Presentation of the Forty-Eighth Annual Report1 By the Chairman of the Executive Board and Managing Director of the International Monetary Fund, M. Camdessus

International Monetary Fund. Secretary's Department
Published Date:
November 1993
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Mr. Chairman, Governors, Ladies and Gentlemen, I join Lew Preston in welcoming you all, and in particular our new members, to our Annual Meetings. I am also delighted to note that these meetings are being chaired for the first time by a Governor from a country successfully completing its transition to a market economy.

We are meeting again at a time of great promise for further progress toward peace and stability. In the Middle East, the historic peace accord struck between Israel and the Palestinians should reorient the energies of the entire region toward cooperation and integration. And in South Africa, statesmen are taking courageous steps to build a new country. But we are also meeting at a time of considerable concern about economic difficulties in many parts of the world. Many expectations, born of developments of only a little while ago—the end of the cold war, the growth of the industrial economies in the mid- to late 1980s, and the progress of European integration, to name a few—have been disappointed. In many countries, you are confronted by pressing problems, but frustrated by constraints on your actions. And in many of the industrial countries that should be providing much of the momentum for world growth, confidence is low. But I believe that there is a way forward, and it is my duty this morning to tell you why. The potential for progress is still present; we do face new opportunities; and, preoccupied as we may be by rising unemployment and protectionist pressures, we must not forget what is perhaps the most significant development of the closing decades of this century, the phenomenon of globalization which, often unnoticeably, is transforming our economic life. So it is from this globalized perspective that I would like to analyze with you, today, our key problems and opportunities, and try to mark the guideposts for the way ahead.

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Problems and Opportunities

Problems and opportunities! The problems are formidable, but the opportunities are in some respects unprecedented. Let us try to identify them more clearly, so that we can tackle the problems and build on the opportunities.

First, the problems of the industrial countries. Let me mention only three. They are interrelated, and this makes them more entrenched.

  • First, unemployment. In the industrial countries as a group, the number of unemployed is expected to rise above 32 million this year—3 million more than in the trough of the last recession a decade ago. This is intolerable! In Western Europe, unemployment has risen to postwar records in a number of countries, and is now close to 11 percent in the Community as a whole. Nor are employment conditions strong in North America or Japan.

  • Second, growth remains anemic, at best, in most industrial countries, with output declining this year in much of Europe. After further downward revisions to our projections, we now see growth of only 1 percent in 1993 in the industrial countries as a group, which is below even last year’s weak performance. And for 1994, we are projecting a fifth consecutive year of below-par growth, at little more than 2 percent.

  • Third, fiscal positions are weak in almost all industrial countries. Budget deficits have widened considerably in many countries, only partly as a result of high unemployment and weak activity, and for the industrial countries as a group they are expected to amount to 4½ percent of GDP in 1993—matching the previous record of 1982. In most of the major industrial countries, budget deficits have grown far beyond what would have resulted from the normal operation of the automatic stabilizers; and government debt, already high in many cases, is growing faster than GDP. Even in the case of Japan, the recession has left a mark on the fiscal position, although there is still some room for flexibility.

These are formidable difficulties; and they are feeding on one another and so multiplying their damaging effects. They are most acute in Western Europe, where they have contributed to a major destabilization of the European Monetary System (EMS). Market pressures have dissipated since the recent widening of the intervention bands, but what remains is a system that is looser, and whose future is less assured. Such developments cannot be taken lightly. The setback suffered by the EMS is a new illustration of a phenomenon that is only too familiar. Recession not only increases human deprivation, but also intensifies protectionist pressures, and injects a virus that can be deadly into even the best established instruments of economic cooperation.

Turning to the developing countries, the reasons for satisfaction are many, but here also destructive forces are at play. As a group, developing countries have continued to show resilience in the face of the weakness of industrial country performance, growing by 6 percent again this year; and a further robust performance is projected for 1994. In fact, a number of developing countries, especially in Latin America but also in Asia, in a spectacular turnaround from the 1980s, have been dealing with pressures associated with large private capital inflows. But the main problem in the developing world, of course, is that economic progress has been so uneven, bypassing hundreds of millions of the world’s poorest people. In terms of the four major regions, only Asia has shown a significant rise in real GDP per head over the past decade. Many developing countries have made little or no progress in the past ten or even twenty years in raising the living standards of their people. Many countries, particularly in Africa, still bear heavy debt burdens and remain mired in extreme poverty. When we think of Africa—when we consider the human cost of its civil and ethnic wars, of its famines, of its two decades of decline in incomes per capita—do we not see a sinking continent?

Third, the countries in transition to market systems are facing problems as daunting as any. Although output has begun to recover in some countries, the group as a whole is in its fourth consecutive year of decline—by 2 percent in Central Europe and 13 percent in the former Soviet Union. Formidable problems remain for macroeconomic stabilization and structural and enterprise reforms. The greatest concern continues to be the lack of monetary stability in Russia and most other states of the former Soviet Union, with the outstanding exception of the Baltic countries. But this does not discourage us. We are working hard to assist the Russian authorities in their efforts to bring their first systemic transformation facility (STF) program back on track, and we are providing support for programs that promise progress toward macroeconomic stability in Belarus, Kazakhstan, the Kyrgyz Republic, and Moldova, while looking forward to assisting further progress in the three Baltic states. In most of the other countries of the former Soviet Union, stabilization and reform programs have yet to be developed, and excessively long delays make this task only more difficult.

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This is indeed a daunting catalogue of problems. But as I said at the beginning, there are also some favorable opportunities that provide the potential to contain and even reverse these corrosive processes. Let me mention the three that are the most striking.

First, the world monetary and financial situation has significantly improved, in a number of respects. Inflation in the industrial countries remains subdued, and it has waned in a number of developing countries also. In some industrial countries it is at its lowest levels since the 1960s, and in a few one could call it virtual price stability. This is the precondition for sustainable growth that has proved so difficult to establish since the 1960s. Lower inflation has provided scope for monetary conditions to be eased in most industrial countries to support demand. And the declines in long-term interest rates seen in some countries, to levels not seen since the 1960s, are surely due in large part to a long-awaited shift in market perceptions about underlying inflation. These hard-won gains must be protected, and indeed extended: inflation is a dragon that can be subdued, but never slain. Nevertheless, these are gains, and they increase the scope for monetary policy to play a supportive role during periods of cyclical weakness and as budgetary imbalances are reduced.

Meanwhile, in foreign exchange markets, notwithstanding the recent turmoil in Europe, there is today no misalignment of major currencies approaching in scale or significance the misalignments of the last decade. It is easy to forget the threat that was posed by the overvaluation of the U.S. dollar in the mid-1980s and which preoccupied so many of us for much of that time.

The 1980s were also a period of dangerous financial instability. The debt crisis—a major systemic threat—has by now receded. The overall debt-export ratio of the developing countries has declined from a peak of 180 percent in 1986 to 115 percent this year, and many middle-income countries have regained access to capital markets. Of course, the debt burden of many of the poorest countries, especially in Africa, has yet to be reduced to tolerable levels; but instruments that will allow this problem to be addressed now exist, and I hope the creditor countries hear our call to utilize them in a way that provides a decisive solution, particularly for the poorest of the poor.

Finally, among the improvements in the financial sphere let me mention the progress that has been made in the industrial countries in the resolution of the crisis arising from asset price deflation. The need for balance sheet adjustments in response to the correction of the inflated asset prices of the late 1980s has been a major factor underlying recent recessions and hesitant recoveries in a number of industrial countries. It seems that those adjustments have now, at least to some extent, worked through another element of financial progress. So for all these reasons, we can build on somewhat sounder money and finance!

In telling you about the second favorable feature of our situation, I shall be stating the obvious. I am referring to the remarkable performance of roughly half of the developing world; its positive impact on the whole world economy; and—at least equally important—the inspiring example these countries have been setting for the rest of the membership. I referred last year to the impressive performance of the 35 successfully adjusting countries: their performance has been maintained, with an annual growth rate of per capita incomes averaging 4½ percent over the past five years. And look at the global effect of this progress at this time of slack in the industrial countries! U.S. exports to China, the Middle East, and Latin America grew in 1991 and 1992 at ten times the rate of increase of U. S. exports to Western Europe. Ten times! And Japanese exports to the same markets grew ten times faster than Japanese exports to the United States. And for the EC, while their exports to Japan and North America declined in this period, their exports to the same group of developing countries grew by 13 percent. In fact, the developing world as a whole is currently accounting for more than the whole of global growth! The successful developing countries not only show the way forward for other developing countries. They have also shown to the industrial countries that there is no action more effective in speeding up and strengthening their own recovery, and no better investment, than to provide appropriate support to speed up and strengthen the full integration of the developing and transforming countries into the global economic system.

In a similar vein, we can welcome the progress that has been made by several countries in transition, including your own. Irrespective of the problems that many of the countries in Central Europe and the former Soviet Union continue to face, most of them have made decisive and irreversible progress in the transformation of their economies. This is itself an achievement of momentous significance. But this is not all. In several of the Central European countries—including Albania, the Czech Republic, Hungary, Poland, and Slovenia—and also in the three Baltic states, following the determined implementation of policies supported by the Fund and the Bank, considerable progress has been made toward price stability, economic liberalization, and institutional reform. And in many of these countries output has begun to respond. Positive growth is expected this year in Albania, the Czech Republic, Estonia, Poland, and Slovenia, and output has bottomed out in a number of other countries also. We can also welcome the impressive progress made by a number of countries in transition in Asia—not only China, with its extraordinarily rapid growth in recent years; but also Cambodia, a country rebuilding from devastation; Mongolia, where the move to a market economy is proceeding vigorously; and Viet Nam, where the Fund is about to participate in the resumption of financial support by the international community.

These are truly positive developments! Yes, they show us the way forward: through the diversity of these experiences we can see the policies that work and that provide true opportunities for global recovery.

Our third opportunity is that we now have a better recognition on the part of the membership of the new responsibilities created by globalization, and a new readiness to address our problems in a framework of global economic cooperation. For the Fund, one of the most significant developments in the past twelve months was the issuance by the Interim Committee last April of an unprecedented declaration that emphasized “its determination to address the current challenges and opportunities in a global, cooperative framework.” These are not just words. We have already seen important developments consistent with the April strategy:

  • the adoption by the U.S. Congress, and also in Germany, of substantial packages of budget consolidation measures;

  • the adoption by Japan, in June and again two weeks ago, of fiscal stimulus packages, an equally welcome discount rate reduction, and also structural measures, all to support activity;

  • further reductions of interest rates in Europe;

  • recent significant declines in military expenditures and decisions indicating that this trend is likely to continue;

  • and two days ago, the forceful confirmation by the Interim Committee of the objectives and policies agreed in April.

Our monetary and financial foundation is distinctly stronger; we know what policies work; and we have a strategy for truly global cooperation. Let us also take inspiration from those who have managed to reverse decline or even devastation in their countries; and from those who have given a new chance to their economies—be it in Pakistan or India, the Baltic countries or Eastern Europe, Italy or Finland, southern Africa or Benin, or Chile, Peru, Argentina, or Mexico… the list could be much longer! And let us see how to develop and achieve the full potential of global cooperation.

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The Guideposts for the Way Ahead

So now let us turn to the guideposts—to what needs to be done. I see three main tasks before us:

  • to refocus boldly our policy mix;

  • to strengthen the international monetary system;

  • to sharpen our instruments of cooperation.

Boldness, strength, sharpness: these are strong words. I use them not for the sake of rhetoric, but because we cannot expect to reverse current trends through “business as usual,” or with half-hearted compromises.

Boldly Refocus Our Policy Mix

This applies primarily to the industrial countries, since it is with them that the central responsibility lies for strengthening growth prospects. And I say boldly because the crisis is severe, and because if there is any lesson to be learned about the reactions of globalized markets, it is that sooner or later they will not forgive inconsistencies between exchange rates and fundamentals, or imbalances in the mix or stance of macroeconomic policy. So let us now be sure to adapt our policies appropriately to the pressing requirements of our countries.

Trade comes first. This is the clear message from the Interim Committee. All countries must grasp the opportunities to liberalize trade and exchange arrangements; and the industrial countries in particular must reverse the trend of recent years toward protection and managed trade.

As Mr. Sutherland has said, we are now at the eleventh hour. Resistance to competition and change, rooted in ingrained interests, is jeopardizing agreement on trade liberalization and on trading rules fitting the requirements of the decade ahead. These protectionist pressures have gained strength from weak growth and joblessness. Yet protection, and resistance to competition and change, are among the major impediments to stronger growth: they foster inefficiency, invite retaliation, and are in the end self-defeating, hindering growth and destroying more jobs than they purportedly save. This is truly a most vicious economic circle—defensive pressures feeding on economic weakness, and economic weakness being exacerbated in turn by the ensuing protection. Protection is indisputably a negative-sum game. This is one of history’s clearest lessons, and indeed one of the main reasons for the foundation of our institutions. Many developing countries, as well as the countries in transition, bear the scars of past inward-looking policies which they are now eschewing, but many others, not least among the industrial countries, appear to be ignoring, at considerable cost, the wounds they are inflicting on themselves.

There is only one way out of this vicious circle, and that is to reject defensive measures and to engage much more decisively in the game of competition and free trade. Governments cannot allow themselves to miss the opportunity provided by the Uruguay Round, or to risk the cost of failure. We know what the world’s consumers stand to gain. And these gains will translate directly into production, employment, and fiscal gains. Let me emphasize also the importance, to the developing countries and countries in transition, of the expansion of global markets and improved access to markets in the industrial countries. Perhaps no single policy action would be more effective in improving global growth prospects than the successful conclusion of this Round by the end of 1993.

But what about the growing trend toward regional trading arrangements, such as North American Free Trade Agreement (NAFTA), the Association of Southeast Asian Nations (ASEAN) Free Trade Area, the Southern Cone Common Market (Mercosur), the Visegrad Group, and the EC’s closer links with European Free Trade Association (EFTA) and Eastern Europe? Regional trade liberalization can play a useful and welcome role in stimulating trade and growth; and I note with satisfaction that the countries involved in these arrangements see them as a complement to, and not as a substitute for multilateral liberalization. To avoid the danger that countries not included in these arrangements may be hurt, it is essential, of course, that these regional arrangements be accompanied by parallel steps toward multilateral market opening.

There is also more to be done to liberalize exchange arrangements. As you know, Article VIII of the Fund’s Articles—the commitment to current account convertibility—is a hallmark of the regime of multilateral exchange relations that the Fund was founded to promote. I welcome the fact that six additional member countries have accepted the obligations under Article VIII in the past year—The Gambia, Lebanon, Micronesia, Morocco, San Marino, and Tunisia. But this is not enough. Still only 79 members have made this commitment. A majority of member countries still avail themselves of the transitional provisions of Article XIV, and many of them have done so for a very long time. I know that many have made substantial progress in eliminating restrictions and could easily accept the obligations of Article VIII. I urge all member countries that are in a position to do so to accept these obligations. As a minimum, let us aim for a clear majority of members to have accepted Article VIII by the time we begin to celebrate our fiftieth anniversary in a year’s time.

Second, structural policies. A mistake that most of us made was not to perceive sharply enough, or early enough, that the upward trend in unemployment in the industrial countries over the past two decades was not due mainly to cyclical developments. We now know that a hidden force created by structural rigidities was at work, amplifying and entrenching cyclical unemployment, and all the more dangerous because it is less visible and less easily reversible. Part of the problem is that our well-meaning efforts to protect the unemployed and people in insecure and low-paid jobs have actually been adding to labor market rigidities. This is now one of the most difficult problems to tackle, but it has to be done if we are to achieve a lasting reversal in unemployment trends. And it has to be done boldly and without illusions: it will be hard; and it will take time for progress to become apparent. But I believe there is increasing recognition of the need to reform social insurance schemes, to promote job search and wage flexibility, to limit taxes and regulations that discourage employment, and at the same time to devote more resources to education and training. These are the kinds of measures that are required to improve structural flexibility and to create the jobs of tomorrow in the constantly changing conditions of a globalized market. If such measures are not taken, there is a serious risk that the cyclical increase in joblessness seen in this latest recession will add further to structural unemployment.

Third, fiscal policy. Except for Japan, industrial countries have no further room to use fiscal policy to support demand: the automatic stabilizers, and the margin for countercyclical measures, have been more than fully used. Even in Japan, medium-term considerations suggest that fiscal stimulus can be applied only on a temporary basis. Elsewhere, the best support that fiscal policy can provide is through medium-term budgetary consolidation: active preparation of measures, and adoption of legislation are needed to allow sound fiscal conditions to be reestablished as soon as cyclical conditions permit.

Plans recently adopted in the United States, Germany, Italy, and Canada, to name a few countries, signify a commendable recognition of the problem, but still they do not go far enough to secure the fiscal consolidation that is needed. Stronger medium-term deficit reduction plans need to be formulated in virtually all industrial countries, to be implemented steadfastly as the recovery gathers strength. And we know where it is best to focus our attack: unproductive expenditures, including excessive military spending, and subsidies that nurture inefficiency. There can be no doubt about the need for this enhanced fiscal effort. Apart from anything else, it is needed to avoid the recurrence of the situation at the end of the last upswing where unsustainable fiscal positions left governments without the appropriate budgetary margin to counter recessionary tendencies. It will not be easy, but it will be facilitated by the success in containing inflation, which provides scope for monetary policy to support activity, and also by the likely reactions of financial markets, demonstrated by the positive experience in the United States over the past year.

Fourth, monetary policy. Here I can be brief, after what I said about the progress against inflation. Let me just mention that for Europe, it is here—in the scope for further interest rate reductions—that we must look for another part of the answer to the problems of stagnation and unemployment. The continuing decline of inflationary pressures in Germany, as well as further fiscal consolidation, promise relief from this direction. The temporary additional flexibility in the exchange rate mechanism can also contribute to this trend of supportive interest rate movements, provided it is used within the limits defined by the imperatives of stability, convergence, and cooperation.

All of this amounts to a bold adaptation of the policy mix for the industrial countries. For the developing countries, my task this year is simple, since the course set out last year, on the basis of the experience of the 35 successfully adjusting countries, is still valid. Of course, those countries that have achieved success must sustain and reinforce their stabilization and reform strategies. And they must respond prudently to the return of private capital—a reward of success that is welcome, but which can also bring its own pressures and risks, and which does not obviate the need to promote domestic saving and to use financial resources productively.

Those developing countries that have not progressed must strive, with the support of the international community, to implement the policies that have been shown to work by those that have achieved success. We know the ingredients of the strategies that have been shown to work:

  • First, sound macroeconomic policies: a firm anti-inflationary monetary policy, a sound and sustainable fiscal position, and a realistic exchange rate;

  • Second, structural policies and a development strategy that make the most of the benefits of a competitive market system, but which also provide for the government to intervene where appropriate—to invest in infrastructure and human capital, and to protect the environment;

  • Third, a liberal trade and exchange regime that provides openness to trade and investment, to secure the benefits of full participation in the global economy;

  • Fourth, social policies—to help ensure broad-based participation by the population in economic and social life. I include here policies to alleviate poverty, protect the most vulnerable, and slow down excessive population growth;

  • And last but not least—essential as a matter of fact—all elements of good governance, including public accountability, participatory government, and legal and regulatory frameworks that are transparent and fair. I do not hesitate to single out here the fight against corruption. In saying that, I remember what a new president of one country told me recently: “When I was in charge of the economy, my priority had to be the fight against hyperinflation; now as president, it will be the fight against hyper-corruption.” Let me only add that the fight against corruption— like adjustment—needs to be universal: it needs to be fought by all of us, not only in the developing countries.

The Second Main Task: To Strengthen the International Monetary System

To do this we have to see the system not from a postwar perspective, nor from the perspective of the shocks of the 1970s, but from the perspective of the globalization of the end of the century. This new perspective carries three immediate implications.

First, the global nature of the system must be reflected further in the work of the Fund. Constructive steps have already been taken in this direction, with the globalization of the Executive Board and of the Interim Committee’s agenda, and our efforts to make as universal as possible the recruitment of staff of the highest possible caliber. But we have to continue adapting ourselves to our new world—a world where ideological confrontations have vanished; and where developing and transforming countries are no longer almost exclusively on the receiving end of policy lessons and financing, but offer outstanding examples of successful policies, and are, for instance, most generously considering making a substantial contribution to the financing of the enhanced structural adjustment facility (ESAF) successor.

Second, the existing foundation for international monetary stability must be strengthened. Here I have time only to refer to two significant contributions of the 1980s:

  • The success of policy coordination among the seven major industrial countries in helping to reduce their current account imbalances and the misalignments of the major currencies, and in helping to ensure that their exchange rates have since been kept broadly in line with fundamentals. These efforts must be reinforced, and the Fund is ready to continue to contribute to them actively.

  • Progress toward European Monetary Union (EMU) must be encouraged. There is much more at stake here than the objective of European unity, great as that may be. A properly functioning European Monetary System (EMS), and tomorrow a successful coming into effect of the second stage of EMU, can make a distinct and concrete contribution to a stronger world monetary order. But this of course requires that the conditions necessary for the successful operation of the system are respected. Willingness to defend exchange rate parities is important for the credibility of governments’ anti-inflation commitments. But recent events have once again demonstrated a crucial lesson: credibility also depends on consistency between economic policies on the one hand and the country’s economic performance and domestic requirements on the other. The fact is that the objectives for exchange rate stabilization had become too ambitious in relation to three factors—the convergence in economic conditions that had been achieved; the differences in cyclical conditions and domestic policy requirements among member countries; and the extent of policy cooperation. These three elements— convergence; relative cyclical conditions; and cooperation— provide the key to the re-establishment of exchange rate stability and to the restoration and strengthening of the system.

With the temporary widening of the bands, a new base has been established on which to build. This new base should itself help the working of the system during this transitional phase, by making possible interest rate reductions that are warranted by economic conditions. This will help to promote recovery, and thus to narrow divergences in the perceived domestic requirements of monetary policy. But, as I said in August immediately after the widening of the bands, it also entails a risk of a relaxation of discipline. This must be resisted by a major effort at economic policy convergence. The greatest challenges lie in the area of fiscal policy; but commitment and discipline will also be needed to maintain the achievements already made in terms of the other criteria spelled out in the Maastricht Treaty, and to increase the flexibility of goods and labor markets. It will also be essential to strengthen policy cooperation. Possible approaches here include broadening the indicators used in the conduct of national monetary policy to incorporate developments in the participating countries generally. In any case, greater coordination of monetary policies, with appropriate instruments, will be needed as a prelude to the conduct of a common monetary policy. It was well known in Europe that the second stage of EMU would be the time of the greatest dangers. Progress along the lines I have outlined would help to resist them, to re-establish exchange rate stability, and to secure the prospect of monetary union.

No doubt these efforts in Europe, together with the improved implementation of agreed strategies in the key industrial countries, can help to build a stronger and more stable international monetary system.

But there is a third essential ingredient needed to fortify the globalized monetary system: the Fund must continue strengthening its surveillance. This was reaffirmed by the Interim Committee last April and again two days ago, and also by the Tokyo Summit. With such encouragements, the Fund has actively sought to strengthen its surveillance over the past year. We have been adapting procedures in a number of ways to ensure that the surveillance process is continuous, flexible, and relevant. I include here the greater selective use of informal follow-up contacts with authorities on substantive issues after Article IV consultations; greater continuity in the Executive Board’s discussions of world exchange and financial market developments; a stronger focus on regional surveillance; and the strengthening, at the most senior level of staff and management, of the procedures whereby we focus, on a continuing basis, on all developments of potential systemic importance.

All this entails confidential initiatives that, from time to time, may come as surprises to some of you. No surprise in the surprise! We all recognize the need for strong surveillance; but as human beings we are less inclined to see it as timely or appropriate when it applies to ourselves. I owe to it, this year, the experience of moments of—let us say— some tension with several of you. May each of those concerned find solace in the fact that he (or she) has not been alone in receiving such frank messages and such precise suggestions. To give an idea of the breadth of coverage of these unusual dialogues, I can say that among others, seven large industrial countries—I am not saying the Seven!— shared this special privilege. Even if all were not convinced by our observations, I have been encouraged by their response to continue in this way.

But what the Fund can achieve even with the full use of its persuasive capabilities, surveillance, and instruments is limited. The last word is yours, since you are ultimately responsible for the policies of your countries, and, through their successes or failures, for the common good of humanity. I say this with some emphasis because it applies also to the third and last task we face on the way ahead.

The Sharpening of Our Instruments for Cooperation

Our institutions are facing unprecedented challenges, and all the instruments available to us must be utilized. The activities of the Fund have continued to grow rapidly in all our areas of responsibility. A record number of countries are being provided with policy advice, financial assistance, and technical assistance. At the present time, 45 countries have financial arrangements in place with the Fund, and a further 17 countries are engaged in active negotiations or preliminary discussions with a view to obtaining Fund financial support in the near future. With regard to training, almost 1,700 officials from member countries have been trained over the past year in our residential courses here and in Vienna. The expansion and adaptation of our activities that have been necessary in recent years have inevitably placed unusual strains on our human resources. They have been necessary, but we still need your help to strengthen further the effectiveness of the Fund and to sharpen its instruments.

We have seen clearly that the success of the adjusting and transforming countries, thanks to their integration into the world economic system, has provided essential support for global growth. So as to be able to promote their further integration more effectively, we have taken action to put in place two essential, sharp instruments. Let me tell you about them.

Systemic transformation facility (STF): This was the innovation of this spring, when we saw a clear need to enhance the Fund’s ability to play its role in facilitating the transformation of the formerly centrally planned economies, and particularly to assist these members in dealing with the formidable disruptions caused by the shift to multilateral, market-based trade. The membership brought creativity and an appropriate sense of urgency to the task of formulating this facility, and the STF is already providing support for programs in six countries, paving the way for the adoption of comprehensive programs of stabilization and reform under our stand-by or medium-term facilities, extended Fund facility (EFF) or ESAF. May our common resolve to support the difficult policies that need to be applied give powerful and persuasive encouragement to those countries that still need to take the decisive steps that are necessary to address the large budget deficits and credit creation that have fueled rapid inflation, distorted incentives, and delayed the restructuring and enterprise reform needed for sustainable growth. There is nothing more urgent than the vigorous and consistent application of strong stabilization programs in these countries, with all the necessary support from our side.

The successor to ESAF: This is the essential instrument for assisting adjustment for high-quality growth in the poorest countries. There is broad and strong consensus among the membership that the first ESAF has provided a very effective mechanism for Fund involvement in these countries. Experience under ESAF-supported programs has been most encouraging. But the facility will expire at the end of November. The membership has agreed that a successor facility needs to be established. To ensure continuity of operations, it is now essential that all countries in a position to contribute come forward as quickly as possible. The success of this exercise is crucial for our poorest member countries, especially in Africa. I appeal for the broadest possible participation in the provision of the subsidies that are needed; and of course I call particularly on those in a position to recycle part of their current account surpluses through this instrument to contribute to the well-secured trust account.

Now after commenting on the new STF and the ESAF successor let me say this: their roles are indispensable, but as with all other Fund instruments, they are not blank checks. It would be a mistake to think that they are intended only to allow governments to buy time, or to enable them to be satisfied with misguided, piecemeal actions, or actions that are too soft or gradual to counter hyperinflation or hyperdirigisme. Impatient as we are to provide effective assistance, we shall not disburse these resources in support of poor policies, because that would be a breach of our duties. As a matter of fact, the best service we can provide to these countries, apart from the frankness and professionalism of our advice, is the efficiency of our catalytic role. This depends on the readiness of the industrial countries in particular to support our programs through appropriate debt restructuring and alleviation measures; quick-disbursing, well-targeted financial support; technical assistance for both institution-building and enterprise transformation; and, of course, openness to trade. We can expect such support to be forthcoming only if our programs preserve their credibility; and we shall continue to ensure that they do.

Finally, the prospects for an allocation of SDRs: In my view and in the view of the vast majority of Fund members, the SDR must be revitalized. There is no doubt in my mind that the moderate allocation of SDRs we have proposed is called for by the continuing growth in global demand for reserves and by the handicap that many developing and transforming countries face in having to tackle their reserve shortages by compressing domestic demand and net imports. Really, how could a cooperative monetary institution justify this handicap when there is so much slack in the world economy? Such an allocation would also be a response, albeit a modest one, to the objective, enshrined in the Articles, of making the SDR the principal reserve asset of the international monetary system. While sufficient support for a new allocation is still lacking, I welcome the agreement of the Interim Committee on the need for further consideration to be given to these issues, having particularly in mind the situation of the 38 new members that have not participated in past allocations.

This effective acknowledgment that considerations of equity call for these new members to hold SDRs is a step forward. But should we not do more? Should we not ask ourselves, from the perspective of the new, global dimension of our solidarity, whether this unique, non-budgetary instrument should be used now, not only to help these new member countries, but more generally to help all members with inadequate reserves and effectively no access to markets to improve their reserve positions without having to resort to the compression of imports—in other words, in the language of the Articles, without having to resort to “measures destructive of national or international prosperity”? And would this not help these countries undertake the further liberalization of their trade and exchange arrangements that I called for earlier? For this reconsideration also, Governors, I appeal to your vision and leadership.

* * * *

All my remarks this morning have in the end been about ending recession and resuming stronger growth, and about two central questions: when? and how? On the question of when, we know the consensus of economists, and we have no major reason to challenge it. Perhaps we have already passed the turning point, or are not far from it. But more important is the second question: how shall we choose to emerge from this slowdown and face the next phase of the cycle? Shall we emerge weakened, more protectionist, and unprepared for the next downturn— allowing deprivation and suffering to persist behind our walls, while failing to create new opportunities for our people? Or shall we emerge strengthened, drawing lessons of wisdom and cooperation from our painful experiences, knowing that it is by cooperating to improve our neighborhood that each of us can best improve our own individual situations—in other words, shall we emerge working together for a faster and better integration of all countries within a growing international economy? This is the main question we face, and you know that there is much at stake for mankind in our choice. Let us now make the right choice.

September 28, 1993.

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