Speech

96/15 Address by Michel Camdessus
Managing Director of the International Monetary Fund
at a Meeting of Financial and Business Leaders
Kuala Lumpur, July 15, 1996

---

Thank you, Mr. Minister, for your kind words.

It is a great pleasure for me to be visiting Malaysia again. This is my second visit to Malaysia and I still have vivid—and warm—memories of my first visit, which was almost a decade ago, shortly after I took office. It is a privilege to see first hand the giant strides that Malaysia has made in this period, and I am frankly amazed by these changes. I will have more to say on this in a moment. Let me say, first, that I take great pride in the IMF's long and close relationship with your country. Also, I especially welcome this opportunity today to speak to many leaders in the fields of business and finance about the challenges facing the IMF and Malaysia.

Malaysia is well known at the IMF as one of the most successful economies, centered in the most dynamic region in the world. Malaysia's transformation from a relatively poor, primary producing country with a per capita income of about $300—just three decades ago—to the threshold of a fully industrialized country is among the more remarkable stories of modern economic history. Growth rates of about 7-8 percent—outstripping even the objectives of your own development plans—have allowed real income per head to grow more than tenfold in this period, and the proportion of people living below the poverty line to be reduced by four fifths. Very few countries in the world can make such a claim.

Equally extraordinary is that this growth has been of the high-quality kind, a goal I never tire of stressing. What do I mean by high-quality growth? It is a demanding concept, with at least four dimensions. I believe that growth, to be sustainable, must maintain macro stability, benefit all sections of the community (especially the poorest), and respect national cultures and political freedom.

High-quality growth of this kind is obviously not easily attained. However, even by the high standards of the ASEAN region, Malaysia's performance in this respect stands out. After all, Malaysia has been exceptionally successful in sharing the benefits of its rapid growth among its culturally diverse population and in dramatically reducing poverty. In the early 1970s, close to 50 percent of Malaysia's population lived below the poverty line. By 1995, this had been reduced to 9 percent, better than targeted in the Sixth Plan and, I understand, a further reduction—to 6 percent—is targeted over the next five years. Hard-core poverty—those with incomes less than one-half the poverty line—has already almost been eliminated. Sensitivity to the environment—I am glad to say—has also been a major concern of Malaysia for many years. Indeed, with Malaysia's urban environment among the cleanest in Asia, I can see why chief executives of foreign companies view Malaysia as a top destination! Why do I stress these achievements? It is not to flatter your government. Rather it is because part of my job is to be involved in monitoring economic progress in the world and, when outstanding performers can be identified, to try to understand the reasons for their success, and then to disseminate this understanding throughout the IMF membership.

So, the question for me is: what are the reasons for Malaysia's success? Five sets of policies deserve emphasis, with several elements in common with your fast-growing neighbors:

• First, policies have maintained broad macroeconomic stability, which is crucial to the achievement of the virtuous circle of high saving, high investment, and rapid growth that you have enjoyed;

• Second, the overall strategy has been both outward-oriented and increasingly market-friendly;

• Third, the long-term emphasis on the investment in human, as well as physical, capital has unlocked another powerful virtuous circle of education spending, productivity, and growth;

• Fourth, as I have already emphasized, the successful pursuit of deliberate anti-poverty programs has not only reduced poverty, but also helped maintain social stability and ensure the political sustainability of the reform process; and

• Fifth, the very cooperative way in which Malaysia has availed itself of the benefits of its membership in the Bretton Woods institutions, especially the IMF, has resulted in a permanently open and mutually trustful dialogue.

How did the latter develop?

• At crucial times, the IMF has helped with financial support: in Indonesia, in the early years of its stabilization program, between 1966-73; in Thailand, through the support of their comprehensive adjustment program in the first half of the 1980s; and, in Malaysia, through the financing we provided in the 1970s and early 1980s, to tide your country over periods of commodity price declines and export shortfalls.

• The Fund has also provided Malaysia—as well as its neighbors—with technical assistance in a number of areas of IMF expertise. Such technical assistance has focused on establishing a sound basis for lasting macroeconomic stability—by strengthening the domestic institutions for macroeconomic management, especially in the central banking and budgetary areas, and improving statistical systems.

• On a more regular basis, Malaysia, like all other IMF member countries, participates in the annual surveillance exercise. It is through this surveillance process that the IMF seeks to maintain a sound external environment for all countries, a factor that has certainly contributed in no small measure to the success of this country and of the region. Surveillance involves in-depth discussions every year between each government and the IMF staff on the country's economic developments and prospects. The reports subsequently prepared by Fund staff are discussed by the IMF's Executive Board in Washington, which represents all of its 181 member countries. Through this process, Malaysia gets the benefit of our experience in all other countries; equally, Malaysia has the opportunity to give its views on the policies of all other countries. Thus, the membership can exercise considerable peer pressure and moral suasion over the direction of individual countries' policies. This is a form of discreet and mutual support that has gained increased importance at a time when globalization multiplies challenges and risks facing every country.

---

Globalization equals opportunities, risks, and new tasks for the IMF

The globalization of the world economy is basically positive. It has boosted net private capital flows to developing countries tenfold over the past two decades—to over $100 billion per year in recent years. Malaysia—and the region as a whole—is no stranger to these trends. You have been among the most effective countries in tapping private capital inflows and quickly responding to opportunities in the global market place. Indeed, the most spectacular increase in such flows has occurred in Asia.

However, these trends have also brought risks. Among the many lessons of the experience with Mexico is the all-important reminder of the speed with which market sentiment can shift and how disruptive such shifts can be. Given the high degree of market integration today, crises can quickly spill over into other markets. Therefore, the IMF now has an even more challenging responsibility in maintaining a favorable and stable external environment.

How do we do this? By promoting high-quality growth in all countries. As I said not long ago in Manila, and will repeat here, the words "high-quality growth" define our actions. The importance of this has been reconfirmed by the experience in Mexico, especially the importance of macroeconomic discipline and consistent policy implementation in maintaining market credibility—and of the severe consequences entailed by a loss—even temporarily—of such discipline. Thus, we see our principal task as one of encouraging countries to pursue sound domestic economic policies, to open up their economies to trade and investment, and to practice good governance—by which I mean transparent and accountable governments that follow the rule of law.

This is our mandate. But the question remains: how are we preparing ourselves to make our role even more effective in the context of the new challenges? I will touch on three areas:

First, let me address our surveillance role. We are building on this role to make it even more effective. In particular, we have intensified our dialogue with member countries so that we will be in a better position to assist with emerging problems before they become full-blown crises. We have also introduced new, more flexible—and more frequent—reviews of country and regional matters by the IMF's Executive Board, to supplement the surveillance exercise. Through these vehicles we are paying greater attention to the soundness of banking systems, especially to the nature and quality of banking supervision, to financial flows and their sustainability, to the problems of countries at risk, and to countries where financial market tensions could spill over into other countries' markets.

Second, we have committed ourselves to promoting the increased transparency of each country's policies. A crucial aspect of this is the increased transparency that results from the availability of timely data on a country's economic performance—this was yet another key lesson of the Mexican crisis. Toward this end, the Fund has developed a set of data standards to guide member countries in providing greater economic and financial information to the public, so that markets will be better informed—and less prone to surprises. We are encouraging all member countries to provide basic information to the public. We are urging countries that tap the international financial markets to meet a more demanding standard with regard to the coverage and periodicity of the data they release. It is my hope that Malaysia—and other countries in this region—will take the lead in this respect.

Third, the experience of Mexico also demonstrated that the Fund must have adequate financial resources so that it can continue to fulfill its mandate—as forcefully and decisively as circumstances demand—in this globalized, and at times unpredictable, world. With claims on our resources continuing at a high level— including from Russia, other transition economies, Latin America, and Africa—we are taking the following steps to strengthen our resources:

• Work is underway on the Eleventh General Review of Quotas, and this will remain our top priority. Quotas are the main resource base for IMF lending, and we are aiming for a timely and substantial increase in quotas—hopefully a doubling—that would be needed to see us through to the beginning of the next century.

• In addition, as you may know, the G-10 and other countries—including, I am glad to say, countries in this region—are establishing parallel financing arrangements, complementary to those already in place, with the aim of doubling the credit lines currently available to the Fund, to a total of approximately $50 billion under this mechanism.

• We are working to ensure the long-term future of the Enhanced Structural Adjustment Facility (the ESAF) so that the Fund can continue to assist its poorest members into the 21st century.

• Finally, I fervently hope that we will be able to make progress in making a new allocation of SDRs in a way that will address the important equity issue rising from the fact that 38 of our members have never received an SDR allocation.

In all these adaptations of our role, the IMF has received strong support from Malaysia. Indeed, as Malaysia's economic role in the world has dramatically increased, and pari passu with its growing economic strength, Malaysia will be playing an even larger role in the IMF in the years ahead. Not only do we look to your country for the lessons of growth, but also to your support in strengthening the IMF's resource base, as well as in increasing the relevance of our surveillance. In a word, Mr. Chairman, the Mexican crisis has made crystal clear to the world that we are already in the brand new, globalized 21st century, a world with tremendous opportunities and challenges. What is the immediate implication of this for Malaysia?

---

Challenges facing Malaysia

Yes, let me now turn to some of the challenges facing Malaysia in this new environment, as it seeks to maintain growth and build on the successes of the past three decades. Many of these challenges Malaysia shares with the other fast-growing countries in the ASEAN region.

The basic challenge is the familiar one—to maintain the ingredients of high-quality growth that have already characterized Malaysia's economic performance over a long period. It remains essential, of course, to maintain macroeconomic stability, pursue a market-friendly economic strategy, maintain and promote investment in physical and human capital, and continue the successful fight to eliminate poverty.

While the agenda for maintaining these vital ingredients is already well established, rapid global integration raises more specific challenges in the immediate future, including strains on the macroeconomic framework. After the recent years of rapid growth in Malaysia—and in the region—these strains are not surprising. Specifically:

• Strong demand pressures—stemming from increased investment and consumption—have raised external current account deficits and put pressure on domestic prices. In Malaysia, the strain has been felt most acutely in the current account, where the deficit has risen quickly from about 4 percent of GDP in 1992-93 to over 8 percent of GDP in the past year. In the real economy, these strains can also be readily seen in a number of indicators, such as labor market pressures, especially of skilled labor, and rising property prices.

• In some countries, strains have also been felt in domestic banking systems that have had to intermediate a massive volume of resources, especially in the context of the surge in capital inflows.

The Malaysian authorities are, of course, well aware of these challenges. Indeed, the need for careful management of the pressures resulting from high growth has been well set out in Bank Negara's most recent Annual Report, including the need to maintain a strong financial system. And, a number of steps have been implemented toward this end. Let me say, also, that economic fundamentals in Malaysia—as in the region—are strong, and provide an margin of comfort against possible risks. Nevertheless, open economies like yours have to pay increasing attention to market sentiment. Given the mobility of capital flows, and their speedy response to concerns about sustainability, there is a clear premium on not delaying policy adjustments. Thus, we welcome greatly the continued commitment in the Seventh Plan and in the Bank Negara Report to a stable macroeconomic environment, one that would keep inflationary pressures in check and significantly reduce the current account deficit in the coming years.

A common issue in our discussions with countries across the region has been how best to strengthen the policy response to demand pressures. As we put together the lessons of these consultations, allow me to offer some observations on how the macroeconomic policy mix could best be adapted to deliver the demand restraint that is needed. In Malaysia, where a concern must be to reduce the current account, it will be necessary, of course, to increase saving relative to investment. Although higher private savings are desirable, Malaysia's record in this regard is already exemplary. Thus, especially in the short term, the public sector has to play an important role in responding to the demand pressures. In Malaysia, where the public sector is already in broad balance, the challenge is to aim for a fiscal surplus. This will require policymakers to strike a balance between spending needs—particularly in infrastructure areas—and the demands of macroeconomic stability. A similar challenge confronts Indonesia and Thailand (where the government sector is already in surplus). I have every confidence that the region will rise to this challenge, as it has to previous ones.

Why do I focus on fiscal policy in the recommended macroeconomic policy mix? This is because the tightening of fiscal policy tends to reduce interest rates and the current account deficit, simultaneously, and thus addresses the problem posed by capital inflows. A tightening of monetary policy, alone, is more likely to have adverse effects on private activity, capital inflows, and the current account. Thus, the obvious lesson for the policy mix is that monetary policy is best used in conjunction with fiscal policy to reduce demand pressures.

While so far I have focused on the near-term challenges posed by demand pressures, allow me to say a few words on where Malaysia stands with regarad to its continuing structural reform process and the medium-term goal of sustaining high- quality growth. Without question, Malaysia has come a long way in deregulating its economy, an accomplishment that has surely been at the root of the impressive rate of total factor productivity growth achieved over a long period. Nevertheless, in today's environment where all countries are competing for market confidence, there is always more work to be done. The Seventh Plan gives considerable confidence that Malaysia will be building strongly on its structural reform efforts of the past. An impressive agenda of reform is set out in the Plan, covering a variety of crucial areas—education, the labor market, infrastructure, health, environment, to name just a few.

From a macroeconomic perspective, let me highlight these important points. First, further development of the financial sector would be instrumental in helping finance—and sustain—Malaysia's high growth. Second, continuing tax reform—most efficiently, in our experience, through the introduction of the value added tax—would help with the fiscal consolidation. Third, the further liberalization and simplification of Malaysia's trade regime—where future progress is among the regional initiatives of AFTA and APEC—would deepen the outward orientation of the economy. All these structural reforms would, both, contribute to an even more efficient economy, as well as establish a lasting foundation for macroeconomic stability.

Allow me now to return to an area that is particularly close to my heart—and also to sustainable growth—and place high emphasis on maintaining Malaysia's competitive advantage in environmental matters. It is essential that environmental quality be maintained in the face of rapid industrial growth. For many years, Malaysia has enjoyed one of the least polluted environments in Asia. While rapid economic growth is starting to impose costs, I am pleased to say that policymakers in your country are responding actively to this challenge. I applaud these steps, and encourage you to continue and strengthen your efforts in this area, and so safeguard Malaysia's rich natural resources for future generations.

Last, but not least, Mr. Chairman, let me applaud the sense of international responsibility that your country has displayed as its economy has continued to strengthen—especially in accepting a more active role in our multilateral institutions and in supporting the efforts of poorer countries on their path towards adjustment and reform. For example, Malaysia has contributed to the ESAF in the past, thereby demonstrating that it regards solidarity with the poorer countries as a universal "must," and I am hopeful that it will continue to do so in the future. I look forward to Malaysia's leadership in other areas as well—not least to its contribution to the discussion of international monetary affairs in the IMF and in the Interim Committee— the IMF's policy-making body that is playing an increasingly important role in defining a cooperative global strategy. All countries in the world should pledge to implement the latter so as to promote worldwide stability, growth, and development. This would indeed be a most effective way for Malaysia to play its full role in the "new global partnership" that the G-7 summit in Lyon emphasized, and that should benefit our new world, as long as all partners fulfill all their obligations.

In conclusion, Malaysia still faces further challenges as it looks ahead to becoming a fully industrialized economy. Prime Minister Mahathir's Vision "2020" sets the target of achieving industrial country status by that date. Malaysia's progress in recent years leaves no doubt that this objective can be met. You can count on the IMF to support your efforts with every means at its disposal. Equally, I am sure that the IMF can count on Malaysia to continue working with other IMF members to strengthen the international monetary system. In integrating itself into the world economy more everyday, Malaysia sees both the benefits and the responsibilities that such integration entails. I have no doubt that you will continue taking advantage of the former, while acknowledging the latter.