Transcript

IMF Acting Managing Director
Thursday, April 13, 2000
Washington, D.C.

Stanley Fischer

MR. DAWSON - Good morning. I am Tom Dawson, Director of External Relations at the IMF, and with me is Stanley Fischer, the Acting Managing Director of the Fund. This is the traditional Managing Director's press briefing for the Spring Meetings. Mr. Fischer has an initial statement, and then we will be happy to take questions from you, and, as usual, if you would identify yourselves and your organization when you ask the question. There will be an embargo until 15 minutes after the end of the session. We will identify that precise time when we are finished.

MR. FISCHER - Thanks very much Tom, and good morning. I would like to say a few words before we take questions about this, which is the first meeting of the IMFC, the International Monetary and Financial Committee, which used to be the Interim Committee. After 25 years of being interim, it had its last meeting last September. The IMFC meets on Sunday, and that is known to you and many, many people on the outside of the Fund as well at the moment.

The IMFC is the main forum through which our members, 182 of them, hold the Fund, hold the management and the staff to account, and tell us what they expect us to do for the next six months and longer. Each member has a representative on the IMFC or is part of a constituency represented in the IMFC, and that means that every country's voice is heard, and this is especially important now when the reform of the IMF, when debt relief and poverty reduction are on top of the agenda, because those are issues that one way or another affect every single member of the Fund. This, together with the Executive Board of the IMF, which has the same representation, is the basic mechanism of accountability of the IMF.

Sunday's discussion will start with the World Economic Outlook, and you heard about all about that yesterday from Mike Mussa, so I won't go into it; I couldn't, in any case, do it with the style and skill with which he does it. But it is sufficient to say that the world economy is doing better, much better than anyone hoped a year ago, with growth strengthening and with inflation remaining subdued, with the challenges being the rebalancing of global growth and the unwinding of current account imbalances. We hope that process will be done smoothly. The baseline scenario in the WEO is one in which that happens. But, if the process turns out to bumpy, policymakers in most countries have room to respond.

Let me say something about a few countries in which you may be particularly interested. As you know, I returned last week from a visit to Russia, where I met with President-Elect Putin. We should not underestimate the challenges that face Russia, but I came back impressed with the increasing extent of the consensus there on the need to restart the reform program and the political conjuncture in Russia that should make that possible. I hope we can renew our support for Russia soon, as the necessary policies begin to be put into effect. The meeting with President Putin and other officials certainly gave hope that that will be possible.

If you look at Latin America, we really see the benefits of structural reforms and sound macroeconomic policies, because a year ago, almost exactly a year ago, we were all nervous about what was going to happen in Brazil following its devaluation, and what impact that would have on other countries in Latin America. While Brazil is performing very well, growth is gathering momentum, inflation is on target, the current account deficit is declining—and you may remember a few months ago there was concern that that was not happening—exports are picking up rapidly, and the fiscal position is better than expected.

Mexico, in the year of its election, seems determined to avoid the crises that have accompanied earlier elections, and is managing macroeconomics and exchange rate policy extremely well. Ecuador has undertaken the prior actions necessary for the Board of the Fund to consider its request for a stand-by, and that will happen next week, so that if things stay on track, and we have every reason to believe they will, we could have an agreement in place with Ecuador within a week.

Argentina is recovering and making reasonable progress on fiscal and structural policies, and growth there has picked up, which is extremely encouraging. Then in Colombia, we hope that this year's program objectives will be achieved. The recession has probably bottomed out, but it is a difficult political context. Structural reforms and privatization remain key challenges. I met with the President two days ago and was very reassured by his determination to push ahead on fiscal policy, on privatization, and on structural reforms. Outside of Latin America, the Turkish reform program supported by the IMF is off to a really very good start, with news on fiscal, structural, and inflation fronts there all promising.

Turning to Asia, you know that progress has been spectacular in the recovery, but on structural reform the picture is more mixed. Corporate sector restructuring is difficult everywhere, always, but it is under way in Korea. Korea and Malaysia have made more progress on banking sector reform than the other crisis countries. There is some delay in completing the review of Indonesia's program; Indonesia was at the Paris Club yesterday and today for discussion. But President Wahid indicated his strong support for reform, and we hope to complete the review in a reasonably short time.

If you look at Africa, there has been substantial progress toward macroeconomic stability and reform during the past decade. We finally see real per capita income starting to rise, but performance varies greatly from country to country, and much more progress will be needed to make serious inroads into poverty. The new Poverty Reduction and Growth Facility is allowing us, the Fund, working very closely with the Bank, to focus our activities more effectively. I hope we will see continued progress on poverty reduction and per capita growth in Africa.

Let me now turn to Sunday's business, which is the policy questions on the agenda of the IMFC. There are four topics on IMF reform. Safeguarding the use of Fund resources, a review of our lending facilities, surveillance of economic policies, and the involvement of the private sector in crisis resolution. I would like to take up those four topics in turn.

First, safeguarding the Fund's resources. The number of occasions on which the proceeds of IMF loans are misused or when countries obtain loans that have given us false information is small. That is a rare outcome. But, any such occasion is an abuse of the trust on which this institution is based, and has to be taken with the utmost seriousness. We have a series of existing safeguards in place, but from the middle of this year we will be introducing a new two- stage safeguards assessment.

An essential part of that safeguards assessment is that the central bank of every country to which the IMF lends will have to have an independent external audit that meets international standards done as a matter of routine. We will, in the first stage of our safeguards process, review recent audits of the central bank, the audit procedures of the central bank and management of its reserves and internal controls, and the relationship it has with the government and any subsidiaries it may have.

If this first stage of the process reveals no problems, and in most cases I expect that will be the outcome, then we are done. But, if there are problems in safeguards, then the Fund will carry out an onsite review, with the assistance of outside experts, and help the country put in place corrective measures. This will not eliminate misuse, but it should go a long way toward helping do that.

The review of our lending facilities goes to the heart of questions about the role of the Fund. As you know, we have already eliminated four facilities that have outlived their usefulness, but there are several basic issues remaining: for instance are we happy with the cost and maturity of the various IMF loan facilities? How can we use our lending activities in the cause of crisis prevention rather than crisis response, and that refers particularly to the contingent credit lines. They are, I believe, a very important innovation, and incidentally go in the direction that the Meltzer Commission recommends, but they have not yet been used. We need to consider changes in the design of the contingent credit line to make them more useful and to make their preventive function one which is welcome by member countries. Third, we are going to have to look at the question of Fund lending over long periods and what to do about the few countries that come to us to borrow repeatedly. So, that will be on the agenda. I am sure we will get directions from the IMFC as to how to proceed down this road in the months to come.

The third item we are looking at on the agenda is surveillance, which is the key to crisis prevention. There has been a significant strengthening of surveillance in a number of areas, including exchange rate regimes, the soundness of financial sectors, capital account developments, assessments of vulnerabilities. We need now to consider how to integrate assessments of compliance with international standards and codes into the surveillance process.

We are working, together with the World Bank and others, producing reports on the observance of standards and codes; there are about 20 countries in the pilot project. Those are going well. The financial sector assessments are proving especially valuable. But, there are several questions, for instance which standard should be assessed, by whom? The Fund cannot do it in all the cases. Second, should the process be voluntary or compulsory? Third, should the results be published? What if, for instance, you find weakness in a particular bank or something like that; should that be published? Fourthly, how do we deal fairly with the fact that not all countries are at the same level of development and you cannot expect all their institutions to meet the same standards?

In reviewing surveillance and strengthening it, we were incidentally able to draw on the suggestions of an independent evaluation of surveillance that was carried out by a team headed by John Crow, the former Central Bank Governor of Canada. We will be setting up an independent evaluation office with the details of what is to be done worked out in the next six months as another step along the road to greater transparency, and particularly accountability, of the Fund.

The next item on the agenda is private sector involvement and the resolution of crises. We have reviewed our experiences, country experiences in Ukraine, Romania, Pakistan, and Ecuador. There is now a widespread acceptance that concerted action to involve private creditors is sometimes needed and, furthermore, that as that has become accepted, it is clear that it is not going to cause the sky to fall in on lending to countries that are basically sound.

So, we have made progress in this. We are developing a set of rules for private sector involvement, but there is much to debate. Some want those rules to be very hard and tight; some want to leave flexibility to deal on a more case-by-case basis. I believe the outcome will be that we will develop a general set of principles, but that the cases we deal with are sufficiently different, that no general set of principles will be adequate to cover every case and that there will have to be case-to-case variation. But this is an area which, for some time, I think was the most difficult issue in Fund interactions with the private sector, on which I believe there has been real progress.

Finally, Ministers will review progress on debt relief, poverty reduction, and growth strategies for the poorest countries. This is an area where, of course, we work extremely closely with the World Bank, and it will be on the agenda of the Development Committee as well. We have made progress in implementing the changed strategy, but the shareholders will no doubt have important issues to address.

First, debt relief was promised last year, but it still hasn't all been paid for by the owners of the various institutions and bilateral creditors. We in the Fund are fortunate that we had the gold resource available to finance a quite large part of our contribution to the HIPC Initiative. But, for some other institutions, particularly the regional development banks, it remains unclear how they are going to pay for the current initiative, and obviously let alone for more generous relief campaigns that many would want, and even we in the Fund still have "sold" only 9/14 of the relevant gold. We need permission to proceed on the other 5/14, and that would require congressional approval.

Second, there is this very difficult issue in the new poverty and debt reduction strategy, which is the tension between the need to move speedily and the need for countries to develop poverty reduction and growth strategies that they own, that they have developed, and that their societies believe in. That is a complicated process in almost any context; just think about it in your own country, getting a general strategy agreed to by all of society.

That is what we are looking to in the developing countries that will receive debt relief, because everybody wants the debt relief to be used productively to reduce poverty. But if we take too long over that, if countries take too long over that, debt relief will take too long. So, there is that tension. It has to be dealt with. I hope we find a way of moving fast while ensuring that the mechanisms needed to make this debt relief, reduce poverty, and increase growth are put in place.

Thanks very much. That summarizes the agenda. Now let us take questions.

A QUESTIONER - Let us talk about Argentina. The government raised the taxes quite a bit in the last few months just to balance the budget and to comply with IMF requirements. At the same time, that rise in taxes has caused problems in the general population. How can you balance both demands, both necessities?

MR. FISCHER - This is always very difficult. Often, policies that should be taken—and that applies in many countries—in time are not taken in time. When the going is good, people are very reluctant to put in place policies that are difficult. But the Argentine budget deficit is too large now, and it could have been smaller if fiscal policy had been tightened earlier. So, you are now in a position where, to stabilize the economy, you need tax increases, unfortunately at a very bad time in the business cycle. It would be better if it were done before. It wasn't done before. It needs to be done now. It would be much worse if it were not done now and nothing was done now. So, it is an unfortunate necessity at the moment.

A QUESTIONER - At least two of the top American policymakers warned Treasury Secretary Lawrence Summers and Undersecretary of State Alan Larson of the State Department, has suggested that India, which is growing at 6 percent, can grow even up to 10 percent with the necessary reforms. I was wondering how you look at it. Do you think that 10 percent is a feasible figure, and what is your recipe for that?

MR. FISCHER - Sustained 10 percents are very rare. They have happened. It has happened in Korea; it probably happened in China for some time. Nobody keeps growing at 10 percent forever. But there is a large untapped growth potential in India. You have seen it as the reform process has begun—the 3 percent growth rate became 4 percent, became 5 percent, became 6 percent, and still there is a huge amount of reform to be done in India.

I think as you open up cautiously, which is the approach you have been suggesting, on the capital account and as you liberalize trade and begin to deal with your financial system as well, undertaking structural reforms, there is a vast growth potential in India. You could go up, I don't know whether it is 10 percent or 8 percent, but it could be significantly higher than it is now for a significant length of time. And it must be very encouraging that India, through the period of changing governments, short-lived governments, did manage to maintain its growth momentum, and that gives reason to think that a sustained, strong reform program would move you into an even higher growth trajectory.

A QUESTIONER - Japan plunged back into recession late last year, with negative growth in the third and fourth quarters. But even in the fourth quarter there was a substantial increase in private investment. More recently, we have seen more positive signs, more encouraging signs of economic recovery in Japan, such as the Bank of Japan's TANKAN survey which showed much improved business sentiment in Japan. Stock prices in Tokyo have been rising, probably reflecting investors' more optimistic views of the Japanese economy. Incidentally, stock prices rose substantially even on reports that the Prime Minister of Japan was hospitalized after suffering a stroke.

Now, at this moment, how large do you think is the risk of a deflationary spiral in Japan? Is it now small enough to allow the Bank of Japan to end its zero interest rate policy at this moment?

MR. FISCHER - I believe the WEO describes the Japanese recovery as halting, and that includes the recession in the second half of 1999. There is some hope that the data will turn out to be better on final revision than they are now, and that possibly it is not as bad as it seemed. But the recovery is not firmly in place. When fiscal surplus was withdrawn in the second half of 1999, you got a slowdown, probably a recession. So, there is no reason whatever to withdraw stimulus right now. The need is to make sure that recovery in Japan becomes self-sustained. That means it is hard to see any good reason for monetary policy to tighten up. There is no threat of inflation in Japan. There is a threat of deflation. Why to tighten monetary policy in those circumstances is very hard to understand.

A QUESTIONER - Could you be please more specific on coming changes in the IMF's relationship with Russia or IMF policy toward Russia?

MR. FISCHER - I do not know precisely how the relationship will change. Let me tell you how different it seemed in Russia now. This is the first time I have been to Russia in 10 years that I sensed a much greater consensus on what needs to be done, and a political setting in which it seemed the government, the President had the ability to do that, to get it through.

We have always said, and it is absolutely true, that when a country owns its economic program, it is far more likely to succeed. It does not mean that if a country does not own the program, it won't succeed, but it is less likely. This looks to me the first time in some time that Russia has the prospect of putting its own policies into effect, virtually supported across most of the political spectrum. If that happens, we would be in a much stronger position to support the program, and that is what we would like to do. In my discussions with the President, it seemed that what he wanted to do was very much what we would like to support, so that is encouraging.

The second thing that is clear is that Russian society, having in August/September 1998 argued for some time that maybe they needed higher inflation, maybe they needed larger budget deficits, decided on a very broad scale basis that that was not what they wanted, and so macroeconomic stability is not really an issue in Russia anymore. There is nobody who wants the moderate inflation, 40 percent a year, 60 percent a year strategy.

So, it is quite likely that there will be less emphasis on macroeconomics, less need for emphasis on macroeconomics, and greater emphasis on the needed structural reforms. Some of those structural reforms relate to macroeconomics, those the IMF is interested in. Others, while essential, are deeply in the bailiwick of the World Bank. So, I expect the second thing that will happen, in addition to having a program we can more easily support that is more owned by Russia, is that the Bank's role will increase relative to the Fund's role.

A QUESTIONER - Again, a two-part question. You said that the Argentine authorities have done reasonable progress—that sounds a little cautious—on structural reforms. The other thing, you seemed to be a little alarmed about the size of the deficit, fiscal deficit of last year. Do you think that the Menen government was a little bit irresponsible on this front and that they put the convertibility system at risk by behaving the way they did?

MR. FISCHER - First of all, let me be clear that what the new government has done very soon after coming into office, both on the budget and on structural measures, is more than reasonable. The IMF is having trouble with its adjectives in the last few days, regrettably so, if I may say.

MR. DAWSON - It's an adverb, actually.

MR. FISCHER - It is an adverb? Thank you. Sorry.

It was done much better than reasonable. It was courageous, and it moved ahead of us. It did a lot of the things before we had a program, even.

On last year's policies, those were very difficult times. What I said was in good times, more should have been done. It is always much harder in bad. Last year was a very tough year. It is when things are going well, 1997, and so forth, that you want to tighten the position so that, if you get into trouble, you have room to run the more expansionary policies. But, if you haven't done it then, then when the crisis comes, you cannot do on fiscal what would be much better from the viewpoint of offsetting the crisis.

"Irresponsible" is kind of an extreme adjective. I don't want to get into those words.

A QUESTIONER - I have a question about debt relief. At a time when our Minister of Finance is playing quite a prominent role on the Board of the IMF and World Bank, there are also South African protestors who are involved in the Jubilee 2000 debt relief campaign and who are in fact on the streets of Washington this week.

One of those protestors said to me yesterday that he believes that debt relief and debt forgiveness is the wrong term to be using; that in fact it is some of those lenders who should be asking for forgiveness for lending to the Apartheid regime in South Africa, for example, which has led to the impoverishment now over decades of the countries around South Africa. He is calling for a cancellation of all debt and in fact for reparations to be paid to the people of Southern Africa for the lending which took place.

You said that you would like to do more in terms of debt relief but the resources are not there. Following the precedent of reparations paid to Jewish people in relation to the atrocities caused in the second world war, do you not think there is a moral case for reparations to be paid to the people of Southern Africa by western banks and by multilateral institutions for lending to Apartheid and now perpetuating the impoverishment of Southern Africans?

MR. FISCHER - I think that analogy is very far-fetched. You can easily discuss those issues without making analogies of that sort. There are complicated issues involved when you lend to a regime of which you thoroughly disapprove as to whether the right route to go is to cut off all relations and increase economic misery in the short run in the hope of reducing it in the long run. So, I do not see any point in getting into those issues. I don't have a basis for answering your question. It sounds to me like something that someone could say. One would have to look into it very carefully. I don't see how we could reach an agreement on an argument like that.

There is a debt reduction process in place. We are trying to make it move more rapidly. South Africa is the most prosperous country in Southern Africa. We rely on it to be the engine of growth for Southern Africa, and I hope that continues.

A QUESTIONER - I would like to ask you to perhaps comment a little bit on what is going on outside this week. As we all know, there are going to be thousands of young and old people from around the world demonstrating against the IMF. Now, what are these people saying? One thing they are saying, and perhaps in essence what they have been saying is that what the IMF does around the world is make the world safe for global corporations. What does this mean?

This means, for instance, developing countries are being forced to open their borders wide, without any arrangements, and this the IMF does as if Germany and the United States and other countries that are now industrialized a hundred years ago, as if they had built up their industry behind open borders and not behind high tariff walls. So, these countries are being forced, these people outside are saying, to open their borders so the big corporations, like Coca Cola and Starbucks can come in and compete with the locally-owned corporations. Also, they are forced to open the borders so American and European car companies can come in and buy up Korean car companies...

MR. DAWSON - I think we got the point.

A QUESTIONER - The question is, these people are saying that there is more to life than economic growth and more to life than financially measurable utility. I mean, what do you have to answer to these people?

MR. DAWSON - Thank you. We understand the question.

MR. FISCHER - Yes, there is much more to life than economic growth, and it is particularly people in rich countries who say that. What we are trying to do is to help people in poor countries have the same opportunities as people in rich countries have, and people in rich countries have got that way through opening their borders and integrating into the world economy.

The notion that the IMF or the World Bank is supporting immediate trade liberalization, with no gradual reductions in tariffs, is just wrong. You should look at what actually happens in a trade liberalization process. It is not an overnight process; tariffs come down slowly. All the evidence, all the evidence is that the best way to grow is to integrate into the global economy.

We are not trying to keep poor countries down. Look at what is all the academic evidence on outward oriented policies, on pro-market policies, which suggest that is the way to grow. Now, you can make the argument that economic growth is not everything and that poor countries should stay poor in order to maintain their inefficient car producers. But, who owns the car companies in Korea is not the same as whether there is car production in Korea. If you are looking to employment, if you are looking to efficient employment, if you are looking to companies which stay open over the long term, then allowing international investment is the better way to go; allowing foreign direct investment is the better way to go.

The policies we are supporting are policies which have been shown to work. We have not heard what the alternative is. The policies you are recommending were tried in the 1950s and 1960s; we don't have to look to the United States in the 19th century, great continental powers like the United States, which didn't rely very much on trade. We can look at what happened in the 1950s and 1960s, when the basic policy was protectionism and when the system broke down. Protectionism first did well; it always does well at the beginning, because you allow new companies to open, and then it gets stuck and you end up without innovation; you end up leaving your people with very inferior products, because you protect against foreign competition.

I can give you a few examples: until recently, India's 1958 British automobiles, which being produced through 1980 and 1990, and Argentina's 1962 Fords as the main means of propulsion around Argentina, until they opened up to allow modern Japanese cars in. You look at the products when you keep foreign production out. All you do is create domestic inefficiencies and you make people worse off, and that is what the evidence is.

Now, we have to listen to the demonstrators. We have to have discussion with them. We try to do that. We have the same goals as the demonstrators. We want to reduce poverty all over the world, especially in the poorest countries, and we have to see what works. We have to listen to other views. If the evidence comes in that shows that we should change policies, we do. That, for instance, is why we have changed the whole structure of the ESAF and it has become the Poverty Reduction and Growth Facility. So, we want to listen; we want a dialogue. But there are also facts; there is also the products of research that need to be examined

A QUESTIONER - A follow-up on that question. Mr. Fischer, the protestors outside claim to represent the peoples of the world. I wanted to know if you agree with that proposition. Second, in your view, what do they represent?

MR. FISCHER - There is a very difficult issue as to how you deal with the interactions of democratically elected governments and outside groups who claim to represent the people in those countries. In some cases, we are dealing with countries where governments are not democratically elected, and outsiders' views may well be a more accurate reflection of what is in the true interests of the citizens of the country than what the government says.

In many, many cases, for instance in your country, we are dealing with a government elected through a democratic process, with a Congress, which is to say the least of it very populist, where it is very hard to accept that the political process isn't doing what it is designed to do, allowing the views of the people to be represented. So, it is just a different situation in each country, and I don't think there is a general answer to that.

People outside represent many different views. Some of them are from NGOs who have a lot of experience in the countries with whom we are working and have offered many good suggestions for how to do things better, for instance through participatory processes, that we have discussed with them and that have led to real changes, have put a lot of pressure on politicians in their own countries, asking for more resources for developing countries, for trade liberalization in the industrialized countries in favor of the developing countries. Those are all things that are very productive. Others are there because, with less knowledge and because possibly they haven't studied the situation, are not aware of what we are trying to do, have not had sufficiently good explanations from us. Others are there because it is spring time.

A QUESTIONER - What I wanted to ask you is if the demonstrators in a way have already succeeded in changing the tenor or the tone of the meeting, and in that way have cast a pall over the meeting in much the same way that they did Seattle.

MR. FISCHER - The agenda we are dealing with is the agenda we have been working on for the last six months, in fact for the last few years since the crisis. So, in terms of what it is that will be discussed here, we will be discussing what we should be discussing, which is our work program, which is a program on reform of the international system, which we have made a lot of advances on, and because we have changed the poverty reduction strategy, together with the Bank on that, in the Development Committee and in the IMFC.

So, as long as we do what we should do, which is to get on with the work we need to make the international system more stable and to improve our efforts to reduce poverty, then I think we are doing our work. We need to listen to what is being said outside. If there are things that will improve the way we work, we should take account of it. But at this stage, I don't see that the fundamental purpose of the meetings has been changed by what is happening outside.

A QUESTIONER - How worried are you that the word globalization does now appear to be a dirty word. Even if you are making changes, the IMF does seem to be losing the PR battle.

MR. FISCHER - You are a better judge of the last than I am. I think the word globalization could become a problem, but the process that it represents, which I think of as the only way that we are going to raise people around the world to the same levels of income by allowing them access to the same global markets and to the same global information and information technology, I think that process is fine. It may be that we need to ask Mr. Dawson to come up with some better term that we can use, but it really is a good description of what is happening and it is something which is going to accelerate. Trying to stop it is something which will make people worse off, not better off.

On the public relations front, we have short memories, but it was only a year and a half ago since we were in the midst of the Asian crisis. I think certain questions have been resolved, and it has been demonstrated that the IMF-supported policies succeeded, and I think that is understood. We will have to deal with this challenge, which is a new one, not the same as the attacks we were under two years ago. We will have to talk to the people who are making these claims, which we believe are inaccurate, and try to persuade them of that.

A QUESTIONER - One of the criticisms that the IMF has been under is that there is a lack of transparency. I am wondering if you could explain a little bit in terms of the policy questions that you said that will be addressed, particularly Question 1, the safeguard assessment, and Question 3, surveillance, how transparency might be increased.

MR. FISCHER - First of all, in terms of what we ourselves are doing, the very complicated agreement on the safeguards assessments, because obviously that required the agreement of the countries, the borrowing countries, as well as the lending countries, and that is one of the benefits of the IMF that all countries are represented here, that agreement is on the Internet, the Chairman's summing up, which is in fact the agreement. So, transparency about the outcome of the process is there.

When these safeguards assessments begin to go into place, we will have to decide at that time how to deal with issues of transparency. Countries are naturally reluctant to have all details of difficulties necessarily revealed. I think it will be clear when these safeguards have been undertaken successfully.

On surveillance, the transparency is very, very obvious. It is all there on the Internet, in increasing amounts. I see we had 3 million hits on our website last month. We are in a pilot project on the publication of the Article IV reports. Our comments on various national economies are in the newspapers all the time through the WEO. The Chairman's summings up are done, letters of intent are published. So, I think that on surveillance there is far more transparency certainly than there ever was before. We are very close to the limits, I think, of what can be done, because there is not much that we are not publishing now.

A QUESTIONER - I would like to pick up on a comment you made a couple of questions ago in which you said that you have to deal with governments that are not democratically elected. I don't know if you have seen it, but in this morning's New York Times there is an article that quotes Amartya Sen, asserting and quantifying the fact that economic growth is maximized in a democracy.

Do you believe that, No. 1, that that is true, and No. 2, if it is true, should that become an issue that should be taken up by the IMF as part of its charter, promoting democracy in democratic institutions.

MR. FISCHER - There is a lot of evidence that growth is higher in democracies. That is, incidentally, something which is a change in view since the 1980s. There used to be the line that only under an autocratic government could you get growth going. That has gone by the wayside, particularly as Latin America became democratic.

Also, that causation goes two ways. The richer a country is, the more likely it is to become democratic. We have seen, say, in southeast Asia and in many other places, as income levels rise, people are much less willing to put up with nondemocratic governments. I mean, it is not a uniform relationship, but the tendency is there.

I am continually concerned about the expansion of conditionality on IMF lending, and requiring various measures in favor of democracy to be put in place as a condition for lending would, I think, take us too far beyond our mandate. But everything has its limits. There are governments so repressive that we should not lend to them, and that is clear. And there are things we support which are inherently pro-democratic. All the emphasis on transparency, the emphasis in the PRGF on participatory processes, those are things, both of them, transparency and participatory processes, are pressures that would move in the direction of creating democracy. But I do not think we should have explicit conditionality on that.

A QUESTIONER - During the Inter-American Development Bank meeting, IaDB President Iglesias said that Latin America needs to grow 6 percent a year to start dealing with poverty problems and the distribution of wealth in that region. I was wondering if you could say worldwide what growth really needs to be to deal with the problems of poverty, and if you could be specific on certain reasons.

Also, just if you could clarify some comments you just made. You said there are governments that are so regressive they shouldn't borrow from the IMF. Are there any examples of countries that the IMF did not lend to for that reason?

MR. FISCHER - Yes, there are many examples of countries we did not lend to because they were essentially not accepted by the membership as deserving loans. There isn't a unique point at which if growth is that rate, poverty starts declining, and otherwise it doesn't. The more rapid growth you can get, the better. Furthermore, for a while, if you have properly designed anti-poverty policies, you can reduce poverty without growing very fast. Ultimately, that resource stops becoming available and you need to rely on growth.

I think what Enrique Iglesias must have been saying is that at 6 percent growth you could be sure that you would be seeing quite rapid reductions in poverty all over Latin America. And 6 percent growth is not at all out of the question in Latin America. It is what is happening in Chile, which has followed exceptionally good policies, and it could happen elsewhere. In Latin America, there are still fiscal problems in many places, the balance of payments is still a problem in quite a few. Getting those things dealt with in economic policy and many countries are moving that way, are putting in place better social safety nets, and particularly education and health expenditures, would go a long way toward creating more rapid growth and dealing explicitly with poverty. It is entirely possible that those things can happen in most of Latin America.

A QUESTIONER - Developed countries are not punished whenever they have huge current account deficits and developing countries, like Latin American ones, are punished whenever they have a current account deficit, which they need to grow and to sustain this 6 percent growth. But they are immediately punished by the rating agencies. Is there anything in the new architecture on the reforms for IMF or multilateral institutions that will help these countries not to be punished by these huge current account deficits?

MR. FISCHER - I don't think that Latin American countries need very huge current account deficits in order to grow. They need an environment that will encourage investment in their countries and that will also encourage domestic savings. As an arithmetic matter, the huge current account deficit in the United States now, the largest ever, at 4 percent of GDP, is less than that in many Latin American countries that didn't get into crises.

The numbers are massive in the United States because the economy is so large. But, a 4 percent deficit is not exceptional by developing country standards. It is not true that at levels like that—4, 5, 6 percent of GDP—there is always a crisis in a developing country. You have to make sure that the way your deficit is being financed is sustainable. And for short periods, if you have a lot of foreign direct investment, you can run 3, 4 percent deficits. You cannot do that over sustained periods unless you are actually growing.

So, I don't think the basic premise is right, in two regards. They can grow without very large current account deficits, and it is not true numerically that the industrialized countries run larger deficits than developing countries, by any means.

A QUESTIONER - Mr. Fischer, you have described what we might call procedural reforms which will be discussed at the committee this weekend, which doesn't mean they are unimportant, but there seems to be an appetite today for a discussion of much wider reforms that get to the core functions of these institutions. I wonder how you would see that debate unfolding, where do you think it will lead, and, in particular, what do you think of the proposal this week of the Overseas Development Council that the Fund basically stick to a core function of dealing with short-term liquidity crises and its surveillance and monitoring activities and transfer its poverty reduction activities over to the World Bank, making the World Bank the core institution for poverty reduction.

MR. FISCHER - That, by the way, is a procedural change as well. I think that the way we are discussing fundamental issues of reform is by discussing what we are doing, for instance through the review of the lending facilities, in particular through the strengthening of surveillance through the changes in the design of the PRGF. This is a debate that has been going on for some time. Many of these changes began to be put in place during the Asian crisis, for instance the creation of the Supplemental Reserve Facility, which is a big change in the way we do business, the creation of the contingent credit lines. Those were a response to an ongoing debate, similarly the change in the ESAF to become the PRGF. So, that is part of the reform process, part of the discussion of what we should be doing. It is a fundamental discussion.

On the ODC proposal that the PRGF be moved to the World Bank and the IMF focus on crisis lending, it strikes me as one which seems to think that there is a different macroeconomics for poor countries than for rich countries and which overlooks the fact that there are macroeconomic issues in developing countries that need to be dealt with in the poorest developing countries, and that the expertise for dealing with macroeconomics is in this institution.

There is not a different macroeconomics for poor countries. Inflation is bad for people, particularly for poor people, everywhere. Macroeconomic instability is bad for poor people, everybody, everywhere. Those are not different issues for the poorest countries. Now, there may be implications. A very poor country may have an undeveloped tax system and it may need to rely somewhat more on inflation, so it may need a higher inflation rate, say 7-8 percent instead of 2-3, because it needs to use the inflation tax. So, there are differences in the circumstance of each country.

But I don't see what is accomplished by turning this over to the World Bank, taking our macroeconomists, putting them in the World Bank, and moving part of the IMF there. We have the accumulated expertise; we have the cross fertilization of these ideas; and—this is really important—this is a cooperative institution. The members of the IMF, the 182 members, are entitled as members to the use of the IMF's facilities, including the right to borrow. It is in the Articles of Agreement of the IMF. Taking the poorest countries out and saying, bye-bye, you are going to borrow from the World Bank, and when you grow up you will become a fully grown member of the international community, with all the rights that other countries have in the IMF, strikes me as exactly the wrong way to go, and you will not find support among the developing country members of the IMF for this proposal. They are among the strongest supporters of the PRGF and of our close cooperation with the World Bank to make that strategy work better.

So, I think that is a bad idea, not very logical, because it would say that for poor countries there is some different way of doing macroeconomics and that the poor countries in the IMF don't have the same rights to borrow as other countries in the IMF.

A QUESTIONER - You were referring to Latin America. I am interested to know what is the extent of the new poverty focus of the IMF. Is it just reduced to the countries that are included in the debt relief program, or are you devising any other policies for middle-income countries where, even if you have growth, inequalities are rising and poverty is rising.

MR. FISCHER - That statement about poverty rising in all middle-income countries where growth is rising is not right; it is not true of Mexico at the moment, and it will not be true of Brazil as growth resumes, and it is not true in Chile and probably quite a few others as well, so that is not true.

What we do in our surveillance activities is look at trends in poverty and examine social welfare, particularly pension policies that are in effect in countries. But we do not have the same requirement for middle-income countries for a poverty reduction strategy paper along the lines that we have in the HIPC countries. That requirement is confined to the HIPC countries.

I believe the IMF cannot afford in its lending activities in any country not to ask what impact does that have on poverty in that country, is that country doing something to deal with the impact on poverty. We are not following the same procedures as in the PRGF countries, the poorest countries that are receiving debt relief. We are asking those questions where those measures are not in place, we are asking governments to develop them, but that is not in the IMF's basic mandate and it is not something that we can require as macroeconomic conditionality. But, it is something we can support. Typically, it is done by the World Bank in collaboration with the country. We generally want very much to support that in middle-income countries, as we did, for instance, in the Asian crisis countries.

MR. DAWSON - Thank you very much. The embargo will be lifted at 10:15, please.

[10:05 a.m. END]