Speech

By Shigemitsu Sugisaki
Deputy Managing Director of the International Monetary Fund
Washington, D.C., February 3, 1999

I am pleased to host this lunch, which marks the conclusion of this conference and of two and a half days of intensive discussions. On behalf of the Managing Director and the three departments that jointly organized the conference—the IMF Institute, European I, and European II Departments—I would like to thank you for the valuable contributions you have made to a better understanding of the transition record and the challenges that lie ahead. The proceedings of this conference will be edited and published later in the year, but, in the meantime, let me try to highlight some of the themes that emerged from the papers and discussions of the conference.

First, fiscal and monetary prudence is an essential priority and a continuous requirement for recovery and sustained growth. Indeed, there has been no instance of sustained growth in the transition economies without macroeconomic stability. The empirical evidence presented during this conference pointed to the positive correlation between lower inflation rates and economic growth in the transition countries. And I was also impressed by the finding that rapid disinflation had not involved output costs once other factors had been taken into account.

Second, macroeconomic stabilization needs to be complemented and supported by a broad spectrum of institutional and structural reforms. Participants noted the crucial role played by progress on these two fronts in fostering growth and attracting foreign capital flows, particularly foreign direct investment. There was also considerable agreement that a market-friendly environment is still missing in many countries, and needs to be fully developed even in those countries that are more advanced in the transition process. As the Managing Director noted in his opening statement, this means, in particular, enforcing the rule of law and property rights, and putting in place the institutions and incentives required for the proper functioning of markets. This will help discipline the newly privatized entities into being efficient profit-seekers. But it will be equally important to shrink the underground economy and open the door to new private enterprises, a key source of dynamism and innovation in these economies. The positive effect of the changing role of government—played mostly through the tax system, the budget, and a few simplified and transparent regulations—was stressed.

Third, privatization, which for the general public may be the most important symbol of transition, generated the greatest amount of debate. The issue at hand was not whether to privatize—this was viewed overall as being the preferred option in dealing with the problems of state enterprises—but rather how best to privatize; in other words, whether to do so through rapid mass privatization programs or through a gradual, case-by-case approach. While this question still eludes a definitive answer, the participants at this conference were unequivocal in stressing that a strong institutional framework is critical to the success of privatization, and that privatization must proceed in an open and transparent manner. The examples of successful privatization in a number of transition countries should serve to guide those countries still grappling with privatization problems.

Fourth, banking sector reform is an essential component of the reform agenda. The task at hand is a dual one—to develop a modern system of financial intermediation and to ensure sound behavior by banks. Progress in carrying out this task will require a stable macroeconomic environment, a competitive system open to foreign financial institutions, strong prudential regulation, and, here too, the appropriate incentive structure.

Fifth, the sharp income inequalities that we see emerging during the transition must be addressed, not only to redress the growing inequalities but also because public perceptions of unfairness can eventually undermine support for the reform process. Institutional change and increased competition can contribute to reducing economic rents and income inequalities. In the interim, however, governments need to do more to provide a well-targeted social safety net for the most vulnerable segments of society.

These are the five key themes that have come out of your deliberations. Perhaps all may be captured under one umbrella, namely, the role of government. Under central planning, the administrative control by government was all pervasive, and transition has meant dismantling and changing its massive and intrusive operations. But much remains to be done in all transition countries to redefine the role of government, to build up new government structures, and to establish proper incentives. The transition from an omniscient provider overseeing all aspects of the command economy to an agent supportive of an environment conducive to private sector growth is indeed a historic one.

This conference has addressed the most fundamental issues in transition, taking stock of the achievements and shortcomings of the transition process so far. The exchange of views and the experiences of the participants from the transition countries have provided a most valuable menu of ideas on which we all need to reflect, and which, I hope, will provide a basis for better answers to the challenges in the coming years. I thank you for your participation.