Discussion of Policy at Second Joint Session1
- International Monetary Fund. Secretary's Department
- Published Date:
- November 1993
Statement by the Governor of the Fund for Italy—Piero Barucci
Allow me first of all to welcome the new members of the World Bank and the International Monetary Fund: Croatia, the Czech Republic, the former Yugoslav Republic of Macedonia, the Federated States of Micronesia, the Slovak Republic, Slovenia, and Tajikistan. Weak growth in the industrial countries still persists. The peripheral areas of the Northern Hemisphere, notably some countries in the Far East, show signs of vitality. Among the most advanced market economies, growth is lower than anticipated in the United Kingdom and the United States and disturbingly negative in Europe as a whole. Low growth, high unemployment, a deterioration in public finances, an excess of productive capacity—these are the main features of a phase in the European economy in which the bright aspect is the low rate of inflation.
The crisis of the exchange rate mechanism (ERM) has contributed to worsening the economic situation in Europe. The duration of the crisis and the recurrence of turbulences have given rise to an increase in interest rates in several countries and sizable adjustments in the old parities. More specifically, nominal interest rates in some European countries have not declined along with the decline in inflation and economic activity. Real interest rates are still too high compared with growth rates in the different European countries.
Italy has experienced all of these problems. Some specific features make recovery in our country particularly difficult. Unemployment is within the European average; economic growth is positive, but close to zero; and the ongoing restructuring of some industrial groups is producing local tensions in some labor markets.
The depreciation of the lira has allowed vigorous growth of Italian exports. Strong government action has produced an incomes policy without precedent in Italy, and the weaker lira has not translated itself into any increase in inflation. However, the crises of the lira of September 1992 produced a dramatic peak in interest rates and, as a consequence, weighed heavily on the servicing of the public debt. The latter, undoubtedly too high, has limited the scope for government action to stimulate public demand. The turning point for economic and budgetary policy in Italy occurred in the late summer of 1992 with significant results. The outcome of public finances for 1993 will be satisfactory. For the first time in many years, the public sector borrowing requirement (PSBR) will be lower than that of the previous year. The primary surplus will be sizable for the second year, after more than twenty years of primary deficits. These results were obtained in spite of the adverse effects of the economic cycle.
In 1993, fiscal policy has been particularly severe. The positive effects on the budget have been enhanced by accompanying legislation curbing the increases in health expenditures, social security, and public employment. A reshaping of local public finances has also started. The incomes policy is having positive effects on enterprises. A new and effective privatization policy is also being implemented. The government program aims at putting on the market several important Italian companies operating in the fields of energy, communications, banking, insurance, machine tools, and food products. Foreign investors have been active and are welcome to participate in the program. The two most important recent sales had foreign buyers.
The present Government, which came into power at the beginning of May, has continued and has, in some cases, enhanced the policies laid down by the previous Government. The leadership of President Ciampi—a former Governor of the central bank—assures strength and coherence to a Government made up mainly of nonmembers of the Parliament, well known for their professional activity. The markets have welcomed both the program and the actions of the new Government. The domestic and international credibility of the current political leadership has been strengthened. In particular, interest rates on government securities have decreased dramatically, at a faster pace than interest rates in Europe. That decrease has affected both short-term and long-term maturities. The fall in yields on certain bond issues has exceeded 400 basic points since the beginning of the year. The stock exchange has made a widespread recovery. Both quotations and the value of exchanges are constantly growing. Around mid-August, a record volume in the Milan Stock Exchange was reached. Foreign capital has recently flowed back into Italian monetary and financial markets.
The budget bill for 1994, just approved by the Government, aims at strengthening the credibility of Italy’s economic and financial policies. The Government has dedicated a great deal of time and energy to designing a finance bill for 1994 that will help to loosen the clamps of the recession and, at the same time, to keep unaltered the path to fiscal improvement. While including significant measures to help economic recovery, the bill also aims at improving the efficiency of public administration, reducing waste in the national health service, and reshaping social security. The target is to obtain a PSBR for 1994 lower than for 1993 and a slightly higher primary surplus. The Italian Government’s willingness to consolidate public finances is beyond question. Equally determined and irreversible is its decision to contribute to monetary and political union in Europe. The noble concept of European unification is regularly put into question any time the economic situation is adverse. It is happening once again, today. Italy is convinced of the opposite. This is the right time to vigorously relaunch the process of the unification of Europe.
As regards the ERM, the Italian Government has already formulated a set of rules to revitalize it: joint action in fixing the exchange rate parities, jointly changing those parities when they are no longer in line with the fundamentals of the various countries, and jointly defending them when necessary. We are all striving to overcome a crisis in the world economy whose causes are not completely clear to us, but the means available to us are limited. In this context, we wish to reaffirm Italy’s strong support for the roles of the International Monetary Fund and of the World Bank in assisting developing countries and formerly centrally planned economies. In a time of difficulty, the role and meaning of international economic cooperation are often subjected to scrutiny by public opinion. Questions are asked, such as: “Do we really need international cooperation?” “Why should our country be subject to other constraints in addition to those imposed by the national Government?” Italy does not belong to that choir. On the contrary, we are determined to strengthen the role of the institutions of international economic and monetary cooperation.
Statement by the Governor of the Bank for China—Liu Zhongli
I am very pleased to attend the 1993 World Bank and International Monetary Fund Annual Meetings. First of all, please allow me, in the name of the Chinese delegation, to extend our sincere congratulations to you on your assuming the chairmanship. We are confident that under your leadership the meetings will be a great success. The present-day world finds itself in a transitional period marked by bipolarization giving way to multipolarization. The ending of the cold war, however, has not brought about the hoped-for peace and prosperity to the world. Since 1990, the growth rate of the world economy has slowed down noticeably; the economic recovery of developed countries remains lackluster; the economic performance of developing countries is mixed; and the incidence of their poverty continues to be appalling. Experience demonstrates that, in order for developing countries to achieve sustainable development, an external environment conducive to such development is necessary to complement their own efforts. At present, however, many developing countries are still in a very difficult situation, due to the sluggish growth of the world economy, the deadlock of the Uruguay Round, the increasing scarcity of resources, and intensifying trade protectionism. All this calls for serious concern by the international community.
Peace and development are the two major issues confronting the world today. Without economic development, peace could hardly be sustained. All countries, developed and developing, after all, live on the same planet, Earth. The economic difficulties of developing countries not only impede their development, but will ultimately also affect the interests of developed countries. Therefore, the international community should give equal importance to the issues of peace and development. We agree with the President’s assessment of the grim external environment faced by the developing countries. We call on the developed countries to make more efforts to roll back trade protectionism, to increase development and environmental assistance, and to reduce restrictions on technology transfers, among others, so as to help revitalize the economies of the world, especially those of the developing countries.
The Chinese Government all along has held the view that international cooperation should be based on the principle of equality and mutual benefit and that people of different countries should be allowed to choose their own model of development in light of their specific country situation. Among nations, there should be the spirit of seeking common ground while reserving differences. We are against the attachment of political conditions to economic assistance. Faced as they are with various challenges, there is still a long way to go for developing countries to wipe out poverty. It is true that in recent years through their own efforts, and with the help of the international community, some developing countries have achieved substantial progress. However, the estimation of the economic development of developing countries should be realistic. Like most developing countries, China still has a very low income level. Although the Chinese economy has made considerable headway and the size of the national economy as a whole has expanded considerably thanks to the reform policy, per capita indexes of the overall economy remain very low, reflecting the fact that China is still a developing nation with a vast area, a large population, and sharp regional disparities. There are still a large number of people living in poverty, and poverty reduction continues to be a priority on the development agenda of our Government. Therefore, we hope to continue cooperating closely with the international financial institutions, in our efforts to further attack poverty and promote economic and social development.
At present, the developing countries, which account for the majority of the world’s population, are making strenuous efforts to develop their national economies. They need the sincere cooperation and substantive support of the international community. It is our hope that the World Bank will continue to play its unique role in assisting the developing countries. We also hope that IDA-10 will become effective as soon as possible. And we look forward to seeing the third replenishment of the Special Program of Assistance effort reaching a satisfactory conclusion. The IMF’s enhanced structural adjustment facility (ESAF) has played a positive role in supporting the adjustment program of the low-income countries, some of which have achieved progress in stabilizing their economies and promoting reform. We are pleased to note that the majority of the industrial nations has reached agreement on the continuation of ESAF and hope that these countries will soon make a concrete commitment. We continue to support strongly the proposal of a new SDR allocation and would like to call on those countries which disagree to respond to the reasonable request of the majority of the member countries and reconsider their position, with a view to finding a satisfactory solution at the earliest possible date.
It has been fifteen years since China adopted the program of reform and opening to the outside world, and great success has been achieved. The national economy has been growing continuously, and the benefits of the rapid growth are being harvested by the Chinese people, whose living standards have improved rapidly. The measures taken by the Chinese Government to deepen reform and promote development have the firm support of our people. Today, China is enjoying social and political stability and economic growth. The policies of reform and opening to the outside world have taken root in the hearts of the Chinese people and thus cannot be reversed. While the economic trends in China look favorable, some foreign friends are concerned about the overheating of the Chinese economy, as well as the sustainability of the current pace of growth. This concern of our friends is understandable. During the first half of this year, some problems surfaced in the Chinese economy, such as an excessive expansion of investment, disorder in the financial sector, accumulation of inflationary pressures, and the widening disparities among regions. Fundamentally speaking, these problems are the result of the conflicts and frictions between the two systems at a time when the defects of the old one are yet to be completely eliminated and the merits of the new one are still to be brought fully into play. The Chinese Government has been fully cognizant of all these problems and believes that these problems, which cropped up during the process of rapid growth, are still within manageable limits. Since June of this year, we have adopted a package of measures designed to strengthen macroeconomic management. This package was not meant to introduce overall economic austerity, but to further our efforts to undertake economic structural adjustment, the aim of which is to ensure that the economy develops in a healthy, steady, and sustainable manner. We have already seen preliminary results of these measures and expect to see more of them in the coming months.
The long-term solution to the above-mentioned problems lies in the acceleration and further deepening of the reform of the economic system. China is now moving actively ahead with reforming the economic system in the context of establishing a socialist market economy. Maintaining macroeconomic stability is the key to the success of reform policy. Bearing in mind past experience, the Chinese Government will pay more attention to macroeconomic management in order to achieve a rapid and coordinated economic growth. To this end, the relationship between centralization and decentralization needs to be addressed properly; adequate attention should be given to the social and institutional issues during the reform; and infrastructure development must be effectively strengthened to reduce the bottlenecks which would otherwise hinder reform and development. Not long ago, we made some efforts to put the financial sector in order, with a view to laying a sound basis for financial system reform. Our goal is to establish a central bank and a regulatory system empowered to implement independently the monetary policies under the leadership of the State Council, a financial, institutional setup in which directed and commercial lending will be separated, with the state commercial banks as the backbone coexisting with other financial institutions. This would establish an open and unified financial market system with fair competition and effective management.
In the area of fiscal and taxation system reform, we will establish a taxation system, with a value-added tax (VAT) as the core, to promote equitable distribution and fair competition; institute a tax-apportionment system between the central and local governments so as to enhance the macromanagement capability of the Government; unify the tax rates on domestic enterprises, while stepping up tax collection in accordance with the law; and put into practice a budget system that will separate current expenditures from capital outlays, in order to control strictly the budget deficit. Another priority of China’s economic reform effort will be that of state-owned enterprise reform which will focus on the separation of ownership and management, with a view to gradually establishing a modern enterprise system. The state will only exercise its ownership function over the enterprises. Efforts are being made to transform the state-owned enterprises into independent economic entities through a shareholding system, enterprise mergers, and enterprise groups. In addition, we will also adopt measures to push forward complementary reforms in other areas, including investment, foreign trade, foreign exchange, social security, housing, labor and wage system, etc.
The transition from a centrally planned economy to a market-based economy is a complex and difficult process. It is even more challenging and, indeed, unprecedented, to try to establish a market economy within the framework of a socialist country. The Chinese Government is well aware of the inevitable difficulties and problems ahead. But we firmly believe that, through the common efforts of our people, difficulties and problems can be overcome, and, in the process, the 1.2 billion Chinese people shall benefit from a constantly improving living standard. Reform has integrated the Chinese economy ever more closely with the world economy. The development of the Chinese economy needs the development of the world economy, which, in turn, will be helped by the development of the former. China is willing to strengthen its cooperation with other countries, as well as with the international financial institutions on the basis of equity and mutual benefit. And we shall, as always, endeavor to make our due contribution to world peace and development.
Statement by the Governor of the Bank and the Fund for the United Kingdom—Kenneth Clarke
It has been a great pleasure to attend my first Annual Meetings as U.K. Governor of the World Bank and the International Monetary Fund. And I should like to begin by welcoming Tajikistan, Croatia, Slovenia, the Czech Republic, the Slovak Republic, and the Federated States of Micronesia as new members of the Bretton Woods institutions and the former Yugoslav Republic of Macedonia as a new member of the Fund.
It is no surprise that many of our proceedings this week have been dominated by anxieties about the economic situation in the industrial world. Activity in many countries is, at best, fragile. In the United States, recovery has failed to gather momentum. In Japan, despite a succession of attempts to stimulate domestic demand, the economy is still in decline. And, while in the United Kingdom a modest recovery is now under way, much of continental Europe remains stuck in recession, and unemployment there is rising further from already high levels. But, serious though these short-term problems are, it is vital for governments around the world to avoid the temptation to grasp at short-term palliatives. This is the theme I wish to develop today. The challenge before us now is to adopt policies which provide the basis for long-term prosperity. Governments must respond to unemployment not by introducing schemes for job protection, but by freeing up labor markets. The response to recession must not be to restrict imports, but to expand free trade. And whatever the short-term temptations, it is vital to keep a clear eye on the long term by encouraging higher savings and productive investment throughout the world.
In my view, one of the most striking features of our meetings this year has been the contrast between the gloom in many industrial nations and the strong growth now being seen in some parts of the developing world. Growth in East Asia continues at spectacular rates. And Latin America is expected to grow by 3½ percent this year—a remarkable turnaround from the problems of the 1980s. Even in the economies of Eastern and Central Europe, there are signs, at least in some countries, that the decline in output following the collapse of central planning has now come to an end. Where the reform process began early, and has been pursued vigorously, sustainable growth, led by the private sector, has returned. Poland will be the fastest growing of all the large economies in Europe this year.
By contrast, in Africa growth remains weak. But even there, countries that have adopted sound structural and macroeconomic policies have performed best. Many have taken brave measures and risked short-term unpopularity in order to make the necessary adjustments. They deserve our praise and support.
The IMF and the World Bank have played their part by providing finance and advice to the developing world. But they have also acknowledged the limitations of their role and recognized as all governmental institutions must, that successful development depends ultimately on a thriving private sector. In my view, the role of the international financial institutions will become increasingly a catalytic one—encouraging the private inward investment, which contributes so much to sustainable development.
The Bretton Woods institutions themselves will therefore need to continue to adjust. I believe that the International Finance Corporation (IFC)—with its unique private sector mission—should continue to expand further its role within the World Bank Group. And let me pay tribute at this point, on the occasion of the last Annual Meetings before his retirement, to the work of Sir William Ryrie as head of the International Finance Corporation.
We tend to speak of “adjustment” as a problem only for the developing world. In fact, the industrial countries face adjustment problems, too. And all of us will have to work consistently to achieve the right structural policies to encourage jobs, investment, and enterprise, together with sound public finances and low inflation. For many industrial economies, adjustment will be difficult. This can perhaps be seen most clearly in the labor market. For individuals, unemployment is a distressing and demoralizing experience. And for many Western governments, particularly in Europe, unemployment is the most serious economic problem they face. The European Community (EC), following John Major’s lead, at last has begun to examine the causes of high unemployment in Europe. The Commission will shortly be publishing a White Book setting out its views. And at the Tokyo summit, the leaders of the Group of Seven agreed to hold a special conference on jobs. I very much look forward to participating in that conference in the United States this autumn, and to discussing these difficult issues in some detail.
To reduce unemployment, governments have to look to its fundamental causes: inflexible labor markets, excessive costs, and lack of competitiveness. All too often in the past, when faced with these stark truths, the temptation has been to avoid the difficult measures necessary to confront them. Many governments have failed to loosen the grip of regulation; they have added to employers’ costs in the name of social protection; and have shrunk from competition instead of rising to it. Attempts like this to find painless solutions may appear to offer short-term relief, but in the longer term they simply make unemployment worse.
We need look only at the United States to see the benefits of a flexible labor market. In the 1980s, total employment in the United States rose by over 18 percent; and over 18 million new jobs were created. In the EC, the increase in employment was just under 6 percent, or 7½ million new jobs, most of which were in the public sector.
In the 1980s, the British Government went down a different path from that chosen by many of our European partners. We reduced government-imposed constraints on employment and we tried to make the labor market work: we reduced the power and privileges of the trade unions; we removed restrictions on employers; we cut taxes on labor and income; and we devoted considerable effort to establishing in the United Kingdom a thriving small business sector, which offers the greatest hope for a long-term reduction in unemployment. In the United Kingdom there have been some encouraging signs, although there is still a long way to go. Over the last cycle, employment in the United Kingdom rose by 1¼ million, while manufacturing productivity grew more rapidly than it had in many years. And during the latest recession there were welcome signs of increased flexibility. Earnings growth has fallen to its lowest level in 25 years; our unit wage costs have actually fallen; and unemployment seems to have peaked at an earlier stage in the cycle than usual.
As a result of the reforms of the 1980s, we in the United Kingdom are better placed than many of our partners in Europe to translate a sustained recovery in output into new jobs and falling dole queues. But we cannot be complacent. The sustainability of the recovery in the United Kingdom will inevitably depend upon progress elsewhere, especially in the countries of the EC. If we are to increase employment in the industrial world as a whole, labor markets everywhere must be allowed to adapt to changing patterns of demand.
Governments can, of course, play a key role in improving the flexibility of labor markets. We can concentrate resources and strive to raise standards in education and training. A better-educated and better-trained work force is a more productive work force. We can provide help for people looking for jobs and take active measures to provide the unemployed with the skills and knowledge they need to get back to work. But the greatest contribution governments can make is to refrain from well-meant, but harmful, forms of labor market regulation. Measures to restrict hours of work, for example, or to set minimum wages, may in the short run benefit those in work, but their main impact is to reduce the opportunities for the unemployed by imposing excessive costs on employers. Every single regulation carries with it a cost. So by creating more regulations with which employers must comply, governments simply reduce the opportunities for job creation.
And so too with other nonwage costs, including corporate taxation and contributions to social security benefits. Governments overtax businesses at their peril. The practical results of an inflexible, high-cost regime can be seen in the relatively high level of unemployment in the European Community compared with that elsewhere in the developed world. When wage and nonwage costs are combined, the EC’s are significantly higher than those in the United States or Japan. So is EC unemployment.
Above all, if we are to tackle our unemployment problem, we have to face up to the competition in today’s world markets. Some people fear that free trade, far from creating jobs, will destroy them throughout the industrial world. It is vital to counter that fear. We cannot improve our competitiveness—or our living standards—by retreating behind trade barriers. That offers only short-term respite, at best. And by closing our economies to imports, we close them to innovation. That way we lose the opportunity to create more jobs over the long term. Competitiveness, not protection, is the key to lasting growth and jobs. And competitiveness is best secured by playing a full part in the global trading economy. Contrast the performance over recent decades of the outward-looking, export-oriented East Asian economies with the protected, inefficient mess of the former socialist countries.
An open world economy allows regions, countries, industries, companies, and people to concentrate on what they do best. The quality and quantity of output increases; there is more trade; growth is fueled; employment flourishes; and welfare rises for all. A successful conclusion to the General Agreement on Tariffs and Trade (GATT) Round offers every country the chance to enter that virtuous circle. Failure offers only the dismal prospect of recriminations, slump, and a downward spiral of confidence and despair. A GATT settlement would provide the biggest available noninflationary boost to growth in the world economy. It would enrich both developed and developing countries—and in the best possible way: by enabling the private sector to increase trade, prosperity, and jobs. We have about 12 weeks left to reach agreement. And that is what we must do.
Capital and Savings
More flexible labor markets and freer trade are crucial to prosperity and, in my view, they should be right at the top of our policy agenda in the period ahead. But I want to conclude today by focusing on another crucial influence on long-term economic performance, and one to which I attach particular priority in the United Kingdom—saving and investment, and how to increase them over the medium term.
With the exception of Germany, saving in all the Group of Seven economies now represents a lower proportion of GDP than it did in the 1970s. In my view, that is a potentially damaging trend, and one we should seek to reverse. Of course, in free countries, governments cannot force people to save or invest, nor should they seek to do so. But what we can do is try to ensure that our macroeconomic policies and our whole approach to public expenditure and taxation support investment and saving wherever they can. And that is precisely what I am seeking to do in the United Kingdom. I want to see a recovery that is sustained over the rest of the decade and beyond. A recovery driven by investment and exports, not by consumption; by the private sector, not by the state.
And I believe that to achieve that, we need to ensure that all our policies are working with the grain of industry and commerce:
First, by keeping underlying inflation within the tight target range we have established, to preserve the gains in competitiveness we have made over the last year;
Second, by getting public borrowing down over the medium term, which will increase the level of saving in the economy and help to underpin the recent fall in long-term interest rates;
Third, within our tight overall public expenditure ceilings, by ensuring that the costs of running government, and especially public sector pay bills, are kept under the firmest possible control, to leave the maximum scope for expenditure on productive capital projects and essential public services;
Fourth, by gearing up the Government’s own investment spending through greater use of private finance and private sector design and management, under the Government’s new private finance initiative; and
Finally, by keeping in place a tax structure, which favors enterprise, entrepreneurship, and thrift—a tax system that does not prevent business from earning a satisfactory rate of return on its investment. And when we tax consumers, we should target their spending, rather than their savings or incomes. That means relying, wherever possible, on indirect rather than direct taxation.
In the short run, the program of action we have put in train has required the Government to take some difficult and unpopular decisions:
high interest rates to combat inflation;
tax increases to get the deficit down;
pay restraint in the public sector to leave room for capital spending; and
tight control over public spending.
But these are the sorts of decisions that governments all over the world are having to face up to, to secure the long-term prosperity of their peoples.
And I believe that whether it is the challenge of freeing up labor markets, the imperative of completing the GATT Round, or the attempt to put in place a medium-term strategy for investment and savings, those of us who are entrusted with the power to govern must take the decisions that are right for the long term.
Statement by the Governor of the Bank for Paraguay—Crispiniano Sandoval
I consider it a great honor to address the joint meetings of the Boards of Governors of the World Bank and the International Monetary Fund, on behalf of the nations of Latin America and the Caribbean, in order to offer some thoughts on current developments in the world economy from the perspective of our region in general, and of my own country, Paraguay, in particular. These meetings are once again taking place against a backdrop of historic changes in the international political arena, whose ultimate implications, although they still cannot be precisely evaluated in view of the dynamic nature of the changes in question, have nonetheless had major economic repercussions. I am referring in particular to the end of the cold war, the consequent transformation of the centrally planned economies, and the practically universal acceptance among developing countries of the desirability of conducting their policies along market economy lines—to wit, the “silent revolution” described by the Managing Director of the IMF, which has led to the execution of numerous economic adjustment programs and structural reforms.
These changes have gone hand in hand with new developments in the international economy, chief among them the increasing global integration, rapid technological innovations, and greater interdependence among the various regions of the world. Now more than ever, these developments call for consensus-based, global solutions that transcend traditional political barriers. Latin America has been at the forefront of these changes. The profound and prolonged crisis of the 1980s, known as the “lost decade,” led to a reappraisal of economic strategy in Latin America while ushering in an era of democratic transition in a number of countries in the region. This process resulted in a fundamental shift in economic policies and the dawning of a new era in the region’s economic history. Although there are important differences among the various countries, it may be said that, in general terms, the new economic paradigm encompasses outward-looking policies, the private sector as the engine of economic growth, and the public sector as a regulatory authority focusing on serving social and infrastructure-related needs, all against a backdrop of market economies.
It follows that this period has been characterized by the adoption of more prudent fiscal and monetary policies, export promotion, the reduction of restrictions on and regulations governing economic activity, the privatization of public enterprises, and reforms in the areas of taxation, finance, customs, and social insurance systems. This period has also seen the rise of a number of regional integration initiatives based on the principles of a multilateral system of open and competitive trade. These reforms have not been easy, nor have they been free of social costs. Nonetheless, we are gratified to observe that positive results have been recorded in terms of the resumption of growth in Latin America, the substantial reduction of inflation in many countries, and the consolidation of the external sector. Since 1991, growth in Latin America has exceeded the average growth of the world economy by a considerable margin.
In addition, there have been sizable inflows of private capital into the region, which have enabled private investment to increase above the levels determined by domestic saving and external indebtedness, and which have contributed to economic growth in the region. In certain countries, capital flows have been so intense that they have led to a variety of economic policy responses, including tolerance of an appreciation in the real exchange rate, the adoption of disincentive measures in respect of speculative capital, such as increasing the reserve requirement on foreign currency deposits, raising taxes on foreign currency loans, and sterilized intervention on exchange markets.
In spite of the promising results of the structural adjustment and reform programs, we are fully aware that the success of the economic initiatives in Latin America is inextricably linked, inter alia, to the international economic climate. As such, we view with great concern the persistent stagnation of world economic growth, as a result of the recession in Western Europe and Japan, and the very modest revival of economic activity in North America and the United Kingdom. One consequence of this state of affairs has been the steady decline in the terms of trade of countries exporting commodities, as well as the reduction of employment in a number of regions of the world, particularly Western Europe, which has recorded a high rate of structural unemployment for over a decade now. Unfortunately, this deterioration in labor conditions in Western Europe and elsewhere has fostered domestic pressures that favor a return to protectionism, which ignores the beneficial role of free trade, international competition, and market integration in promoting world economic growth.
In this context, Latin America regards a prompt and successful conclusion of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) as essential to the proper functioning of the international economy. We enthusiastically welcome the public stand taken by the World Bank and the IMF in support of this view with the aim of promoting the systemic benefits of integration, which considerably outweigh its adverse effects upon specific sectors in individual countries over the short term. We believe that the opportunity created by the recent partial agreement on market access among the Group of Seven countries in Tokyo should not be wasted. Accordingly, we urge the industrial nations to reach rapid agreement on the urgent need to eliminate agricultural subsidies—which do a great deal of harm to the world economy in general and to developing countries in particular—so that the Uruguay Round can at last be brought to a successful conclusion.
In addition, the problem of external debt persists in certain heavily indebted countries of Latin America in spite of the progress achieved overall in recent years. In such cases, the provision of more extensive and sustained financial assistance is clearly called for, in the context of adjustment programs, in negotiations with both official creditors and private banks. Furthermore, greater flexibility and fungibility in the use of Bank and Fund resources intended for debt-reduction operations will help to bring forth a definitive solution to this serious problem.
The international economic environment has a decisive influence on efforts to promote reforms that have been under way in the developing countries, including the lowest-income countries. It is regrettable that for this latter group of countries, in spite of the implementation of structural reforms and strict financial policies with technical and financial assistance from the World Bank and the IMF, the results in terms of renewed economic growth have not been satisfactory.
That is why it is important for the World Bank and the IMF to persevere with their efforts to assist this group of countries, coming under the headings of the International Development Association and the enhanced structural adjustment facility (ESAF), respectively. In order to encourage complementary action by these institutions, we urge the international donor community to take more rapid steps to ensure the Tenth Replenishment of the International Development Association and to reach agreement on the financing for the ESAF successor facility, given the consensus that appears to have emerged on its institutional characteristics.
In addition, the end of the cold war, which I mentioned earlier, and the concomitant process of reform in the formerly centrally planned economies have generated challenges unprecedented in contemporary economic history. Never before had an economic bloc unleashed a process of reform on such a scale and in such an adverse external environment, caused by world economic conditions and the problems associated with the collapse of the region’s trading system.
It should come as no surprise that these nations are facing enormous economic, political, and social obstacles. Accordingly, it is clear that the execution of prudent financial policies, ensuring a reasonable degree of price stability, is a prerequisite—although not sufficient in and of itself—for ensuring the success of these reforms. At the same time, the international community must face up to its responsibilities by assisting these countries’ efforts with appropriate and expeditious financing, in recognition of the systemic nature of such efforts. However, we should not overlook the fact that there are countries in our region, such as Nicaragua, that are experiencing an equally delicate transformation and that also require the support of the international community.
Both the World Bank and the IMF are uniquely well qualified to assist this process by providing financial resources and technical assistance. In fact, the recent increase in World Bank disbursements to Eastern Europe and the nations of the former Soviet Union, as well as the IMF’s transfers to the same region through its traditional facilities, and the recently created systemic transformation facility attest to growing involvement on the part of these institutions.
However, it would be most unfortunate if, at a time when many countries are in a particularly vulnerable position, their assistance were to be given at the expense of aid to other regions of the world. By the same token, it is important to remember that the resources of these institutions cannot take the place of bilateral flows from the traditional international donor community.
Given the financial needs of the countries in transition and of the other developing countries that are implementing economic reform programs, as well as the severe fiscal constraints facing several donor countries, we support a modest allocation of SDR 36 billion for the remainder of the Sixth Basic Period, 1993-96. We believe that this allocation would not have inflationary consequences, in view of the estimated demand for international reserves for the following years.
At the same time, a new SDR allocation would help to strengthen the position of the SDR as a reserve asset within the international monetary system, in accordance with Article XXII of the IMF’s Articles of Agreement. Moreover, we also favor the introduction of a redistributive mechanism subsequent to the allocation that would, however, be strictly based on sovereign decisions by the member countries involved.
Before finishing, I should like to offer some observations on my own country, Paraguay. Beginning in 1989, Paraguay launched a process of political and economic liberalization. The transition to democracy, after nearly four decades of authoritarian government, took a new turn on August 15, 1993, with the inauguration of the first civilian president, Juan Carlos Wasmosy, to have emerged from direct, democratic elections in Paraguay’s history as a republic. On the economic side, the current administration has adopted a strategy based on the principles of market economics, the maintenance of stability through the pursuit of prudent financial policies, and integration of Paraguay’s economy into that of the region and of the world at large. This strategy is being complemented by a range of structural reforms, including, in particular, the reform of the financial system, the privatization of public enterprises, and the modernization of the state apparatus.
In common with many Latin American countries, we are aware of the constraints upon the state’s capacity to act, even as we see society’s demands increase. Accordingly, it is necessary to achieve a clear definition of the public sector’s role in regulating economic activity and within economic activity itself. As such, it is the private sector that should act as the principal engine of economic growth, and it should have the state’s actions as a complement to its productive efforts. Engaged as we are in this undertaking, which is ultimately intended to improve living conditions for all Paraguayans and to consolidate the democratic process in Paraguay, we trust that we can count on the steadfast and catalytic support of the World Bank and the IMF. We are mindful of the wealth of experience that these institutions have acquired over time and in nearly every corner of the globe.
Statement by the Governor of the Fund for Germany—Helmut Schlesinger
The Annual Meetings of the World Bank and the Fund provide us with a forum for the critical assessment of global economic developments, for weighing up opportunities and risks, and for debating the appropriate economic and monetary policy responses. They provide the opportunity for looking beyond the restricted horizon of day-to-day events and considering the issues on the agenda in a longer-term perspective.
Problems Are Familiar
The great tasks and the economic problem areas that we are called upon to address are well known.
The expectation that the industrial countries would emerge rapidly from their period of economic weakness has proved overly optimistic, though that will only affect the time horizon.
High unemployment in the developed economies is a major cause for concern. We observe that there is growth without new jobs, but we know that we need growth that creates more jobs. It is politically unacceptable that a substantial share of our population does not participate in the productive processes.
Notwithstanding the welcome progress made in some countries, political and economic transformation in many states of Central and Eastern Europe is proceeding only slowly, and results actually achieved are called into question by new political uncertainties. Removing the shackles of planned economies, reforming the legacy of inefficient structures, and creating a legal system which safeguards private property and supports entrepreneurial spirit has proved more arduous than we had originally thought. This is a familiar experience for us, having already encountered many such obstacles in eastern Germany.
In the developing countries, the situation is equally complex. In particular, the situation of many countries in Africa still gives cause for concern. We cannot rest satisfied when faced with declining real incomes, economic destitution, substantial deficits in education, and inadequate health care.
Some Encouraging Trends
Yet, despite these pressing problems, there are some encouraging developments:
There has been worldwide progress on curbing inflation.
Budgetary discipline and structural reform are recognized as priority requirements, and there are signs of improvement here also in countries which cannot be considered rich.
After the turbulence in European exchange markets, the situation has stabilized with the temporary widening of exchange rate mechanism bands agreed at the start of August.
Those countries in Central and Eastern Europe that made an early start on credible reforms, opened their economies to international competition, and promptly took the correct steps toward adjustment have since made appreciable progress. There are exemplary stabilization successes in the Baltic states and the Czech Republic.
Many developing countries have resolutely tackled and in part resolved their economic problems and have even transformed themselves into locomotives for economic development and growth in their regions and worldwide.
With a few exceptions, market-oriented structures increasingly prevail worldwide.
Encouraging Growth Without Neglecting the Medium-Term Perspective
Despite all the remaining problems, there are quite good prospects that economic stagnation will soon be overcome in industrial countries which until recently experienced recessionary tendencies. There is no uncertainty as to the strategy that must be pursued in this situation: with credible, confidence-building policies we must create the necessary conditions to promote sustained, noninflationary growth and to overcome unemployment. The room for maneuver in fiscal and monetary policy, where it shows up, can be used to stimulate economic activity while taking the medium-term requirements of fiscal consolidation and price stability into account. Many of the structural problems facing us today are the outcome of decisions that were geared excessively to the short term. Consequently, it would be wrong to limit the current economic policy debate in the industrial countries exclusively to the objective of maximizing short-term growth. While it is vital for us to stimulate global economic activity, I must stress that we should not do so at the cost of neglecting inflationary risks and underestimating the potential for erosion of confidence. We must take unequivocal decisions today to secure fiscal consolidation in the medium term. In many countries, social welfare systems making excessive demands on economic and financial resources are threatening to undermine fiscal stability. They also have demotivating effects on the active part of the population. Ways must be found to cut back their excessive growth without damaging the legitimate interests of the truly needy. Making labor markets more flexible and ensuring adequate pay differentials will contribute toward the more effective use of available human resources and the creation of useful employment opportunities.
Germany’s Economic, Fiscal, and Monetary Policy
German economic policy strives to reconcile the need for growth in the short term with the medium-term requirements of consolidation and structural adjustment. Our multistage growth and consolidation strategy aims at bringing about progressively an appreciable reduction in the fiscal deficit over the next few years. Added to this are structural reforms designed in particular to make the labor market more flexible, to reorganize the social welfare system, to eliminate investment disincentives by improving the pattern of corporate taxation, and to bring about further privatization and deregulation. Thanks to this comprehensive economic policy strategy, Germany will be able to hold its own even in the face of tougher international competition. Protectionist attitudes would make it more difficult to overcome adjustment and restructuring problems in the longer run. The liberal German approach with regard to the international exchange of goods, services, and capital remains unchanged.
When assessing the German situation from the outside it is easily forgotten that the “Iron Curtain,” which until a few years ago divided the world, ran right through the middle of Germany. Bridging the gap of more than forty years which separated two totally different political and economic systems has never been and will never be a task to be shouldered lightly.
In view of this exceptional challenge, it is important that the Bundesbank’s monetary policy, which is aimed at achieving price stability, and the medium-term growth and consolidation strategy of the Federal Government have succeeded in maintaining the confidence in the deutsche mark. One important consequence is the reduction of long-term interest rates to historically low levels and a relatively stable exchange rate of the deutsche mark over the whole period since 1990. In the same period, the scope for a monetary policy of gradually declining short-term rates has been extended and has been used. The historically low level of medium- and long-term interest rates in Germany supports the restructuring process, which is in full swing; it supports activity in the construction sector, which has become a particularly dynamic factor in the economy; it also diminishes the interest burden of the public sector. This has only been possible thanks to the determined stabilization policy of the Bundesbank.
International Cooperation Necessary
Despite the essential efforts of each individual country to “keep its own house in order,” we will only be able to deal effectively with the problems confronting us if we combine forces and work closely together in the pursuit of joint solutions. As the central pillars of international monetary and development policy cooperation, the IMF and the World Bank are symbols of the international community’s will to cooperate. Yet the member countries of the Bretton Woods institutions must ensure that each of these bodies is able to perform its specific roles. We readily acknowledge that the leading industrial countries bear a special responsibility in this respect.
Developments in the Near East, too, are being watched with great hope. The World Bank will also have a special role to play here; it has already submitted an aid program of $3 billion for the occupied territories. The measures proposed under the program will improve the economic situation of the occupied territories, thus making an important contribution to supporting and securing the peace process in the Near East. The World Bank is rightly concentrating its activities on infrastructure projects, which, in turn, will create the conditions for private investment, the true driving force behind growth and prosperity. Besides the World Bank’s activities in the Near East, I feel that the Bank’s special role in enhancing the quality of the projects it finances deserves particular mention. In the Wapenhans Report, and by putting the recommendations of that report into practice, the Bank has set standards for other development banks that are also generally applicable.
With increasingly interdependent and globalized markets, it now makes even less sense for a country to attempt to take action in isolation in the area of foreign trade. There is growing pressure for cooperation. All parties are now called upon to demonstrate their firm resolve to come to agreed solutions. This holds true, first and above all, for the Uruguay Round. The successful and early conclusion of negotiations is both a matter of the utmost priority and a measure of the credibility and effectiveness of our cooperation. Unrestricted access to markets, the free exchange of goods, and improvements in the international division of labor are essential conditions for increasing prosperity for all. Specific interests, impressively stage-managed by well organized groups, must not be allowed to stand in the way of this gain in prosperity for the whole world.
Environmental protection is another area in which progress can be made only through joint action. We all know the earth does not belong to us—we are only holding it in trust for our children. We must act rapidly and specifically to implement the environmental protection commitments undertaken last year in Rio. All countries must use their policies and their resources to achieve lasting development in the interests of both present and future generations. The World Bank’s Global Environment Facility (GEF) is of particular importance in this respect. The present negotiations on restructuring and replenishing the GEF should therefore be brought to an early conclusion.
Newly Independent States
It is not surprising that the reform course in Russia and other successor states does not proceed along a straight line and that time and time again it faces political counterforces. Nevertheless, continuation of the reform course is the only way to ensure a better future for the peoples affected; it must therefore continue to receive support from the West. The Western countries have reached an early agreement at the Economic Summit in Munich on the overall framework for comprehensive cooperation and concrete “help for self-help” to underpin the necessary reforms. The broadly based offer of assistance from the West has in the meantime progressively been given practical effect. Commitments are being implemented as soon as the necessary prerequisites are met. Much remains to be done. But all assistance from the West can only be an offer to support one’s own endeavors to achieve economic and political reform. The assistance offered cannot take effect without significant efforts on the part of Russia and the other newly independent states. It is particularly important for the authorities of these states to cooperate closely with the IMF. Some Eastern European countries demonstrate that the process of structural transformation can proceed without strong inflationary tendencies. It is not necessary to be a rich country in order to achieve and maintain stability. In fact, without monetary stability and budgetary discipline, the great reforms will not be carried through successfully.
IMF and World Bank at the Center of Cooperation
All countries must contribute toward improving the present and safeguarding future development. At the center of this cooperation are the international organizations, especially the IMF and the World Bank. They deserve our full support for their task of promoting the developing countries’ own efforts, of giving help for self-help through stabilization programs and development assistance. The appreciable progress made in overcoming the debt problems of many developing countries is evidence of the effectiveness of these organizations and of the debt strategy jointly endorsed and implemented by all concerned. Economic stabilization, structural reform to unleash market forces, and worldwide free trade are still the principal requirements for integrating the developing countries, the countries of Central and Eastern Europe, and the former Soviet Union more effectively on a free-market basis into the global framework, thus giving them the opportunity of themselves generating the foreign exchange they so urgently need to develop their economies. The IMF and the World Bank provide indispensable forums for the coordination of the required policies. They are also indispensable for the effective use and monitoring of funds raised on a multilateral basis. I wish the management of both institutions and their sister organizations best success in their endeavors, which are so important for the world economy.
Statement by the Governor of the Fund for Spain—Pedro Solbes Mira
For the fourth successive year our expectations of economic recovery for the industrial economies have been frustrated. One year ago most of us and our experts predicted an end to the crisis during the second half of 1993. Of course, the disarray in the European Monetary System (EMS) was barely beginning. We had no reason to expect that community exchange rates would so sharply reveal the divergences that still exist among Europe’s economies and the deep imbalances that affect them. This was owing not only to short-term conditions or to the economic cycle, but ultimately to the extremely narrow maneuvering room we have to implement policies and measures that will enable us to escape from this situation of low growth and growing unemployment.
Renewed comparison with the situation of one year ago shows us that currency markets have settled down following the correct decision to widen the fluctuation band in the exchange rate mechanism of the EMS. Nevertheless, the strong structural component of the imbalances in the fiscal area and in labor markets urgently requires a medium-term policy designed, and above all implemented, in a coordinated manner, for only thus can the reactivation of our economies rest on a sound foundation that will enable it to endure over time. To this end, a prompt agreement on the Uruguay Round of the General Agreement on Tariffs and Trade, to which Spain is prepared to contribute to the full extent of its possibilities, would help dispel uncertainties by improving expectations of a trend reversal in the world economy.
Allow me also to address briefly the two aspects I believe are fundamental in explaining the current situation and establishing our economic policy priorities, that is, fiscal policy and labor markets.
From the standpoint of a member country of the European Community, such as Spain, the experience of the last twelve months has been a highly instructive one, as it has starkly shown the consequences of insufficient confidence in our economic adjustment and insufficient convergence. Doubts as to the ability of our economies to fulfill the agreements leading to economic and monetary union gave rise to speculation, which intensified as economic indicators deviated from the projections and targets set forth in our convergence plans. This had an almost automatic impact on interest rate trends, evidencing a temporary inability to live with an exchange corset that was overly tight under the circumstances. In this context, the decision to widen the bands to 15 percent not only is justified but also seems to be an appropriate, realistic policy that allows cooperation among member countries’ monetary authorities. This august decision maintains the agreements that worked so satisfactorily over many years and will lead us to economic and monetary union by 1997.
If events are to unfold as foreseen, concerted efforts must be deployed to correct the deterioration in government accounts without delay and to demonstrate the firm political will to attain the objectives agreed upon by the European Community. I readily share the analysis and conclusions in the World Economic Outlook documents as to the possibility and advisability of fiscal adjustment that does not jeopardize economic recovery in the industrial countries. I also share the opinion that fiscal policy has no slack to drive recovery at this time. The fiscal deficits that affect many of our countries are characterized by a very substantial structural component; accordingly, no decision is possible other than severe budgetary constraint and the implementation of structural reforms to sever the automatic link between weak growth and overexpansion of public expenditure. But this does not prevent the possibility of selectively maintaining, as part of fiscal policy, initiatives to encourage investment, both public or private, so as to prevent the behavior of government accounts from being exclusively procyclic. Obviously, the fact that the deficit must be reduced at the aggregate level will limit this possibility, depending on the structure of expenditure and the room for maneuver in each country. We will not be able to establish the foundations for lasting growth—the ultimate, priority objective of our decisions—unless private investment is sufficiently stimulated. This, in turn, will not be achieved unless there is an immediate reduction in interest rates and a recovery in investor confidence.
Along these thoughts, the welfare state is a concept that is much in debate in many of our countries today, and it is undeniably an asset that must be preserved. To this end, it is essential to correct those aspects that paradoxically hinder the growth and job creation that are its very essence. We cannot move backward from the social protection level we have already attained, but neither can we allow an excess, or abuse, of protection to throttle the economic growth that is the basis of welfare and employment in every society. Virtually no industrial country has room to apply an expansionary fiscal policy. In almost all our economies, we must give priority to reducing our deficits if we intend the budding reactivation to reach its full potential. The number of unemployed in our countries is no doubt the most pressing problem we face, and any measure we adopt will be aimed toward a fundamental mitigation of this problem, even if this cannot be achieved in the short term.
Nevertheless, the truth is that as the crisis became deeper over recent years, our countries—much more pronouncedly those of Europe than other industrial economies, to be sure—have been weaving a safety net for unemployed workers that, with time, becomes impossible to finance and ultimately gives rise to even greater unemployment. Similarly, wage negotiation systems should be reoriented to avoid the asymmetry between defending the interests of jobholders and of the unemployed. Experience has shown that an aggressive wage policy ultimately displaces a large number of workers from the market, which outcome is thoroughly unjustifiable under a high unemployment situation, such as at present. It is even less justifiable if one considers the impact of wage costs themselves on certain prices, which are now somewhat under control, and on the entrepreneurial surplus needed for investment and employment creation.
With regard to the reactivation of the Spanish economy, we may be relatively optimistic, as there are indeed signs of stabilization of the major imbalances; while some of the indicators have yet to begin to improve, their rates of decline have slowed appreciably. This relative optimism should not prevent us from thinking that some time must yet elapse before the effects of the reversal become evident in new job creation.
In conclusion, I must not miss this opportunity to convey to you, on behalf of the Spanish Government, our most cordial invitation to visit Madrid next year. As you probably know, Madrid will host the Annual Meetings in 1994. The challenge this presents to Spain is being faced, and preparations are proceeding apace, and I am convinced the meetings will be a success. I look forward to your distinguished presence. We are at your disposal, and I welcome you in advance.
Statement by the Governor of the Fund for Dominica—Mary Eugenia Charles
I have the honor to speak on behalf of the members of the Caribbean Community and Common Market (Caricom), namely, Antigua and Barbuda, The Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, and Trinidad and Tobago. The general prospects facing the global economy are somewhat subdued judging from a number of very pertinent factors. First, growth in the Western industrial countries has been sluggish at best, with short-term prospects not being particularly encouraging. Unemployment has become a very serious problem with over 30 million people being out of work in the Organization for Economic Cooperation and Development (OECD) countries. In addition, fiscal deficits still persist and current account imbalances continue to be experienced by many countries. Another area of concern is the currency instability in Europe which has persisted since September 1992 and has placed severe strain on the exchange rate mechanism. This scenario is not very encouraging as there does not seem to be any member of the Group of Seven that can serve as a locomotive for pulling the global economy out of recession. The great need for assistance by the countries of the former Soviet Union and the Eastern bloc is a further dampening factor on global events.
It is against this backdrop that the countries of Caricom, on whose behalf I speak, recognize the need for strong and sensitive leadership in resuscitating the international economy so that there can be increased flows to the developing world and the opening up of markets in the industrial countries to the products—both commodity and manufactured—of developing countries. These are important questions that must be asked of the international community and the Bretton Woods institutions, as many countries, including those in the Caribbean, subject themselves to rigorous adjustment programs and make sacrifices and yet see no benefits in terms of increased flows. In fact it is quite the opposite, as there are significant reflows to the international financial institutions from our region and many others in the developing world. The question of debt to multilateral institutions has to be squarely faced and mechanisms have to be designed to give genuine relief to debtor countries while preserving the financial integrity of the institutions. Concerning debt to bilateral creditors, we continue to believe that more far-reaching debt-reduction solutions are required to deal with debt of low-income and lower-middle income countries. We note the United Kingdom’s recent proposal to increase the level of debt and debt-service reduction under Trinidad terms. In this regard, we urge creditors to move decisively toward a reduction of the stock of debt for eligible countries. In light of the need to complement reforms with increased resource flows, we are concerned about the slow progress made with regard to the establishment of a successor facility to the enhanced structural adjustment facility (ESAF). We therefore urge that prompt action be taken on this front in order to ensure continued concessional financial assistance from the Fund in the post-ESAF period.
The Caribbean countries once again support the call for a new SDR allocation. We feel that this is urgently needed and call on industrial countries opposed to an allocation to rethink their position.
On the question of trade, the Caribbean region supports a speedy completion of the Uruguay Round but is very concerned that transitional arrangements should be put in place for countries that structurally are unable to comply with the new regime in the short run. We strongly support the Global Environment Facility (GEF) which we hope will address environmental issues not of our own making but which affect us; we also hope that the GEF will address issues of immediate concern to us like solid and liquid waste disposal and protection of our marine environment, which is of vital concern to us particularly in light of the importance of the tourist industry to small island states. In our part of the world, we have been cooperating for many years with the IMF, the World Bank, the Inter-American Development Bank, and the donor community through the Consultative Group for Caribbean Economic Development (CGCED). In light of the new emphasis in the World Bank as a result of the Wapenhans Report, we call for a strengthening of the CGCED to improve the delivery systems of aid to the region.
Finally, we in the region are committed to strong macroeconomic performances, balanced sectoral growth, and an effective public service. We support the efforts of the private sector in our development thrust. We also place great emphasis on human resource development in our development strategies. We believe that each country must make efforts on its own behalf, but, in an increasingly interdependent world, the efforts of others, particularly the industrial countries, are important for a successful approach to development. We call upon the Bretton Woods institutions to supply strong and positive leadership in bringing the global economy back on track and promoting the cause of development for the have-nots of the world.
Statement by the Governor of the Bank and the Fund for Ireland—Bertie Ahern
Year after year we all declare from this platform that the key to prosperity is balanced economic growth and good social conditions. We know full well that this requires active coordination on a global basis and particularly among the large and wealthier countries. We look to groups in positions of influence such as the Group of Seven to provide the lead. There has been insufficient direction or coordination in recent times. Disparities between rich and poor have widened. Since the beginning of the 1990s the continuing pattern in the developed world, with some exceptions, has been slow growth, recession, and rising unemployment. The main industrial countries have failed to respond adequately to this. From a European perspective the past year in particular has been overshadowed by tensions in the currency markets, high real interest rates, and little or no growth.
Last year I expressed the hope that the General Agreement on Tariffs and Trade (GATT) negotiations might be concluded by year’s end. Deadlines have passed and, while there are still considerable difficulties, the prospects of a final breakthrough have improved. An early and successful conclusion to the Uruguay Round would be the single most important action on policy that could be taken to stimulate recovery. We all know this. We need a greater sense of vision, courage, and a willingness all round to achieve success.
Within the European Community there has been an active, but so far insufficient response to the recessionary conditions. There is a new emphasis on growth and employment. Coordinated programs of development have been initiated. This reflects the deep concern and frustration that the momentum for growth has been lost and that unemployment is moving toward record levels. There is also a timely appreciation that persistent high interest rates have had a very negative impact on the whole European economy.
We tend to link growth and employment as a matter of course. Growth creates jobs, but it creates many fewer jobs than before because of the impact of technology. The balance between capital and labor has shifted decisively. We have come to a point where we can no longer offer adequate answers to unemployment. For some of us this has already become a crisis, and, a few years down the road, it may well be the foremost global economic problem. Employment is bound up with human dignity and human development; without a job in today’s world many people feel they lack identity. Sooner or later we must address this problem at a global level and look for comprehensive solutions.
There are some positive developments. There has been a continuing easing of inflation in most industrial and developing countries. The debt problem remains unduly severe for some low-income African countries in particular, but for most of the middle-income developing countries it is essentially under control. The prospects for a number of developing countries appear brighter than they have for some time, following successful adjustment programs. However, the outlook remains quite uncertain in the industrial countries, and growth projections have been scaled back again recently. For Europe in particular, the indications are that little or no improvement will take place in the short term. Once confidence is diminished, the attitude of depression spreads rapidly, sometimes well beyond what is justified, and it can be very difficult to refocus attention on growth.
In Europe, the credibility of the European Monetary System has been tested severely. We have come through a very difficult monetary crisis. There are lessons for everybody from this experience. The most important lesson, I believe, is that weaknesses in the international monetary system can only be addressed properly at the global level. The paramount objective of monetary policy is price stability. This is the only solid base for sustained growth in the longer term. A stable global system is of vital importance for smaller countries. Otherwise, conflicting national priorities will tend to create continuing tensions; in these circumstances the smaller countries are usually left in a vulnerable and exposed position. The unprecedented growth in market volumes and the greater exposure to international capital flows can be a source of new tensions for the monetary authorities. While I am not suggesting a return to a regime of capital controls, nevertheless this explosion of mobile capital may require substantial adjustments to regulatory conditions in due course.
The transition to a market economy in Central and Eastern Europe continues to be difficult, as we had anticipated. The area has inherited unprecedented problems. There are, however, some notable successes, and small-scale businesses appear to be thriving in some areas. However, the overall picture for those states that comprised the former Soviet Union is still very bleak. The successful transformation of this region will pay large dividends for the entire world community in time. In the meantime, we must not forget that the developed world has a clear obligation to support the process of transition actively.
The number of people living in poverty continues to increase; over one billion people can be classified as essentially destitute. This is appalling. Rhetoric about economic and social progress will continue to have little meaning if we cannot make some rapid headway on this problem. The World Bank has raised its profile in relation to poverty. Reduction in poverty is now seen as a benchmark for measuring performance, and I welcome this. The role and influence of the nongovernmental organizations have been expanding and reflect their merit and achievements. I share their conviction that active participation of local communities in their own development is essential. The agreement on Tenth Replenishment of IDA (IDA-10) is a significant development in international cooperation. The negotiations were difficult, as a number of countries, preoccupied with their own domestic problems, were reluctant to increase aid. In addition to its basic contribution, Ireland will provide a supplementary contribution to IDA-10. We are now taking the necessary steps toward ratification of the agreement.
Concessional lending is vital, in sub-Saharan Africa in particular. For this region the debt crisis continues to be a crushing burden. It spends four times as much on debt servicing as it does on health expenditures. It is difficult for those of us who live in the developed world to appreciate what this means in human terms. It is time to formulate a debt-relief package for this region and the other poorest regions at least in line with the Trinidad terms. The most abundant asset that the poor countries have is the labor supply. It has been demonstrated again and again that if this is used efficiently in conjunction with access to education and health care, considerable progress is possible. These countries need labor-intensive economic growth that will generate employment and income for the poor. They must also show more urgency in dealing with domestic mismanagement which has contributed to the decline in economic growth.
In this context I welcome the greater awareness of the economic and social costs of excessive military expenditures in several developing countries. I am pleased that such expenditure will be one of the factors taken into account in determining lending levels under IDA-10. Up to 5 percent of the world’s GDP is spent on military needs. This is obscene, particularly as so many people must live in abject poverty, and military activity intensifies poverty. The world, it seems, is still quite apathetic about this and will continue to tolerate situations where military expenditures crowd out essential social spending.
We now know that economic progress cannot be sustained over an extended period, if it is not in harmony with the environment. There is still a need for greater awareness of environmental issues, especially in poorer countries where other priorities make it difficult to take a long-term view. It is a fact of life that environmental considerations usually add to investment and operating costs; consequently, there is a certain reluctance at times to do all that is needed. The environment is a universal concern, and we have a common interest in protecting it. I want to pay tribute to the work of the World Bank in keeping the environment high on the agenda.
The Irish economy has been affected adversely by the persistent weakness of the international economy. The monetary crisis and the continuing recessionary conditions in Europe have been particularly difficult for us. However, we continue to sustain a growth level well ahead of the European average. This is essentially due to our strong competitive position. Inflation is low, interest rates have come down much more quickly than we had anticipated earlier this year, and we have a strong positive balance of payments. The main problem for us is unemployment. Now that this issue is a priority for Europe as a whole, we feel more confident than before that a strong, concerted effort will be made to bring about a worthwhile improvement.
In conclusion, I want to acknowledge once again the work being done by the International Monetary Fund and the World Bank. There are lessons to be learned from the recent European experience that have consequences for the international monetary system as a whole. There are undoubtly problems to be addressed in the conduct of markets in the new climate of capital liberalization. On the development side, there is still a great need for more coordination and global solidarity on many issues. The IMF and the World Bank are the vehicles through which we make progress together. We must give them our fullest support.
Statement by the Governor of the Bank and the Fund for the Russian Federation—Aleksandr N. Shokhin
I would like to start by comparing the present discussion with that of the previous Annual Meetings. Regarding the issues of growth of industrial and developing countries, today we have the same concerns that we had a year ago. While the continuing recession was the theme of last year’s discussion, today it is the downward revision of the projections for growth in the industrial countries. While last year’s Annual Meetings were preceded by turmoil in the European exchange rate mechanism (ERM), a year later an even deeper crisis in the ERM has erupted. The good news relating to this group of issues is also not new. It is the steady and even strengthening economic growth of the developing countries, despite the continuing recession in the industrial world— the phenomenon that a year ago was considered paradoxical.
It looks like this year we are approaching a consensus regarding the reasons for the persistence of the recession. The first is the chronic problem of fiscal imbalances in most industrial countries, which severely constrains the possibility of fiscal stimulus. I welcome the growing awareness of this problem in Western Europe and North America. In a number of countries, fiscal-reduction measures have either already been adopted or are under consideration. The second factor hindering the macroeconomic policy response to the recession has been the rigidities of the ERM. The additional flexibility on the monetary side—recently introduced in response to the latest crisis in the mechanism—is broadly expected to produce a positive effect on the prospects of economic growth in countries that are participants in the ERM and in the larger perspective of the world economy. The last, but not least, reason for the protracted recession is the high level of labor market rigidities in the industrial countries. I believe that comprehensive labor market reform is the key instrument for addressing the typical “triangle of problems” for the industrial countries—economic recession, high unemployment, and fiscal imbalances.
It is rather worrisome that quite the opposite approach to addressing this set of problems is still popular—not on the path of economic liberalization, but by means of strengthening the economic rigidities. It is proposed in terms of this approach that instead of dismantling internal barriers whose existence is the obstacle to flexibility and efficiency, external barriers be built against goods from the developing countries and countries in transition. These barriers do not benefit the populations of the industrial countries—they only benefit the inefficient producers. They do not help to preserve jobs in the industrial countries even in the medium-term perspective—they undermine countries’ competitiveness and, consequently, lead to economic decline and a reduction in the number of available jobs. The adverse effects of these barriers are especially harmful now, when, according to the latest World Economic Outlook, the developing countries are becoming the engine of growth for the world economy. The Uruguay Round talks have reached a critical phase, and I truly believe that their successful conclusion could be a major factor of world economic growth. The failure of the Uruguay Round at this stage could produce grave results for the world economy.
As regards the former centrally planned economies, the situation has become even more heterogeneous. On the one hand, there are countries in which the general economic situation has strengthened— the Czech Republic being a prime example. There are also countries, Poland in particular, where, after a serious decline in production, an upturn is now evident. On the other hand, there is a group of countries in which the economic situation has deteriorated during the past year— most of them being countries that comprised the former Soviet Union. Ukraine, where we can already observe the first stage of hyperinflation, is probably the most vivid example. The successes or failures of each country were certainly determined by their individual mixes of favorable and unfavorable circumstances. However, the experience accumulated in the area of market-oriented transformations allows us to be certain of at least two conclusions. First, that macroeconomic stabilization is a necessary precondition for the resumption of economic growth and for the fruitfulness of the structural reforms. Second, that the major factor in the decline in output is the magnitude of the initial structural distortions in national economies—rather than the tightness of macroeconomic policies.
Another factor of great importance is the disruption of traditional economic ties and the loss of the traditional import and export markets during the transition process. In this respect, the new systemic transformation facility (STF) created by the Fund is especially helpful. It provides vital support to a large group of countries where the size of the initial adverse effects of the systemic changes is so high that the traditional stand-by arrangement is not a sufficient instrument to provide the necessary support for the balance of payments needs of these countries. The practice so far in approving the STF shows that the fears that the new facility will become an instrument of unconditional disbursements have proved to be groundless. In our view the STF has indeed become an instrument for bringing Fund conditionality closer to the realities of a large group of countries in transition—realities that previously had not been encountered in IMF practice. The opportunity to have access to the STF has certainly stimulated several countries of the former Soviet Union to undertake bolder stabilization and reform efforts. The Kyrgyz Republic, Belarus, Kazakhstan, and Moldova have assumed very serious obligations, especially in the budgetary area.
Russia became the second country after the Kyrgyz Republic to receive financing within the framework of the STF. The program, supported by the Fund, was adopted this past spring. In its elaboration and implementation, the Government relied on the political results of the April referendum, in which the Russian people expressed their support for market reforms. The initial stages of the program have been quite successful. From mid-June to mid-August the exchange rate of the ruble against the dollar, which had previously dropped sharply, rose in nominal terms by approximately 13 percent, which was the first sign of a reversal of capital flight. However, macroeconomic policy was loosened in August, and the program went off track. Seasonal factors played quite a significant role here, as did the liberalization of prices of some basic resources. The main role, however, belonged to the deep political crisis, which reached its highest point in September and became a practically insurmountable obstacle to the implementation of stabilization measures as well as structural transformation. The practical realization of a package of emergency budgetary measures adopted by the Government at the end of August was put in doubt. The decisive steps taken by President Yeltsin last week are aimed at resolving the crisis democratically and thereby creating the prerequisites for further progress along the path toward market reforms. Since then, the Russian Government has undertaken some key steps in the fiscal and monetary areas, including elimination of grain subsidies and complete abolishment of soft loans by the Central Bank. The Government is committed to further implementing all feasible measures to reach macroeconomic stabilization and to undertaking all necessary structural reforms. On our part, we hope to obtain the understanding and support of the Fund, and we look forward to early approval by the Fund of a second tranche as a result of our joint efforts.
The successful implementation of macroeconomic stabilization and structural transformation is a necessary precondition for Russia to receive technical and financial assistance from the World Bank. The Russian Government highly appreciates the World Bank’s support of its package of economic reforms and its active participation in the development of a program to assist Russia within the framework of the Group of Seven. In the area of the financing of structural transformation in Russia, we would especially like to note the Bank’s support for the process of privatization and restructuring of enterprises, as well as its assistance in creating market mechanisms in the development of the financial sector and in management training.
We attach great importance to the World Bank’s investment projects, which substantially contribute to stabilization of the country’s economic situation. Reconstruction of the energy system, particularly the oil and gas sector, will serve as an important factor in the recovery of the Russian economy. We particularly welcome the International Bank for Reconstruction and Development’s (IBRD) first oil loan to Russia. The projects financed by the World Bank and export credit agencies could play a catalytic role in attracting private foreign investments in the oil and gas sector. However, this positive impact is hampered by the delay by the World Bank in waiving its negative pledge with respect to Russia. It is necessary to emphasize that our prioritizing of the energy sector does not diminish the importance we place on the investment projects developed by the Bank in the areas of agriculture, transportation, housing construction, and the environment. We are also interested in broadening the scope of the activities of the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA) in Russia following the first projects approved last year. We appreciate the useful activity of the Foreign Investment Advisory Service.
In conclusion, I would like to express support for the efforts of the Fund’s management to solve the problem of a global shortage of official reserves through an SDR allocation. At the same time, it is clear that the idea of a full-scale SDR allocation at the present time—in the manner of previous ones—does not enjoy sufficient support among the members of the Fund. Therefore, Russia proposes a two-phase approach, which, as past discussions have already indicated, seems to be more acceptable to many members of the Fund. A small-scale SDR allocation could be carried out as a first stage in order to put on a par with the other members of the Fund those countries that entered the Fund after 1970, including 38 countries that have never participated in an SDR allocation. It should be acknowledged that it is precisely these countries, for the most part, that are experiencing a serious shortage of foreign exchange reserves. The Executive Board must study and submit for the review of the Board of Governors the entire range of legal options for the allocation and/or reallocation of SDRs in the interest of achieving equity in allocation among all members proportional to their current quotas. A new, full-scale SDR allocation, the size of which is still waiting to be determined, could be carried out at a subsequent stage when it receives sufficient support of the Fund membership. In our view, such an approach would be in compliance with the efforts of the international community to support the developing countries and the countries in transition. We appreciate the support this idea received at the recent Interim Committee session.
Statement by the Alternate Governor of the Bank and the Fund for Japan—Yasushi Mieno
It is my great pleasure to be able to address you today at this year’s Annual Meetings of the World Bank and the International Monetary Fund. First, I would like to express a warm welcome to the countries that have joined the Bank and the Fund since our last Annual Meetings. Next year marks the fiftieth anniversary of the Bretton Woods conference. That historic conference was attended by 45 countries. Today, we have 178 member countries attending the Annual Meetings, which shows that the Bank and the Fund have become universal organizations with the participation of virtually every country in the world. With this growth, the Bank and the Fund have taken on increasingly important responsibilities, and these Annual Meetings, attended by the Governors of all the member countries, have become even more significant. I would also like to take this opportunity to express my appreciation for the historical progress that has recently been made between the Israeli and the Palestinian peoples toward peace in the Middle East. A donor meeting will be held in the near future during which assistance policy within the international framework will be discussed. I am pleased to announce Japan’s intention to extend about $200 million in assistance to the Palestinians over the next two years. I highly appreciate the role the Bank has been playing in the process of the Middle East peace talks.
For Global Economic Recovery
Turning to the issues before us, I would first like to speak of the world economy and Japanese economic policy. The world economy has experienced slower-than-average growth over the last four years, and there are, as the World Economic Outlook of the Fund has pointed out, still uncertain aspects about the process of recovery.
In many of the industrial countries especially, there is concern about the weakening of public confidence, and those economies are faced with persistently high levels of structural unemployment that is not a result of cyclical developments. Given this economic situation, I believe it is essential, if our countries are to achieve sustained and noninflationary growth and if we are to revitalize the world economy, that we seek to enhance confidence through prudent macroeconomic policies based on not only short-term considerations but also on medium-term perspectives. In particular, in implementing macroeconomic policies, it seems essential that we seek to promote sound fiscal positions by reducing our fiscal deficits and that we retain flexibility in fiscal policy in view of the rapid aging of the populations of most of the industrial countries. This would also lead to a reduction in long-term interest rates, which, in turn, would have a favorable impact on public confidence. Macroeconomic policies alone are not sufficient to reduce structural unemployment. We need to make an even more determined effort to deal with the implementation of structural policies, including especially policies to improve the functioning of our labor markets.
After a long period of growth, the Japanese economy entered an adjustment period exacerbated by the so-called bubble’s collapse and has been sluggish ever since. Despite its stringent fiscal position, the Government responded to this situation with a comprehensive economic package in August—a budget for fiscal year 1993 that paid due attention to promoting economic recovery—and a package of economic policy measures in April. The goal of this economic policy management has been to respond quickly and appropriately to economic conditions. Thanks in part to these economic initiatives, the worst is arguably over for the Japanese economy. However, there is still concern about the possible impact of the recent, rapid appreciation of the yen, and we cannot take any full-scale economic recovery for granted. We are well aware of the importance of revitalizing the economy and stimulating domestic demand, and we are making every effort to vigorously and steadfastly implement to maximum effect the April 1993 economic package. In addition, on September 16, the Government adopted the New Package of Economic Measures providing for a wide range of measures to deal with the difficult economic conditions confronting the people, including those suffering from the appreciation of the yen, as well as natural disasters, in addition to deregulation, and the pass-through of the benefits of the yen appreciation to the general public. Moreover, a panel has been established to look into reforms in Japan’s socioeconomic structure in the medium- to long-term frame and to have its conclusions ready by the end of the year.
Likewise, the Tax Council is undertaking a comprehensive study of the fundamental reform of the tax structure, with the aims of achieving a balanced structure of taxation on income, consumption, and assets and adjusting the imbalance between direct and indirect taxes.
On the monetary side, the Bank of Japan cut the official discount rate, on September 21, by ¾ of 1 percentage point to a record low of 1.75 percent. Following a series of reductions in the official discount rate, market interest rates had already been considerably lower. We expect that the latest discount rate cut will further accelerate the effect of monetary easing spread throughout the economy.
With the effect of the steadfast implementation of these measures reinforcing the impact of previously taken policies, which is expected to be substantial, I believe these initiatives will facilitate the achievement of sustained growth led by domestic demand. This, in turn, will have a favorable impact on reducing the current account surplus and contribute to the global economic recovery.
Currency Market Stability
Next I would like to turn to currency market issues. The yen has appreciated by approximately 20 percent against the dollar since the start of the year, and considerable concern has been expressed that this rapid appreciation might dampen Japanese efforts to achieve sustained economic growth. At the same time, the recent currency unrest in Europe has had a considerable impact on Japanese and other currency markets. It is now twenty years since the world moved to floating exchange rates. Although we have made determined efforts over the last two decades to maintain a degree of stability in currency markets, there have been occasions, as can be seen in the events since last year’s Annual Meetings, when the markets have exhibited marked instability because of speculative pressures. This has made us aware once more of the need for stability in the exchange rates of the major currencies. To this end, Japan believes it is essential that the leading countries pursue cooperation in implementing sound macroeconomic policies and that we cooperate closely in exchange markets.
Support for the Developing Countries
Next, I would like to speak of the need for support for the developing countries. Although it is most gratifying that the developing countries as a whole have recently achieved steady growth, it should also be noted that the disparities among regions have become more pronounced and that poverty reduction still remains one of the highest priorities for development policy. Continuous and tenacious support for the developing countries is crucial if sustainable world economic growth is to be achieved. It goes without saying that the industrial countries’ assistance cannot be truly effective unless the developing countries execute sound macroeconomic policies, promote structural adjustment, and make other bootstrap efforts. These steps, in turn, imply a need for steady efforts to promote human resource development as well as institution building conducive to these bootstrap efforts. Assistance to the developing countries has long been one of the main pillars of Japanese efforts to contribute to the international community, and it is significant that Prime Minister Hosokawa’s first policy speech to the Diet included a ringing declaration that Japan is determined to make a contribution to the international community in full awareness of its international position and responsibilities.
Currently, the funds necessary for economic development in many developing countries remain insufficient. Even in the developing countries that have made relatively steady progress, there is a great demand for funds for the environment, infrastructure improvements, and other purposes. Japanese official development assistance (ODA), including yen loans from the Overseas Economic Cooperation Fund, and non-ODA, such as untied loans from the Export-Import Bank of Japan, are, I believe, very important both as financial flows, as a means of official financial cooperation, and as a catalyst for the inflow of private sector capital to the developing countries. Realizing this, Japan announced the Funds for Development initiative in June, through which a total of $120 billion is intended to be provided over the next five years, including both ODA and non-ODA funds. Cofinancing with the Bank and the Fund is one of the features of this initiative. The Export-Import Bank of Japan, which extends loans in parallel with the extended Fund facility at present, intends to start parallel lending with a certain type of IMF stand-by arrangement to provide support in the initial stages of the economic structural adjustment process. We are also working to accelerate cofinancing with the World Bank by drawing upon its experience and expertise in order to provide appropriate and timely support for infrastructural improvement and environmental programs it initiates.
It is essential for the developing countries to have sufficient new money. Bearing this in mind, Japan believes that we should be cautious about official debt relief because it has a negative effect on the additional inflow of new money. To support the assistance of the Fund, the Bank, and the other multilateral development banks to developing countries, we need to ensure adequate capital resources for these institutions. Given how difficult it is for the low-income countries to find access to private capital markets, it was most significant that agreement was reached late last year on the Tenth Replenishment (IDA-10) of $18 billion for the International Development Association, the main channel for concessional capital. Japan took an active part in these negotiations and agreed to provide about $3.6 billion of the total amount. It is essential that we work to enhance capital resources of regional development banks according to their financial needs. The Asian Development Bank’s Fourth General Capital Increase (GCI-IV) is especially urgent. Capital increases are also needed for the Inter-American Development Bank and the African Development Fund.
Given the approaching cutoff date of November 1993 for the current enhanced structural adjustment facility (ESAF), we have to expedite our discussion of the successor facility, so that the Fund can continue to support comprehensively the macroeconomic adjustment initiatives and the structural reform efforts of the low-income developing countries. Now that a consensus to use an extended ESAF trust structure has been reached, contribution from the broadest possible circle of countries is urgently required as it was in the case of the current facility. I want to take this opportunity to state to you that Japan, having contributed a significant share of the total amount contributed for the current ESAF, is ready to contribute a comparable share to the successor facility as well. Having said this, I would like to invite broad commitments from potential contributors and expect the very best efforts by the IMF Managing Director.
The global environment issue remains very important. The Global Environment Facility established under the Bank’s initiative should continue to play a central role in this area.
I think, in drawing up development strategies for developing countries, it is useful for multilateral development banks to analyze the experiences of the countries and regions that have succeeded in achieving economic growth and improving their income distributions. From this point of view, I believe that the Bank’s recent report, The East Asian Miracle, is a most appropriate piece of research.
Supporting the Transition to Market Economies
As regards support for the former centrally planned economies, I believe the international community should continue to support these countries’ efforts to shift to market economies. In this connection, I very much welcome the fact that the Fund has established the systemic transformation facility (STF) in consideration of these countries’ special conditions, and I think it bodes very well for the future that the Kyrgyz Republic and other countries are engaged in vigorous reform efforts with policy advice from the Fund and are making use of the STF.
Major progress has been made in the international framework for support for Russia since the Annual Meetings last year, with the agreement on the rescheduling of its official debts in April, the adoption of a comprehensive support package at the Joint Ministerial Meeting in Tokyo of the Group of Seven on Assistance to the Russian Federation, the agreement at the July Tokyo economic summit on a special privatization and restructuring program, and other developments. The Bank has played a central role in providing support for privatization and other structural adjustment reforms. The support for Russia is to be provided in ways that complement its self-help efforts and is to be phased in with the progress of the reforms. We hope that this support will be extended smoothly in line with progress in reform and appropriate policy implementation by Russia.
At the same time, we must not forget the importance of reforms in countries other than Russia. I am, for example, glad to see that serious efforts continue to be made in the formerly planned economies of Viet Nam, Cambodia, Mongolia, and the Lao People’s Democratic Republic to shift to market economies. I also welcome the fact that financial assistance by international financial institutions, including under the STF, is being strengthened along with the bilateral assistance framework being formulated by donor countries. Japan intends to continue to take positive initiatives to support these countries’ efforts, including by serving as co-chair of the donors’ meetings.
Toward a More Open Trading System
Finally, I would like to say a few words about trade. Efforts to maintain and strengthen the multilateral system of free trade and to turn back protectionist tendencies are prerequisites to expanding world trade and achieving global economic growth. Japan has been actively participating in the Uruguay Round negotiations, and we believe it is essential that the negotiations be successfully concluded by the end of the year. Achieving substantial results in these Uruguay Round negotiations is crucial to maintaining the multilateral system of free trade, and I suspect that a successful Uruguay Round can also contribute to deterring undue attention to bilateral trade imbalances. There have also been moves for regional integration in the Asia-Pacific region as economic ties there have grown stronger. We believe that it is important to continue the dialogue while maintaining this region’s openness to extra-regional partners and intend to contribute along these lines. Whatever the region, we believe that regional integration must work to complement the multilateral system of free trade and to promote global trade as a whole.
With the end of the cold war, the world is moving to a fully integrated economy based on market mechanisms, and we are looking for new global paradigms. Against this background, it is incumbent upon all of us—industrial countries, former centrally planned economies, and developing economies alike—to pursue prudent macroeconomic policies in order to achieve the sound development of the world economy. Closely monitoring world economic conditions, the Bank and the Fund have a central responsibility for supporting and encouraging sound policy efforts by all member countries based upon free market principles and for resolving the many problems facing the world economy. Aware of its international standing and responsibilities, Japan intends to continue to support the Bank and the Fund vigorously in their ambitious efforts to contribute to resolving our shared global problems.
Statement by the Governor of the Bank and Alternate Governor of the Fund for Switzerland—Otto Stich
With these Annual Meetings, Switzerland has now been a member of the Bretton Woods institutions for one year. After some comments on the world economy, I will therefore take the liberty of drawing up our first balance sheet. The world economy is moving stagewise into recovery, with the United States and the United Kingdom blazing the trail to a certain extent in this direction. This slow process improves the prospects of sustained, noninflationary economic growth. Yet, the upturn is still too weak to bring about any real reduction in unemployment, which is still disturbingly high, especially in Europe. And experience has shown us that high unemployment fuels protectionism and threatens social peace. It is therefore essential that every effort be made to eliminate the structural causes of rising unemployment, with special emphasis on Europe. Today’s rapid technological advances and worldwide competition call for permanent adaptation of the work force’s qualifications. Our education and training system must be set up accordingly. Further measures to increase vocational and geographic mobility are needed. Then excessive burdening of labor by social charges must be avoided. Only in this way can an economy remain competitive, with the result that its enterprises are able to create jobs. Finally, the trend toward deterioration of the budget situation now evident in most industrial countries must be reversed. Healthy public finances coupled with a monetary policy focused on price stability create the conditions for a competitive economy.
It is today most encouraging to note that some of the countries whose economies are in transition and a number of developing countries have found the path to robust economic growth. This is the outcome of a consistently implemented stabilization and structural adjustment policy. And it should serve as a shining example to spur other still-hesitant countries to tread this arduous path. Failure to act now can only make adjustment ultimately more difficult. Unfortunately, the position of the poorest developing countries, particularly in Africa, is still far from promising. Despite all their efforts, they will find it hard to attract foreign investors and to obtain access to international capital markets. These countries will remain dependent on development assistance. The industrial countries must ensure that the restructuring of their economies is not accomplished at the expense of those nations.
The tasks of the International Monetary Fund have been correctly set, as before, and must be pursued energetically and with creativity. These tasks comprise supervision of the world monetary and payments system and of member countries’ economic policies, on the one hand, and provision of balance of payments assistance to countries that are consistently carrying out the necessary restructuring measures, on the other. In order to maintain its efficiency and flexibility, the Fund should be kept small and uncomplicated in terms of its organization and the instruments available to it. To improve the effectiveness of its program, the Fund will not, however, be able to avoid giving increased attention to the social consequences of reforms and to the ecology. It is clear that in addressing these issues the Fund will have to work closely with the World Bank, in order to utilize the experience gained by that institution. In this connection, we believe that the confidentiality of the dialogue with the member countries must remain ensured. However, we also consider that the Fund’s program and its technical assistance must be subject to continuous evaluation. We must not fail to congratulate the Fund on the establishment of the systemic transformation facility, which represents an appropriate and prompt solution for supporting the transformation process. It is therefore regrettable that the countries for whom this facility is intended have so far made little use of it.
With the enhanced structural adjustment facility (ESAF), the Fund has an instrument that can be used to support the radical structural adjustments and stabilization efforts in the poorest countries. We accordingly supported the establishment of the successor facility from the start. We hope that the countries that opposed a new allocation of SDRs will be more receptive to the successor facility. Since Switzerland made a sizable contribution to the ESAF, we would like to see an appropriate distribution of the costs of funding the successor facility. We also consider it important that the countries of the former U.S.S.R. that meet the necessary criteria should also have access to the ESAF successor facility. Switzerland is accordingly prepared to vote for an allocation of SDR 36 billion. The uneven distribution of monetary reserves in the world can in fact be considered a systemic risk. Moreover, the circumstance that 38 new member countries have not yet received any SDR allocation raises the question of equal treatment of members. As we see it, however, the SDRs allocated ought to be held in reserve and should not be used as a source of cheap financing. Finally, we attach great importance to strengthening the supervision of member countries’ economic policies, and especially those of the industrial countries. On the one hand, this will provide a possibility to introduce more symmetry into the worldwide adjustment process. On the other hand, the persistent instability of the exchange and financial markets calls for improved economic policy coordination.
Now the World Bank. It seems to me that we have been hearing primarily about the Bank’s failures recently. Its numerous successes are, one could almost say, bashfully concealed. The picture we have been given does not line up with the facts. World Development Report 1993, subtitled Investing in Health, points up the success of international development cooperation, the keystone of which is the World Bank. Since 1950, life expectancy in developing countries has risen from 40 years to 63 years, child mortality is down from 280 to 106 per 1,000 births, and certain scourges of humankind have been eradicated, such as smallpox, or else curbed, as in the case of poliomyelitis. However, in the sphere of poverty reduction, too, which is its real core purpose, the Bank has no reason to hide its light under a bushel. In China and in Indonesia, which are major recipients of World Bank lending, over the space of twenty years the proportion of the poor in the population has been reduced by more than two thirds. In the countries that first moved into the transition process a few years ago, the first achievements are now being seen: Poland has posted the highest GNP growth in Western and Central Europe, and even Albania expects to attain 10 percent growth this year.
Of course, these results are attributable in the first place to the countries’ own efforts, and they are to be commended on this. However, without the considerable financial assistance furnished by the Bank and its cooperation with the Fund, these impressive accomplishments would scarcely have been on the same scale. It is to the Bank’s credit that it constantly seeks to verify the effectiveness of its prescriptions, that it takes criticism and experience gained seriously, that it pays due heed to new needs and future circumstances, and that it is prepared to modify its policies. I assert without reservation that as a result of the action program approved by the Board following the Wapenhans Report, the effectiveness and impact of Bank programs and projects will be heightened. What is sought is quality. Right in a time of budget constraints, in the trough of a cyclical downturn when certain symptoms of fatigue are apparent in the international donor community, it is important to be sure that the available capital is efficiently performing its assigned task of promoting development. I also welcome the intention of strengthening the supervision of implementation of programs and projects, and of ensuring that borrowers fully and completely identify with the Bank’s goals. The Bank’s new information policy is most welcome. Timely information will foster the above-mentioned identification of the peoples and governments concerned with the Bank’s goals and promote understanding of the Bank’s aims in the donor community. The decision to set up an independent inspection panel to verify, if need be, observance of the Bank’s rules and procedures demonstrates, finally, that the Bank does not flinch from opening its books.
Ever since the Bank’s establishment, its task has been to deploy its activity in the problem-beset regions of this world, in difficult sectors and for the poorest segments of the populations concerned, and to perform a leadership role where, because of considerations of risk, private enterprise does not yet go or is still hesitant. I advocate bold action. However, the Bank’s sound financial position must not be jeopardized in so doing. I accordingly support here, too, the steps begun to strengthen substantially the provisions and reserves. Despite its successes, the World Bank’s task remains to improve vastly the economic and social well-being of a large number of countries. In their addresses, Mr. Camdessus and Mr. Preston presented a sobering picture of the political, economic, and social situations of numerous countries. It is the duty of the Bretton Woods institutions to support the progress of these countries by word and deed. The Fund and the Bank have demonstrated in the past that they are equal to this task. Now that the Bretton Woods institutions have been in existence for nearly fifty years, there is no reason for this to change.
Statement by the Governor of the Bank for El Salvador—Mirna Lievano de Marques
On behalf of the Government of El Salvador, I would like to take this opportunity to thank the international financial community for supporting our efforts to consolidate peace and democracy in El Salvador. As we have mentioned on previous occasions, President Cristiani began his administration in 1989 with three basic aims in view: achieving peace, regaining economic growth, and fighting poverty. Over the course of the last four years, we have kept this forum apprised of our most significant political, economic, and social achievements. This forum was at our side when we took office with aspirations to achieve peace, as it was again later in January 1992 with the signing of the peace accords, which marked the end of the armed conflict and the commencement of efforts to achieve national reconstruction. It is our hope that this process will at last come to fruition with the forthcoming elections for president, deputies, and mayors scheduled for next March—the first elections to involve participation by the entire political spectrum in El Salvador.
In mid-1989 the Government began implementing the 1989-94 Economic and Social Development Plan, designed to reduce the existing macroeconomic disequilibria while laying the groundwork for sustained economic growth, greater prosperity, and a better quality of life for all members of society, particularly those living in extreme poverty. Of the principal measures implemented to date, which were supported by programs with the International Monetary Fund and the World Bank, we might mention:
privatization of state-owned banks and the initiation of privatization of other publicly owned enterprises;
elimination of price controls, liberalization of interest rates, and the unification and liberalization of the exchange rate;
elimination of most quantitative restrictions on foreign trade, the substantial reduction of tariff dispersion, abolition of the state coffee and sugar monopolies, and El Salvador’s entry into the General Agreement on Tariffs and Trade;
reform of the tax system, including the introduction of the value-added tax, adjustments to the rates charged by public utilities, and rationalization of public expenditure;
initiation of reform of the central government, with particular reference to the budget system, the government procurement system, and the customs system.
All of these measures have been accompanied by compensatory programs and projects intended to soften the impact that the stabilization and economic adjustment programs would have on the general public (and particularly on the most vulnerable members of society). The compensatory social policies have focused on the provision of basic services, with emphasis on the construction and rehabilitation of the basic social infrastructure, and with particular reference to those communities in extreme poverty. The principal programs have included preventive health and nutrition, education and school lunches, day-care facilities, water supply and sanitation, assistance for microenterprises, and the opening of community banks. In addition, a social investment fund has been established with the aim of providing an expeditious response to the most pressing needs of groups in extreme poverty. In addition, work has begun, with assistance from the World Bank, on implementing the program for rehabilitating the social sectors, which is designed to strengthen the Ministries of Health and Education and to improve the quality and coverage of services they provide, as well as the program for restructuring the Ministry of Agriculture.
In the first three years that the Government was in office, GDP grew by an average of 3.8 percent a year compared with 1.5 percent during the preceding five-year period. GDP is expected to increase by approximately 5 percent in 1993. Investment, both public and private, has increased remarkably. Although the fiscal deficit after grants fell from 4.2 percent of GDP in 1989 to 2.5 percent in 1991, it increased to 4.1 percent of GDP in 1992 on account of the increase in public spending entailed by the peace accords, the drastic decrease in coffee export tax revenue, and the drought, which caused financial problems for the electricity company. The goal is to reduce this deficit by 25 percent in 1993. It is hoped that inflation, which reached 23.5 percent at the end of 1989, can be reduced to about 12 percent by the end of this year. The balance of payments has also recorded an improvement for three consecutive years, making it possible for arrears in external payments to be eliminated as of 1991 and for international reserves to be accumulated by the Central Reserve Bank. However, the trade balance has recorded further deterioration on account of the process of economic liberalization and the greater buoyancy of productive activity.
Despite these achievements, El Salvador still has formidable challenges to contend with. First, it is necessary to expedite the implementation of the national reconstruction program and to proceed further with the democratic reforms, including the strengthening of the judiciary and the Office of the Human Rights Attorney, and with the consolidation of the new National Civil Police. Second, it is necessary to reduce the lingering macroeconomic disequilibria. Third, it is important to strengthen the market economy, competition, and consumer protection while pursuing industrial restructuring and technological progress. Fourth, it is vital for El Salvador to become more fully integrated into the international economy in conjunction with our regional neighbors. Fifth, it is essential to protect the environment. Sixth, programs aimed at overcoming poverty should be pursued and intensified. And finally, the state needs to be modernized.
We are aware that the public sector will continue to represent one of the greatest obstacles to meeting these challenges successfully. Accordingly, the Government is implementing a public sector modernization program, the primary aims of which are to modify and substantially improve the conduct of economic and social policies by enhancing the efficiency and effectiveness of public sector operations while promoting full participation by civil society in the conduct of these policies. This program is being supported in part by the World Bank through a second structural adjustment loan that was recently approved.
This program will include efforts to:
strengthen the strategic management capability of the central government, by reforming its institutions and simplifying and rationalizing its operations and procedures;
improve the quality and allocation of human resources;
improve the mobilization, allocation, and utilization of financial resources by means of a new system of integrated financial administration; and improve fiscal administration with the aim of boosting the collection of revenue;
decentralize the implementation of public policies by strengthening the management capacity of municipal governments by placing them within a new framework together with the operations of central government and the efforts of civil society;
transfer the provision of certain services to the private sector, and pursue privatization;
rationalize and modernize government regulations in order to enable the productive sector to develop more efficiently.
However, additional financial assistance will be required to implement all the reforms proposed in the modernization plan, which will eventually form a crucial part of the agenda for the forthcoming administration. This additional assistance could take the form of a sector loan for public sector reform, which could be supported by the World Bank.
In spite of all the difficulties, which are a matter of record, the Government of El Salvador over the last four years has proven its commitment and political willingness to implement a far-reaching economic reform program, assisted by two structural adjustment loans from the World Bank. To further consolidate the reforms implemented since June 1989, we are currently preparing a draft economic and social program for the next Government.
Allow me, if I may, to end on a personal note. This will be the last time that I participate in this forum as the representative of President Cristiani’s Government. The last four years have been a time of intensive activity, in which we have had to contend with numerous problems; however, as we depart, we can take some satisfaction in leaving behind a country in peacetime, experiencing full economic recovery, with greater opportunities for all Salvadorans to reap the benefits of economic growth. Many of these achievements would not have been possible without the resolute support of the World Bank and the International Monetary Fund since the beginning of our time in office.
September 28, 1993.