Speech

Remarks prepared for the Manila Social Forum
addressing The New Social Agenda for East, Southeast, and Central Asia
November 9, 1999

by
Peter S. Heller
International Monetary Fund^*

After almost two years of serious economic disruption, the Asian economies have begun to rebound. Growth rates are positive and significantly higher than earlier projected; inflation rates have come down to modest levels, interest rates are far below the peaks experienced in 1997 and 1998, and exports are expanding. Yet the period of crisis was no ordinary cyclical trough. Its emergence was partly the consequence of an absence of the policy reforms necessary to prosper in a global economy with increasingly open capital markets. The costs of the crisis were not small; output declined and remains below trend and poverty rates increased (although by less than initially feared), reflecting in some countries significant declines in real wages and in others a large increase in the rate of unemployment. Personal savings of many households were depleted and many households had to draw heavily on traditional family relationships in order to cope with the loss of incomes. Many enterprises were bankrupted or have survived only in a financially weak condition.

It is important for policy makers in Asia to draw the appropriate lessons from the experience of the last decade and maintain their resolve to implement reforms. Indeed, the structural policy reforms that should have been the necessary complements to the growth-oriented policies of the 90's remain as urgent as before. Even with the current economic revival, they should be accorded a high priority in terms of the needed pace for implementation. To not pursue these reforms could have significant long-term costs. Capital for meritorious investment projects would be more difficult to attract and financial instabilities could reemerge in the future.

In my remarks, I want to highlight that the IMF firmly believes that a social agenda should be part and parcel of the reform initiatives of the Asian region. This agenda can be realized only in part by focussing on reforms in the areas of structural, regulatory, and macroeconomic policy management; these are now clearly recognized as prerequisites for sustainable growth. And we know that growth is a necessary condition for reduction in poverty in the long run. But these ongoing reforms should be complemented by a social policy framework, both to ensure a capacity to address the social consequences of inevitable cyclical downturns and to foster a flexible labor market and achieve the investment in human capital necessary for growth. The longer term issues associated with providing for aging populations must also be addressed. Some of the missing critical pieces of a "social policy agenda" must be developed in the short to medium term; others can be developed over the longer term.

The Structural Architectural Agenda

In the stock-taking that has occurred in many national and international fora since the Asian crisis, a consensus has emerged on the priorities for institutional reform. The objective is to support vibrant growing economies that can benefit from global investment capital seeking high returns, while still being resilient to the potentially destabilizing pressures that can emerge, whether from contagion, capital movements, or external economic developments. High growth is consistent with openness; the task is to ensure that capital mobility and free trade do not destabilize or undermine the financial and real sectors of an economy. Avoiding steep recessions and providing an environment that facilitates rapid growth in output and employment are the most powerful preventive strategies for reducing poverty. Such growth, and the jobs its creates, can lift real wages and enable workers to manage, without excessive periods of unemployment, the inevitable structural and sectoral transitions associated with the evolution of the industrialized and service-based economies of the coming century.

The institution of stronger legal, regulatory, and supervisory frameworks is crucial for sustaining growth. These so-called "second generation reforms" would encompass: new or strengthened bankruptcy and foreclosure laws; judicial procedures that allow for an expeditious resolution of claims; accountancy practices that ensure that the financial position of corporations is transparent to investors and regulators; tax reforms that eliminate discretionary exemptions, high rates, and multiple incentives and credits; institutions that ensure greater transparency in fiscal and monetary operations as well as in corporate governance. More flexible labor market policies and adhering to ILO principles are equally relevant. Actions to comply with the Fund's new Codes of fiscal, monetary and financial transparency, to strengthen banking supervision in line with the Basel Core Principles, and to participate fully in the Special or the General Data Dissemination Standards (including greater transparency on external reserve positions) would be important first steps in this direction. Ensuring responsive and transparent political institutions and responsible governance within public agencies is vital for ensuring confidence and trust, not to mention effective policy formulation and implementation.

Efforts have already been initiated by Asian policy makers as a consequence of the crisis itself-in the restructuring of corporate debt; the recapitalization of those banks that have a reasonable prospect of financial soundness as well as in the reduction of nonperforming loans; and the closure of those banks that were mismanaged and with excessively high shares of nonperforming loans. Measures have been taken to improve regulatory and prudential frameworks, introduce greater transparency and accountability, and strengthen governance more generally. It is important that Asian countries persevere in these efforts.

The Social Policy Agenda

There are four essential elements of an enhanced social policy agenda:

(1) investing in human capital as an essential part of any strategy for growth and poverty reduction; (2) developing a capacity for the targeting the protection of the poor during economic shocks; (3) establishing cost-effective social insurance policies that both reflect prevailing local cultural norms and that do not create large disincentive effects in the labor market; and (4) establishing vehicles for long-term savings in the context of aging populations.

Investments in human capital have long been recognized by students of economic growth, and certainly by policy makers throughout Asia, as central to any growth strategy and do not need to be belabored in these remarks. The Asian economic miracle witnessed the achievement of high literacy rates, the promotion of investments in secondary and higher education, the proliferation of networks of primary health care facilities, and the spread of high quality secondary and tertiary medical care. The challenges now faced by many Asian economies are increasingly similar to those encountered by industrial countries-to ensure that social sector spending is efficient, that costs are contained, and that equity in access is achieved. Naturally, such investments need to be complemented by well-designed policies for regional development and some targeted policies in agriculture, finance, and infrastructure in order to ensure that those poor that are less well-integrated in the formal economy can take advantage of the employment and investment opportunities afforded by rapid growth.

Addressing surges in poverty and income loss. A key and salient lesson of the recent crisis was the lack of preparedness by governments to respond to the sharp losses in wage income experienced by many households and the large jump in unemployment rates in other cases. In part this reflected the lack of monitoring systems. A central deficiency that emerged in the recent crisis was the inadequacy of most governments' capacity to monitor household income developments and thus to track situations where groups of non-poor were being thrown into poverty or experiencing a sharp drop in their assets, and where remedial programs were most necessary. The need to understand better who were the big losers and how households were coping with the economic dislocations experienced during the Asian crisis meant that much time was lost in developing strategies for cushioning the impact on those actually most vitally affected. Governments should have the capacity already set up to identify those groups and regions where poverty is particularly a problem, as well as to understand the factors and dynamics responsible for the persistence of such poverty.

Equally, a central element of any social agenda must also be the institutionalization of a capacity for a rapid targeted response of income relief and employment generating measures. Subsidies directed at poorer households may need to be activated to ensure that vital education and health services remain affordable and available to those most affected by economic shocks. In the recent crisis, governments lacked the institutional capacity to rapidly put in place targeted schemes to cushion the impact of income losses. Public works schemes were slow in getting off the ground and when developed, did not offer much confidence that they were not subject to serious governance problems, such as waste and abuse. Subsidy schemes proved badly targeted, resulting in income transfers to non-poor groups.

Social insurance to address life-cycle contingencies. Throughout the industrial world, formal systems of social insurance are in place to insure against adverse events such as disability, unemployment, death of a the household's main income provider, and old age. Such systems have now begun to develop in some emerging market countries of Asia. The development of public pension systems in some countries (see below) has been the leading edge. But systems are slowly emerging in other spheres. For example, in Korea, an unemployment insurance system has progressively been put in place that allows workers some income coverage during periods of unemployment. For those Asian economies that are participating in the global economy, it is certain that there will be flux in the industrial and service sectors-as dynamic firms grow and inefficient enterprises shrink and close down. Moving from situations without formal unemployment insurance or only enterprise-specific systems to some form of broader unemployment insurance coverage will become a necessary piece of the social architecture in these countries.

The critical task will be to design systems so that they do not conflict with the equally important objective of fostering growth in employment in these economies and maintaining job search incentives. Some OECD countries have gone too far in providing social insurance entitlements, creating inefficiencies and distortions that have led to high structural unemployment. At the same, countries should avoid the heavily segmented type of system found in some other emerging market countries, where coverage may be extensive for those in the formal sector, but virtually absent for workers in the informal sector. This means countries must walk a careful line in their development of social protection systems. The recent efforts of the World Bank and other UN agencies to develop broad principles of good conduct in the social area should provide further guidance to countries in this regard.

Aging populations. Asian populations are aging and the capacity for traditional old age support systems to cope with the changing demographics of the next century must certainly be considered problematic. Asian societies have demonstrated a high capacity and willingness to save; in some cases, this has been institutionalized in national provident fund schemes (e.g., in Singapore and Malaysia); in other cases, pension systems have been limited to some segments of the formal sector, civil service, or a selected group of larger enterprises.

The challenges faced in designing a financially viable multi-pillar pension system that can sustain an aging population has been the subject of much attention in recent years, and our understanding of the risks and benefits associated with different approaches-public, private, or mixed, defined benefit and defined contribution--is now quite substantial. We also understand much about the institutional prerequisites of different systems-in terms of the types of financial products and institutions that need to be developed and the regulatory and governance challenges that are posed. There is no one right system, and different balances can be struck as to the weight given to the various pillars. The appropriate solution for a country will very much depend on its history, culture, and political economy. It is clear that most Asian countries have much work to do, both in terms of designing systems with broader coverage and in developing an institutional framework that can reliably, and with good governance, deliver on the promises that will be implicit in any scheme.

The Role of the IMF

Finally, I want to highlight the way in which these social issues are influencing the Fund's work. Certainly, the initiatives unveiled at the Bank-Fund Annual Meetings six weeks ago have truly placed poverty reduction at the center of the IMF's efforts for its low-income member countries. The IMF's concessional lending facility, the ESAF, has been transformed into the new Poverty Reduction and Growth Facility (PRGF), which makes poverty reduction a key element of a renewed growth-oriented economic strategy. The cornerstone of the new approach is a nationally owned, comprehensive, Poverty Reduction Strategy Paper (PRSP). This strategy paper will be country driven, being prepared by the authorities with assistance from the World Bank and the IMF, and reflecting the outcome of an open, participatory process involving civil society, relevant international institutions, and donors. It will be produced according to a timetable that is as ambitious as possible, while recognizing various constraints. The PRSP will identify priorities for public action to achieve the greatest impact on poverty reduction. It will also address the critical, and often complex issues related to enhancing good governance and supporting transparency in policy making. Analyses will be undertaken of poverty and of the impact of the proposed reforms on the most vulnerable social groups.

In the necessary division of labor between the IMF and the World Bank, the latter institution, with its sister institutions-the ADB and other regional development banks, and UN agencies-will be at the forefront of discussions with authorities on the design of policies for poverty reduction. The Fund staff will seek to ensure that these social and sectoral programs aimed at poverty reduction can be accommodated and financed within a supportive, growth-enhancing, low inflation macroeconomic and budgetary framework. In providing financial support, the Fund's PRGF will place high priority on the key reform measures critical to achieving rapid and sustainable growth that also leads to faster poverty reduction.

But it is also important to understand the IMF's contribution in the social area for the many countries of the world that are not implementing Fund-supported programs. This, of course, is particularly relevant for many Asian economies. Here the Fund's role principally arises from its surveillance responsibilities-its close working relationship with countries in discussing their macroeconomic policies and the global and regional economic environment within which these policies must function. Traditionally, the focus has been heavily macroeconomic in character. However, in recent years we, together with our membership, have become increasingly aware of the importance of a country's structural policy framework for the global macroeconomic environment.

As a result, the Fund has paid increased attention to the social implications of its policy advice. Some do find it controversial that an essentially macroeconomic institution should focus on social issues. However, we have come to recognize that poverty, unemployment, and severe inequalities in the income distribution, can undermine growth, and lead to large welfare transfers that burden the budget. It is for this reason that the Fund has emphasized that as part of its surveillance process, the Fund staff should collect and monitor social and poverty indicators as needed. Account may need to be taken of policies in the social sectors, including with respect to the adequacy of social policy instruments, the performance of social safety nets, and the potential social ramifications of macroeconomic and financial policies. Equally, in situations where social policies threaten to give rise to significant vulnerabilities in macroeconomic policy management-either over the short or long term, the policy implications may need to be addressed in the surveillance process. Again, the views of other international agencies with principal responsibility in the social spheres would be sought, taking advantage of their comparative advantage and expertise.

In closing, what is apparent is that the crisis in Asia has made us all aware not only of the remarkable strengths and resiliency of the Asian economies, but of the important policy agenda-both in the economic and social spheres--which must be tackled in the coming years if these countries are to sustainably make the transition to high income economies with low rates of poverty.

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The author is Deputy Director of the Fiscal Affairs Department of the International Monetary Fund. All views are those of the author.