Speech

99/17 Address by Michel Camdessus
Managing Director of the International Monetary Fund
at the St. Petersburg Economic Forum, Russia
June 16, 1999

Thank you ladies and gentlemen. I take it as a great honor to address this Economic Forum, whose search for a vision for the future of Russia takes place in midst of, and hence is symbolically rooted in, the history, culture, and beauty of this incomparable city, a splendid symbol of the unique contribution of Russia to the world civilization and of its promise for the future.

Coming to St. Petersburg I find myself infected with the fever that has gripped your country in celebrating the bicentenary of Alexander Pushkin. Unable, alas, to read him in his own language, I was nevertheless not only touched by his poetry but was impressed to find that he was also versed in contemporary economics. It seems that his immortal character, Eugene Onegin, of whom he said:

"Theocritus and Homer bored him,
but Adam Smith restored him,
And economics he knew well"

understood that what makes a nation prosper, was not the mere possession of gold but the capacity to produce goods. By contrast, Eugene's more profligate father did not quite comprehend these principles, and in the pursuit of easy money mortgaged all the ancestral land he could.¹ Would you not agree that many economic crises of the last twenty years, not to say of the last twenty months, have demonstrated that many in the world who pretend to run national economies should read Pushkin again? As far as we are concerned here today let us examine the conditions for increasing Russia's capacity to produce more goods and find "the ways in which a state progresses" while preserving a just and harmonious social order.

Let me first, however, place Russia's present problems in a broader, global perspective. In my frequent visits to Russia and the other countries of the Commonwealth of Independent States (CIS), I have been privileged to witness at first hand two major economic phenomena of the 1990s that have converged in Russia. One has been the explosive growth and increasing integration of the global capital markets as international investors have sought new opportunities, especially in the "emerging market economies," at a far higher level than in previous decades. The other has been the transition of Russia and its neighboring countries from central planning to market-oriented economies. However, in the past two years, both these phenomena were interrupted abruptly. In August 1998, Russia suffered a major domestic financial crisis-I do not need to remind you of that. But, in a sequence of events that began in mid-1997, the global economy has suffered the greatest threat to its stability in the past half-century. After a long period of remarkable growth, crisis struck some of the countries in Asia that had shown the strongest growth, and then, it threatened other countries around the world, not only the emerging markets in other regions such as Latin America, but even the financial markets of the industrial countries.

The two crises—one national, the other global—are not unrelated. Russia's turmoil has contributed to the severity of the global crisis, and in turn has been worsened by some of the effects of that same crisis. Among the pressures that contributed to Russia's financial crisis in August 1998 were domestic economic imbalances and policy shortcomings—an internal dimension to the crisis. But there was an external dimension too, that reflected the deteriorating international conditions of the time, especially declining oil and commodity prices, a risk to which Russia, due to its still excessive dependence on energy products for its exports, was particularly vulnerable. When crisis struck in Russia, the reverberations were felt around the world, as investors pulled back from lending to emerging market countries generally, confirming that the world was confronting not an Asian crisis—as we had portrayed it until then—but a global crisis.

What is the outlook now? During the last few months, the global situation has improved considerably, even if risks remain. In particular, the Asian countries are well on the road to recovery, and those in Latin America are not far behind. The many policy changes and reforms already launched, give these countries the opportunity to emerge from the crisis stronger than before, as long as they keep up the momentum of reform.

This experience is one of the reasons why I continue to be confident about Russia's long—term prospects. To be sure, Russia faces a similar range of economic problems—macroeconomic imbalances, incomplete structural reform, weak system of governance, and heavy use of external borrowing—that were found in differing degrees in other countries in crisis. And it faces unique economic and political challenges, as it struggles to emerge from its seventy—year legacy of soviet economic management. Having been close to those in charge of handling these issues, I know well how hard it is. But, even if the present crisis is still far from being resolved, the country is endowed with enormous economic potential. No amount of poor policy or bad luck can destroy the resources, the land, or the people's education, talent, energy and spiritual values. Yes, these strengths can be, and have been, misused or neglected. Yes, the situation you are in now is particularly difficult. But there is absolutely no reason, given the right policies, the political will, and—of course—patience and time, why Russia should not be able to move forward into an era of growth and prosperity.

And some hope may also be found in the economic performance in the early months of this year, when the economy has been growing again—admittedly from a very low level—and the rate of inflation came down quickly to 2 percent in May. Yet these gains are modest, indicating that Russia's condition is not hopeless, but that the task has barely begun of establishing sustainable, high-quality growth in Russia. That will not happen until the extremely large stock of Russian savings held abroad—effectively one of Russia's most valuable assets—begins to flow back into the country. And they will if the right policies can be found to encourage their repatriation and to promote new saving. And they will, since capital goes to lands of opportunities, and the priority task for you is precisely to reveal to the world that Russia is again a land of opportunity.

Given today's difficult situation, it is perhaps understandable that there are some who attribute the country's problems to the failures of the last decade of reform and blame Russia's woes on the move toward the market recommended by the IMF. Nevertheless I cannot share this analysis. First, because it gives too much importance to the IMF—something I could live with.....but, more seriously—because it just ignores history and if I may say so, geography.

History, yes, as it ignores how harsh the 20^th century has been for Russia. The war and revolution literally interrupting the trend of reforms which had been just initiated at the end of the last century to address problems which consequently are still with you. In reading recently extracts of a book by Jean de Bloch, published exactly a century ago, about the finances of Russia at that time, I had, I must say, the impression of reading a back-to-office report of an IMF mission in 1999 deploring the "bureaucratic mechanism" that confronts you². And that analysis ignores also geography, as it does not recognize that several of your problems reflect an almost universal syndrome of incestuous relationships between governments, banks and enterprises. Those who consider that Russia is in a uniquely desperate shape should refer to the newspapers. Have they not seen the students demonstrating in Jakarta carrying banners proclaiming "down with corruption, collusion, nepotism"? What we saw in Asia was labeled "crony capitalism," but it has other names in other places—"oligarchism" for instance. These are universal risks democracies can and must overcome. And Russia, which went through this difficult century giving the world outstanding demonstrations of the heroism of its people, the outstanding quality of its research and technology and of its capacity to preserve—even when they were hidden—its religious and spiritual values, Russia can overcome similar dangerous scourges. Yes, it can regain new, rapid, sustained momentum in its efforts to integrate itself in the globalized economy of the 21^st century, reconciling the values of modernity, democracy, and market economy with the admirable heritage of its patriotic, cultural and spiritual values.

But how? I should be the last in this room to answer this question. Indeed, you are the ones who will answer it. But, I understand that you want me to speak since you welcome me as a friend whose job is full of opportunities for dialogue with people around the world confronted with the urgency of similar reconciliations. So be it! But please take my words only as suggestions for your own reflection and debate, and of course, forget them if you have the feeling that I, too, need to learn more about Russia's history and sociology!

How? Understandably the crisis of 1998 has led to a reevaluation of the strategy of reform, and some deceptively easy solution have of course been suggested.

One is to return to the command economy. I understand that for many, life is so hard that such nostalgia could manifest itself. But, I believe this is not the answer, as it would mean isolation, and deeper economic stagnation and social collapse.

Another—not that different—is to become more isolationist, to protect Russia from the cold winds of international competition. But this would ignore the universal experience showing that countries that integrate fully with the world are the ones that prosper the most. And, please tell me—are not the very splendours of this city an illustration of the capacity of your people to produce not only adaptable and unique Russian masterpieces, but also prosperity, out of its openness to the world?

A third dead end is for the government to borrow more: your experience with foreign borrowing, which has now been largely cut off does not need commentary. And Russia's bitter experience has shown also just how inflationary recourse to borrowing from the central bank—printing money—can be. Then what?

* * * *

Mr. Chairman, there are no easy answers—no quick fixes—for such formidable challenges. An economic stalemate exists that calls, no doubt, for profound changes in the way in which economic policymaking, lawmaking, public administration, business, and the people's needs are reconciled. Though I hesitate to use the language of an 18^th century French philosopher who had almost everything wrong in his philosophy and who, furthermore, had not the privilege, as did Voltaire and Diderot, of the friendship of your Catherine the Great—I talk about Jean Jacques Rousseau—I would say that your basic challenge now is to put together a new "contrat social," a genuinely Russian social contract among the different sectors and institutions of society—government, enterprises, individuals—that establishes arm's length relationships among them and fosters quality, efficiency, integrity, good faith, and transparency in their relations. These are values you can find in your traditions and which precisely characterize the relationships in most well-functioning economies, where they did not come about by accident nor are they maintained without effort and vigilance. I see with sympathy and admiration many Russian leaders in the Government, in the Parliament, and in civil society taking initiatives which seem to be converging toward a consensus among all key groups in society to create something very similar to such a new social contract. What might be its key economic elements in a democratic market economy context? Let me mention just a few.

First, the state must complete the process of transforming itself from being the central economic actor—planning, producing, setting prices—to being the originator and upholder of the rule of law and of basic social protection. Its task is to focus on creating an environment in which private enterprise can flourish. Its legitimate role is to set the legal framework for the operation of the market; to act as regulator and supervisor of essential standards and practices, and to formulate broad economic and social goals and policy. It must withdraw from day-to-day business activity, from granting dispensations and waivers to the law. And it must withdraw from promising what it cannot deliver anywhere—decent social protection for all—if the budget is unable to collect the resources needed for this most legitimate purpose.

Equally fundamentally, the basic reorientation of the economic structure of the country should be completed to make it more open and competitive, a point succinctly conveyed by President Yeltsin in his March 1999 speech to the Federal Assembly when he said, "The motto of the [21^st] century is competitiveness and integration into the global processes." This will entail undertaking the long-term task of restructuring industry, including privatization. It will also mean trade reform and a well-sequenced approach to liberalizing capital flows that is supported by appropriate structural reform and macroeconomic policy.

Second, productive and financial enterprises need to complete the process of delinking themselves from government while behaving as exemplary citizens.

They should no longer spend their time in ministerial offices seeking favored treatment, import protection, tax breaks and subsidies, but to do their job of building businesses that increase production, exports and income for the country. This will mean accepting the international standards of corporate governance—in other words to cultivate a culture and style of management that values transparency, and accountability. It will also mean, operating within a legal system that defines property rights, enforces the honoring of lawful contracts, and actively imposes the sanctions of bankruptcy and tax diligence when necessary. The financial system must make itself effective in order to provide a medium for payments and for channeling resources from savers to productive investors in the country. In return, all enterprises—private or public, domestic or foreign—should expect to receive even-handed treatment by the authorities.

Third, nowhere in the world do we find a well-performing economy that works on the basis of barter and non-monetary transactions. So it is urgent to rid the country of the culture of non-payment, to move back to a monetized economy, and to root out corruption. For that the government should ensure that:

· In all public institutions transparency and accountability prevail, and, alas, we are not yet there!

· The rule of law is fostered through a central body of legislation backed up by an effective and independent judicial system and a set of standards and codes of practice, supported by strong regulatory and supervisory bodies,

· Its debts are paid and arrears eliminated be it for wages, pensions, supplies or foreign creditors;

· The tax system is simple, fair and efficient, based on transparent laws and an effective administrative system,

· A clear demarcation is established between the federal government and regional governments, ensuring that their respective responsibilities are clearly established and that adequate resources are available to perform their respective functions.

Last but not least and certainly central to a solid social contract, Government and Parliament must establish a clear and unambiguous commitment to equity in society. The concept of equity, is to a large extent, tied up with national culture, but it should be self-evident that commitments in this area are an essential ingredient for defining any national vision of the future. It starts with a very straightforward requirement: to put an end to the ability of unscrupulous people to take for themselves revenues and assets that belong to the State or to other people. Nothing has created so much inequity, or undermined popular support for reform so much, as the sight of large-scale misappropriation of public revenues and assets. Any social contract worthy of the name, and any society with Russia's traditional concern for community, must overcome this canker. The population should be assured also of equal access to opportunities for education, health care, and provision for the elderly. And clearly in Russia's situation, with a long road of reform lying ahead, it is essential that there be an adequate social safety net to assist those vulnerable to the costs of economic change. This is basically a matter of giving greater weight in government budgets at all levels to the social needs of the population than to the demands of particular economic interest groups. But, for that, Mr. Chairman, the state must be endowed with sufficient resources.

When talking about the social element of a "social contract" in a democratic country, we should not lose sight of the cornerstone on which a democracy is built: the consent to and compliance with taxation. This is not only a basic requirement of democracy but also of a soundly working social market economy. The state cannot face its social responsibilities if citizens and enterprises evade their duties as taxpayers, or pretend to wait till the moment the tax system will be fair in their own eyes to start complying with this primordial duty of free citizenship. Hence our insistence and support for Russia in resolving its fiscal problem so as to be able to build its own brand of a successful social market economy.

* * * *

Mr. Chairman, talking about "social contracts" brings us, in a manner of speaking to "day one" in the history of countries. And there is something of this for your country, despite its already immense role in the history of humanity, as you contemplate your challenges, your resources and your ambitions for the future. On "day one" it is the society that defines itself with less significant reference to the rest of the world. But at a time when interdependence is so crucial, is there perhaps a role for the international community to assist you in implementing your strategies, in reducing the pain and duration of the initial adjustments? If you believe so, then remember that the IMF has created for that and is ready to continue its task here.

The IMF has been in an active dialogue with the Government throughout the period of the transition. I fully expect this dialogue to continue in a constructive and mutually respectful spirit, with a realistic understanding of what needs to be done. Our role—and that of the wider international community—as you define your vision of the future; will be to help you find the specific instruments that are needed to implement this vision; to continue offering technical assistance for building the institutions of a market economy; and to provide financing that is relatively short-term in the case of the IMF and longer-term in the case of other agencies. But we should not overestimate the importance of external financing.

In short our aim is to help Russia help itself. The new Government's economic program can be regarded as providing guidance for the first few steps on the long journey. This program aims at overcoming the negative economic and social consequences of the August 1998 crisis. If the program is fully and steadily implemented, macroeconomic stability will be firmly re-established through appropriately tight financial policies, and in particular through a fiscal policy that enforces statutory tax liabilities and government control over its spending commitments. At the same time, key structural problems will be addressed through a comprehensive program—designed in collaboration with the IMF and our colleagues in the World Bank and in the EBRD—to restructure the banking system, as well as an array of measures aimed at addressing the pressing problem of nonpayments. The essential goal of external viability—nothing can happen without this—will hinge on finding a solution to the external debt problem based on cooperative relations with Russia's creditors. I note with pleasure that some of the agreed actions have been taken, and this makes me confident that Russia will now make rapid progress in the huge task implied by a program designed to continue addressing your historic challenges.

* * * *

Mr. Chairman, those who are familiar with the IMF may be struck that in the many measures that I have identified today, I have left it to very late in these remarks to mention the concept of macroeconomic stability. I have taken it as a sine qua non for progress, that a well-governed country will have a sound fiscal and monetary framework as the foundation for all other policies. I know that this is generally accepted in Russia, even though the fiscal leg of the support for macroeconomic stability has yet to be successfully constructed.

My intention today has been to try to take the long-term view, to share with you in your search for the long-range vision that could motivate the development of Russia and to find the policies that are needed to realize the vision. Growth in the economy and in living standards will come only from a commitment of enterprises and individuals to their country, from their willingness to invest their savings in Russia and to build for the future rather than grab all that is available today. This in turn requires a fair, stable, and safe environment for private business. And it is to create this, as well as a just and harmonious society, that I have tried to find in your own values the elements of a new Russian social contract. By re-establishing the momentum of reforms the country can strengthen its economy, increase stability, and raise the level of prosperity that the people richly deserve. The task that you face is immense. And it is urgent as your people need to see a strategy in place towards a better future. But have no doubt that once momentum is reestablished, this great country has the potential and the endurance to rebuild itself and to bring itself again to occupy its place in the world at the forefront of the human progress, culture and civilization.

1 The full stanza is :

"Theocritus and Homer bored him,
But Adam Smith restored him,
And economics he knew well;
Which is to say he could tell
The ways in which a state progresses -
The actual things that make it thrive,
And why for gold it need not strive,
When basic products it possesses.
His father never understood
And mortgaged all the land he could.

Alexander Pushkin, Eugene Onegin, translated by James E. Falen, (Carbondale, Illinois: Southern Illinois University, 1990), Stanza I.7.,

2 Jean de Bloch, Les Finances de La Russie au XIX^e Sicle, (Paris, France, 1899), cited in Politique Etrangère, January 1999.