Opening Address by the Chairman of the Boards of Governors and Governor of the Fund and the Bank for Chile1

International Monetary Fund. Secretary's Department
Published Date:
November 1996
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Eduardo Aninat


It is with a sense of honor and responsibility that I welcome you to the Fifty-First Annual Meetings of the International Monetary Fund and the World Bank Group.

As we set our sights on the world economy, and take stock of emerging challenges and opportunities that lie ahead of us, I would like to take this opportunity to congratulate Mr. Michel Camdessus on his election for an unprecedented third term as Managing Director of the IMF. Under his leadership the Fund has not only held steadfast to its founding charter, but also managed to adapt rapidly to the realities of a fast-changing world.

I would also like to welcome Mr. James Wolfensohn, now entering his second year as President of the World Bank Group. His “hands on” approach has been warmly received among the Bank’s membership, and has gone a long way in strengthening external partnerships, increasing Bank-wide professional excellence, and achieving better results on the ground.

It is a pleasure for me to extend a special welcome to the delegation from Bosnia and Herzegovina, attending these Annual Meetings in the capacity as member for the first time and to the delegation from Brunei Darussalam who joined the Fund and the Bank during the Annual Meetings last year.

World Economic Outlook and Agenda for the Next Year

To set the stage for our discussions, let me offer my perceptions of the current global economic environment and world economic prospects before highlighting what I regard as the major policy and institutional challenges we will face as we prepare for the new millennium.

The global economic environment today is characterized by an important degree of consensus. The combination of democracy and market economy is now widely seen in a virtuous relationship as a necessary basis for economic and human development. There is also a growing awareness of the strong interrelation between political liberty and economic freedom. This interrelation implies that imperfections in either the political or the economic sphere lessen the impact that the other sphere exerts on the process of economic and social development. As a result, efforts are now increasingly centered on the deepening and reinforcement of market mechanisms and democracy in order to boost the economic system’s growth potential and the political system’s effectiveness to respond to the needs of people.

If we look at the figures, world economic and financial conditions appear quite satisfactory. Global economic growth is expected to continue at a good pace throughout 1997, and over the medium term. The strength of economic activity has been especially impressive in the emerging market economies, particularly those of the Asian region. In the industrial countries, inflation should remain subdued, with further progress needed toward reducing fiscal imbalances and addressing structural rigidities, particularly in labor markets. As a group, the developing countries are expected to sustain their positive growth performance, reflecting their increased resilience to external disturbances and their success in reducing fiscal imbalances substantially over the past decade. In the Latin American region, the countries most affected by the Mexican financial crisis are showing encouraging signs of recovery. The adjustment undertaken has proved the irreversibility of market-oriented policies and has strengthened confidence further. Therefore, a solid basis may be set for growth becoming firmly established in the period ahead.

In Africa, the perspective has improved in an increasing number of countries after implementation of stronger macroeconomic and structural policies. However, economic conditions remain difficult in some countries where policy improvement is urgently needed. In the Middle East, economic performance has strengthened as a result of further adjustment. The transition countries have achieved remarkable progress toward macroeconomic stabilization and reform with promising growth prospects for 1997. However, remaining fiscal deficits, continuing government intervention on behalf of ailing sectors, and the absence of well-targeted social programs are still a constraint on the sustainability of recent hard-earned reductions in inflation and structural adjustment.

The encouraging picture drawn from this brief appraisal of global economic prospects makes clear that progress in implementing the policy strategy outlined in the Madrid Declaration of the Interim Committee two years ago has brought significant results in many areas. We may therefore remain cautiously optimistic about the prospects for growth and continued stability.

We have also witnessed an unprecedented expansion of investment and trade, and increasingly rapid dissemination of information and technological innovation in a world where economic progress is bound up with the process of globalization. Our overriding task will be to consolidate the gains achieved so far.

Policy and Institutional Agenda

From the promising outlook for the world economy and the accelerating pace of globalization, a number of issues emerge as natural topics on which I would like to focus our policy and institutional agenda for the coming year.

First and foremost in this agenda is macroeconomic stability. Inflation in Latin America has fallen to a level not seen hi 25 years, and price stability in the transition countries has markedly increased. Fiscal deficits have also been reduced in many developing countries. The lessons learned from Asia’s high-performing economies and the experiences of my own country highlight the importance of macroeconomic stability and public savings as a necessary condition for sustainable growth. A reasonable level of public savings is beneficial not only because of its impact on price stability but also because it supports a high level of domestic investment with sustainable external accounts.

This is borne out by the Chilean experience of the past seven years, where average annual fiscal saving—in the order of 4 percent of GDP—went hand in hand with strong growth at an annual average rate of over 7 percent and moderate current account deficits in the order of 3 percent of GDP. However, macroeconomic stability and fiscal health is never a once and for all achievement but a task that requires perseverance with coherent and prudent policies. Therefore, the challenge ahead will be the consolidation of the progress already made and the further deepening of fiscal adjustment. This is a task for both the developing and the industrialized world. The Fund and the Bank are uniquely placed to support domestic policy efforts in this direction. They can provide additional monitoring of macro-economic performance and sound policy guidelines based on best practices learned from the most successful economic performers.

In the context of fiscal adjustment and consolidation, concerns arise about the social impact that reduced spending might have. This brings me to the second point on my list, the urgent need for increased efficiency and better targeting of social spending as an effective means to improve social equity and to reduce poverty. The widely observed elimination of poorly targeted subsidies over the last few years indicates progress in the right direction. However, there is still room to enhance the quality and effectiveness of social investment. The private provision of publicly financed social services is only one example of alternative ways to foster efficiency. For example, Chile is successfully using a voucher system in housing and education to subsidize demand rather than supply. Progress in areas such as optimal targeting, decentralization of social policy, and the innovation of instruments and administration are also needed to boost the impact of social investment in development.

Special emphasis should be given to human capital development. Education has proved to be the single most important factor explaining differences in long-term growth performance, in poverty reduction, and in social equity across countries and regions. There is also much evidence on the positive externalities of better primary and secondary schooling. These convincing findings clearly justify putting education at the center of modern social policy.

The need for reengineering public social security and health care is another task that seems to be urgent in both the developed and the developing world. Too generous benefits, early retirement provisions, demographic aging, and lower productivity growth have driven many public pay-as-you-go pension systems into difficulties, drawing much-needed public resources away from alternative, more efficient uses. In Chile 15 years ago, the near bankruptcy of the public pay-as-you-go scheme was replaced with a fully funded, privately administered mandatory system. Today, after transition, the private system has already accumulated pension savings worth over 40 percent of GDP. Pension reform has clearly contributed to the development and broadening of financial markets at home. The experience depicted serves to underline the importance of finding acceptable transition paths to new sustainable and growth-enhancing social security systems. A similar task of reform applies to public health care where reengineering includes the search for more appropriate incentive structures and the development of proper regulation schemes for the private provision of publicly funded health services.

The fourth important item on our agenda for the coming years is the deepening of global economic integration. World trade has grown spectacularly over the last few decades, and significant progress has been made in trade liberalization. Multilateral mechanisms to reduce barriers to trade have increasingly been complemented with regional and bilateral agreements in order to accelerate the opening of markets. This process has been particularly impressive in Latin America where protectionist regimes have been significantly liberalized in only a few years. The recognition of the mutual benefits that trade provides to trading partners is the basic rationale behind this liberalization process. But reaping further gains from globalization requires a firm commitment to an even further opening of our economies. In this context, stronger cooperation of our two institutions with the newly created World Trade Organization (WTO) and regional trade entities will be beneficial. Attention should be paid not only to further reduction of tariffs on merchandise goods but also to the liberalization of trade in services and capital flows.

Fifth, in the area of international financial integration, sequencing the degree of opening of the capital account will depend on a country’s economic structure, existing regulations, and the monitoring capacity of the authorities. This is evidenced by the Chilean experience at the beginning of the 1990s when renewed access to voluntary capital led to an important abrupt surge of short-term inflows, which created heavy local currency appreciation and some overheating pressures. In response, a combination of permissive policies for long-term capital inflows and simultaneous deterrents to disruptive short-term inflows were set in practice. The above phenomenon, combined with a high level of national savings, has encouraged the authorities more recently to further intensify the promotion of Chilean investment abroad.

Finally, in the global economy, good governance is paramount to economic success and development. Under conditions of rapid integration, we have to find ways to promote responsible and representative political structures, thereby lending legitimacy to the formulation of global economic strategies. In addition to the possibility of citizen participation, good governance also implies the development of effective administrative structures and transparency in the use of fiscal resources. In the past, state organizations have often failed to focus on the needs of the people. Part of this failure is explained by the lack of adequate standards of accountability at different levels of government. Thus, despite progress in recent years, the modernization of public institutions remains a pending issue in most countries represented in this meeting.

Role of the Fund

After having depicted a general agenda of issues for the near future, I would like to focus on the specific role that our two institutions might take in our ongoing efforts to improve global economic conditions.

The Fund’s central mandate of exercising surveillance over the international monetary system and members’ policies is more relevant than ever. The need for heightened surveillance, in a world of potentially destabilizing capital flows could not have received more vindication than in the aftermath of the Mexican financial crisis in 1995.1 fully support recent efforts by the Fund to undertake continuous, intensive, and probing surveillance of its members’ policies.

The effectiveness of Fund surveillance depends critically on the capability of its members to provide timely and high-quality economic data. To that end, I applaud the recent launching of the Special Data Dissemination Standard initiative. This new service created by the Fund will better equip market participants to evaluate the sustainability of financial flows as well as macroeconomic developments in capital market countries.

The 36 countries that have subscribed so far include industrial, emerging market, and transition countries, and represent a broad range of membership. I urge other members to consider subscription to this standard as soon as possible. I also urge the Fund staff and management to finalize work on the general data dissemination standard.

The Fund’s role in providing technical assistance to its members has become increasingly important across a broad range of areas. I view the continuation of that role as critical to the development of sound policy frameworks and to the process of institutional reform.

A further core activity of the Fund is to make its resources temporarily available to members facing financial problems so that these might be resolved without inflicting undue harm on the country concerned or its trading partners. The Extended Fund Facility has become increasingly important for assisting some of our larger members. In addition, the Enhanced Structural Adjustment Facility (ESAF) has proved to be an invaluable vehicle for lending to the low-income countries. I warmly welcome the understanding reached to ensure a continuation of the ESAF and the Fund’s participation in the heavily indebted poor countries (HIPC) initiative. It is worth noting the large number of developing countries that have pledged their financial support to achieve this goal. I am proud to announce today that Chile has the honor of belonging to this group.

The basic source of IMF financing is its quota base. The Eleventh General Review of Quotas should be completed as soon as possible. It has become urgent to secure the financial resources the Fund will need to continue supporting members’ adjustment efforts. In addition, I welcome the progress made by the Group of Ten and several other countries in establishing the New Arrangements to Borrow that will effectively double the resources available to the Fund under the General Arrangements to Borrow (GAB). I also applaud the consensus reached to reduce disparity among members through a one-time special allocation of SDRs through an amendment of the Fund’s Articles of Agreement.

The Interim Committee has adopted a new declaration on Partnership for Global Sustainable Growth. I wish to take this opportunity to urge member countries to follow through with the implementation of this strategy.

Before turning to issues concerning the Bank, let me take this opportunity to convey to Mr. Van Houtven our appreciation for his service as Secretary of the Board of Governors for the past 20 years.

Role of the Bank

For the World Bank Group, this has been a year of challenge. Mr. Wolfensohn has begun a number of very important initiatives. Let me take a few moments to highlight several of the advances made by the World Bank and its affiliates in the last year.

Poverty reduction and sustainable development remain central objectives of the Bank Group, and greater emphasis is now being placed on strengthening the effectiveness of the Bank’s activities. More attention is being given to the needs of its clients and the results achieved on the ground, as reflected in recent activities such as the creation and replenishment of trust funds for Bosnia Herzegovina and for Gaza and the West Bank and the recent establishment of a joint Africa/World Bank “partnership” for capacity building. The Bank has also taken important actions to give a broader choice of products and services to its clients. For example, in response to client demand for broader currency choice, the Bank has undertaken initiatives to provide borrowers with the flexibility to determine the currency composition of their IBRD loans. I applaud the increasing ability of the Bank to respond quickly to the needs of its clients, and I urge further progress in this direction.

Within the Bank Group institutions, the International Finance Corporation (IFC) has continued to expand and diversify its investment, mobilization, and advisory activities in response to its clients’ needs. I commend the Corporation’s new initiative, “Extending IFC’s Reach,” which will promote private sector investment in countries where IFC’s activity has been limited as a result of difficult country conditions. As the Corporation gains experience with this and other innovative programs, we expect its outreach in favor of small- and medium-sized enterprises to be strengthened.

The membership of the Multilateral Investment Guarantee Agency (MIGA) has grown to 137 members, and an additional 19 countries, including several in transition, are in the process of fulfilling membership requirements. However, in several countries the operational capacity of MIGA is constrained by its capital base and reserves adequacy. Therefore, MIGA should explore alternatives for solving this problem. I also look forward to seeing new developments around the idea to create a guarantee facility that would issue guarantees against noncommercial risks without requiring counter-guarantees from governments of member countries.

Regarding the International Development Association (IDA), I urge the richer countries to consider the plight of the poorest countries. Your increased contributions are absolutely necessary so that essential support for economic development programs in those countries can continue. This year the IBRD will be making an unusually large contribution to IDA through a transfer from its net income. Nevertheless, in the long run a well-funded IDA should not be crucially dependent on IBRD resources.

In addition, I would also like to strongly commend the substantial efforts and the progress made by the Bank and the Fund to develop a significant debt-reduction scheme for the heavily indebted poor countries. As final details of the initiative are still open I would like to recall the importance of establishing burden-sharing criteria that are commensurate with the preferred creditor status of the institutions.

For some years now, the IBRD has been generating significant net income and this trend is expected to continue. In allocating this income, the main goal should be the preservation of the financial position of the Bank through adequate reserve building. The allocation of the significant residual income should be guided by the multilateral spirit of the Bank and therefore take into account the interests of all members. I therefore urge the Bank to develop a set of guiding principles for the future that ensures an appropriate balance in the distribution of net income.

Conclusions: Human Dimension of Economic Development

Before concluding, I would like to share with my fellow Governors some further ideas concerning the social sphere of the development process. In particular, we need to ask ourselves about the profound meaning of development as it relates to the needs and aspirations of all of our citizens. How is the agenda we have laid out related to human development?

We all share the view that rapid economic growth, macroeconomic stability, and the resurgence of free trade and cross-border investments in the context of globalization are key ingredients of the development path in the present scenario.

My claim today is that we must never forget that all of the above represent means to an end. The profound agenda of our citizens has to do with human progress, with the pursuit of individual and social happiness. That is the core matter at stake as we approach the change of the century.

Among the most precious values cherished by people during this key epoch of mankind is the achievement of social equity. The poor, the worse-off, the vulnerable groups in our societies are in need of key resources for their development. But these groups also have a deeply rooted hunger for voice and for finding an effective way of participating fully in the economic and civic lives of the community.

The context of stability and economic progress we are experiencing is a promising sign. But it shall not take profound roots in the history of mankind unless it serves to open up clear opportunities to all of our citizens. Yes, in my view this is at the core of the challenges ahead, as we come to the twenty-first century: will the engine of progress become an instrument of vast integration and social enhancement or merely a vehicle to benefit the few?

My fellow Governors, let us not miss the great opportunity we are facing. We have a profound obligation to work decisively and with no hesitation towards the betterment of the quality of lives for all. The characteristics of exclusion, of marginalization, of deprivation, should be left behind as shortcomings of the past.

Let us not confuse ourselves. There is one key enhancing task for development: providing clear-cut and down-to-earth opportunities for raising the dignity of each and every one of our fellow countrymen. It is the crucial link between economic and social development and the efforts to dignify mankind that makes our work a truly meaningful task. Thank you.

I hereby open the Fifty-First Annual Meetings of the International Monetary Fund and the World Bank Group.

Delivered at the Opening Joint Session, October 1, 1996.

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