Discussion of Policy at Third Joint Session1
- International Monetary Fund. Secretary's Department
- Published Date:
- November 1993
Statement by the Governor of the Bank for Greece—Petros Doukas
The main challenge confronting us today is to restore sustained economic growth in the world economy. Widespread uncertainties still surround the resumption of economic activity in the leading industrial countries. The persistence of high fiscal deficits in a number of countries puts pressure on interest rates and absorbs global savings while undermining exchange rate stability and world growth. In this respect, the recent deficit reduction packages in the United States and in Germany are important steps in the right direction. Growth and employment prospects would be enhanced by a more coordinated policy implementation in industrial countries, by greater flexibility in labor markets, and by a rapid conclusion of the Uruguay Round.
It is encouraging that many developing countries in Asia and Latin America have attained high rates of growth, despite weak global economic activity. Their impressive economic performance underscores the benefits of sustained stabilization and reform efforts involving fiscal consolidation and the reinforcement of market forces. Similarly, in several of the countries in transition to market economies there are promising signs that output is responding to market reforms and to a stable macroeconomic environment. The growing recognition of the benefits of disciplined financial policies and reliance on market forces enhances the capability of the world economy to generate growth and jobs.
In Europe, economic activity remains weak, and unemployment continues to rise. Though attributed partly to cyclical developments, there is a risk that the increase in unemployment would prove difficult to reverse in the absence of structural reforms. Following the unprecedented turmoil in the exchange rate mechanism (ERM) over the past year, the decision to widen temporarily the fluctuation bands provides scope for a gradual easing of interest rates consistent with market expectations and with the commitment to price stability. This would support economic recovery in Europe and help resolve the policy dilemmas that contributed to exchange market pressures. An early return to narrow bands during stage II of the economic and monetary union (EMU), due to begin next January, should be avoided before the necessary conditions for the smooth functioning of the ERM have been re-established. The requirement for stability is not narrow fluctuation bands. It is sustained convergence efforts and a strong commitment to policy coordination. Indeed, a return to the previous narrow bands is not a prerequisite for the eventual move to a single currency, a commitment whose importance cannot be overstated. No other monetary arrangement can offer the stability associated with a single currency.
The Greek economy has started to converge with the rest of the European Community (EC). Following the unsustainable buildup of public debt in the 1980s, the fiscal deficit was halved over the past three years through expenditure control and discretionary tax measures. Discipline and transparency were restored in the broader public sector. The social security system was reformed to ensure its long-term financial viability; tight limits were imposed on the wage bills of public enterprises and entities; tax evasion has been reduced through computerization and cross checking of information and through measures to increase voluntary compliance; and primary fiscal surpluses have emerged since 1992 for the first time in decades, while public spending has shifted toward growth-supporting priorities, including infrastructure investment.
In parallel, important progress has been achieved in structural reforms aimed at improving the functioning of markets. Price and exchange controls have been lifted, the financial system has been liberalized, and regulations stifling competition have been removed. Income tax rates were cut to levels that are among the lowest in industrial countries; distortionary taxes on banking transactions were eliminated to reduce borrowing costs; and the legal framework governing capital markets and the banking system has been revamped. Most state-owned enterprises in the industrial sector have now been privatized, and the framework has been created for private sector participation in sectors that have traditionally been public monopolies, such as energy and telecommunications. Private sector funding and operation of large projects, including the new Athens airport, have been secured. Privatization of public utilities, which is critical for the success of the reform program, has, however, run into intractable opposition by special interest groups.
These policies have met with considerable success. Sound financial policies have improved the external position and inflation performance. Foreign exchange reserves have been rebuilt; the exchange rate has been strengthened; and market confidence has been restored. At the same time, structural reforms have improved efficiency and growth prospects. The recovery of economic activity, though moderate, is well under way. Although fiscal imbalances have severely limited the scope for countercyclical fiscal measures, growth has consistently exceeded the EC average while the inflation differential has narrowed. Over the past three years, we have thus converged with our EC partners in both nominal and real terms. Greece is now in a much stronger position to reap the benefits of the single market and to participate in EMU.
But despite recent progress, the recovery remains fragile. Given the high degree of integration of the EC economy, Greece’s high public debt and the weak international economy create significant risks. Any policy reversal would undermine confidence and threaten the progress that has been achieved. We thus recognize that the fiscal consolidation and structural reform efforts under way need to be sustained over a number of years so as to achieve stability and a lasting improvement in living standards. It is essential to build on and reinforce the recent positive trends that offer the basis for sustained growth.
But efforts of individual countries are not enough. An essential contribution to improving economic prospects worldwide would be the reinforcement of the multilateral trading system and renewed efforts to further liberalize international trade. We have been struggling for seven years to bring the Uruguay Round to a successful conclusion. Failure to conclude the Round this year will result in trade disputes and undermine the prospects for sustained economic recovery worldwide. Trade is a vital lifeline to better economic performance, especially for economies in transition. It would indeed be a sad paradox if these countries, having implemented bold structural reforms, should now be forced into defensive actions by a failure of industrial countries to allow freer access to Western markets.
Statement by the Governor of the Bank and the Fund for Malaysia—Anwar Ibrahim
When we met here last year, the world economy was under the long shadow of recession. Although there were expectations—robust economic growth in East Asia and a mild recovery in the United States— these had been offset by the worsening situation in some countries belonging to the Organization for Economic Cooperation and Development. Indeed, notwithstanding the problems of the developing countries, the main responsibility for strengthening world economic growth now lies with the industrial countries. As long as the industrial countries fail to pursue more balanced macroeconomic policies, they will be a major destabilizing force in the world economy.
Economic recession has raised the specter of unprecedentedly massive unemployment in the industrial countries. Such extensive unemployment will be a fertile ground for growing protectionist interests, racism, and strong anti-foreign sentiments. We are, therefore, anxious to see the Group of Seven implement speedily and effectively the pledges they have made to increase macroeconomic policy coordination among themselves to expedite economic recovery.
It has been recognized that the resilience of the East Asian economies in adopting appropriate macroeconomic adjustment measures— privatization and general economic reforms—has been the foundation for sustaining economic growth with stability. Implementing these structural adjustment measures and appropriate macroeconomic stabilization policies requires some degree of persistence and courage.
The conclusion of the Uruguay Round of multilateral negotiations to liberalize trade is essential for the growth of the world economy and crucial for the development process in the South. We all hope that the Uruguay Round will be concluded by the end of this year and not delayed by any insistence on additions or changes in the draft agreement.
Many middle- and low-income countries that are making slow progress in their development efforts require not only markets for their exports but also continued support from the international community, in terms of financial and technical assistance and the transfer of technology. We therefore welcome the establishment, earlier this year, of the systemic transformation facility to help the urgent needs of countries in transition. While this effort is commendable, the International Monetary Fund must ensure that the facility is also extended to all member countries experiencing similar difficulties. Equal opportunity for access to this facility should be the guiding principle.
We are also pleased to note the progress made toward resolving the debt problems of middle-income countries following the implementation of structural adjustment and reform programs, with the support of the Fund and the World Bank. However, we are concerned that the debt situations of many low-income and a number of lower-middle-income countries remain severe, despite concessional rescheduling terms offered by their creditors. We suggest that the terms be made more flexible, according to the debtor’s capacity to pay. Creditors should also provide further debt reduction to a number of countries to help reduce their debt payments to manageable levels.
During the last year there was a net increase in resource flows, much of which constituted private flows. However, these flows were concentrated among a small number of countries. The budget cuts from donor countries resulted in the reduction of official development assistance, which is now stagnating at a level well below the internationally agreed target of 0.7 percent of donor GNP. Yet the necessity for aid is now greater than ever before. We hope all members strongly support the speedy ratification of the Tenth Replenishment of the International Development Association. We are also equally concerned over the decision by the Fund to adopt the purchasing power parity (PPP) concept for the purpose of aggregating individual country output. No developing country deserving of financial assistance should be disqualified simply on the basis of PPP income. We, therefore, urge greater transparency in the use of the PPP concept.
Ensuring the success and improving the development impact of the Bank’s current projects and loans is as important as giving out new facilities. Thus, I would like to congratulate the Bank, and in particular its President, for initiating the bold actions called for by the Wapenhans Report to improve the effectiveness of the Bank portfolio management and to ensure greater accountability by the Bank. The Bank has continued to play a very important role in supporting developing countries moving toward market-oriented economies. The Bank is again called to play its part for the people of Palestine and South Africa. With respect to Palestine, we need to translate the peace agreement into a framework that would fulfill the hopes, ideals, and aspirations of the Palestinian people.
We support the call for a successor to the enhanced structural adjustment facility (ESAF). The continuing need for the Fund’s concessional financing is clearly evident, not only to sustain ongoing programs under ESAF, but also to support new reform efforts of low-income countries that have yet to benefit from ESAF and are currently in arrears to the Fund. Finally, we also support the call for a modest allocation of SDRs during the remainder of the Sixth Basic Period and a post-allocation redistribution of SDRs. This is to enable low-income developing countries to reach appropriate levels of international reserves to meet their liquidity requirements. Such an allocation will not be inflationary but will facilitate the structural adjustment being undertaken by many developing countries.
No one should dispute our common resolve to achieve democracy, honor human rights, and protect the environment. But what is resented is a condescending approach to some countries preaching these ideals as a new kind of theology. We have also to accept the need to enhance and translate these ideals in all societies. But we have to accept a multitude of social, economic, and political problems encountered by different countries with equal urgency. The extent of the resentment among many developing countries is shown by the continuing debates on aid conditionality and structural adjustment, which are viewed as an attempt to impose a set of new beliefs. Some degree of flexibility is surely required in the design and timing of the implementation of adjustment policies. Similarly, countries should not feel inhibited from expressing their views because of their near total dependence on the Fund and the World Bank.
Our concern with economic growth should not, however, lead us to forget that there is a deep-seated and abiding human concern with equity. Growth with equity can ensure the stability that we are all striving for. Our concern with growth must, therefore, be matched with a continuing concern with justice.
Statement by the Governor of the Bank for the Netherlands—Wim Kok
The world faces huge challenges. Mounting unemployment, strained international trade relations, continuing poverty in low-income countries and stagnating reforms in some countries in transition are the most urgent issues to be resolved. A common strategy to create the conditions for sustainable development, growth, and employment needs three pillars: first, cooperation and policy coordination between all countries in a multilateral setting; second, a stable macroeconomic framework to bolster confidence and reduce uncertainty; and third, structural adjustment to make it easier to absorb shocks, even those of a monetary nature. Macroeconomic stability requires a return to fiscal health. Current budgetary trends—particularly in most countries of Europe—are unsustainable. If we want to create a strong basis for a lasting reduction of real long-term interest rates, a reduction of debts and deficits is indispensable.
The need for sound budgets is all the greater because of future pension liabilities and environmental burdens. If adjustment policies are neglected, the burden will be shifted to future generations. Now that many developing countries and countries in transition are faced with the need for environmentally sustainable development, industrial countries should stand ready to support this process through bilateral and multilateral aid programs. A successful completion of the negotiations on the replenishment and institutional restructuring of the Global Environment Facility is essential. Environmental sustainability may never be regarded as a luxury that we cannot afford. It is the lack of sustainability that we cannot afford.
A shift of taxation from labor to the use of depletable resources and polluting activities would contribute to attaining sustainability. Welcome side effects would be a higher demand for labor and a stimulus for innovation. International agreement on the introduction of a CO2 energy tax, as being considered within the European Community (EC), would be an important step forward.
The rise in unemployment is a threat to economic and social stability and a waste of human resources. Powerful and combined efforts are needed to stop this process. In the EC, a so-called White Paper on employment growth and competitiveness is being prepared. The first main element is a bold investment program: a shift from consumption to investment in infrastructure and environment. The second is education and training. The third is a better functioning of the labor market to increase job opportunities, especially for newcomers and lower-skilled workers. In addition, there is a need for a restructuring of social security mechanisms to focus better on the people who are most in need. Within the EC, conditions must be created for a credible return to exchange rate stability. We have learned again that it is not easy to maintain exchange rate stability, certainly not with differences in cyclical position and fiscal imbalances. But it is certainly possible, provided the right attitude and the will to stick to the rules of the game are there.
It is clear that trade is an engine for growth, employment, and development. It fuels innovation and productivity. Focusing on sectional interests and bilateral imbalances risks a downward slide into managed trade and a loss of prosperity. The Uruguay Round is now in its final stages. A failure would mark the decline of the multilateral trade system. History would not look kindly on us. The negotiations should be pursued with maximum dedication. All efforts should be focused on bringing this Round to a successful conclusion. The joint statement of Messrs. Camdessus, Preston, and Sutherland should be endorsed by all of us.
Courageous structural measures, including market opening, have been implemented by a growing number of developing countries. For the group as a whole the results are impressive. Their continued rapid economic expansion highlights their crucial contribution to global economic prosperity. Successful developing countries have invested in human resources, achieved macroeconomic stability, and allowed market forces to play their part. High rates of domestic saving have proved to be of cardinal importance. We urge the international financial institutions to deepen their understanding of the impact of these processes on poverty, employment, and the environment.
Many heavily indebted low-income countries still face enormous economic and social hardship. Adequate support from the International Monetary Fund and the World Bank remains essential. The Netherlands favors a successor to the enhanced structural adjustment facility (ESAF) and is willing to contribute to the interest subsidy account. In the poorest countries, undiminished concessional assistance is needed. The budgetary problems of the industrial countries do not justify cutting back on crucial international transfers. I wholeheartedly welcome the enhanced concessions by the Paris Club, as well as the exit arrangement for countries that have properly implemented IMF programs and Paris Club arrangements.
The developing countries themselves have the responsibility to create the framework in which stabilization and structural adjustment programs can take hold. Externally imposed conditionality cannot substitute for this. Good governance is both a precondition for and an integral element of successful adjustment. The lack of basic health services for vast parts of the population is a structural bottleneck. Governments of many developing countries should be aware of the fact that the future of their country depends on the health, education, and participation of all people, not only of the happy few.
The key role for structural reforms, particularly the restructuring and privatization of state-owned enterprises, is also apparent in the countries in transition. Governments have an important part to play: they must create the framework for fair competition and provide social safety nets and social services such as education and health care. The vigorous pursuit of reform by the countries themselves is crucial to success. The international community must play its part by opening its markets and by providing technical and financial support.
Major political developments give us hope for the future. First: the historic peace agreement between Israel and the Palestine Liberation Organization (PLO). The partners themselves face a major challenge now, but the donor community should step in generously. The World Bank with its unrivaled experience should play the leading role in coordinating the efforts to support development and prosperity in the region. Second: the process toward real democracy and freedom in South Africa. We applaud the progress being made in the process of constitutional reform and democratization. Opening up within will lead to a reopening of the rest of the world to South Africa itself.
All together there is reason for hope, but we have a heavy agenda for the coming years: bringing rising structural unemployment to a halt, strengthening cooperation in a multilateral setting, and concluding the most ambitious trade agreement ever. Let us do what we can—each of us—to make decisive progress on these counts as a forceful contribution to sustainability, development, social justice, and our common future in one world.
Statement by the Governor of the Bank and the Fund for India—Manmohan Singh
I would like to join my fellow Governors in welcoming the new members—the Czech Republic, the Slovak Republic, Croatia, Slovenia, Tajikistan, the former Yugoslav Republic of Macedonia, and the Federated States of Micronesia. The Bank and Fund have now become truly universal institutions. This is reflected in the expanded Board of Governors, which now has a truly global responsibility to discharge.
Today, we confront an unusually complex global economic situation in which adverse trends are mixed with real reasons for hope. On the negative side, world economic growth has remained stalled at around 2 percent for the fourth year in succession. Growth of industrial economies has been even slower and has fueled protectionist pressures in these economies. In the transition economies of Eastern Europe and the former Soviet Union, output has fallen for the fourth year in a row. Most African countries have suffered another year of decline in living standards, as painful adjustment programs have failed to elicit significant supply responses and the inexorable decline in commodity prices has exacted a heavy toll on real incomes. Many developing countries remain burdened with high levels of external debt, and flows of official development assistance have stagnated. Indeed, net transfers have been negative. The outlook for world trade remains clouded in uncertainty on the outcome of the long drawn-out Uruguay Round of Multilateral Trade Negotiations. These adverse features of the global economic situation are real, and we risk underestimating them only at our peril.
Yet I believe there is another side to the global picture that offers grounds for hope—but only if the international community acts boldly and cooperatively to implement a well-coordinated package of progressive policy initiatives. The rapid growth of Asian economies and the more recent turnaround in economic performance in many Latin American nations highlights the possibilities for better global economic performance through fuller exploitation of the untapped growth potential of the developing world and the economies in transition. For their part, developing countries and transition economies are engaged in far-reaching structural reforms aimed at stimulating greater efficiency, investment, and growth. We are at a rare, opportune juncture when international initiatives to promote a more favorable external environment will yield large payoffs not only for these countries, but also for the world at large. In the industrial countries, which continue to account for a preponderant share of world output and trade, there are clear signs of a basis for sustained recovery. Inflation is at a historical low; interest rates continue to fall; and the international banking system has adjusted to the problems created by the debt crisis. On a wider canvas, the age of superpower confrontation is behind us, and many stubborn regional conflicts are being resolved peacefully through negotiations. The progress being made in the Middle East peace process and the triumph of human dignity and democracy in South Africa give rise to exciting new opportunities. All this holds out promise of a more prosperous future. But the promise can be realized only through wise and decisive actions by the international community.
First, for the global economy to prosper, industrial countries must effectively coordinate their macroeconomic, financial, and trade policies to generate sustained noninflationary growth of output and productive employment. In this endeavor the IMF should play a pivotal role through effective surveillance of economic policies and outcomes in these countries.
Second, if the sweeping reforms of economic policy under way in developing countries and transition economies are to yield their full promise, access to world markets through an open, nondiscriminatory, multilateral trading system is absolutely critical. The Uruguay Round of trade negotiations must be speedily brought to a balanced and successful conclusion, paying particular attention to the needs of developing countries. In the eight years since the negotiations began, most developing countries have undertaken far-reaching, unilateral steps to open their economies. It would be tragic for these countries, and the world at large, if their demonstrated commitment to an open trading regime is frustrated by any failure at the Uruguay Round. The global economy cannot afford such a dismal prospect.
Third, the greater openness of so many developing countries and the integration of formerly centrally planned economies into the world trading system clearly add to the demand for international reserves. To help meet this demand, the international community should speedily agree to the IMF Managing Director’s proposal for a fresh allocation of SDR 36 billion. Any misgivings about inflationary consequences of such a modest allocation are obviously misplaced in today’s context of historically low inflation rates.
Fourth, the far-reaching reforms of policy under way in developing and transition countries call for enhanced levels of financial support from the donor community, in general, and the multilateral financial institutions, in particular. The overall flow of official development assistance must be increased and its growth sustained at an adequate rate. It is especially important to accelerate the flow of concessional assistance to low-income countries to supplement their own efforts to alleviate poverty and to help fund long-gestating investments in physical infrastructure and human resource development, which cannot be financed on normal commercial terms. More specifically, speedy action is necessary to put in place a successor to the enhanced structural adjustment facility of the IMF (which expires this November) and to complete the ratification process for the IDA-10 agreement. For the severely indebted low-income countries, greater flows of concessional assistance need to be complemented by generous and flexible debt-reduction packages.
Fifth, we must learn from the decade-long experience with adjustment programs in dozens of developing countries and implement four key lessons:
Adequate and timely flow of concessional assistance is a prerequisite for the success of adjustment programs;
Reform must be bold and decisive, but experience has also demonstrated the slowness of the supply response in developing countries, especially in low-income nations, where infrastructure is weak, savings are low, and private sectors are underdeveloped. We must therefore be realistic in phasing the reform and realistic in expectations in the short run.
Reform and adjustment efforts must be designed to minimize the burden on the poorest and most vulnerable sections of society. A successful program has to be framed around the basic vision of improving the living standards of the common man.
Above all, experience has shown that for successful adjustment, programs must command wide acceptance within the country and be rooted in accepted national priorities, concerns, and aspirations of the broad mass of its people. Without the necessary consensus, reform programs cannot be sustained.
Let me now say a few words about our own record of reform and adjustment. Two years ago, when India faced an unprecedented economic crisis, my Government launched a far-reaching program of macroeconomic stabilization and structural reform. We sharply cut our fiscal deficit, overhauled our foreign trade and payments regime, swept away bureaucratic controls on industry, and introduced a new foreign investment policy and a new program to widen the social safety net. We have also initiated reform in many other areas including taxation, banking, and capital markets. I am happy to report that the initial fruits of our efforts have fully justified the sweep of our reform program. Inflation has been brought down from 17 percent to 7 percent. Foreign currency reserves have climbed from around $1 billion two years ago to $7.5 billion today. Overall real GDP growth, which had fallen to about 1 percent in 1991-92, recovered to 4 percent last year and is expected to be about 5 percent this year. Exports are responding to the new policies and grew by 28 percent in U.S. dollar terms in the first four months of the current financial year. Foreign investors are also beginning to respond. We have now ratified the Multilateral Investment Guarantee Agency (MIGA) Convention and look forward to participating in MIGA as a full member.
We fully recognize that our program of economic reform has a long way to go, and we can brook no complacency. But the tangible achievements in the first two years have given us confidence to persevere determinedly on the arduous path of economic reform. I must also record our deep and sincere appreciation of the strong support and understanding extended to us over the past two years by the international community and especially by the Bretton Woods institutions under their wise and far-sighted leaders.
In the past few years, the world has changed beyond recognition. The cold war has ended, age-old regional conflicts have been peacefully resolved, and for the first time in decades the prospects for truly global economic and social cooperation are bright. Developments in science and technology have opened up new vistas of opportunity for mankind. The conquest of hunger, ill health, and illiteracy is a feasible goal of human endeavor provided we pool the knowledge and resources now at the disposal of the world community. Tomorrow’s world must also hold the promise of economic security not only for the richest quarter of the world’s population, but also for the poorer three fourths. It is this vision of global brotherhood, concern, and cooperation that must determine the future agenda of the Bretton Woods institutions. The fiftieth anniversary of these institutions is almost upon us, and they must reassert their original mandate as pacesetters in mankind’s quest for prosperity and global economic security.
Statement by the Governor of the Bank and the Fund for the United States—Lloyd M. Bentsen
We are on the threshold of one of the great events of our lifetimes, the prospect of true peace between Israel and its Arab neighbors. I sat with other leaders of our Government on the White House lawn two weeks ago to witness that historic handshake. It was something to see— peace coming to a land that has been troubled for far too long. But it is not a single, isolated event. It is the latest in a series of historic transformations we have been privileged to watch and participate in. Since the fall of the Berlin Wall in the autumn of 1989, we have ridden a tidal wave of change: from Berlin to Bucharest, from Prague to Port-au-Prince, and from Johannesburg to Jericho.
As we approach the end of the century, we face the opportunity for a period of truly global peace and prosperity. But peace and prosperity do not happen by themselves. They will require a concerted and concentrated effort from all of us.
Success will be determined largely by how we face three key challenges in the coming years:
rekindling global growth and reversing the rising tide of unemployment;
maintaining the momentum of global economic integration; and
reconstructing economies that have undergone crises.
Rekindling World Growth
In February, the Group of Seven (G-7) met in London and agreed we had to change course to rekindle growth and bring on recovery. In April, we defined a general strategy. At the Tokyo summit in July, further specific policy measures were agreed, and the strategy was fully fleshed out. The major elements are now in place—lower interest rates and budget deficit reductions in the United States and Europe, and lower interest rates and fiscal stimulus in Japan. That is a remarkable achievement.
In the United States, President Clinton’s program represents the largest deficit reduction in our history. This program, which is already being implemented, will cut $500 billion from the federal deficit over the next five years. This will sharply reduce my Government’s call on world savings, freeing up resources for investment throughout the world. Inflation and interest rates in the United States are now at their lowest level in two decades. The economy is preparing for a strong upswing. There are increasing signs that business investment is growing and that production will rise. Furthermore, President Clinton has just announced a fundamental reform of the entire U.S. health care system. These reforms will help ensure that all Americans have adequate, affordable health care. At the same time, the overwhelming cost of the system will be attacked, reducing the cost to the budget, to business, and to citizens. We intend to provide Americans with that which other developed countries provide their citizens.
In Europe, interest rates have fallen, and the basis is being laid for further declines. Some progress is being made on fiscal deficits, with declines expected in 1994. Inflation has been tamed; nowhere in the Group of Seven is inflation as much as 5 percent. We hope these trends continue.
Japan has just announced its third fiscal stimulus package, in an attempt to jump start an economy hovering around zero growth. We hope the deregulation aspect of the stimulus package will help unleash the power of the Japanese consumer and reduce the ever-growing trade imbalance. The best way to pursue long-term growth is to let Japanese consumers achieve the standard of living to which their economic performance entitles them. In this context, we are pleased that the Prime Minister has opened the door to a tax reform package that would put more money in the hands of consumers and get the economy moving again.
Despite these successes, the job-creating growth we seek still eludes us. The IMF has again revised downward its projections for world growth this year and next. We estimate that G-7 economies operating below their potential in the past three years have lost $600 billion in GDP. There are over 35 million unemployed people in the industrial countries—22 million in Europe alone.
We face the very real risk of arriving in Madrid one year from now with nothing more to say than, “Recovery is still right around the corner.” After three years, this line is beginning to wear a little thin. Growth cannot be achieved by pronouncement—only by good policies. Our challenge is to find the political will to implement those policies. I believe we are doing that. I am encouraged by the discussions in the G-7 and the Interim Committee this week. I believe we are all moving together.
But the fight against unemployment requires that we do more than stimulate demand. Structural unemployment has ratcheted up with each recession in the past three decades. It must be attacked at every level. Policies that spur demand will urge companies to take on workers and increase production. At the same time, we must eliminate the structural barriers employers face—the ones that convince them in a thousand little ways that hiring the extra employee is just not worth the trouble.
We will address both of these areas at the upcoming G-7 Jobs Conference in Washington that President Clinton proposed in Tokyo. We must learn from each other’s experience and find ways to restore our ability to produce jobs.
Maintaining the Momentum for Integration
Growth in the industrial countries is important not only to us, but to the whole world. An extra 1 percent in industrial country growth, sustained for three years, would provide more resources to the developing countries than all foreign aid flows to the developing world.
For many years, the shared ideology of anticommunism has been the glue that has bound the developed and emerging worlds together. Throughout this time we have forged strong ties, both political and economic, that have served us well. Without that common threat, we need to find other ways to knit the economies of north and south, east and west closer together. In that regard, the United States is absolutely committed to reaching a successful conclusion to the Uruguay Round. Open markets and global integration are the key to prosperity. The United States has always prospered from international trade and competition, and we will continue to do so. As President Clinton said recently, “We will compete, not retreat.”
This has so far been a decade of seized political opportunities. If the people of Russia and Eastern Europe, and of the Middle East and South Africa, have seized the opportunity for a better future, surely we can seize this opportunity to make that future more prosperous and offer our citizens higher standards of living. But we can do it only if we look forward and not backward. Let us finish the Uruguay Round this year. But the General Agreement on Tariffs and Trade (GATT) agreement alone is not enough. We can build economic integration and harmony at the local and regional levels as well. Our trade with the developing world doubled from 1987 to 1992. That additional $90 billion has created 4 million new jobs. It is clear that America’s future prosperity will also depend on our ability to look beyond the G-7, to the dynamic, emerging economies of our world.
Let me say a few words about U.S. relations in each of the world’s major regions.
In the Western Hemisphere, we are looking to build upon our historically strong ties on our own continent. The North American Free Trade Agreement (NAFTA) is an opportunity to do that. It will allow us to create the jobs of tomorrow, rather than trying to preserve the economic structures of yesterday. NAFTA will create stronger economies and more jobs in all three countries on the continent. That is good for us, and it is good for the world.
But being both a Pacific and an Atlantic trading power, the United States must also look east and west, as well as north and south. Over 20 percent of U.S. trade is with countries in the Pacific region other than Japan, compared with 15 percent in Latin America. And the economies of developing Asian nations grew by 8 percent in 1992, four times the rate of the world as a whole. President Clinton has announced that he will convene a special meeting this fall of leaders of Asia Pacific Economic Cooperation (APEC) countries, following the APEC Ministerial. That will allow the President and his counterparts to talk about ways to share prosperity and opportunity. President Clinton has also asked me to begin a dialogue with Pacific finance ministers. I think this meeting can help us to strengthen economic relations throughout the region and will contribute to the development of a common perspective on the economic policy requirements facing all the Pacific Community countries.
The transformation of the nations of the former Soviet Union and Eastern Europe to market-based democracies is perhaps our largest challenge. President Clinton is fully committed to supporting these unparalleled developments. He is working closely with Congress and our Western partners, as well as with the international financial institutions, to make certain this historic opportunity is seized. We must increase access to our markets for these countries. It is exports that build jobs and stable economies.
The poorest, heavily indebted countries, most of which are in sub-Saharan Africa, continue to need our special attention. We will urge the Congress to authorize the United States to join other creditor countries in the Paris Club in offering 50 percent reduction of nonconcessional debt for countries undertaking economic reforms.
Reconstructing Economies Coming Out of Crisis
The third challenge is to provide the financing and assistance to rebuild economies coming out of crisis and to improve our abilities to respond to these crises. The international financial institutions play a critical role in our efforts to take on such crises—and to support development and sound economic policies more broadly. But they, like all of us, must do more with less. We want to work with the institutions and our fellow shareholders to improve the efficiency and responsiveness of the institutions. U.S. support for the institutions will depend on our success. Countries where we face particular challenges rebuilding economies include not only the states of the former Soviet Union and Eastern Europe, but also Cambodia, Viet Nam, Haiti, South Africa, and the West Bank and Gaza.
Helping these economies has proven a monumental challenge to the adaptability of the international financial institutions. We have created new institutions and new facilities. We are very pleased, for example, with the creation of the systemic transformation facility, and with the work of the World Bank and the IMF in the transitional economies. Each area in today’s headlines will require us and our institutions to develop new approaches, sometimes very rapidly. We are pleased with the work that has already begun, particularly at the Bank, regarding the needs of the West Bank and Gaza.
In Gaza and the West Bank, the needs are dramatic. Immediate relief is needed to tangibly improve the daily lives of Palestinians—including access to basic necessities, such as housing, medical facilities, and water, to name a few. There also is an urgent need for investment in public infrastructure. The international community should try to meet these needs in a way that builds self-sufficiency. The United States and Russia will co-host a ministerial conference here on October 1 to advance the effort to meet financing and technical assistance needs. To ensure that our assistance is well coordinated, we believe that the World Bank should assume a strong role.
In addition, recent developments in Moscow make it clear how difficult it is to transform the economies of Eastern Europe and the former Soviet Union into market economies. While dismantling the structures of central planning offers the hope of future prosperity, it also brings hardships. Accelerating reform and rejecting the policies of the past will require the undivided attention of Western nations. And, the international financial institutions have a critical role to play in the process.
Our global community faces immense challenges, but the potential rewards are equally immense. Meeting these challenges will require not only dedication and sacrifice, but creativity and a new willingness to work cooperatively. If we succeed, we will turn over to our grandchildren the powerful, vibrant world economy they will need to face the unexpected challenges of the next century.
Statement by the Governor of the Bank and the Fund for Korea—Jae-Hyong Hong
Challenges for the World Economy
I would like to start my speech by drawing your attention to the four major challenges that the world economy is facing today.
First, the prospect of economic recovery in the industrial countries remains uncertain. This continuing recession has not only caused stagnation in the growth of world trade, but has also dampened the growth prospects for the world economy. The recession is a cause for particular concern because it might weaken the reform efforts in the countries in transition. We must also remember that protectionism usually emerges in such a time of recession.
Second, today’s world economy is in turmoil with pressure from two opposite movements: progress toward globalization and free trade, on the one hand, and setbacks to regionalism and protectionism, on the other. Because there is still no sign of a successful conclusion to the Uruguay Round, some industrial countries may be more inclined to resort to bilateral arrangements to solve trade issues. Moreover, regional trade arrangements that claim to stand for trade liberalization appear to stand for contradictory messages.
Third, some industrially advanced countries appear to be restricting trade, claiming environmental reasons, or setting environmental standards too stringently for the developing countries. If these trends coalesce, a new type of protectionism will emerge that will reduce world trade and actually further aggravate environmental problems.
Fourth, in the course of their transition to market economies, the states of the former Soviet Union are still confronted with severe difficulties, such as price instability and output reductions.
How to Address These Challenges
Since the Second World War, the world has worked together to overcome the numerous economic challenges presented to it. I believe that today’s challenges are equally surmountable. In this respect, I highly praise the Declaration on Cooperation for Sustained Global Expansion that was adopted last April and reaffirmed by the Interim Committee three days ago. As for addressing these problems, let me begin by saying that the industrial countries should endeavor in the short term to boost their economies. In the medium term, they should substantially reduce their fiscal deficits, thus establishing a foundation for sustained world economic growth. In connection with these goals, I would like to commend highly the effort that the IMF has recently made to strengthen its surveillance over these developments.
Second, I strongly hope that the Uruguay Round will be concluded this year so as to secure free trade and help the recovery of the sluggish world economy. I believe that at this particular juncture an early agreement is more important than a perfect agreement.
Third, with respect to global environmental issues, I believe it is most important to recognize the problem from a transborder perspective. In addition, environmental matters should be addressed not through trade sanctions but through effective transfers of financial resources and technologies. On this occasion, I would like to praise the World Bank for its recent efforts to address such global environmental issues.
Fourth, for a successful transition to a market economy, the states of the former Soviet Union must endeavor to stabilize their current political and economic situation. Furthermore, continuous financial and technical assistance and the expansion of trade must be provided by the international community to bolster their reform efforts. Related to this, I would like to propose that the World Bank and the Fund consider positively the idea of utilizing former senior government officials of successful developing member countries as policy advisers for the countries in transition.
The Korean Economy
As for the Korean economy, Korea is making its best efforts to advance its economic system and to contribute to the efforts of the international community in overcoming the current challenges facing it. Internally, the Government has stimulated the private sector through broad deregulation and, externally, has vigorously pursued internationalization and market opening, especially in the financial sector. In June, the comprehensive Financial Liberalization and Market Opening Plan was announced in close consultation with the Fund and the World Bank. Encompassed in the Plan are interest rate deregulation, transformation to an indirect monetary control system, and foreign exchange and capital account liberalization.
Furthermore, in August, a bold and sweeping implementation of the real name financial transaction system was introduced to root out financial irregularities in all sectors of the economy. Although the immediate effect of this system might be tough on the economy, Korea is willing to take strong medicine now for the sake of long-term benefits. In expanding our market opening, Korea is actively taking part in recent discussions emerging in the Asia-Pacific region and is planning to join the Organization for Economic Cooperation and Development (OECD) by 1996. Joining the OECD, in particular, will provide momentum to liberalize capital movements, which will contribute to our economy’s internationalization.
In regard to economic cooperation with the developing countries, almost 40 percent of our total trade volume and more than 50 percent of our overseas direct investment are channeled to the developing world. And the Korean Economic Development Cooperation Fund, established in 1987 to extend economic cooperation loans to developing countries, will be further activated through replenishments. Moreover, an area of recently increasing concern has been the agenda for the global environment, an issue Korea has been addressing actively. For example, we hosted the Senior Officials Meeting on Environmental Cooperation in Northeast Asia this February to address regional environmental issues. In the near future, we plan to contribute to the Global Environment Facility, which will play a major role in tackling global environmental problems.
Today’s world economy is interlinked more than ever before, and this trend is expected only to increase. In this intricate web of economies, the economic success of one country at the sacrifice of another cannot be sustained, and one country’s economic success indirectly raises the welfare of another. In this respect, I urge all member countries of the Bank and the Fund to resist the pressure of certain national interests and to join efforts in meeting the global challenges we are all facing today. Last but not least, I would like to welcome the delegations from those countries that have newly joined the Bretton Woods institutions and express my deep gratitude to the Joint Secretariat and its staff for their fine arrangements of the Annual Meetings.
Statement by the Governor of the Bank for Pakistan—Syed Babar Ali
It is a special honor for me to represent Pakistan at this year’s Annual Meetings of the World Bank Group and the International Monetary Fund. I join other Governors in welcoming the new members in a progression that moves our two institutions toward true universality.
The world economy continues to be characterized by sluggish growth. As the IMF’s recent World Economic Outlook notes, 1993 is the fourth consecutive year of below-average growth. This has led to a disturbing rise in protectionist sentiment. The repeated delays in reaching an agreement on the Uruguay Round and the growing preference for regional trading blocs are discouraging developing countries from pursuing strategies directed toward yielding open economies.
We, in Pakistan, have moved toward a more stable market economy: price controls have been removed; the system of external trade and payments has been liberalized; the restrictive import list has been cleansed; a number of capital and current account transactions have been liberalized with a view to achieving convertibility; and the structure of public finance has been improved through the introduction of a general sales tax and the removal of exemptions from direct and indirect taxes. For the first time in Pakistan’s history, we have imposed a wealth tax and an income tax on agriculture. On the expenditure side, defense spending has been cut by 1 percent of GDP, and the size of the federal government has been reduced. None of these steps will, however, yield the benefits that are hoped for, unless the external environment becomes less hostile. On our part, we can liberalize the trade regime, as we have done already; we can lower the rates of our import tariffs, as we are continuing to do; and we can open our economy completely, making it more competitive and market based. All this will not, however, improve our balance of trade; nor will market benefits accrue to us, unless the industrial countries also follow the norms of the market economy and dismantle the protectionist barriers that they have built. The irony lies in the quota restrictions and trade barriers that have been imposed to protect the most affluent countries against some of the most poor. If protectionist measures continue, the ability of developing countries to pursue outward-oriented strategies would be seriously weakened. It would undermine the credibility of international institutions like the World Bank and the Fund and would make it more difficult to mobilize the necessary domestic political support for reforms.
Pakistan has been successful in attracting growing amounts of non-debt-creating portfolio and direct investment inflows. In this regard, I must applaud the role that the International Finance Corporation (IFC) has played in Pakistan. During the last fiscal year, IFC financed seven projects with an investment of $130 million. IFC’s continued and strong presence in infrastructure building will, I am sure, provide confidence and comfort to investors, who have already responded to the Government’s liberalization efforts. Nevertheless, our need for official development assistance (ODA) is expected to remain substantial. We are concerned that net bilateral ODA fell sharply in 1992 and continues to languish at a level about ⅓ of 1 percent of the GNP of industrial countries. It is roughly one half of the UN target of 0.7 percent. Enhanced structural adjustment facility (ESAF) assistance and International Development Association (IDA) credits have played a key role in supporting reform policies and in extending concessional support for the poorest countries. We urge faster progress toward building a consensus on the funding modalities of an ESAF successor. It is imperative to ensure continuity of these operations. We regret the decrease in lending volume, but very much hope that concessionality of this facility will be maintained. We would urge a similar rapid conclusion of IDA-10.
At this time, we need all the instruments that are available. Here I refer to the pressing need for a fresh allocation of SDRs. The stabilization and reform efforts of many countries are being constrained by inadequate levels of reserves. To expect them to build up reserves through a compression in domestic demand and in net imports, at a time of weak activity in industrial countries, would defeat any strategy for sustainable world economic recovery.
Finally, I wish to thank the international community for being cognizant of the fact that the caretaker Government of Prime Minister Moeen Qureshi, which I have the honor to represent here, took office 70 days ago, in response to a political deadlock in the country; and that during this very short period, it tried to lay the foundations of sustained growth and financial stability. Both the IMF and the World Bank have applauded us for this. We thank them for it, and for their support of the measures we have taken to reinforce the elements of good governance, which we shall hand over to the administration that will be formed immediately after the elections we are holding one week from now. We shall not be in office to taste the fruits of our endeavor. But fruition there shall be. And that shall have been our greatest reward.
Statement by the Governor of the Bank for Bangladesh—M. Saifur Rahman
It is a privilege for me to have the opportunity to be with you in this prestigious forum for the third year in a row. Since the last meetings, many new members have joined the World Bank Group and the International Monetary Fund, making the Bretton Woods institutions truly universal. I join my colleagues in extending warm felicitations to all new members.
I am confident that our deliberations in these meetings will yield tangible results in the pursuit of our common goal of socioeconomic development of the developing member countries. The Bretton Woods institutions, during their operation of over four decades, have provided a critical input of resources and know-how and assisted us in developing policies relevant to our needs. I take this opportunity to express my sincere thanks to the Bank President and the Fund Managing Director under whose able leadership the Bank and the Fund have become vibrant institutions.
We are meeting at a time of uncertainties in the global economic and political scenario. Most developed industrial countries are in the persistent grip of economic stagnation and high unemployment with concomitant sociopolitical instability. The scars of recent turbulence in the financial market have not yet healed; the Uruguay Round multilateral trade negotiations have yet to reach a happy culmination. Despite having undertaken painful and politically difficult macroeconomic reform and structural adjustment programs, many developing countries are not yet economically better off because the expected growth in investment, both domestic and foreign, has not yet occurred. The adverse terms of trade, particularly of commodities, have further exacerbated developing countries’ trade gap.
Over the past three years, we in Bangladesh have repositioned our productive resources in the expectation of export-led growth. In rapid succession we have established macroeconomic stability, deregulated the financial sector, liberalized imports, adopted a flexible exchange rate policy, and strengthened institutions for export promotion. We have sent clear signals that, in the interest of increasing economy-wide efficiency, the Government will get out of activities that the competitive markets do best. The Industrial Policy has been further liberalized to allow private investment from home and abroad in the telecommunications, power and energy, and minerals sector. The legal framework affecting private sector activities is being reformed. A Securities and Exchange Commission has been established as part of the capital market development program. The role of the Board of Investment has been changed from a regulatory to a promotional one. A program for planned privatization has been drawn up, and a Privatization Board is implementing it. We have already achieved a great deal of success in increasing public savings. The contribution of public savings to our total annual development budget has risen to one third from a negative position in 1990-91. Development outlays have increased and now focus more on poverty reduction and human resource development.
We are systematically deregulating the economy from restrictive bureaucratic constraints. Reform of public administration is a priority, and a commission has been set up for this purpose. We have taken positive steps to reform and modernize our legal system—particularly in the areas of banking, finance, commerce, capital markets, and taxation. Relevant institutions, laws, and regulations are being reviewed and modernized. With the process of liberalization, the need for accountability and transparency in commercial and financial transactions, and a strong regulatory system for the protection of the rights of the investors, is felt to be critical, and hence steps are being taken to strengthen the regulatory and auditing framework to enforce accountability and transparency in public affairs.
Developed manpower is the most essential agent of growth. Hence we are investing more in people by increasing the share of public investment on education, health, and family welfare. The recently introduced Food for Education Program, for example, will link targeted income transfers with human resource development. To carry good governance to the grassroots level, we are strengthening local government institutions. This will allow the people to participate effectively in the national development process. Nongovernment organizations and private institutions, too, are today playing a more positive and constructive role in areas of human resource development—particularly women in development—and productive employment for the urban and rural poor and in bringing women into the mainstream of socioeconomic life. These measures are doubtless deepening and broadening the reform and renewal of our economy and society.
It would be pertinent to say that bringing about reform in a tradition-ridden developing country is not an easy task to accomplish. Reform is a painful process. Even some of the highly efficient and developed economies are finding the task difficult. The complexity and sociopolitical dimensions of a reform program have to be understood. It must be structured and modified in the context of a country’s sociopolitical milieu and circumstances. In implementing reforms we have to be mindful of their impact upon the least advantaged segment of society and, within our means, build a social safety net for them. The social and financial cost, particularly in its initial phase, is indeed considerable, and forging a political consensus on its essential facets is perhaps even more difficult.
While there is widespread agreement about the objective and goals for reform, strategies and paths vary. Further, the cost of reform and the disruptions associated with reform are vastly different across countries. In some cases, reform has led to immediate, sustained, and rapid economic growth. In other cases, reform has come with serious economic difficulties including marked declines in international trade, GDP, and industrial production. While the goal is not in question, these differences in reform experiences raise questions about standard nondiscriminatory strategies. To the extent reform can be made less costly in economic and political terms, the pace of reform is likely to be greater.
For the poorest countries in particular, with continuing population growth and with large segments of their populations near minimum levels of consumption, reform programs that entail several years of economic stagnation inflict a huge social cost. In the absence of growth, the cost of such programs to the poorest segments of society in these countries cannot be lessened effectively merely by giveaway safety net programs. Recognizing this, we have to undertake short- and medium-term programs that are low in capital intensity but high in use of labor and local resources so that jobs and income of the poor are protected until higher growth is achieved.
It is indeed disappointing that lack of buoyancy in the world economy is inhibiting export-led growth at the expected rate in our country. For the third year in a row, growth in world output will be lower than expected. Furthermore, the linkage between growth in world output and export-led growth in developing countries is becoming weaker as the Uruguay Round remains deadlocked. Slow growth in the world economy has been traced to the lack of the required degree of stringency and consistency in economic and financial policies of the industrial countries who together account for over three fourths of world output. Structural budget deficits in the leading industrial countries range between 2 percent and 5 percent of GDP. This constitutes a serious drain on world savings, which is also preventing long-term interest rates from returning to more sensible levels. We are encouraged that industrial countries have renewed their commitment to a cooperative growth strategy. We urge the Fund to play an active role in improving policy coordination between the Organization for Economic Cooperation and Development (OECD) countries. We also urge that this be complemented by an immediate conclusion of the Uruguay Round so that global trade can come out of the shadows of protectionism.
In this context, we note with concern that, in real terms, official development assistance has declined from its 1990 peak by over 3 percent and, particularly, that the combined net transfer from the International Bank for Reconstruction and Development (IBRD) and International Development Association (IDA) continues to remain negative. Such a discouraging aid outlook, combined with an unfavorable trade climate, is unsettling for low-income developing countries like Bangladesh. While on this subject, I must point out that increases in aid conditionalities and unrelated cross-conditionalities and increased recourse to cofinancing arrangements are causing implementation delays and cost overruns. These problems are being further compounded by lack of sensitivity to the country’s sociopolitical setting. We urge the Bank to give more attention to country specificity while drawing up projects and programs. Further, emphasis should be put more on the substance of the projects than on abstract compliance with individual covenants.
We firmly believe that development, democracy, rule of law, and human rights are interrelated, and one cannot be guaranteed without the others. In this context, we are heartened by the Bank’s reiteration of its commitment to a sustainable reduction in poverty. We commend the Bank for the timely review of its portfolio to see whether the overarching goal of delivering development to the people is being achieved. It is gratifying that the Bank has initiated swift follow-up actions on the recommendations of the Wapenhans Report. The decision to appoint a Task Force on Cofinancing as a follow-up to the Wapenhans Task Force was timely.
We note with interest that the International Finance Corporation (IFC) is playing an important role in countries benefiting from the recent upsurge in nonofficial capital flows. We would like it to play a similar role in the low-income countries that are committed to private sector development. In many such countries, as we know from our own experience, the shyness of the private sector is inhibiting investment growth. IFC, following its charter, should play a more active role in promoting investment in such countries.
Finally, I would like to mention with satisfaction that cooperation between the Government of Bangladesh and the Bank and the Fund is excellent. I would like to reaffirm that despite the difficulties posed by uncertain and inhospitable global conditions, we are confident in our belief that the path we have chosen with the help of the Bretton Woods institutions is the right one. I deem it our collective responsibility, and indeed an obligation of all the member countries, to extend our full cooperation and support to enable these institutions to play a more positive and effective role in the transformation of the world economy.
Statement by the Governor of the Bank and the Fund for Australia—Ralph Willis
I would like to take this opportunity to welcome the new member states—including our near neighbor the Federated States of Micronesia— to the Bank and the Fund family. The dramatic membership expansion in recent years is very much a reflection of the momentous changes that are taking place more broadly in world affairs. In Eastern and Central Europe, in the Middle East and in South Africa, great political events have transformed the landscape, even in the short time since our last Annual Meetings. In many instances, such as in Eastern Europe and the former Soviet Union, these developments are inextricably linked to the challenges associated with substantial and far-reaching economic adjustment. In addition, the recent peace treaty between Israel and the Palestine Liberation Organization (PLO), the political reform program in South Africa, and the reintegration of Viet Nam and Cambodia into the world economy, have significantly enhanced the prospects for economic growth and development in those regions.
In all cases, world political developments have brought with them important economic challenges and opportunities. Taking full advantage of these, and converting them to real gain, will depend importantly on our abilities to raise economic growth to a much higher and sustainable level, globally and in those regions. As we are all so painfully aware, world growth over the last year has been far too slow. In the major industrial economies, the immediate prospects remain weak. We must act to promote higher and sustainable growth in output and employment; to create a climate of confidence that will increase levels of investment and job creation.
Sound domestic macroeconomic policies remain the essential cornerstone of a sustainable increase in economic growth. All of us are confronted, in varying degrees, with the need to ensure a structurally sound fiscal position and to sustain the fight against inflation, thereby facilitating a permanent lowering of long-term interest rates and a stronger focus on productive investment. The benefits of appropriately timed fiscal consolidation are evident in the Australian experience. Our success in winding back public sector debt during the mid- to late 1980s allowed us the scope, more recently, to provide a necessary fillip to domestic activity. In similar vein, the recent fiscal and monetary measures undertaken by Japan are welcome—although, as the Fund has noted in its World Economic Outlook, there may well be scope for Japan to do more on the fiscal front and to deregulate its economy further.
Nevertheless, the desirability of achieving a better match between domestic saving and investment in some countries—and more generally of preserving fiscal policy flexibility—underscores the need to look to the medium-term sustainability of the stance of fiscal policy, and, in many countries, the emphasis must remain on medium-term fiscal consolidation if pressure is to be kept off interest rates, especially as the recovery strengthens. The recent adoption by the United States’ authorities of a fiscal policy package aimed at a sustainable medium-term reduction in the fiscal deficit is particularly timely.
In Australia, commitment to reducing the federal budget deficit from its recession-induced levels of almost 4 percent of GDP this year to about 1 percent by 1996-97 is a central component of our medium-term strategy aimed at fostering growth, investment, and jobs.
In Europe, macroeconomic policy flexibility has recently been enhanced by the adoption of significantly widened exchange rate bands within the exchange rate mechanism. Sensible use of this enhanced flexibility to facilitate lower interest rates, in line with current historically low inflation rates and inflation expectations, would also contribute to the pace of recovery in world activity.
Experience both in Australia and elsewhere suggests that economic growth alone will not fully address the social and economic challenges posed by the increasing numbers of long-term unemployed in most industrial countries. Enhancing the flexibility of labor markets is a crucial element of an employment growth policy. Innovative thinking is clearly needed in the design and implementation of labor market and social welfare policies and in developing the role of vocational education. In Australia, we have initiated a major review of such policies, as have a number of other industrialized countries. In this context, we welcome the decision of the Group of Seven countries to hold a Jobs Conference later this year to look for new ways to generate new jobs.
But the key remains stronger economic growth—and the single most effective contribution governments can collectively make toward higher growth would be to successfully conclude the Uruguay Round this year. Failure to do so will retard recovery in the industrial economies; more important, it will reduce the long-term rate of world growth and will deny many in the developing world the chance to move out of poverty. As estimated by the World Bank and the Organization for Economic Cooperation and Development (OECD) in their recently released joint report, successful Uruguay outcomes in agriculture and industrial products alone will provide a boost to the global economy of up to $213 billion by the year 2002, with the European Community (EC) being one of the major beneficiaries. The opportunity to do something for all our citizens cannot be forgone. The joint Uruguay Round statement issued by the Managing Director of the Fund, the President of the Bank, and the Director General of the General Agreement on Tariffs and Trade (GATT) bluntly and succinctly sets out the issues at stake.
Growth in trade has been one of the key pillars of the postwar expansion in production and employment. A successful Uruguay Round is central to reinvigorating—and strengthening—the multilateral trading system, which must be done if the current pressures for change in the world economy are to be turned into higher living standards. Change, with the tensions it brings, is never easy. Australia is one of a number of countries that have, in recent years, faced up to the economic and social challenges of unilaterally opening up their economies to international competition. We, like others, have recognized that the alternative—attempting to support living standards on the basis of subsidizing activity in inefficient domestic sectors—is, in fact, no option at all. This lesson must not be lost on the major industrial countries.
Australia and the Cairns group have consistently argued for a balanced, comprehensive outcome to the Uruguay Round. It must be recognized that the Blair House accord itself represents a significant compromise for all parties. Further watering down of this accord is not acceptable. In this regard, Australia strongly supports the United States’ forceful refusal to reopen negotiations on the accord. Australia will play its role in promoting a successful outcome within the deadline. The July Tokyo agreement of the quads was designed to generate real momentum in the Round negotiations—it now needs political regeneration, and we are encouraged by recent statements by Ambassador Kantor and Sir Leon Britten reaffirming the commitment of the United States and European Communities (EC) to the December 15 deadline for completing the Round.
The contribution to growth of strong trade expansion has been evident in East Asia, the most dynamic region of the world. As a result, economic growth in the Asia Pacific area—which accounts for half of the world’s economic activity—has consistently exceeded the world’s growth rate since the 1960s, making the region a strong force for the world economy. The Asia Pacific region is forecast to continue growing more rapidly than the world average, and its share of world output will correspondingly increase. Within this region, the reduction in tensions and positive economic developments in Indochina are particularly welcome.
Australia is pleased to see the progress that has been made toward clearing the arrears of Viet Nam and Cambodia with the Fund, which is a precondition for finance from the Fund, as well as from the World Bank and the Asian Development Bank. Australia has participated in international support groups for these countries, which have introduced wide-ranging, market-based reforms in difficult economic circumstances. Their progress merits continued international support, including from the Bretton Woods institutions. More generally, a fundamental part of economic success in the Asia Pacific region has been the extent to which the regional economies have been able to develop close trade and investment linkages. The Asia Pacific Economic Cooperation process—APEC—will build on these linkages. APEC, which grew from an Australian initiative, has developed as the preeminent regional economic grouping and will be an important force in promoting the continued dynamism of the region. The November meeting of APEC leaders in Seattle will help to build an Asia Pacific economic community and give political authority and weight to APEC.
In other parts of the world, the experience of economic adjustment and development is a mixed one. While the outlook for Asia is generally favorable, daunting problems of health, poverty, and adequate economic growth remain in many parts of the world. Sub-Saharan and southern Africa face chronic problems and will continue to require substantial Bank and Fund assistance. The recent agreement by the major negotiating parties in South Africa to proceed with the establishment of the Transitional Executive Council is a welcome development. Australia has joined with others in completely lifting economic and financial sanctions against South Africa and looks forward to the resumption of IMF and World Bank operations.
The role of the World Bank will be a vital element—as will that of the Fund—in helping establish sound economic and social policy frameworks in borrowing member countries. There is little doubt, however, that external assistance will yield significantly better results where governments are committed to sound macroeconomic stabilization and structural adjustment programs. Australia therefore believes that Fund and Bank assistance to developing countries and those in transition should place heavy emphasis on facilities that require such conditionality.
Application of the lessons of the Wapenhans Report is most important, and we endorse the follow-up actions recently taken by the Bank’s Executive Board. The new approach, with its focus on portfolio management and country assistance strategies, should ensure significant improvements in the quality of the Bank’s operations. We look forward to a reversal of recent declines in portfolio performance. The Bank’s proposals to increase the flow of information on its activities to the public are also welcome and will increase public confidence in its work.
Confidence in the Fund and Bank will increase if these institutions are shown to be cost-effective and to provide good value for money. After several years of rapid expansion, the Fund and the Bank must now bring their administrative costs under much tighter control. We welcome President Preston’s commitment to that objective.
In closing, I would like to stress again the central importance of the Uruguay Round. The positive measures taken by developing countries and the valuable work of the Fund and Bank will be diminished if we fail to take action now to liberalize world trade. The major players in the negotiation must not betray their trust to the developing countries— and, indeed, to consumers and taxpayers in their own countries—by capitulating to protected sectional interest groups. I take this opportunity to wish the Fund and the Bank well in assisting members to meet the great challenges that lie ahead in the coming year.
Statement by the Governor of the Bank for Thailand—Tarrin Nimmanahaeminda
It is my great pleasure and honor to address the 1993 joint Annual Meetings of the Boards of Governors of the World Bank Group and the International Monetary Fund. On behalf of the Thai delegation, I would like to join my fellow Governors in welcoming the Federated States of Micronesia and Tajikistan as new members of our Bretton Woods institutions.
The world economy has once again failed to achieve the recovery expected earlier. Output is growing only at a modest pace, especially in industrial countries. The world trading system is being threatened by growing protectionist sentiments; and the successful conclusion of the Uruguay Round by the end of this year, imperative as it is, is still uncertain. Among the major economies, the United States is now showing some positive signs of recovery. The fiscal deficit, however, limits the ability of the United States to pursue economic policies supportive of growth and threatens the fragile recovery. In Europe, structural weaknesses such as fiscal imbalances, high unemployment, and the prohibitive cost of absorbing the former East German economy still prevail. Meanwhile, Japan has not recovered from the recent downward adjustment in the stock market, corporate investment, and property values. Economic performance is still weak despite attempts by the Government to stimulate domestic demand through increases in government spending for public works. The recent rise in the yen could deal yet another blow to the chance for rapid recovery. One relief, however, is the fact that inflation remains subdued in all the major economies.
Despite these general weaknesses, the East Asian economies have continued to make headway over the past year. Indeed, they have effectively become the focus of growth for the global economy. This is no accident—for it is the result of a relentless pursuit of outward-looking policies, supported by strict fiscal and monetary discipline. Being basically export-driven, however, these economies are highly dependent on overseas markets and an open world trading regime. The delays in the world trade talks and the creation of several regional trading arrangements have induced these countries to increase trade among themselves, including forming their own trading arrangements. Furthermore, they continue to implement their policy choices to sustain investment and growth on the basis of sound fundamentals. Nonetheless, without an improved world economic environment, they cannot be relied on to indefinitely continue supporting the world’s growth momentum. To continue with this momentum, it is important that industrial countries pull out of the current recession as soon as possible. To effectively address the issues at hand is no easy task and requires structural reforms as well as concerted policy coordination among major industrial countries. It is also necessary to strengthen the world’s free trading regime. The Uruguay Round of multilateral trade negotiations must be concluded without further delay. In this connection, I am grateful to take note of the joint call of the Fund, the Bank, and the Director General of the General Agreement on Tariffs and Trade to this effect yesterday.
Let me now turn my focus to Thailand’s local scene. During the past five years, annual growth has averaged nearly 10 percent. For the past two years, however, a growth rate of around 7.5 percent was observed. The downward adjustment is on account of a series of unfavorable external events—but it also reflects a “soft landing” toward a more sustainable growth path. Policy objectives other than high growth are being pursued. These include decentralization, infrastructure, buildups, environmental protection, and the bridging of the income gap.
Taking both external conditions and our domestic situation into consideration, the Government’s policy is directed at maintaining fiscal and monetary discipline, development, and liberalization of the financial system in order to create conditions for more private sector investments. The following components are involved: enhancing tax collection through improving the tax structure and administrative efficiency; encouraging fund flows to all parts of the country; supporting increased investments for infrastructure and environmental protection; improving the finance of local administrations; improving the efficiency of state enterprises; mobilizing domestic savings; liberalizing the financial system; establishing needed financial institutions including an export-import bank; and also taking steps toward making Bangkok into a regional center for finance, trade, and other economic activities. Thailand, for its part, is playing an increasing role in economic integration, regionalization, and transformation of the East Asian economies.
Taking the above into consideration, we see several roles that the Bretton Woods institutions can and should undertake to enhance the world’s economic prospects. As financial institutions whose membership is virtually universal, they are in a unique position to play a leading role in spearheading these market-oriented economic adjustments that go beyond national boundaries.
World prosperity is dependent on all countries accepting the common international framework in different spheres of economic undertakings. In trade, there are the multilateral trading arrangements and the respective regional arrangements. In development and finance, it is the work program of the World Bank Group and the Fund that is instrumental in furthering the common economic objectives. We commend the World Bank Group for substantially increasing new lending commitments to developing countries in 1993. We notice, however, that most of the increase is accounted for by the countries of the former Soviet Union and Eastern Europe. We hope that this is not being done at the expense of other developing countries, which still require large amounts of external resources for their development. In particular, we strongly urge that appropriate assistance be extended to transforming countries in the Southeast Asian region. Thailand, for its part, is playing an increasing role in this effort and hopes to see more concrete joint projects in the future, in order to enhance the growth prospect of the whole region.
We welcome the agreement recently reached among donor countries on the Tenth Replenishment of the International Development Association (IDA) and urge all donors who have not yet given formal notification to do so promptly, so that the operations of IDA will not be disrupted. We also welcome the World Bank’s introduction of single currency loans as an addition to existing targeted currency pool loans. This initiative provides borrowers with greater flexibility in risk management and in selecting terms that meet their needs. The requirement that borrowing agencies have matching revenues in the same currencies may, however, severely limit the eligibility of borrowers, especially those with income in local currency.
As for the Fund, the immediate tasks of helping the former “second-world” economies to adjust are, to say the least, quite demanding. The earlier that these countries can be integrated into the global economy, the faster will the net benefit flow to the rest of the world. We support the Fund’s efforts toward attaining this goal at the earliest date. At the same time, it is important that financial resources on concessional terms continue to flow toward the poorest nations. We therefore welcome the prospective establishment of a successor to the enhanced structural adjustment facility. Finally, we hope that a satisfactory outcome will be achieved concerning SDR allocation. As a reserve asset, SDRs can provide additional liquidity in support of expanding world trade and investment.
In conclusion, I wish the Bank and the Fund every success in meeting the difficult challenges that lie ahead. I would like to thank the Chairman, the Bank’s President, the Fund’s Managing Director, and the managements and staffs of the Bank and the Fund, as well as the Government of the United States of America, for the excellent arrangements made for the meetings and for the hospitality extended to the Thai delegation.
Statement by the Governor of the Bank for Austria—Ferdinand Lacina
This year’s meetings are still marked by a disappointing performance of the world economy: in the industrial world, growth has receded further, contrary to what we expected last year. As a consequence, unemployment continues to worsen while previous gains in fiscal consolidation are being wiped out.
The fact that the economic interdependence of nations is stronger than ever before requires new cooperative strategies. No institutions in the world would be better equipped to channel such efforts than the Bretton Woods institutions, given their truly universal membership, as well as their immense intellectual and financial power. This fact also carries a unique responsibility.
Austria welcomes the efforts by both institutions to meet their expanded role. Indeed, we may be closer than ever both to agreeing on a global strategy for growth and to providing tailor-made assistance to members in need. As Mr. Camdessus recently noted, in the medium to longer term, the most self-serving policy is not to protect one’s economy, but to help the others grow; and there is no investment with a higher yield today than accelerating the integration into the global economy of transforming and developing countries alike.
More than usual, the task of formulating adequate macroeconomic policies is complicated by conflicting requirements. All leeway to support economic activity must be exploited while making sure that, over the medium term, stabilization efforts are not abandoned. It is thus even more urgent to ensure that the contribution of structural policies to support growth and employment is being further explored. We still have reason to hope for the long-awaited completion of the Uruguay Round. Moreover, for the first time in postwar history, we are using our joint imagination in fighting unemployment. I would particularly like to refer to the European Community’s Medium-Term Strategy for Growth, the parallel endeavor by the countries of the European Free Trade Association as well as the Jobs Conference recently announced by the U.S. Government. In this innovative line of thinking, I would also include the Fund’s emphasis on the quality aspect of public budgets, in particular the worldwide economic gains of cuts in military spending.
In the transition economies, it will still take great efforts to get the transition process safely on track. Many reform countries have experienced cumulative income losses of one third to one half, a fact that carries serious social and political risks. Therefore, foreign support is needed, and Austria contributes more than proportionately. However, the magnitude of the task points to an increased involvement of multilateral institutions. Again, it is not only the financial strength but also the technical expertise of the Bretton Woods institutions that is called upon. The institutions’ involvement in the Joint Vienna Institute can be regarded as a particularly effective contribution to institution building.
Turning to the developing countries, an increasing number of Asian countries can be seen as success stories. Latin America, by and large, has been able to overcome the long stagnation that followed the outbreak of the debt crisis, but its further progress will, among other things, depend on whether the welfare gains can be spread to larger parts of the population. Sub-Saharan Africa, by contrast, has, as a whole, not yet succeeded in breaking the vicious cycle of poverty and stagnation. A comprehensive development strategy for this region will have to include substantial debt relief.
I share the view that a new SDR allocation is called for, both on economic and on equity grounds: on economic grounds, because it would be of great help to many developing as well as transition countries; on equity grounds, because the new members of the Fund—and most of the transition countries are among them—have not received any SDRs yet.
It is also urgent to come to a conclusion on the extension of the enhanced structural adjustment facility, based on broad donor support. Moreover, timely commencement of IDA-10 is required to support the adjustment process in low-income countries. The central role that the Bank and the Fund play is also reflected in heightened public attention. Particularly the Bank has recently taken up the challenge and has improved access to information for those affected by its projects. In this context, I also would like to encourage the Bank to continue its efforts to improve its portfolio performance.
Finally, I would like to thank Sir William Ryrie for his guidance in expanding the International Finance Corporation’s (IFC) role as a promoter of foreign direct investment.
Statement by the Governor of the Bank for Latvia—Ojars Kehris
I am very pleased to have this opportunity as the first representative from the Republic of Latvia, and as the second from the Joint Baltic Group, to address you on this important occasion. We are very grateful for the support of the international community in the struggle to regain our independence, as well as for the economic assistance we have received in the rebuilding process.
The transition from a centrally planned economy to a market economy requires structural changes. A natural consequence of these changes is that inefficient and unnecessary sectors decrease. This leads to a production decline. Yet, the extent of the decline in economic activity in the three countries in recent years may not be known by many of you. In 1990-92, according to World Bank statistics, the cumulative GDP decline in the former Soviet Union was a little less than 30 percent, but it was significantly greater in the three Baltic countries. In Latvia, the decline reached 49 percent, in Lithuania 47 percent, and in Estonia 34 percent. While many unproductive enterprises oriented to the Soviet system in all three countries have not yet been closed, and official unemployment statistics remain surprisingly low (although real rates may be as high as 10–20 percent), the standard of living for many people has plunged precipitously. There have been rapid increases in the cost of housing and basic utilities, the overall level of prices rising roughly tenfold in all three countries in 1992, which has impoverished most fixed-income recipients. In Latvia, for example, about one fourth of the population receives a monthly pension of 15 lats ($24 at the current exchange rate). Over the past two years, the average daily calorie intake in Latvia has fallen by approximately one thousand, possibly more for some of the elderly. This necessitates well-worked-out social safety net programs with special attention paid to differentiation and care targeted to the most needy. We look forward to sharing the World Bank’s experience in assisting various nations across the world with the design of appropriate social security programs.
The most important precondition for the transition to a normal market economy is a successful macroeconomic stabilization program, involving control over the money supply process as well as governmental budgets. A great deal of progress in this area has taken place during the first two years of regained Baltic independence. The Estonian kroon (EEK) was introduced on June 20, 1992, in a modified currency board form, with a full backing of the monetary base by foreign exchange reserves at the rate of EEK 8 = DM 1. Despite a dramatic decline in output, the fiscal accounts of general government recorded a surplus of 4.7 percent of GDP in 1991, and 1.7 percent in 1992. The Latvian ruble (LVR) was introduced as a supplementary and temporary currency on May 7,1992, but the LVR became the only legal tender in Latvia as of July 20, 1992. While it traded at par with the Russian ruble initially, the monetary authorities in Latvia were quite successful in limiting the growth of the monetary base—much more so than in Russia. By the end of the year, 1 U.S. dollar was trading for LVR 175–80 in Riga, but for approximately 400 Russian rubles in Moscow. As inflationary pressures subsided, the Bank of Latvia introduced the new national currency, the lats, in March 1993, at a conversion ratio of Ls 1 = LVR 200. Since the LVR had appreciated against the U.S. dollar in the first quarter, one lats was worth approximately $1.50 at the time of its introduction, but currently has appreciated a bit further ($1.60 in mid-September). Lithuania also introduced a temporary coupon (talonas) in May 1992, and made it the only legal tender in October 1992. On June 25, 1993, the litas was introduced, and the Lithuanian authorities have succeeded in stabilizing the exchange rate of the national currency against the U.S. dollar. Price liberalization, which we have largely completed, leads to large-scale inflation— over 1,000 percent for all three Baltic states. After this phase, inflation rates in all three countries have fallen below a two-digit monthly rate; this was achieved in all three countries by July. The three countries have chosen different paths to currency reform but have all been successful and now have practically convertible currencies.
In addition to tight monetary and fiscal policies, economic development requires institutional and structural reforms, primarily privatization and trade promotion. All Baltic countries have far-reaching privatization programs. Privatization in Lithuania is proceeding quite successfully—the privatization of the housing sector is actually completed; by the beginning of next year, over half of all agricultural land will belong to private owners, and about 40 percent of the state capital that is intended to be privatized has been transformed to private ownership. Quite a few entities have been auctioned to foreign investors; Philip Morris won the tender for Klaipeda State Tobacco Company and intends to invest about $40 million. Negotiations are taking place regarding the Audejas Stock Company, the Lietuva Hotel, and Kaunas Confectionery Joint Stock Company. Currently, there are 2,658 joint ventures and foreign capital enterprises registered in Lithuania. The first phase of the privatization program will be completed by August 1994. The Republic of Lithuania has received a loan from the World Bank in the amount of $60 million, of which approximately one half has been disbursed: $45 million has been allocated to the energy sector; $6 million to agriculture; and $6 million to health care. Cofinancing by the Japanese Ex-Im Bank has been approved. An IMF loan of $80.4 million is being used to form and maintain the hard currency reserve of Lithuania, and a $46 million loan for the energy sector from the European Bank for Reconstruction and Development has recently been approved. Projects under preparation include power rehabilitation, enterprise financial restructuring, the Klaipeda environment project and agricultural and social sector projects.
In Estonia, the government is committed to restitute or compensate all owners of property in Estonia before 1940 (including their descendants). By February 1993, 211,000 restitution claims had been filed and only 9,400 had been settled. In August 1992, a comprehensive privatization bill was passed, and the Estonian Privatization Office was established. In November and December 1992, an auction of 38 large enterprises was widely advertised internationally, and some 110 bids were received by December 22, 1992. However, some legal issues regarding restitution claims and liabilities had not been resolved, and the evaluation of the bids took longer than initially envisaged. In June 1993, a revised version was enacted, and the Estonian Privatization Agency is working to resolve the remaining issues. In 1993, approximately 100 large enterprises are currently being offered for bids, accounting for more than 20 percent of all state firms. A World Bank rehabilitation loan of $30 million is providing finance for imports in the energy, agriculture, transport, and health sectors. Additional financing by the Japanese Ex-Im Bank has been agreed upon. Projects under preparation include district heating/conservation (mainly in Talinn, Tartu, and Parnu), enterprise financial restructuring, agriculture sector reform, health, and the Haapsalu and Matsalu Bays Environment Project.
In Latvia, privatization in trade, services, and agriculture has been proceeding quite rapidly, although restitution issues are also a problem. Large state enterprises are being managed by a special privatization fund, and a voucher-certificate program is presently being created. In early 1992, the Government prepared an initial list of about 50 priority investment projects to be financed directly, by government-guaranteed foreign credits or by joint ventures. To date, foreign private investments have been modest. A $45 million rehabilitation loan from the World Bank became effective in October 1992, with grant financing of advisors by the Government of Sweden. Cofinancing by the Japanese Ex-Im Bank is under consideration. About half of this amount has been committed, and about one third has been disbursed. A somewhat larger amount (ECU 40 million) from the Group of Twenty-Four countries is currently being allocated, along with a 30.8 million ECU loan for the energy sector. Various donor country governments operate bilateral assistance programs, and several drawings totaling SDR 54.9 million have been made against Latvia’s IMF tranche. Projects under preparation cover agriculture, district heating and power rehabilitation, social protection, enterprise financial restructuring, and the Liepaja Environment Project.
The three Baltic countries are now completing their first stand-by arrangements with the Fund and have met the criteria established to make all drawings under the new arrangements. Furthermore, follow-up programs for the next 18 months are practically in place for all three. Technical assistance and policy advice provided to them over the past year has been invaluable.
Previously, 90–95 percent of trade from the Baltic states was controlled through Moscow. Of course, this has changed now. During the past two years, the percentage of total exports going to Western markets has risen significantly. The three Baltic countries are extending efforts to develop regional cooperation. A significant step in this direction was the signing of the free trade agreement on September 13. Special work groups have been formed to develop agricultural product market cooperation and cooperation in the field of energy. Energy policy is an example of possible World Bank assistance extended to a mutually coordinated Baltic project.
Nevertheless, the population of all three Baltic countries together represents a mere 9 million, and the internal regional markets are thus small. We do have free trade agreements with individual countries of the European Free Trade Association, but still many countries impose large trade barriers to our products. We appreciate the assistance of the international community and gratefully look forward to further economic, and especially technical, assistance. We welcome international investment, for which we are committed to providing a hospitable environment so that the many investment opportunities in the Baltics can be explored without hesitation by international investors. But primarily, the assistance we need most is the opportunity to help ourselves by freely competing with our products and services.
We, the three Baltic countries, have as a goal integration with the Common Market and Western economic structures and expansion of our trade relations with the developing nations. We also wish to preserve good and mutually beneficial trade relations with Russia and the countries of the former Soviet Union. This goal is hampered by the presence of Russian troops on our national territories. We salute the departure of the Russian armed forces from Lithuania and look forward to their withdrawal from Estonia and Latvia as well. This is an urgent matter, and we believe it is in the interests of the entire world community. The Baltic nations look forward to a brighter future with confidence and express their sincere gratitude for the support of the international community.
Statement by the Governor of the Bank for Bolivia—Fernando lllanes de la Riva
It is a great honor for me to address you on behalf of Latin America and the Caribbean region. This meeting is particularly significant because it takes place at a time when our region is formulating new strategies to overcome centuries-old problems. In some cases, remarkable success has been achieved, while in others the process is only just beginning. But there are a number of common elements, which it is both appropriate and necessary to identify.
Latin America and the Caribbean marked their entry into the 1990s by initiating a process of economic recovery. The various reforms have started to bear fruit, stimulating the growth of private investment, the return of capital, and inflows of external financial resources, although, given the external debt-service burden, the net volume of those resources is small. The opening up of the region’s financial markets and the low interest rates prevailing in the industrial countries have also facilitated capital inflows from abroad. However, growth in our countries has faced a permanent obstacle in the form of deteriorating terms of trade, the result of the ongoing slump in commodity and raw materials prices. Prices of certain products have declined in real terms to the lowest levels ever recorded, hampering the region’s export activities. In 1991, for the first time in over five years and despite an increase in volume, the total value of Latin American exports was down. The continued world depression is an indication that the situation has not improved, giving justifiable cause for alarm. We are also aware that with the present-day interdependence among nations, any attempt to achieve sustained growth on the basis of isolated decisions would end in disaster. It is essential that policy decisions be made at the global level. When economic adjustments are unevenly applied, the least-developed countries are the ones that suffer most, and an inequitable situation results.
Likewise, the absence of clear signals for changing protectionist practices and ensuring greater liberalization of international trade, reflected in the stalled Uruguay Round negotiations, is the cause of distorted trade relations among nations. For these and other reasons, considerable discouragement has been spreading throughout our nations. It seems to many of us that the greater our effort the further we are from achieving our goal of well-being for all. Although several of our countries have succeeded in getting their macroeconomic accounts out of the red, the growth rate, beyond mere statistics, has not achieved the dynamism required to meet the most urgent social needs.
The Challenges of Today
Because of the high levels of poverty in Latin America, combined with the social problems generated by external phenomena, which have a particularly serious impact on certain productive sectors, much higher levels of growth are required than those so far recorded. A serious problem in most of our countries is the acute poverty afflicting the largest segments of society. If we add to this the structural weaknesses that have resulted in failure to correct the inequities of income distribution, which have produced an invidious spectrum of privileges, it will be clear that the major challenge facing Latin America and the Caribbean is to achieve sustainable economic growth with social equity. Prompt action is therefore essential to ensure that our structural reforms include measures to improve equality of opportunity and bring about a more equitable distribution of wealth. Neglect is the common denominator of large segments of the population, who live in deplorable conditions of health and nutrition and have little access to education. As a result, they have few opportunities to improve their income, and they do not foresee a much more encouraging future for their children. This produces a vicious circle that tends to reproduce poverty and to accentuate economic and social differences.
This situation makes it impossible to sustain growth over the long term and can lead to deep social conflicts that will in turn bring about yet another stage of political and economic instability. In short, we will have thrown away all the sacrifices we have made if we do not place radical social transformation at the top of our list of tasks to be performed. In these difficult times, with the old Utopias collapsing around us, we are faced with the unavoidable challenge of redefining the functions of government. The process of modernization is intended to assign to the public sector its true role. We must cease to regard the government as the owner and producer of goods and services, a concept that has suffocated individual creative capacity. Rather, it should be viewed as a policymaking and regulatory body, capable of empowering the various components of society to generate wealth and create sources of employment while wielding greater authority where the enforcement of legislation is concerned. Another major objective is to consolidate and refine the democratic mechanisms for social participation by the people.
Bolivia is addressing this meeting after 18 years, at the very time when a new Government has just taken office. The Government is endowed with a clear mandate and a firm will to implement a creative and ambitious program of action designed to engage the country in economic development with social equity. We have made considerable progress in the political and economic arenas. In 1982, Bolivia became a democracy once again, and in 1985, we began to stabilize our economy and initiated structural reform, with the aim of finding a permanent and irreversible solution to the circumstances under which our country has labored for centuries. Despite all that has been achieved, it has been difficult to attain the desired level of dynamism in our growth process. We are facing pressing issues related to unemployment, low wages, education, health, the rural situation, and the grave moral and institutional crisis now confronting the Government.
To discharge the mandate deriving from the unquestionable popular support for the plan of President Gonzalo Sanchez de Lozada, we have been able to draw on the cumulative experience of many of us who initiated change eight years ago. This has enabled us to define our objectives with greater precision and to acquire the necessary instruments to face up to the present challenges with greater chances of success.
The first measure to be tackled as part of this mandate is the radical reform of the Executive Branch, the first step toward modernization. This reform will have three major thrusts: economic development, human development, and sustainable development. Economic policy is based on a commitment to preserve stability and substantially increase investment resources through capitalization of the public enterprises. Over more than half a century, the Bolivian Government accumulated a large number of enterprises, which, unfortunately, have only benefited a small group of bureaucrats and politicians. With a view to allowing the people to reclaim those benefits, it is proposed to return the ownership and profits of the enterprises to their original and legitimate owners: the citizens. This process will be facilitated through a capital increase, open on equal terms to foreign and domestic investors, who will also be entrusted with management and equity participation. The best guarantee for private capital will be to link it with the Bolivians themselves, who have an interest in obtaining a substantial return on their investment.
We are upheld by the conviction that poverty is totally unfair as well as uneconomic. Our approach to designing and implementing our policy is based on the indissoluble link between economic and social aspects. Accordingly, attention to human capital is defined as a national priority. We propose to increase substantially the resources allocated to public education and health, and we give our commitment that we will take all necessary measures to ensure that those resources are efficiently used. In our view, the only way to discharge this commitment is to encourage the population to participate in the design and implementation of social policy. The community represents an untapped source of practical knowledge that will be of help in identifying the services required and in supervising their implementation. Because of the wide gulf separating city life and life in the countryside, our program contains a special section devoted to the rural sector.
The third key element is the recovery and sustainable conservation of renewable natural resources, the basis of all productive activities. The preservation of water, flora, and fauna is a prerequisite for the improvement of our long-term productive capacity. Our approach combines the urgent need for greater resources to finance development-oriented policies with measures to ensure the rational use of our common heritage. We are confident that we are now on the right road to progress and well-being for all. And in this venture, we recognize the importance of the finance institutions, not simply as providers of resources in response to the insatiable demand of governments but also as our companions-in-arms in the battle to overcome the structural conditions of poverty.
Likewise, it would be wrong to think that the rusty chains of underdevelopment can be broken overnight. The fruits of adjustment and reform policies take considerable time to mature—too long, in most cases, given the urgency of our people’s needs. Moreover, the social cost entailed in coping with reality is presenting us with problems. In this area, we have to act with imagination and a true sense of equity. This is the time to ask for the largest possible volume of resources, on concessional and highly flexible terms, in particular for the less-developed countries. Assistance from the World Bank Group is essential if we are to follow the course now before us. While recognizing the institution’s efficient performance, we believe that the efforts being made are still inadequate to overcome the region’s high levels of poverty.
We would also like to mention that promoting trade is crucial to our region. On this point, we believe that the North American Free Trade Agreement (NAFTA) opens up promising prospects. On behalf of Latin America and the Caribbean, I would like to reiterate my conviction that we are now at a crucial point in time, facing the tremendous challenge of crossing over the threshold of the next millennium into a more harmonious world. We believe that our hopes are well founded when we envision a world where greater justice abounds, a world in which we can confidently lead our people along the true path to happiness and to a place where the values of solidarity and liberty are upheld.
Statement by the Governor of the Bank and the Fund for Qatar—Abdullah Khaled Al-Attiyah
It is a great honor for me to be addressing you on behalf of the Arab Governors of the World Bank and the International Monetary Fund. Please allow me first to join the Governors who have already expressed their congratulations to you on your election as Chairman of the Board of Governors for this year, and to welcome the new members who have joined the two institutions.
The world economy is currently undergoing a crisis, the most important characteristic of which has been the continued weakness that has harmed economic growth for more than three years. There are no signs at present of any significant improvement in performance in 1994. This is due to the weak economic recovery in the major industrial countries which have transcended the recent period of stagnation, the expectation of continued economic stagnation in Europe in general, extending beyond the end of this year, and the lack of any encouraging evidence that Japan has surmounted the slowdown that has characterized its economic performance for about two years. Moreover, there are no positive signs of a successful conclusion of the Uruguay Round in the near future. Although many developing countries have, in 1993, maintained high rates of growth for the fourth consecutive year, nothing indicates that they will be able to sustain such performance and to reap the benefits of their strenuous adjustment efforts so long as they continue to be faced with unfavorable external factors.
This critical period, in our view, makes it imperative that the industrial countries embark without delay on restoring confidence in the private sector and rekindle noninflationary growth through the adoption of more balanced financial and monetary policies. This requires, in particular, the adoption by most of those countries of medium-term programs aimed at reducing their fiscal deficits, in conjunction with lowering short-term interest rates, especially in Europe. The industrial countries should also reform their structural and industrial policies, which impede the optimum distribution of production and frustrate the efforts of the developing countries to increase and diversify their exports in keeping with their comparative advantage. Moreover, the industrial countries must act as urgently as possible to introduce reforms in their labor markets so as to improve their efficiency and their ability to respond to technological change and to supply-and-demand indicators. This should be done in such a manner as to provide a radical solution to the problem of unemployment, which has become chronic in many of those countries and has led to political pressures for the imposition of protectionist measures, in addition to inducing losses in production and placing excessive burdens on budgets.
There is no question but that international economic cooperation has grown far more important over the years as a result of the growing economic interdependence among the various countries of the world. This, in turn, has attached a special significance to the process of economic policy coordination at the international level, in particular among the major industrial countries given the great impact of their policies on the path of the world economy. This process of coordination, however, has regrettably fallen short of achieving the level needed to face the challenges brought about by the accelerating political and economic developments in the international arena in recent few years. The Fund can play a vital role in enhancing the coordination process if it is given the opportunity to expand the scope of its participation in it. Indeed, the IMF, with its international character and its distinctive expertise, is in a unique position to take on such a role. In our view, it is important that the Fund be given the opportunity to expand its role in the coordination process. It is also important that the Fund continues to enhance its surveillance role in the industrial countries.
Economic performance in many developing countries has continued to improve in 1993, as a result of their perseverance with adjustment and reform, the easing of their debt burden through debt and debt-service reduction on the one hand, and the decline of international interest rates on the other. The continuing economic growth in the developing world has played a positive, vital role in driving the world economy during the period of recession that prevailed in most of the industrial countries. We should not forget, however, that other developing countries are still suffering from tremendous difficulties. In this regard, I refer in particular to the low-income countries of Africa, where standards of living have continued to deteriorate, and where indebtedness requires radical treatment involving the reduction of their debts in proportions that exceed what has been provided so far. In this respect, it is also noteworthy that the efforts made by a number of the lower middle-income countries to restore their creditworthiness are still being hampered by the heavy cost of foreign indebtedness. Therefore, we once again call upon the Paris Club to implement the provisions in this regard of the Munich Summit Declaration of the Group of Seven countries. While still on the issues of the foreign indebtedness and financing of the developing countries, I must point to the importance of the international community’s giving due attention to the financing needs of those developing countries which, despite their heavy debts, have not rescheduled and continue to service their debts. I would also like to commend the move of some industrial countries toward improving the financing environment for those countries that have restored or are about to restore their creditworthiness. It is important that the industrial countries exert more effort in this area. I would like to underscore the need to reconsider the Basle criteria of capital adequacy, which would discriminate against developing countries with high credit standings.
We welcome the success achieved in a number of developing countries in the area of economic adjustment and structural reform, as evidenced by significant improvement in domestic saving and inflows of private capital. In this regard, it is important to bolster the opportunities of the developing countries which have succeeded in attracting private capital to benefit from this source of financing in order to increase investment and production through adopting somewhat flexible monetary policies. There is evidence that the monetary expansion resulting from such inflows is but a reflection of spontaneous foreign financing for vital investments, and that it will not lead to inflationary pressures.
The success of economic adjustment and structural reform programs supported by the Bank and Fund in achieving their objectives depends on a number of factors which are well known and need not be enumerated here. However, I would like to underscore the extremely great emphasis that should be placed, in the design and appraisal of these programs, on the special objective circumstances of each individual developing country, and the need for greater account to be taken of the political, legal, and legislative frameworks within which economic decisions are taken and implemented. The political and social dimensions of such decisions should also be taken into consideration, with due attention paid to the assistance needed to address the negative impact of austerity measures, through the introduction and financing of social safety nets. I would also like to stress the need for the Bank and the Fund to adopt more selective approaches as regards the measures required for the programs they support. This can be achieved through the preparation of an order of priorities based on linking the corrective measures with the basic objectives of the adjustment process, so as to avoid overburdening the developing countries, administratively and technically.
The repeated failure to reach a successful conclusion of the Uruguay Round is but a reflection of the weakness of international economic cooperation at this time. It is paradoxical that the failure to reach agreements to conclude the Round has occurred even as many developing countries have been opening their markets through economic adjustment programs supported by the Bank and Fund. We are concerned that the potential failure of the Uruguay Round might ultimately lead to increased protectionism in trade blocs in the absence of an effective multilateral trade system. We call upon the industrial countries to remove the protectionist barriers, particularly nontariff barriers, which have increased over the past decade. The continued practice of high sectoral subsidies provided by industrial country governments is of great concern to us since this practice, along with the protectionist measures in general, would impede the efforts of the developing and the former centrally planned countries aimed at export diversification and growth. We call upon the industrial countries to limit the protectionist trends which have proliferated with the growth and spread of unemployment in many of those countries, on the pretext that this crisis has resulted from the unequal competition between producers in the developing world and the industrial countries. This explanation of the causes of and remedies for unemployment is not, in the main, based on objective arguments; it also disregards the fact that such claims of inequality are based on considerations which discount the positive impact of rapid growth in the economic performance of the developing world on employment demand in the industrial countries. In our view, there is an urgent need to open the markets of the industrial countries to developing country exports, in a more positive way. It is also necessary to introduce an adequate framework for dealing with the problem of migrant labor in the industrial countries.
Many Arab countries have made great efforts to achieve financial stability and reform many times during the past decade. A number of those countries are still implementing economic and structural adjustment programs supported by the Bank and the Fund. We call upon the Bretton Woods institutions to provide more support for those efforts, and more resources in response to the needs of the Arab countries for technical assistance, including those countries that do not receive financial resources from the two institutions. In this respect, I wish to commend the resumption of support to Lebanon’s development bank and the increased activity of the International Finance Corporation (IFC) in the Arab countries during the current year. While on the subject of the Arab countries, I should mention the vast economic openness prevailing in many of them, especially in the areas of trade, investment, and capital movements, as well as the generous financial support extended by the Arab oil exporting countries to other developing countries, which has continued at levels far exceeding, in terms of GDP, the levels of development assistance extended by the industrial countries. This has occurred despite the decline in their oil revenues and their increased need for financing as a result of the Gulf crisis. It is unfortunate that while the oil production and pricing policies in the oil exporting countries have been aimed over the years at stabilizing world markets, the industrial countries continue to adopt tax and protectionist policies which discriminate against oil and the petroleum product exports of the Arab countries.
We still believe, as previously noted by the Arab Governors, that all countries, and in particular the major currency countries, should build confidence in the international monetary system and ensure its sound performance. We call upon the Fund to reconsider its policy of approving restrictive measures taken under the pretext of national security requirements.
In closing, I would like briefly to address a number of additional issues pertaining to the Bank and the Fund. As to the Bank, we welcome the 1993 increase in the lending and investments of the World Bank group. This was the result of the Bank’s increased operations in the republics of the former Soviet Union and in Eastern and Central Europe. We also welcome the efforts made to improve the implementation of Bank projects and the new trend of achieving tangible results as regards development in the borrowing countries. In this connection, we wish to stress the need for corresponding increases in the loans and credits extended by the Bank group. Moreover, in connection with the World Bank’s decision to provide more information to the public on its projects and policies, I wish to stress the importance of the borrowing countries’ agreement to provide such information in a manner that is consistent with their systems and circumstances. I would like further to stress the need to keep Bank projects from being exposed to pressures from foreign parties, particularly in the preliminary stages of project preparation.
As for the Fund, I would like to express the support of the Arab countries for a new SDR allocation. We urge the member countries still opposing this measure to join the overwhelming majority of members who support it. I wish also to stress the urgent need to establish a concessional financing program as a successor to the enhanced structural adjustment facility (ESAF). Finally, we welcome the IMF’s introduction of the financial mechanism to support economic transformation, and the agreement that the opportunity to take advantage of the resources of this program not be limited to the countries of the former Soviet Union. Hence I would like to underscore the need for the Fund’s work in other parts of the world to be characterized by flexibility comparable to that shown in dealing with the needs of economic transition. In the same context, the IMF should adapt its various financing programs in such a way as to make them more readily and effectively responsive to the needs of adjustment and development in the developing countries.
Statement by the Governor of the Bank for Belgium—Philippe Maystadt
During the past few days, we have reconfirmed our commitment to the principles defended by the Bretton Woods institutions as the foundation for the restoration of solid economic growth throughout the world. I recall in particular emphasis on:
the need for a cooperative strategy to re-establish the conditions for sustained global expansion;
the importance of greater labor market flexibility, particularly in Europe, as a means of improving our economic performance in terms of job creation;
the urgent need for a clear message regarding the liberalization of international trade, in order to re-establish investor confidence and promote job creation at the global level.
Belgium fully subscribes to these principles and to the appeal made to us yesterday by the Managing Director of the Fund when he urged us to apply them with determination. However, I should like to add a few brief considerations to each of these three points, to ensure that the remedies prescribed produce the desired results.
My first observation concerns the cooperative strategy for sustained global expansion, the central topic of discussion at the last two Interim Committee meetings. I am in full agreement with the principal conclusion reached on this point, namely, that the success of the strategy will depend on each country’s willingness to implement the requisite stabilization programs and domestic reforms. This is a golden rule, observed successfully for several years by a large number of developing countries and by several of the formerly planned economies that are now resolutely engaged in the process of transition. But is it really sufficient for each country to independently adopt the appropriate domestic measures when the aim is to arrive at a satisfactory result on a global scale? In other words, is it sufficient for there to be a global agreement on objectives if each nation is trying to achieve them by relying on domestic policies alone?
I should like to pay tribute to Robert Triffin, who died this year at the age of 81, by recalling an opinion he expressed in 1957, when he said that the fundamental dilemma affecting international economic relations in the twentieth century is that of the inadequacy of the individual-nation approach as a framework for political decisions and their administrative execution in an interdependent world. Interdependence has continued to evolve since that time. In particular, interdependence among the principal currency zones has increased considerably, chiefly as a result of integration of the financial markets, and we have all been aware of the speed with which those markets can shift substantial amounts from one currency to another.
Thus the dilemma referred to by Robert Triffin is now more pertinent than ever: we need a sufficiently solid framework of cooperation, particularly where monetary matters are concerned, to reconcile our individual sovereignties with the interdependent world in which we live. This framework naturally cannot be conceived as a one-size-fits-all model. It will need to be adjusted in order to be as relevant as possible to the objectives and specific situations of each group of partners. For the countries of the former Soviet Union, cooperation agreements will be needed to protect their reform efforts from the effects of the current destabilization of their monetary and trade relations. It is essential that those countries be able to maintain adequate trade relations among themselves. To this end, it might be helpful to set up some sort of “payments union.”
Having opted for a single-market system as a means of jointly achieving their economic goals, the members of the European Community (EC) need to go one step further by adopting a single currency and thereby consolidating their commitment to a growth model based on inflation control and safe from competitive depreciation. In our view, a single currency is the essential complement to the single market. In ratifying the Maastricht Treaty, member countries have opted in favor of a strong and united Community, capable of facing the new political and economic challenges on the basis of shared sovereignty, particularly where monetary matters are concerned. The abandonment or postponement of this ambitious project would have a negative impact, not only within the Community itself, but also in other parts of the world toward which we have a particular responsibility.
It is the task of the International Monetary Fund to assist its members by providing frank advice regarding the conditions to be met so that these cooperation models can produce the desired effects in terms of a contribution to more stable economic and monetary relations throughout the world. Furthermore, given its universal orientation, the Fund is urged to issue systematic statements on the adequacy of exchange relations among the principal currency areas and on the essential principles of cooperation that will ensure that those relations are more favorable to the sustained global expansion of investments and of international trade.
I now come to a second general observation concerning the problem of unemployment, namely, that it is essential to look at all measures that may be implemented at the national level to promote job creation. The IMF staff is quite right to emphasize the importance of labor market flexibility and the need for active policies in the areas of support and of training. The Belgian Government would certainly welcome the introduction of reforms at this level, but it also believes that only a significant reduction in labor costs, with the consequent modification of the relative prices of factors of production, would be able to improve the employment component of economic growth within the Community. We are convinced that unemployment in the Community is partly the result of the very high wage costs that the European enterprises have to bear.
The high level of labor costs in Europe in relation to the rest of the world is mainly explained by the fact that financing of the social protection systems in the majority of the EC member countries at present relies to a very large extent on withholdings from wages. As a result, a move to reduce labor costs would necessarily involve reforming the mode of financing of the social protection systems, to reduce the burden it presently imposes on labor costs as compared with the other factors of production.
Since most of the member countries of the European Community share this view, we are convinced that a Community strategy is called for in order to attack Europe’s unemployment problem. If a labor cost reduction effort is to have any significant impact in terms of job creation, it has to be on a grand scale. In the absence of an agreement at the Community level, it would be difficult for most member countries to find unilaterally the alternative financing that would enable them to reduce labor costs sufficiently to create the conditions for a significant reduction in unemployment.
My third observation concerns the need for a speedy conclusion to the Uruguay Round. We subscribe without reservation to the unanimous view of the Interim Committee, and the Belgian Chairman of the Community is sparing no effort to achieve the compromise essential to concluding an agreement by the end of the year. We are convinced that such an agreement would be one of the most positive signals that we could give in order to improve economic prospects in the coming years.
However, we trust that as progress is made toward freedom of trade, progress will also be made in the area of human freedom. We trust that participation in new trade agreements will be accompanied by an effective commitment to other international accords, such as those concluded under the auspices of the International Labor Organization and relating, inter alia, to female labor, child labor, and forced labor.
The link between these two concerns could perhaps be forged by including in the General Agreement on Tariffs and Trade (GATT) what might be termed “social covenants,” as long as such an expression were not misconstrued. This would in no way mean that all those countries engaging in international trade must have already achieved a level of social protection identical to that prevailing in our countries. This would not make sense, and it would be extremely unfair to the developing countries. But it would mean that those countries wishing to share in the benefits resulting from trade liberalization and the development of international trade must at the same time agree to respect the most elementary rights of their workers, both male and female, as defined in international accords.
Statement by the Governor of the Fund for Viet Nam—Cao Si Kiem
Once again, the delegation from the Socialist Republic of Viet Nam has the great honor to participate in this collective expression of appreciation to the management and the staffs of the World Bank and the International Monetary Fund for their untiring effort in serving all members’ economic and social welfare.
Last year, when we met here, the number of member countries that the delegates represented was 167. This year, it is 178. As we join hands with our colleagues to greet the representatives of the new members, we believe that they have come here not only on behalf of their countries, but more important, to represent a new international economic order, an order brought about by profound changes going on across the continents.
Only two weeks ago, this city witnessed a historic event reflecting the trend of reconciliation and of peace; it was made to happen by laborious effort from all sides. Truly, the noblest task of our time is to foster international cooperation for the construction of a new and prosperous world. Tragedies around the world at this hour are forcefully reminding us of how destabilizing it could be when change is not properly channeled.
For the former centrally planned economies, the road to the free market is particularly hazardous. The changes that they must make, whether for the purpose of structural adjustment, economic reform, or systemic transformation, are very taxing indeed. At times, they even seem dangerous to implement. It is so because not only the direction of reform but its pace and sequencing are equally important. A misstep in the order of sequencing, for example, may invite heavy consequences.
As reported to the Governors during the last Annual Meetings, our country has vigorously embarked on the road of reform. Since 1988, with our own effort and supported by invaluable advice from the international financial institutions, we have gathered some measures of success in transforming our economy. As a result, it has been stabilized to a significant degree, with the rate of inflation pushed down to 12 percent this year and with the good prospect of declining further next year. Our objective of balancing the current budget is being focused on, and step by step, a modest surplus is being achieved, making it possible to begin the reconstruction of our basic infrastructure. Thanks to the acceleration of our liberalization measures, the economy is now growing at the rate of 7.5 percent a year.
For Viet Nam, the Forty-Eighth Annual Meetings of the World Bank and the International Monetary Fund take on a very special meaning. They mark the beginning of a new era of our relationship with the two institutions. The breakthrough in our external economic and financial relations could not be possible without the concerted support of the Fund, the Bank, and our friends around the world, including France and Japan.
With a positive modification of its long-standing position on the issue of the settlement of our obligation to the Fund, the United States has made it possible for the Governments of France and Japan to move forward in supporting our mobilizing resources for this transaction. The elimination of arrears to the Fund will take place within the next few days.
We are now looking forward to the prospect of our full integration into the global economy in order to explore the dynamism generated by free trade. Deviation from that very principle has thus far denied our economy its comparative advantage, which is so essential for our successful transition to a market economy.
Particularly important for our endeavors is the potential benefit from the ability to participate in the Fund’s and the Bank’s facilities. In this regard, we join other developing countries in looking forward to the successful formulation of the successor to the enhanced structural adjustment facility, a new allocation of SDRs by the Fund, and enlarged adjustment lending, as well as to the mobilization of resources for building a global environment program by the Bank. We share the enthusiasm of other members for the timeliness and importance of the Fund’s newly created systemic transformation facility. In launching this facility, the Fund has engaged in helping to alleviate the pain of human suffering in prolonged periods of reform. In fiscal year 1993, no less than 45 percent of the Fund’s technical resources are targeted to support the transformation process.
With the new access to the Fund’s and the World Bank’s resources, we will be able to prepare to enter a critical phase of our transition: the undertaking of major steps in institution building and in reforming public enterprises. The first task for us will be to put promptly in place a legal system based on transparency and uniformity in order to enhance the rule of law.
Let us expect at our next Annual Meetings to celebrate the fifty years since Bretton Woods with even more hope.
Statement by the Governor of the Bank for Nepal—Mahesh Acharya
It is indeed an honor and privilege for me to represent Nepal at the Annual Meetings of the International Monetary Fund and the World Bank Group. I wish to join the previous speakers in extending a warm welcome to our new members and look forward to a flourishing partnership with them. A year has passed since our last meetings in Washington, but the much-awaited economic recovery among industrial countries continues to remain weak and clouded. Such an anemic recovery and subdued demand in the major industrial countries are causing adverse effects on the economies of the developing countries at a time when many of them are implementing far-reaching structural adjustment policies.
Countries that have embarked on economic changes are keen to see a strengthened multilateral trading system. But factors beyond their control appear to be hindering the realization of this dream. Therefore, the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) negotiations should be completed as soon as possible. Failure could mean deterioration in the global trading system resulting in a growing tide of protectionism that could ultimately derail the reform process in developing countries.
Since the last Annual Meetings of the Bank and the Fund, Nepal has taken several restructuring and adjustment measures. The Government has been successful in giving the economy a new dimension with fundamental changes in macroeconomic environment. We have adopted an industrial policy that encourages private sector investment. Trade and tariff policies have been fully liberalized. The financial sector has been relieved of the burden of state control. A comprehensive tax reform agenda has been initiated, and vigorous steps are being taken to improve public expenditure management.
The dual exchange rate system has been unified; full convertibility has been introduced in the current account; import licensing has been abolished; and privatization of public enterprises has been proceeding rapidly. Three state-owned enterprises have already been privatized, and many more are slated for privatization this year. To expedite this process, a privatization bill has been passed by the Parliament. The domestic airline market has been deregulated, and a number of new private financial institutions have just been born. In addition, the downsizing of the public sector bureaucracy has been followed by a new legal framework to bolster the confidence of the civil service and improve bureaucratic performance. The Government is continuing to urge the private sector to share a larger responsibility in the task of nation building, and the confidence level of the business community has been greatly elevated. We have already ratified the Multilateral Investment Guarantee Agency (MIGA) Convention and thus a more congenial environment has been created for foreign direct investment.
These reform efforts have started bearing fruit. Inflation is down to a single digit; external sector export has increased; and the current account deficit has declined significantly, resulting in a favorable balance of payments.
Despite these achievements, our work is far from done. A majority of our population continues to live in abject poverty, and it is incumbent on us to pursue poverty-alleviation measures to improve the quality of life of the poor. We believe that investments, especially in the social sector, are a must in this context. We have, therefore, begun the prioritization of development projects to ensure adequate resources to core and social sector projects.
While taking recourse to a reform path and effective public resource management, it is imperative for us to check the government profligacy, but at the same time we should not forget that developing countries suffer from the inbuilt profligacy of the wrong project design. There are examples where past investments in development projects turned out to be unsustainable, wasting scarce resources and casting doubt on the seriousness of such efforts. This is an issue that needs careful attention from all sides. Regarding technical assistance, it is time to develop a new paradigm that is acceptable to all. We have to move from a world of donor-driven technical assistance to one that is demand driven in the spirit of our philosophy of market orientation. In this context, the Bank needs to examine the merits of indigenous ways of managing and restructuring institutions. If we fail to do so, the issue of sustainability will remain as it is today—fraught with difficulties and devoid of substance. I would, therefore, like to urge the Bank to pay increasing attention to the sustainability of projects, improved quality in project design, and implementation.
The attainment of our development goal, however, is severely limited by the shortage of power in the country. This explains the basis for the Government’s decision to proceed with a major hydro project in the Arun River valley which is capable of transforming our development prospects. The construction period presents a number of macroeconomic and administrative challenges for which continued close cooperation and involvement of both the Fund and the Bank to ensure a coherent macroeconomic framework are welcome.
The economic adjustment programs that we initiated have evolved gradually. We have now moved beyond the issues of stabilization and fiscal balance to an agenda on sectoral policies consistent with our macroeconomic framework. At this juncture, we feel that the foundation for reform has been laid, and our focus should be on the pace of change—a pace that needs to be in conformity with the socioeconomic environment of the country. We are committed to the policy of economic reform. But the process of reform involves adjustments— economic, social, and political—that need to be viewed with pragmatism. Times are hard for the people of Nepal, and economic adjustments are never very easy or politically palatable. We ask that you recognize these constraints and assist us in creating social safety nets that will allow the process of reform to be sustained. The process of economic reform often reminds me of traversing through a dark tunnel: we want to ensure that the tunnel effect does not prolong into our social psyche and that the light of hope and optimism does appear at the other end.
Try as we may to pursue this effort at nation building, there are situations that leave us helpless. In July 1993, Nepal faced devastating floods and landslides that caused the loss of over a thousand lives and left many homeless. In addition, there were severe damages to major crops as well as to infrastructure, in particular, to a key hydroelectric facility, irrigation facilities, important roads, and bridges. During this time of natural calamity, friendly countries and international communities extended their full support to mitigate the problems. I take this opportunity to express my sincere appreciation and gratitude to all of them for the generous help accorded to Nepal during these difficult times.
This natural catastrophe, however, will not derail our reform process. We intend to rehabilitate infrastructure over time within an overall framework of fiscal and monetary prudence. Our overall economic objectives and strategy will remain unaltered, and the comprehensive structural reform program will continue.
Finally, I extend our sincere appreciation to the Bank and the Fund and to their staffs for their continuing support in our development efforts.
September 28, 1993.