It is my pleasure to welcome you to this IMF Institute seminar, which over the next week offers you the opportunity to discuss in some detail the linkages between structural reform and macroeconomic stabilization. Perhaps the most logical place for me to begin is with the terms being used. Structural reform is a broad term that encompasses those policies aimed at improving market functioning, while macroeconomic stabilization has as its goals low inflation rates, high employment levels, a sustainable external position, and relatively calm financial markets. Recent experience and policy challenges in all parts of the world have demonstrated the interdependence of these two prerequisites to sustainable growth. For without macroeconomic stability, market signals are no longer clear, and restructuring is hampered by uncertainty. Conversely, a lack of structural reform undermines stabilization policies.
My remarks will concern economic reform efforts and macroeconomic stabilization in China. There are some remarkable differences between the effects of the Chinese reforms and the results to date of the reforms that have been undertaken in the countries of Eastern Europe and the former Soviet Union (FSU). While valuable conclusions can be drawn from both sets of experiences, China offers some unique lessons.
From 1978 to 1992, China’s liberalization was gradual, with a fairly stable price level and extraordinarily rapid output growth. Since 1989, rapid liberalizations in Eastern Europe and the former Soviet Union (FSU) attempted in the face of falling real output have generated much higher inflation. Yet both regions’ fiscal policies have been surprisingly similar. Like its socialist counterparts in Europe, the Chinese Government has seen its revenue share in GNP fall sharply; in 1991-92, its fiscal deficit approached 10 percent of GNP, as illustrated below. How did China manage to avoid inflation when its government was such a heavy borrower from the state banking system?
Comparing Argentina in the 1980s with Argentina today, I am struck by a phenomenal change. For Argentina, the 1980s started off with the debt crisis and the war in the South Atlantic. The decade was characterized by negative GDP growth, capital outflows, persistent fiscal problems, and hyperinflation. Inflation averaged more than 300 percent a year before 1985 and more than 1,000 percent a year between 1986 and 1990, with two episodes of hyperinflation. Overall, the 1980s were a lost decade for Argentina.
Let me begin by providing a brief overview of the proceedings so far in order to identify some of the issues our panelists may want to address. The seminar to date has covered the main linkages between macroeconomic stabilization and reform and has included case studies from both developing countries and transition economies. Two well-known principles have been reaffirmed, namely, that macroeconomic stabilization is a necessary, but not a sufficient, condition for sustained growth; and that structural reforms are necessary in order for macroeconomic stabilization to be effective.
At the start of a week of presentations on the link between structural reform and macroeconomic policies, it might be useful to stand back and consider why this topic is being stressed. I will therefore begin by briefly discussing the 20 or so years of experience that have led the IMF to become increasingly conscious of this particular link when looking at members’ policies. I will then explain how this growing awareness has helped the IMF and the World Bank fashion their approaches to dealing with member countries. Next, I will review the various areas of linkage between macroeconomic policy and structural reform that will be discussed during the course of this seminar, not only as they relate to the economies in transition, but as they apply to the IMF’s membership as a whole. Finally, I will say something about the general conclusions that may emerge during the course of the seminar.