Speech

The Role of the Fund in Low-Income Countries, Speech by John Lipsky, First Deputy Managing Director of the IMF, at Oxfam event

September 24, 2007

As Prepared for Delivery

I am pleased to be able to join you for this important discussion of the role of the IMF in low-income countries. I would like to thank the organizers for bringing this panel together.

Today's discussion is taking place in an unusual environment that combines notable reasons for optimism about the outlook for low-income countries, although with justified concern about the emergence of potential near-term risks. Overcoming the global economic slowdown of 2000/2001, the global economy subsequently has outperformed expectations. The past five years have encompassed the strongest sustained economic expansion in decades, and the best balanced, in terms of overall GDP growth and in terms of reduced volatility of output.

Who anticipated that Sub-Saharan Africa would enjoy its strongest expansion in decades during this period, with no slowdown yet in evidence? And who predicted that international investors would react to the favorable economic and financial environment by quickly expanding their holdings of local currency-denominated securities of emerging market economies—thereby silencing earlier academic claims that these countries suffered from a so-called "original sin"?

Thus, new and significant progress toward establishing the goals of effective open-economy policies and enhanced financial sector development—speeding up growth, reducing poverty and bolstering economic stability—increasingly appear to be attainable.

The latest developments haven't been all positive, of course. The financial turbulence of the past few months have demonstrated that capital markets are globally integrated, and that market imperfections can create risks to real economic activity. So far, emerging markets have been relatively less impacted by the volatility and the heightened uncertainty. However, if global economic growth slows notably in the coming quarters, the challenges could grow more pressing.

Despite the heightened near-term risks, it is still appropriate to contemplate the lessons of the past few years, and to think about the possibilities of the coming years. Today, I am going to address these issues as they relate to the activities of the Fund. As I am sure that you are aware, there has been considerable debate in recent years about the Fund's role in low-income countries. Changes in the global economic and financial environment have presented us with a series of new developments. For example, the IMF's financial arrangements with member countries reached a record high as recently as 2003, only to fall precipitously to very low levels at present. But more importantly, as the global economy becomes more integrated in every way, we need to consider what we can do to ensure that our low-income members take full advantage of the expanding possibilities for progress.

The Fund set out to address this and other basic challenges though our Medium-Term Strategy—or the MTS, as we call it here—that was developed beginning in 2005. One of the key goals of the MTS is to re-evaluate our engagement with low-income countries, to make sure that we are being as effective as possible by leveraging our core expertise. Of course, this will be achieved only by working in concert with our members and by coordinating with key partners, such as the World Bank and the Regional Development Banks. Our over-arching goals are straightforward: To help the Fund's low-income members integrate successfully into the global economy, to establish and sustain faster and more stable growth, and to reduce poverty.

Two reports released this year—the Independent Evaluation Office's report on the IMF and Aid to Sub-Saharan Africa, and the report of the External Review Committee on IMF-World Bank Collaboration—concluded that there is scope for further clarification and refinement of the Fund's policies. Well before these reports were initiated, the Fund already was putting substantial effort into re-examining our work in low-income countries. The combination of the Fund's internal processes and the insights provided by these external reports have been reflected in recent Fund policy papers on the scaling-up of aid, as we have sought to help countries prepare for, and to extract the maximum possible gains, from the HIPC and MDRI initiatives. We also have established a joint project with our colleagues in the World Bank working on Sub-Saharan Africa to develop new pilot projects on the issues of public finance management, financial sector development and the management of natural resources. Moreover, the Fund's ongoing efforts in providing technical assistance and training remain highly relevant, and include the opening last year of a third African center for technical assistance.

Some fundamental principles should be kept front and center in thinking about the Fund's role. As I have stated already, and as research has demonstrated, the eradication of poverty requires sustained, rapid growth. To date, such growth has been associated with export-oriented, open-economy policies. Macroeconomic balance—supported by appropriate fiscal and monetary policies—helps to sustain expansions. There is no single path to success, as each country has its own challenges. Moreover, each country's own efforts and policies are the dominant factor in creating necessary conditions for substantial progress.

At the same time, international assistance can be important, and it can be helpful. Each development partner should concentrate on its areas of comparative advantage. But their efforts also should be based on a holistic approach, in support of the overriding goals of rapid, sustained growth, strengthened institutions, and increased social justice.

What does this mean for the Fund in concrete terms? First and foremost, we should support low-income countries' efforts to establish and maintain macroeconomic stability as an essential precondition for strong and sustainable growth.

There are encouraging signs of recent progress. Sub-Saharan Africa is experiencing its strongest growth and lowest inflation in over 30 years. Growth should reach 6 ¼ percent in 2007 and we think slightly faster in 2008. The expansion is broad-based, cutting across all country groups and is strongest among oil exporters. Many factors—including the favorable environment for commodity prices—are involved, but the Fund's policy advice has helped countries implement sound policies that contribute to economic stabilization and sustain rising investment and faster productivity gains. Along with the strong demand for commodities, the region also is benefiting from rising capital inflows and in many cases, the decline of armed conflicts and greater political stability. Of course, multilateral debt relief also has provided important—in fact, historic—room for maneuver for fiscal and other policies.

A key challenge today is to build on this momentum, and achieve more tangible poverty reduction. The IMF is helping countries implement the policies and establish the institutions that will help take advantage of the supportive external conditions, while at the same time enabling the effective absorption of aid increases. Fund-supported PRGF programs seek to accommodate the full use of aid, while preserving macroeconomic stability. Aid volatility calls for medium-term budget planning and stronger public financial management systems. Expenditure smoothing helps to ensure that programs are adequately funded, through increased domestic financing or by drawing on reserves, even during periods when aid falls short. Nonetheless, it is also important to strengthen donor coordination and to improve the predictability of aid.

The Fund today is helping its low-income members base their programs on realistic aid projections. Fund staff are helping member countries develop alternative scaling-up scenarios that can be incorporated in Poverty Reduction Strategies. The Fund does not have a mandate to mobilize aid, but we can and do act as an advocate for increased aid—in particular, we consider it very important that donor countries meet their Gleneagles and Monterrey commitments.

Regarding fiscal policy, progress inevitably will involve increased social spending. Thus, it isn't surprising that a recent study by the Center for Global Development found that the average increase in health spending as a share of GDP was larger for countries with Fund-supported programs. Indeed, many programs have included floors on social sector spending to make sure that aid volatility won't impair anti-poverty efforts.

I am aware that PRGF programs have been criticized over the issue of wage ceilings. Some of these programs have included ceilings on government wage bills, often in conjunction with civil service and payroll reforms. In no case have they targeted a specific sector, such as education or health. However, there is a clear policy on wage-bill ceilings: they should be used only in exceptional and well-justified cases and should accommodate additional aid flows in priority sectors.

Helping countries to make better use of aid flows through strengthened institutions is an integral part of our work. The Fund provides a wide variety of technical assistance to low-income countries, spanning virtually all facets of the Fund's expertise, including budget management and tax policy, financial sector reforms, economic statistic gathering, and legal reforms, as well as economics training of country officials at the IMF Institute in Washington and in a number of centers overseas. In fact, one-third of all Fund technical assistance in the current fiscal year is being devoted to sub-Saharan Africa.

We are continuing to refine our policies in support of our low-income members. In particular, the Executive Board soon will consider the Fund's role in the Poverty Reduction Strategy process and in donor coordination. We will clarify expectations as to the Fund's role and establish a consistent institutional approach to collaborating with donors and stakeholders. We also are developing a Joint Bank-Fund Management Action Plan with our World Bank partners. This Plan is intended to help ensure that the efforts of these key institutions remain well coordinated and consistent, while leveraging each institution's resources effectively. The Plan is scheduled to be considered by both Executive Boards before next month's Annual Meetings.

To conclude, I would like to underscore that the economic prospects of the low-income countries depend on their successful linkage to the global economy. A dynamic private sector—and an efficient financial system—are key to raising the growth potential of low-income countries. The public sector also helps to create the possibility of faster growth by providing a stable and predictable macroeconomic environment; by reducing the cost of doing business; by infrastructure investments; by providing health and education services; and by other sectoral reforms, including through improving financial and other regulations. And, of course, by working to reduce barriers to increased trade.

The IMF is committed to helping strengthen its low-income members in all these areas. And we will continue to work closely with our partners in this effort.

Thank you for your attention, and I look forward to the rest of today's speakers and our discussion this afternoon.