenditure to 1.5 percent of GDP and to maintain zero growth of defense budgets for the next decade; and
• Cooperating to interdict the smuggling of raw materials and natural resources used to finance armed insurgency in many African countries.

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Mr. Chairman,

Our agenda is ambitious. Each of us will offer you today his own message, a kind of quintessential distillation of years and years of experiences of institutions striving to serve a given dimension of the universal common good defined by their mandates. For the IMF, the response is demanding but straightforward. It boils down to the very key of development and universal ethics.

The very key of development: for development to have its chance, monetary and financial stability, budget discipline serving human development priorities, trade and financial openness and good democratic governance must be ensured.

The very key of universal ethics: if you pledge something, deliver it. During the last decade, in Rio, Copenhagen, Cairo, and Beijing we have adopted these seven pledges for the years 2005 and 2015. Let us concentrate on fulfilling them. Only then will we have an acceptable answer to the eternal question: "what did you do for your brother..."

And four last words, Mr. Chairman, speaking from my own limited experience, for high quality growth, for employment and work, for poverty eradication, for empowerment and advancement of women, and for education and opportunities for a better life for the children of the world, remember: peace is a must.