Speech

Address by Michel Camdessus
Managing Director of the International Monetary Fund
at the High-Level Meeting of the UN Economic and Social Council
Geneva, Switzerland, July 2, 1997

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Thank you, Mr. Chairman, ladies and gentlemen. I am very pleased to participate in this year’s high-level meeting of ECOSOC. Your theme this year—"fostering an enabling environment for development"—is at the core of IMF’s mandate and activities, and today this mandate is particularly pressing. Globalization is with us: the availability of massive amounts of private capital has opened new opportunities for investment and growth to an ever larger number of developing countries, allowing many to develop much more rapidly than would otherwise be possible.

Certainly, this has been good for individual countries and the world economy. But it also raises new issues. For emerging market economies, how to maintain market confidence and deal with the economic policy complications that often accompany large capital inflows? For less developed countries, which are often ignored by the markets, how to deal with the opposite problem of marginalization, with its tragic human costs. For the international community, how to cope with the growing number of economic and financial issues that transcend national borders? This morning, I would like to bring you up-to-date on what the IMF is doing to foster an environment in which our member countries can meet these challenges and reconcile these two imperatives of our times: the acceptance of increased competition and the corresponding need for enhanced solidarity.

But first, let me say a word about the overall situation and outlook for the world economy. It is—compared with those of the last ten years—a particularly favorable one. World economic output increased by 4 percent last year, and conditions are generally favorable for the expansion to continue at this pace, or even a little faster, in 1997 and over the medium term. Developing countries grew by 6 1/2 percent, and the advanced countries, by 2 1/2 percent, although the situation in a number of European countries is clouded by high unemployment. Global inflationremains subdued, and countries appear more committed to price stability than at any other time in the post-war era. In addition, fiscal deficits are being reduced in many countries—a good omen for interest rates and investment—and exchange rates among the major currencies appear to be generally consistent with economic fundamentals. Meanwhile, many countries around the world have undertaken significant structural reforms, thereby improving the prospects for sustainable growth. This context is particularly favorable to the bold initiatives and reforms needed to prepare effectively for the challenges of this new world. This is a window of opportunity not to be lost. But how to ensure that we have our priorities right?

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It should not surprise you to hear that our strategy must still begin by helping countries reestablish basic macroeconomic equilibria and complete the structural reforms needed to achieve a more efficient allocation of resources and jump-start the engines of growth. Two factors heighten the importance of establishing a sound, stable macroeconomic environment: globalization and increased competition for capital and investment on one side, and on the other, following our Copenhagen pledges, the search for ways to accelerate social progress. It is important to remember that creating an environment of steady growth and low inflation is of tremendous benefit to the poor—for it is they who are most likely to lose their livelihoods during economic downturns and who are least able to protect the real value of their incomes and savings during periods of high inflation.

And indeed, these policies work. In recent years, we have seen more and more countries adopt comprehensive programs of adjustment and reform—many of them with IMF advice and support. The results? Even countries in which the problems of underdevelopment have seemed most intractable have improved their economic performance significantly. In sub-Saharan Africa, for example, average annual growth reached 4 1/2 percent last year and is expected to remain close to that level over the medium term. Heavily indebted poor countries (HIPCs) and the least developed countries performed still better—each group recorded average growth of 5 1/2 percent last year, levels they, too, are expected to maintain over the medium term. Meanwhile, real GDP in developing countries increased by 6 1/2 percent, the best performance in over two decades.

So we must maintain this emphasis on macroeconomic stabilization, and the trade liberalization, price reform, privatization, and other reforms that allow stabilization to take hold. But we have learned that this "first generation" of reform is not, by itself, enough—either to accelerate social progress sufficiently, or to allow countries to compete more successfully in global markets. With that in mind, at its fall meeting last year, the IMF’s Interim Committee set out "eleven commandments" forbroadening and strengthening the strategy of our 181 members. Let me mention four of them: quality of fiscal adjustment, bolder structural reforms, better government, and strengthened financial institutions. Taken together, these constitute what I like to call the "second generation" of reform—the reforms that are indispensable if we want the rate of real per capita growth to increase significantly and greater equity to prevail in the distribution of income. Let me comment briefly on each of them.

The first point concerns the quality of fiscal adjustment. Reducing budget deficits is key, but improving the composition of fiscal adjustment can have profound effects on economic welfare, saving, investment, and growth. You will be particularly happy to learn, I suspect, that the Ministers of Finance of the IMF’s Interim Committee unanimously approved a text stating that, "because the sustainability of economic growth depends on development of human resources, it is essential to improve education and training; to reform public pension and health systems to ensure their long-term viability and enable the provision of effective health care; and to alleviate poverty and provide well-targeted and affordable social safety nets." Indeed, achieving stronger, more widely shared growth also depends on improving the quality of expenditure, which implies, of course, reducing unproductive outlays—hence, our insistence on reducing military expenditure to the real minimum required by national security.

The second point concerns the fact that countries could accelerate growth and increase the equality of economic opportunity if they took a bolder approach to structural reform in general. Too often, people are disappointed by the results of their countries’ initial stabilization and reform efforts. The balance of payments is stronger and inflation has declined, but they don’t see that their own economic opportunities have increased significantly. And often, they are right! The problem is that many of the obstacles to private sector initiative, job creation, and foreign investment have been left in place. The solution is broader, deeper reform. Among the many avenues for this are: civil service reform to secure a smaller, but better paid and more efficient cadre of public servants; labor market reform to remove disincentives to job creation; trade and regulatory reform to level the playing field for private sector activity, and many other reforms with a distinct and immediate social impact—such as agrarian reform, the enforcement of property rights, land registration, mortgage and credit regimes, etc. In all these fields, as well as in many others that I will mention, we rely on the competence of the World Bank and other specialized agencies.

The third point concerns the role of the state. Many countries have reduced the negative aspects of state intervention in their economies, but they have yet to develop their public institutions into a positive force for growth and development. That process begins by increasing the transparency of government operations, so as to limit opportunities for corruption and enhance public accountability. At the same time,countries must rededicate the state to fulfilling the tasks that are so essential to the confidence of private savers and investors and the smooth functioning of their economies—such as providing reliable public services; establishing a simple and transparent regulatory framework that is enforced fairly; guaranteeing the professionalism and independence of the judicial system; and enforcing property rights. In this regard, "good governance" is important for countries at all stages of development—in the poorer countries that are still in the process of building up institutions and implementing reforms to promote economic growth; in middle-income countries whose access to private capital flows may be affected by governance issues; and in the advanced countries, both as regards their own internal governance and their dealings with the developing countries. In this connection, I welcome the commitment of OECD countries to criminalize the bribery of foreign officials and end the tax deductibility of foreign bribes.

The last point concerns the need to strengthen domestic banking systems. Allowing banking sector problems to fester only encourages poor banking practices, impedes effective financial intermediation on which development depends, and increases the eventual resolution costs—often to exorbitant levels. Moreover, when banking sectors are weak, policymakers tend to shy away from tightening macroeconomic policies when needed, for fear of provoking a domestic banking crisis. This is a particular problem in emerging market countries, since perceived policy weaknesses can trigger a change in market sentiment and large, destabilizing capital outflows.

Clearly, the reforms I have just outlined are more demanding than those that many countries have undertaken to date. But increasingly, our membership is coming to the conclusion that reforms of the "second generation" are absolutely indispensable if countries at all stages of development want to grasp the opportunities of globalization and minimize its risks and, in so doing, accelerate the pace of human development. Let me insist on the fact that these reforms are inescapable for all. For countries with no access to markets, these reforms are indispensable to reassure and attract investors. For countries that already have market access, they are equally necessary since, without these reforms, capital inflows could turn out to be a short-lived bonanza promptly followed by—let me put it mildly—disappointment. Let me turn now to some of the ways in which the IMF is contributing to this "second generation" of reform and adapting its role to this new globalized environment.

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In recent years, the IMF has increasingly focused on education and health spending in its surveillance, technical assistance, and use of resources. In the sample of 27 countries with SAF- and ESAF-supported programs most recently analyzed,average spending on education increased by 5 percent per year in real terms, or by more than 2 percent on a per capita basis, over the life of these programs. Likewise, real expenditure on health increased by 7 1/2 percent per year on average, or by over 4 1/2 percent on a per capita basis.

Social indicators also improved during the course of these programs. On average, illiteracy rates declined by 3 percent per year; primary and secondary school enrollments increased by over 1 percent per year; infant mortality declined by 2 percent per year; and life expectancy increased by 1/2 percent per year, while access to health care and safe water improved by nearly 10 percent per year and over 5 percent per year, respectively. But within these averages, some countries have been more successful than others in increasing social expenditure; we must help spread this success more widely. Moreover, in many countries, a lack of data on social spending—especially on its impact on social conditions, such as access to education and health services—hampers policymaking; this is another area where Fund staff will be working more intensively with member governments, as well as with the World Bank.

As regards the role of the state, our approach is to concentrate on those aspects of "good governance" that are most closely related to our surveillance over macroeconomic policies—namely, the transparency of government accounts, the effectiveness of public resource management, the stability and transparency of the economic and regulatory environment for private sector activity. We are promoting these objectives in a variety of ways: through institutional reforms of treasury, budget preparation and approval procedures; improvements in tax administration and accounting practices; increased transparency of central bank operations; and the establishment of effective audit procedures.

Our policy dialogue also places greater emphasis on banking and financial sector problems. At the same time, having seen the state of banking systems around the world, the IMF has pointed to the need for a set of "best practices" in the financial area that are internationally recognized and applicable in countries at varying stages of development. We have also indicated our readiness to help disseminate these "best practices" through our policy discussions with member countries. I am happy to say that important steps are now being taken in this direction—such as the Basle Committee’s "Core Principles for Effective Banking Supervision." We applaud these steps and hope to see more work in this direction.

Lastly, let me mention three other initiatives to help countries take fuller advantage of the opportunities of globalization. The first concerns strengthened surveillance. As market financing develops, so does the vulnerability of countries to shifts in market sentiment. Thus, we have taken a number of steps to ensure that ourmonitoring of individual country economic and financial policies is more continuous, comprehensive, and probing. In particular, we are paying more attention to the soundness of banking systems, to the sustainability of financial flows, to countries potentially at risk, and to countries where financial markets could have spillover effects. Ladies and gentlemen, one of the risks of globalization is increased financial instability. This is a dangerous world, so I don’t apologize for putting such emphasis on crises prevention. It is imperative to preserve the present positive capital flows and to shield the poorest from the catastrophic social conditions that financial crises always create.

The second initiative concerns the transparency of country policies and performance vis-à-vis private markets. Since market perceptions determine where capital will flow, there is now a much higher premium on accurate and timely information about country economic policies and performance. Besides, better information makes for better investment decisions and fewer market surprises. Thus, the IMF is actively encouraging all countries, but especially those tapping, or hoping to tap, international capital markets, to improve the economic and financial data they provide to the public. In particular, we have helped develop and disseminate a set of standards regarding the coverage, frequency, and timeliness of data; their quality and integrity; and their availability to the public. Countries subscribing to this Special Data Dissemination Standard agree to abide by its principles and to post information on their own specific data practices on an electronic bulletin board on the Internet maintained by the Fund. I am pleased to report that so far, 42 advanced and emerging market economies have subscribed to this Data Standard.

The third initiative concerns capital account liberalization. The benefits of an open and liberal system of capital movements—for individual countries and investors, and for the world economy at large—are widely recognized. But in order for countries to reap all the benefits of such a system, they have to open their capital accounts. Up until now, the IMF’s mandate has been limited, by and large, to current transactions. Now, there is agreement among our members that our charter should be amended to call upon the IMF to promote capital account liberalization and give the Fund appropriate oversight over restrictions on capital movements. We will be working out the provisions of this amendment in the coming months. Needless to say, the point is not to encourage countries to remove capital controls prematurely, but to encourage them to proceed in a way that is consistent with sustainable macroeconomic policies, an appropriate pace of domestic financial development and liberalization, and sound monetary and financial sectors. This is good for individual countries, good for investors, and good for the world economy.

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So far, I have concentrated on what individual countries can do to foster an enabling environment for development and how the IMF is contributing to the process. But creating such an environment requires more than adjustment and reform on the part of developing countries—it also calls for effective international cooperation and strong international financial institutions. How can this enhanced solidarity be brought about? The advanced economies, in particular, can respond to this request in several ways:

•by strengthening their domestic policies in order to achieve lower inflation, lower real interest rates, and steady growth;

•by opening their markets, especially in products in which developing countries have or are likely to develop a comparative advantage;

•by recognizing that there is still a strong need for bilateral assistance to low-income countries, particularly in the areas of education and health, basic infrastructure and institutional reform, not to mention emergency financing required in war-torn countries. In this regard, let me tell you that I am not at all convinced by the argument that ODA budgets are natural candidates for cuts in periods of budget constraints. Even though we must be unfailingly vigilant that these resources are used effectively, we must also see in them the highest yielding investment that humankind can make in its future. So the advanced countries must allow the peace dividends to be allocated in a significant way to ODA and thereby reverse the negative trends in development assistance that we have observed for some time. Finally, advanced economies can demonstrate their solidarity

•by providing the IMF, the World Bank, and other international institutions with the resources they need to fulfill their increasingly complex tasks.

I would like to elaborate a bit more on this last point. We know that the reform agenda that I discussed earlier will be with us for a long time to come. Accordingly, we have taken steps to put the ESAF, our concessional lending facility, on a permanent footing so that it can continue to support reform in low-income countries over the long term. Moreover, the IMF and the World Bank have recently begun to implement a strategy to resolve the external debt problems of heavily indebted low-income countries, including their large multilateral debt, so that they, too, will be able to make more rapid economic and social progress. Four countries—Bolivia, Burkina Faso, Côte d’Ivoire, and Uganda—have already been considered under the Initiative, and assistance has been committed to Uganda. Since the IMF’s contribution to the Initiative will be financed from grants from ESAF, it is all the more important that countries provide the necessary resources to allow ESAF to continue functioning untilit becomes self-financing early in the next century. I insist on this: if we seriously want the market to see Africa as a land of opportunity, ESAF programs must be implemented steadfastly and credibly financed. In allocating your resources to development aid, please give the financing of ESAF a very high priority. Allow me, Mr. Chairman, to express my gratitude to all countries, including many developing countries, that have already contributed generously to it.

Of course, the IMF’s ability to assist member countries—and to act decisively in the event of a crisis, as we did in Mexico—also depends on our maintaining the strength of our regular resources: IMF quotas. We are now working toward completing what I hope will be a substantial increase in quotas by the time of our Annual Meetings in September. Lastly, it is my pleasure to note that a number of emerging market economies have agreed to participate, along with G-10 countries, in the New Arrangements to Borrow—that is, the special credit lines that have been put in place to supplement IMF resources, if needed, in exceptional situations. This is an outstanding example of international solidarity.

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The agenda I have sketched out is a challenging one, but these are challenging times, calling as much as ever for close cooperation among the members of the UN family. Let me conclude by telling you of my satisfaction with the progress achieved so far in this cooperation and our determination to continue this way, as we all are confronted with the same challenge: to help our members adapt to the changes in the global economy and benefit from them..