Opening Address by the Chairman of the Boards of Governors, the Governor of the Bank and the Fund for Hungary1, Ivan Szabo
- International Monetary Fund. Secretary's Department
- Published Date:
- November 1993
It is an honor and a pleasure for me to chair, on behalf of the Government of the Republic of Hungary, the Annual Meetings of the Boards of Governors of the World Bank Group and the International Monetary Fund. I note with pride and satisfaction that this is the first time that a representative of a Central European country has been selected to chair these meetings.
I think that honor should be given to the efforts that have been made and results achieved by Hungary since 1990, following the first free election in 43 years. During this time, the legal and institutional framework for a social market economy has been established in our country, we have achieved significant success in privatization (in 1992, 45 percent of GDP was produced by private enterprise), and we have turned our exports from the collapsed Council for Mutual Economic Assistance (Comecon) markets to Europe, as a result of which 70 percent of our total exports are directed to the Organization for Economic Cooperation and Development (OECD) countries today. We are linked through a special association agreement with the European Community (EC), and we are confident that we shall join the EC as a full member within this century.
It is a special pleasure to announce that, a few days before the Annual Meetings, a new stand-by arrangement was agreed by Hungary and the Fund, in acknowledgment of the economic results achieved by Hungary and of the path that is being followed.
I extend a warm welcome to each of you here today. I especially want to welcome those new member countries, the Republic of Tajikistan and the Federated States of Micronesia, that have joined the Fund and the World Bank since our last meeting. We look forward to cooperating with them in the years ahead.
Both the World Bank and the International Monetary Fund have made an immense journey since their foundation. In harmony with the intention of the founders, they have contributed greatly to creating or sustaining stability in certain countries and regions. The journey has been impressive and the results achieved are significant, but, in some cases, regrettably, the recommended medicine did not bring about the patient’s recovery. Alongside successful developments and excellent results, as shadow follows light, there are loans that are classified as bad debts retrospectively, the hopeless indebtedness of a large part of the world, and the increasing disparities between countries, nations, and continents.
But now, having started with a group of 29 states, the area of operations of the two giant financial institutions covers practically the whole globe. With this universal membership comes the sure knowledge that the services of the Bretton Woods institutions are needed now more than ever and—with their global reach—can indeed be more effective. Today, the world faces a crisis of confidence, coupled with continuing concerns about the prolonged weakness of economic activity. Against this backdrop, international cooperation to achieve global economic growth and improvement in the quality of life for all is imperative.
The continued below-par growth performance of the world economy over the past year is disappointing, not only because of its high social costs, but also because of the risks such weakness entails for open trade relations, exchange market stability, structural reform efforts, and progress toward medium-term objectives and a brighter economic future for all. The weak growth performance of most industrial countries is both surprising and perturbing: signs of recovery in the United States, Canada, and the United Kingdom are only tentative and gradual; most Western European countries are experiencing stagnation or decline; and even in Japan, the near-term prospects for a recovery have become more clouded. Output losses in the economies in transition, in the states of the former Soviet Union, and also in Hungary, while perhaps unavoidable, have proved to be more substantial and more difficult to reverse than anticipated. In contrast, the economic outlook for many developing countries, in particular in Asia, but also in many countries of the Middle East and some countries in the Western Hemisphere, has improved markedly, and the decline of many of the economies in sub-sanaran Africa at last appears to have been arrested. The success of the developing countries can only be seen as remarkable; and it points to the need for the industrial countries to do more to support the world economy in a way that is commensurate with their position in it.
In the extension of World Bank and Fund operations, as in extensive developments of any kind, answers must be found to new challenges, different in nature from any previous challenges. It is particularly so in the case of the collapsed Soviet empire, its states and nations, where managing the economic process is impossible by following the classical, or by now crystallized, recipes of twentieth century schools and, more important, where using economic devices only is just not the answer. Similar tendencies could be seen in other regions of the world, especially in former dictatorships where individuals and communities had been denied the experience of freedom.
What are we talking about, after all? The collapse of the Soviet empire—which lasted a few historical seconds—suggests to us that not only did the “living socialism” fall into an unresolvable crisis, but so also did the orthodoxy behind it—the Marxist-Leninist ideology. And it is not an accident, by any means; Marxism was based on the deterministic Newtonian view of the world generally accepted in the last century. This deterministic view has been revised by Einstein, the Copenhagen school, and, putting the dot on the “i,” the Heisenberg views of the world featuring relativity and indeterminism. It was a tempting belief that the exclusive basis of society and the whole world is economy, and that philosophical persuasion, ethics, religion, politics, and arts all function as a superstructure on the economic foundation, but the history of my region has clearly showed that this picture is false.
I come from such a part of the world, from Central and Eastern Europe, where the people and nations have proved, over 40, or even 70, years, that to become accustomed to permanent economic difficulties—to a lower standard of living compared with richer countries of the world—is easier than to be denied the right to publicly declare one’s faith and to speak in one’s fatherland in his mother tongue. Today, people die more willingly in the name of their national and religious affiliations than for social reasons. It is enough to look at the former Yugoslavia and to the Georgia-Abkhaz and Armenia-Azerbaijan conflicts, but we get the same message from a large number of other regions of the world, with their national, ethnic, and religious tensions and problems.
Why did I raise these issues here today, in the opening speech of the Annual Meetings of the World Bank and the International Monetary Fund? The reason is that they raise a fundamental question about the efficiency of our future economic activities—whether we shall be able to find distinct solutions, based on the complex totality of life, in our endeavor to manage the monetary problems of individual countries and regions. Of course, the nature of life is a complex system depending on numerous variables; nevertheless, three factors can no longer be ignored. Although world conferences address these issues one by one, it is difficult to find a path that could link the parallel planes.
The first two planes or aspects that I will refer to are sociology—in a broad context—and economy. I fully share Cardinal Joseph Ratzinger’s views, presented in his maiden speech following his election to the chair of the late Andrey Sakharov by the French Academy, on the new dimensions of the interpretation of freedom following the dramatic events of the end of the century, the “smoking ruins,” metaphorically speaking, of a large empire. He said that “freedom needs a moral content,” that is, freedom only makes sense if it is directed to others, if it has a communal substance. I understand and interpret freedom, proved by the reality of Central and Eastern Europe (and numerous other regions in the world), to mean that, if we cannot, beyond the realm of individual human rights, ensure and guarantee the recognition of certain defined collective rights, our efforts in finance and economy will bear no fruit. The goals of a given community (be it a nation, country, region, or continent) may not differ from the basic goals of the individuals who constitute that community—including the rational and transcendental goals. These basic goals of individuals can be different from region to region, and we have to avoid the belief of the European white colonialists between the sixteenth and twentieth centuries that the unification and advancement of the whole world could be achieved by forcing European habits, legal order, and political systems on peoples of different cultures and traditions.
Clearly, then, a case can be made for recognizing the diversity that prevails among and within countries in transition, given differences not only in economic conditions and structure, but also in cultural and institutional configurations. The Hungarian physicist Edward Teller summed up this diversity by observing that, after decades of subjugation under the former Soviet bloc, each of these countries is now entitled to commit its own mistakes.
On the one hand, pronounced differences among countries justify differentiation in the content and sequence of economic policies and reform measures, as well as in the extent and terms of financial assistance made available to each. In this regard, the international financial institutions deserve praise for their efforts to tailor economic programs and projects to specific conditions. Indeed, the Fund has been ready to support the so-called big-bang approach—consisting of macroeconomic adjustment coupled with a rich structural reform agenda, adopted by Hungary. Furthermore, the Fund’s management should be congratulated for the initiative in launching the systemic transformation facility to address severe disruptions faced by some of these economies, in particular the states of the former Soviet Union. Similarly, the Bank— including notably the International Finance Corporation (IFC)—has endeavored to tune its project and sectoral financing and technical assistance to specific country needs. On the other hand, there are limits to the mistakes that each country can be permitted to make in either the economic or the noneconomic spheres. In the economic area, membership in the Fund and the General Agreement on Tariffs and Trade (GATT) impose certain constraints on each country’s macroeconomic policies as well as on its exchange rate and trade regimes.
Both the Fund and the Bank have supported action to mitigate the adverse social impact of macroeconomic adjustment, price liberalization, and industrial reconstruction. Particular emphasis has been placed on replacing the wasteful and inefficient system of social protection fostered by the previous regime mainly through the subsidization of commodity prices and hidden unemployment in state enterprises, with targeted and explicit assistance to the needy. The Bank and the Fund have helped develop and streamline social insurance programs (old-age pensions and unemployment compensation, among others) that are suited to a market economy and are both socially adequate and financially sustainable over future generations. The latter is particularly difficult in countries, such as Bulgaria and Hungary, that have rapidly aging populations. Deplorable health conditions in a number of Central and Eastern European countries and in the states of the former Soviet Union require technical and financial resources on a much larger scale than those provided so far. This year, the Bank’s World Development Report highlights the enormous costs to human life and economic development of the misallocation, inefficiency, and inequity that characterize these countries’ health-care programs in particular. As the Report suggests, significant gains can be achieved through targeted low-cost public health measures and clinical services.
As I mentioned, there is a third aspect of the quality of life that we must not ignore, and that is environmental protection in all its complexity as it was discussed at the world conference last year in Rio de Janeiro. For us, accustomed as we are to rationalizing finances and economy, the dilemma is really difficult to resolve. It is very strongly implanted in us, it is in our blood, that we should measure the feasibility of investments according to annual balance sheets—that is, a very short time for a return on investment in the context of history. And now, here is an organization demanding long-term rationality more and more strongly and loudly, in spite of the fact that there is no accountancy system capable of accommodating projections and cost allocations for decades or even centuries ahead. But we cannot neglect this demand, although it seems a moral requirement rather than an economic rationale for a practicing economist, who, incidentally, carries the responsibility for his work toward many a generation to come. I bow to the wisdom of the Superior Court of India, which banned the operation of the smoke-emitting plants of the Taj Mahal. However, without trying to spoil the occasion, I would ask what do the human race and its financial institutions intend to do to solve the economic problems of people who have lost their basic living conditions as a result of measures like this one, taken to protect the irreplaceable art and natural treasures of mankind?
The World Bank and the International Monetary Fund can be proud of their contribution to the initial stage of the reconstruction and market-oriented transformation of Central and Eastern Europe, and of the successor states of the former Soviet Union. Both institutions have displayed considerable imagination and flexibility in dealing with problems that are not always amenable to traditional treatment. The complex interaction between the conduct of macroeconomic policies and the institutional reform process, such as the restructuring and privatization of state enterprises, has at times been imponderable. Indeed, over the past three years, the Bank and Fund staffs, as well as the national authorities, have learned together from the experience of postsocialist countries. (Hungary’s piecemeal reform measures taken between the late 1960s and the late 1980s provided a number of useful lessons.)
I must emphasize that transformation is far from complete even in my own country. However, most important, we view import liberalization by developed countries as a key catalyst in the economic reconstruction of Central and Eastern Europe. As stated by Prime Minister Antall at the European Democratic Union conference held in Budapest a couple of weeks ago, our major concern is that the dismantling of the Iron Curtain will be followed by the erection of an economic curtain by the West.
The main goal of the members of the World Bank and the Fund at the current juncture must be to devise and collectively pursue a global strategy aimed at bolstering confidence and strengthening the prospects for a durable noninflationary expansion of the world economy. Such a strategy must be based on the realization that, in an increasingly integrated world economy, national and global interests coincide. We must each of us “think globally and act locally,” in a mutually reinforcing effort to address the current challenges and opportunities in a cooperative framework.
This strategy should focus on five main areas in which international cooperation is essential.
First, there is a need for the industrial countries to coordinate their national economic policies more effectively. The domestic fiscal and monetary policies of one country can now influence developments in other countries more quickly and more directly than ever before. Questions regarding the sustainability of exchange rate policy, for example, encourage massive short-term speculative capital flows, as evidenced by the prolonged crisis in the European Monetary System over the past year. Enhanced consultation and cooperation among the industrial countries would yield substantial benefits not only for their own economies, but also for all participants in the global system.
Second, no effort should be spared to ensure the successful conclusion of the Uruguay Round in order to forestall protectionist pressures, to strengthen consumer and business confidence, and to increase world prosperity. The developing countries lose an estimated $100 billion in export revenues each year owing to trade barriers. Substantial progress has been achieved by the formerly centrally planned economies of Central and Eastern Europe in terms of macroeconomic stabilization and structural reform. However, these countries virtually depend on exports to industrial country markets to underpin the recovery of their domestic economy and to facilitate their full participation in the world economy. Inadequate access to industrial country markets, or delays in concluding the Uruguay Round, could therefore seriously jeopardize the prospects for success of the adjustment and reform efforts of these and other developing countries.
Third, the legacy of the debt crisis of the 1980s has not yet been fully dissipated. While some middle-income countries with heavy debt burdens have been relatively successful in restructuring their debt and in regaining market access, many low-income countries continue to be adversely affected by towering debt-to-export and debt-to-GNP ratios. I would like to mention, as characteristic of the data, that the budget deficit of Hungary, a country burdened with all the problems of transition, is lower than the loan-servicing charges for the given year. Continued financial support from international agencies and bilateral creditors is required to alleviate the debt burden, which in many countries has frustrated economic development and aggravated the effects of poverty.
Fourth, we must give new impetus to facilitating development of the private sector and substantially increasing flows of investment and technology. Our work must support the revitalization of the private economy worldwide and a reduction in those structural rigidities that restrain competition.
Fifth, the complex problems of designing policies that promote international cooperation and economic development and, at the same time, protect the environment remain high on the agenda.
These five issues embrace some of the most urgent problems facing the world economy today. They require strengthened international cooperation between governments and the international institutions we represent here today, the World Bank and the International Monetary Fund. Let me wish all the participants good discussion and successful work.
Delivered at the Opening Joint Session, September 28, 1993.