Chapter

Opening Address by the Chairman of the Boards of Governors, the Governor of the Fund and the Bank for Kenya1, George Saitoti

Author(s):
International Monetary Fund. Secretary's Department
Published Date:
November 1990
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It is a great honor for me to welcome you to these Forty-Fifth Annual Meetings of the International Monetary Fund and the World Bank Group.

All of us present here join together in extending a warm welcome to our newest member, the Czech and Slovak Federal Republic. We also extend a hearty welcome to the delegates from Bulgaria and Namibia, both of which we expect will become members of our institutions during these Annual Meetings. I am also happy to note that Mongolia and Switzerland are currently in the membership process, and that we have with us special invitees from the U.S.S.R.

World Economic Outlook

The past year has been marked by extraordinary political and economic events, all of which have significant implications for the world economy. Three of these developments stand out as particularly important at this juncture.

First, one year ago the Berlin Wall stood tall, a symbol of intense world divisions. Today we meet on the eve of the reunification of Germany. I am sure that all of you will join me in warmly welcoming the German unification and the restructuring and move toward liberalization of countries in Eastern Europe. These countries are already beginning to attract significant amounts of capital, which we hope will not take place at the expense of developing nations, and this points to what may be a central theme of these meetings, namely, the growing imbalance between the demand for and the availability of capital. We welcome the increase in investment in Eastern Europe and hope that it does not take place at the expense of the developing nations.

Second, we are also happy to note the continued and rapid progress toward a united Europe, a development that could have important economic and political implications, particularly for the access to world markets of developing countries. We are indeed living in times when it can be claimed that history is being made.

Third, I must, however, strike a more somber note on account of the recent developments in the Middle East, and of their adverse impact on the world economy. Economic growth will likely slow down in 1990, after seven years of global expansion, even though the prospects for specific regions differ widely. As a whole, the industrial countries, which were expecting a moderate growth and a slight decrease in inflation in 1990/91, will experience an economic slowdown while inflation and interest rates may rise. Within this group, Japan and the Federal Republic of Germany are still expected to post significant gains, but relatively slow growth is projected in North America, the United Kingdom, and a number of smaller industrial countries.

The scenario for oil importing developing countries is even less encouraging. As a result of the increase in oil prices, growth is expected to slow down and inflation may remain very high in 1990. They will experience a fall in income as a result of the deterioration in their terms of trade; their exports are expected to decline as a result of reduced demand in industrial countries; and the increase in world interest rates will raise debt burdens.

Within the group of developing countries, Asia as a whole is projected to enjoy continued rapid growth rates, but for those in Europe and the Western Hemisphere, the need to tackle large imbalances will likely result in almost stagnant output in the short term, except perhaps in the major oil exporting countries. Many of the Middle Eastern countries will suffer from the loss of export markets and a sharp drop in workers’ remittances.

The worst-affected region will be Africa. Lower exports, increased costs of oil imports, and higher debt-service payments are a vicious combination. Most countries will need substantial net inflows of additional resources, combined with the strong implementation of growth-oriented adjustment programs to overcome the crisis and improve living standards for their peoples.

Let us hope that these gloomy predictions will not materialize and that the new spirit of international cooperation that has been established will soon restore peace and order in the region and normalcy in the oil market.

Meanwhile, I am happy to note that the multilateral financial organizations are engaged in imaginative efforts to support those countries that are worst affected by this crisis.

In a brief review of the world economy, the urgent and continuing problem of poverty in a number of countries has to be mentioned. The World Bank has once again sharply focused on this issue in this year’s World Development Report. Poverty remains a daunting problem in a large part of the world. It is “shameful,” to quote the World Bank, that “more than one billion people in the world are living in poverty.” The eradication of poverty has to be an important theme for our deliberations this week.

An Action Agenda

How can we work together to face the challenges ahead, to consolidate the gains of the recent past, and to spread these gains more evenly? This is a demanding goal. I will single out four areas on which to focus our attention:

First, there is a need to coordinate more effectively economic policies among the large industrial nations in order to avoid a global recession. The mechanisms for policy coordination have improved considerably during the past decade, and the political willingness to adjust national economic policies to the demand of the world community is increasing. Right now, the economic outlook is particularly cloudy. The recessionary tendencies in some countries are now added to the uncertainties flowing from the crisis in the Persian Gulf. Governments around the world will have to exercise considerable international statesmanship to steer successfully through the uncertain seas that lie ahead.

Second, the need to improve international cooperation through a freer international trade system remains high on the agenda. The benefits to be derived from freer international trade in goods and services are well known. Time is now rapidly running out for the completion of the Uruguay Round of trade liberalization under the auspices of GATT. I urge all participants in the Round to work toward its prompt and successful completion and to move forward and boldly dismantle the multitude of special agreements, such as those for agricultural products and textiles. These restrict the trading opportunities for developing countries. The inequality of nations at the bargaining table can, so easily, give rise to a perpetuation of poverty.

Third, the problems of poverty remain acute in large parts of the world. The solutions are complex, politically and economically. Actions to reduce poverty must largely start at home, but the active financial support of the international agencies and industrial countries is also required. Specific and imaginative actions, such as buy-back or exchanging debt for environmental action or forgiving debt, as certain creditors have generously already done, are needed to alleviate the debt problem, which in many countries has aggravated poverty. At the same time, poor countries need to design their policies more deliberately to reduce the incidence of poverty and to enhance the potential for more widespread employment opportunities for income generation.

I am happy to note that the design of adjustment programs is now beginning to take into account their social aspects, especially the impact of these programs on the vulnerable sections of the population. Further progress along these lines is called for.

Fourth, we are all now beginning to grasp the complex problems of protecting the environment from exploitation, but we are far from any solution. This is a global problem, but it is more acute and somewhat intractable in the developing world. Nevertheless, we know that it is imperative to preserve the environment, so that our children can inherit a better world. For us in Kenya, President Moi has been in the forefront and actively involved in various international forums to help focus world attention on these issues. The awareness of these problems is therefore growing in Kenya, and we are spending increased resources to protect and reserve our environment, often with technical and financial assistance from a number of friendly nations. However, I would like to point out that poor countries often find it hard to bear the costs of these measures and I urge increased resources to tackle these fundamental issues.

The four issues that I have raised embrace some of the more urgent problems facing the world today. I would urge you to focus attention on these problems, all of which are of a global character, requiring international cooperation among governments and within international institutions such as the Fund and the Bank.

Developments in Sub-Saharan Africa

Let me now turn for a moment to the economic situation in sub-Saharan Africa. The region is currently experiencing a modest recovery, after years of stagnation; yet it is fragile at about 3 percent a year, barely the population growth rate and nowhere near what is needed to raise meaningfully per capita incomes. And this modest recovery may well be jeopardized by the increase in oil prices. Africa’s predicament is characterized by weak agricultural growth, declining industrial output, poor export performance, climbing debt burdens, and deteriorating social indicators. Although many of the problems of the region have been externally generated, we, as Africans, recognize that the primary responsibility for our development rests with our people and their leaders. We cannot afford to borrow foreign ideologies and models for our own development. We know that if Africa is to avert hunger and provide productive employment to its growing labor force, our economies must grow at a much faster rate, the initial source of which must come from agriculture. We also need a sustained growth in our exports, more savings, increased investment, and indeed enough foreign exchange to pay for the essential imports.

Two thirds of the countries in sub-Saharan Africa have embarked upon the difficult, trying, and risky process of structural adjustment aiming to achieve a much faster rate of growth of their economies. They have demonstrated their willingness and capacity to undertake demanding reform programs that have, at times, threatened the already fragile fabric of their societies. In a number of countries the last three or four years have seen a dramatic and welcome change in the pattern of incentives in their economies, appropriate exchange rate, trade and other macroeconomic policies geared to economic stability, and improved production and productivity.

All these measures require domestic commitment and consensus. Above all, to be successful, adjustment measures, and in fact more rapid economic growth, in Africa are critically dependent on adequate financial and technical assistance from the international financial institutions and the international donor community. This is vital in order to ensure a net inflow of real resources to the region, a requirement more acute now than ever before.

The external resource requirements for those countries that adopt and implement sound economic policies in sub-Saharan Africa will only be met if the donor community increases gross official development assistance by at least 4 percent annually in real terms. Concessional debt relief mechanisms are necessary so that debt-service payments are not worse than in recent years.

Looking ahead, I would like to single out three issues that I believe are essential for the future of sub-Saharan Africa. The first is the need to build capacity, human and institutional. This requires a substantial increase in investment in Africa’s human resources, so that the great potential that lies therein can be realized. Indeed, it may be the main key to raising the productivity in many countries. Emphasis must be placed on improving the quality of basic education. We should prepare our children for a more rigorous and demanding postsecondary educational regime which will equip them with the skills necessary for a broader participation in the economy.

A second crucial need is to increase the participation of women in economic activity. Programs and policies that focus on increasing women’s productivity in agriculture and promoting income-generating opportunities for them must be given very high priority. They should be encouraged and assisted to learn skills that enable them to engage more effectively in commercial enterprises. To benefit from these, they must have easier access to credit.

Third, African nations need to encourage more private investment and venture capital from abroad. The economic adjustment measures have already started sending the right signals to the investors, at least in my own country, Kenya. However, we need to continue our efforts to put our economies in shape so as to encourage capital repatriation and become more attractive to international business. We must also recognize that, in the longer run, the flow of financial resources into Africa will increasingly have to be commercial.

Developments in Kenya

Allow me as a practitioner to dwell for a brief moment on Kenya’s recent experience. There is indeed some merit in sharing our experience with my fellow Governors from the region. Beginning in 1985 we put together a set of policies and strategies to deal with our growing employment needs and to strengthen the growth processes in the country.

We have the full support of our people for the implementation of these policies. Today, I am indeed proud to say that Kenya’s real GDP growth rate averaged over 5 percent between 1985 and 1989. Kenya is in fact one of the very few African nations where per capita incomes rose steadily in real terms in the second half of the 1980s. We also managed to reduce inflation from a peak of over 22 percent in 1982 to about 10 percent in 1989. No doubt, the unique political stability we have is a critical factor that has contributed to economic stability and growth.

The trade policy reforms of 1988 along with the decontrol of prices for a number of commodities and reduction of tariffs have helped our manfacturing sector by reversing the decline in investment witnessed in the early 1980s and spurring gross fixed capital formation. Furthermore, Kenya’s agriculture has provided for food security while growing by over 4 percent in real terms between 1985 and 1989, mainly as a result of provision of market incentives.

On the population front, we are beginning to witness the fruits of decades of development and education. Demographic transition is already in place in Kenya, long regarded as having the world’s highest population growth rate. Recent data indicate that that rate has declined by about 15 percent in the last five years.

Reforms are also under way in the financial sector and in capital markets to deepen the financial base and encourage domestic savings. We have also taken several steps to promote exports in the medium and the long term and are putting together an outward-looking, export-oriented strategy that is essential to achieving an even faster rate of growth of the economy and improved welfare for the majority.

Let me draw some important lessons from our experience. First is the need to build a national consensus for reform and widespread political commitment. Here we have been fortunate to enjoy the full backing of our President, H.E. Daniel Arap Moi, who has given consistent and clear backing to the reform process. Second, the reform process must be formulated by those who will be affected by it. There is a price for reform. There are indeed losers in the process and the social aspects of adjustment must be very carefully evaluated right from the beginning. Third, reform processes should be gradually implemented, giving the right signals to the public and the private sectors and avoiding sudden changes in policy. Fourth, countries need able professionals and technical specialists and supportive institutions to design, implement, and evaluate reform strategies and programs.

Finally, and most important, a critical factor for success in adjustment measures is the inflow of substantial resources to the economy. Unless such resources are forthcoming, particularly of the right quality and with adequate flexibility, reform programs run the risk of reversal within a short period of time. This is particularly important for countries implementing trade reform while facing simultaneously a significant drop in earnings from traditional exports.

Role of the Fund and the Bank

I do not wish to elaborate on the roles of the Fund and the Bank in facing the emerging challenges in the world economy. I leave this task to the Managing Director and the President.

Let me, however, state that the two institutions must now demonstrate increased flexibility and be responsive in their search for answers to the issues to which I have alluded. The Bank has just had a greatly needed capital increase. The $15.5 billion replenishment of IDA’s resources is welcome and the donor countries’ contributions—particularly the special contributions made by several donors—are greatly appreciated. A similar increase is also being sought by IFC, and I urge members to agree promptly to such an increase. Finally, it is essential for member countries to move speedily toward the ratification of the just agreed 50 percent increase in Fund quotas. This, as you know, will also require acceptance of the proposed Third Amendment to the Articles of Agreement. Some of us have had our reservations and these have been duly recorded, but the time has come to demonstrate statesmanship. The Fund requires the quota increase to deal with the emerging crisis.

Conclusion

We are meeting at a time of tensions and new difficulties. Global events are rushing ahead at a dramatic pace. But a new sense of international cooperation is being established. We are meeting at a time indeed when world history is being made.

If the outlook for the 1990s is to be promising and if we are to build on this new spirit of international cooperation, action by both industrial and developing countries is required. The developing countries must show their commitment to growth by implementing strong programs adapted to their own particular circumstances. Industrial countries must both ensure their own growth and create a favorable international economic environment for such progress in the developing world.

We have much to discuss in the few days that we are here. I am confident about these meetings, and I hope that all of you do share this confidence. Let us work together to build a better world.

Delivered at the Opening Joint Session, September 25, 1990.

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