Presentation of the Forty-Fifth Annual Report1 by the Chairman of the Executive Board and Managing Director of the International Monetary Fund, Camdessus M.
- International Monetary Fund. Secretary's Department
- Published Date:
- November 1990
By the Chairman of the Executive Board and Managing Director of the International Monetary Fund—Camdessus M.
I welcome you to our Annual Meetings, and in particular I would like to extend a warm welcome back to Czechoslovakia, which played an important role in the early years of the Fund. I welcome also the delegations of Bulgaria and Namibia, which will become members during these Meetings, and the delegations of Mongolia and Switzerland which have applied for membership. Welcome, also, to our special invitees from the Soviet Union.
The prospects for the world are cloudy, at the end of this summer, but let us pause a moment and join the celebration of the people of Namibia, who have reached the end of their long road to independence; express our wholehearted readiness to support the Eastern European countries in their efforts to reform and participate more actively in the world economy; and congratulate our German friends for creating the vision of a peaceful and unified Germany, by the momentous step they will take on October 3rd.
The extraordinary developments in Europe, the recent spread of democracy in every continent, and the progress by many countries in their economic strategies, had led us to look forward confidently to the future. But the crisis in the Middle East has reminded us all that peace is fragile and that economies are always vulnerable.
So let us address three questions this morning:
How to face the crisis?
What policies are needed to keep the world economy on a trend of sustainable growth?
How to improve the trade and monetary system?
* * * *
I. The Fund must be prepared for the unexpected, and give confidence to its members that it is ready to help meet the financing needs associated with their efforts to adjust to new circumstances.
The impact of the Middle East crisis will be adverse for most of the Fund’s membership. They will experience both lower growth and higher inflation this year and next, than would otherwise be the case. Provided the situation does not deteriorate further, our best estimate is that it will remain manageable for all of the industrial countries and most of the developing countries.
While we should not overreact to the crisis, we have to recognize that a number of countries are especially harmed by the crisis. They deserve special attention. They include some of the least developed countries, several developing countries that are heavily dependent on oil imports, and the countries of Eastern Europe that are at a particularly vulnerable stage as they embark on major systemic reforms and will be affected simultaneously by the shift to world prices for intra-CMEA trade. These groups of countries are expected to feel a severe adverse impact, compounding seriously their existing difficulties and reinforcing their need for strong policies. They cannot cope with the additional burden on their own. This is a time when the international community of nations, in a spirit of solidarity, should come together to extend and coordinate its assistance.
The Bretton Woods institutions will do their share. For the Fund, I do not propose the creation of any new oil facility. The Fund has the adaptability needed to cope with a situation of this sort, with its existing facilities. Our resources are, at present, adequate to enable us to look after the expected needs of the bulk of our members; they will remain so for some time when the agreed quota increase comes into effect. Nevertheless, some strengthening of existing instruments could enhance the speed and flexibility of the Fund’s response and make more effective its assistance to the membership.
I am particularly concerned about a limited number of countries for whom the regular credit facilities of the Fund are too costly. Common sense suggests that we should be prudent about extending such financing to countries that might experience difficulties in servicing such new debt. I am satisfied that the Interim Committee has invited the Executive Board to develop expeditiously the modalities of “adaptations of its existing instruments.” And they have asked us “to take account of the requirements of current circumstances in tailoring members’ access to Fund resources, including ways to address the problems of certain members in servicing such debt.” I share the Committee’s hope that all members that are in a position to do so will collaborate in these efforts. For these hopes to be translated into action, we will need financial contributions from each of these members, and urgently. It is with some hesitation that I once again request their contributions, especially since they are subject to other demands. But how could we do otherwise? The IMF has been created to help avoid situations in which members are obliged to restrict drastically their imports or, to quote the Articles of Agreement, to resort to measures “destructive of national or international prosperity.” In the absence of such financing, what else could these countries do? Therefore I am confident that the Governors of countries that are able to contribute will bear in mind the high leverage of their contributions, both in promoting good policies and in catalyzing financing from other sources.
* * * *
Our collective response to the present crisis will produce only short-lived benefits, however, unless it is accompanied by an unflinching resolve by members, particularly the major industrial countries, to maintain sound economic policies. This is the essential precondition for restoration of a healthy global environment.
The industrial countries face this heightened challenge at a sensitive time—when concerns are being expressed in some of them about both a possible recession and an upsurge of inflation. In the immediate future, their objective must be to resist inflation and to improve the prospects for sustained noninflationary growth. The developments of recent weeks give increased importance and urgency, not less, to the implementation of a strategy to contain inflation and raise national and global saving and investment.
In these circumstances, a relaxation of monetary policy would yield neither an enduring reduction in interest rates nor a lasting improvement in employment. Instead, the market’s concerns should be allayed by providing clear and credible signals that the authorities are determined to reduce inflation. Market confidence in the authorities’ medium-term strategy can help the recovery. This is the surest way to improve the prospects for growth.
This being said, the increased demand for resources associated with unification in Germany and reform in Eastern Europe, together with the pressing needs of the indebted countries, underscores the importance of increasing world saving. Serious consideration should be given to the removal of distortions that discourage private saving. However, the most effective way to boost national saving would be fiscal consolidation, particularly in those countries where fiscal deficits remain high, such as the United States, Canada, Italy, and several of the smaller industrial countries. A particular urgency attaches to the decisions to be taken in the U.S. budget summit in the next few days that should make credible and lasting reductions in the fiscal deficit and strengthen the budgetary process. A reduction in the absorption of saving by governments of industrial countries would tend to lower interest rates, thereby encouraging private investment and helping to reduce the debt-service burden of developing countries. This must be a key component of a medium-term strategy to reduce and reverse the net transfer of resources from the developing to the industrial world.
* * * *
II. I am struck by the similarity of economic strategies followed by the more successful developing and industrial countries. The following main elements are commonly found:
Policies are pursued steadfastly within a medium-term framework and with the focus on producing sustainable growth, low inflation, and a viable balance of payments. The government seeks to create and maintain a sound economic and legal framework that is conducive to growth.
Financial policies maintain firm discipline at both the macroeconomic and microeconomic levels. In particular, fiscal policy aims at controlling expenditure effectively, at raising revenues in ways that minimize distortions, and at avoiding troublesome fiscal deficits. Monetary policy strives consistently to bear down on inflationary pressures.
Governments attempt to control expenditures effectively, and to allocate resources in accordance with society’s priorities. Increased attention is given to the quality of expenditure. By this I mean that more value is given to expenditures on health and education, for example, that help develop that most precious of resources, human capital. More scrupulous care is given to protection of the most vulnerable members of society, through provision of adequate safety nets. Preservation of the environment is increasingly recognized as essential to the future of our planet and all who live on it. And the citizens of many countries are becoming more critical of expenditures that are clearly wasteful or counterproductive.
Structural policies are designed to enhance the productive capacity and efficiency of economies. Here the range and diversity of measures is very wide, reflecting the special circumstances of each country. But we see recurrent themes: reform and simplification of tax and subsidy systems to create an incentive structure that encourages work, saving, and productive investment; a removal of excessive regulation, and a reduction of bureaucratic red tape; in many cases, privatization of state enterprises and removal of the government from direct participation in commercial activities that can be more efficiently performed by the private sector; and a greater exposure of the economy to international trade and competition.
Governments of many countries have been pursuing reforms of the financial sector, to raise saving, improve intermediation, and allow a higher level of investment. Deregulation of the financial sector can produce major benefits, but it can also pose serious dangers. It should not be implemented in ways that allow unsound practices to flourish. Therefore deregulation should be accompanied by active supervision to enforce proper standards of behavior, transparency of transactions, disclosure requirements, and adequate prudential standards of capital adequacy.
Taken together, these elements amount to a substantial change in the role of government to give more scope to market forces. In some cases it results in a reduced role of government, but in all of them the emphasis is on better government.
* * * *
Let me comment now on policies in three groups of countries that at present face challenges of historical magnitude—those undertaking systemic reforms, the heavily indebted, and the least developed.
First are the countries in Eastern and Central Europe and elsewhere that are introducing systemic reforms.
These countries are still at the early stages of transforming their societies. Their reforms hold out the promise of a better life for their peoples. Yet they are fraught with dangers and difficulties, not least because their starting point is a weak one and the required adjustment is considerable.
Their task is daunting. Success is by no means certain. They will need financial help and technical assistance in the transitional period. And, in particular, it is now more important than ever for the international community to open its markets to imports of the goods from those countries that show a comparative advantage in producing them. And the efforts by these countries to raise their domestic savings must be accompanied by an adequate inflow of foreign capital.
The initial results of the programs being implemented in Eastern Europe are encouraging. They testify to the wisdom of a comprehensive and bold approach in transforming an economic system. Comprehensive, in the sense that reforms have to be broad based to put in place all the main interconnected elements of a market system. And bold, because governments have to break new ground, while avoiding two traps—a half-hearted gradualism or the excesses of simplistic shock therapies. These countries are not making either of these mistakes. Nor are they aiming to return to a crude old-fashioned system of laissez-faire. Rather they wish to create a system for themselves that works, by implementing their reforms in a pragmatic way, and in directions consistent with the model, which many other countries are reaching toward, of a limited and better role for government.
The Soviet Union is not a member of the Bretton Woods institutions. Yet we are all watching with interest, and sympathy, the efforts of the Soviet Union to move toward a market-oriented and more efficient economy. As you know, the heads of state or government of the Group of Seven major industrial countries have requested a detailed study of the Soviet Union’s economy to make recommendations for its reform and to establish the criteria under which Western economic assistance could effectively support these reforms. The IMF has been asked to convene this work, which is being undertaken with the World Bank, the OECD, and the designated president of the European Bank for Reconstruction and Development, in collaboration with the EC.
We hope that this work will contribute constructively to a sustained economic dialogue between the Soviet Union and its partners.
Second are the heavily indebted developing countries. The collaborative debt strategy is producing favorable results for those countries that were quick to introduce strong programs and have persevered in implementing them firmly. But the overall record has been mixed. A number of countries were slow to accept the necessity of reforms. Others were half-hearted in implementing their programs. Opportunities were lost. But I am happy to note that more and more countries have recently introduced major programs, and are tackling their problems decisively, with our assistance. I am optimistic that we will be able to report more successes in the coming year.
The strengthened debt strategy has the potential to make debt a manageable problem, and no longer an obstacle to growth. But it will require considerable leadership from each of the partners who share responsibility for the strategy. Each of them faces tough challenges:
• Tough challenges for debtor governments. In the face of increased difficulties, they have to implement strong and comprehensive growth-oriented structural adjustment programs. Such programs should lead to a strengthening of confidence, a return of flight capital, a reduction in interest rates, and in so doing contribute to their eventual success. This is the sort of virtuous circle that can be started by a careful design and implementation of programs that will attract support, at home and abroad.
It is time now to build on the potential for sustained and vigorous growth over the medium term that is made possible by these strong programs—and with it the restoration of a credible capacity for debtors to make regular payments on a debt that has been renegotiated in a realistic way.
• Tough challenges also for the banks. Their interests have become more divergent with the passing of time. While the development of a wide menu of options is helping to make the debt strategy workable, it increases the complexity of the negotiating process. This is not, however, a valid reason for long delays, which can lead to derailment of a program and loss of an opportunity to resume normal business relations. These delays are not in the best interests of any of the parties.
It is time for debtors and banks to find new ways to negotiate, expeditiously, debt agreements that are mutually acceptable and realistic, that underpin adjustment, and that restore creditworthiness.
Official creditors have continued, within the framework of the Paris Club, to develop techniques for assisting in the debt strategy, including a variety of steps to help ease the burden of external debt on low-income and lower middle-income debtors. I welcome very much the various proposals that have been advanced, including the most recent ones by France, the Netherlands, and the United Kingdom to address better the problem of official bilateral debt. I am confident that these ideas will be considered carefully and will contribute to solutions that are durable and that support adjustment and growth in the debtor countries.
Third are the least developed countries. We need to create a supportive environment for growth in all developing countries. Sustainable growth for all members is the central objective of the Fund’s activities and conditionality. This applies particularly to the poorest countries.
In promoting growth in the low-income developing countries, the IMF’s main financial instruments are our concessional facilities, the SAF and the ESAF. A particular virtue of the SAF and ESAF arrangements is that they involve especially close collaboration with the World Bank.
It is most encouraging that 26 countries are now implementing such programs. Many of them are doing so in the face of severe difficulties, with rising interest rates and deteriorating terms of trade. Despite this, they are achieving positive real growth per capita, thus reversing the tragic downward trend over the previous two decades. But their progress remains uneven and insecure. One cannot make up for many years of negative growth in only a few years. Their per capita income growth is fragile, and still insufficient. Even relatively minor external shocks, or a relaxation of their efforts, could easily threaten their modest gains. More must be done to put these countries solidly on the path of sustained vigorous growth and reduction of poverty. The IMF’s latest medium-term scenarios for these countries show clearly that sustained strong growth will require a bolder effort by these countries. This should be matched by a proportionate increase in support by the international community. Forgiveness or alleviation of part of their public debt, in conjunction with internationally supported and monitored programs, would be desirable.
A demonstration of international solidarity is especially needed for a small but important subgroup of countries that are trying to normalize relations with the Fund and other international institutions. Some of them will be taking advantage of the “rights” approach, which the Interim Committee endorsed last spring, to secure support for those countries that are in a particularly distressed situation, and which have accumulated financial arrears to the Fund. I trust that the necessary support will be forthcoming for these countries.
* * * *
III. One common feature that these three groups of countries share with the rest of the members is that they would benefit greatly from a strong and open international trading and monetary system.
I do not need to remind Governors that the international trade and monetary system evolved during the 1980s in ways that have worked to the advantage of the world community. The system has permitted a healthy expansion of world trade and has underpinned the long phase of economic expansion. It has shown itself to be resilient, by weathering several storms, including the debt crisis, the problem of exchange rates between major currencies which led to the Plaza Agreement of 1985; the stock market crises of 1987, which had no lasting adverse effects thanks partly to a speedy policy response; and most recently the Middle East crisis, to which the system is responding quickly, and we hope effectively.
But each of these shocks has demonstrated the vulnerability of the international system and the value to all of a quick and cooperative approach in responding to threats. In view of the Fund’s role in this process, you will not be surprised if I suggest some additional ways to reinforce the system.
The first is in foreign trade. The last decade witnessed a resumption of rapid growth in world trade. This contributed substantially to sustained economic growth in the industrial and many developing countries. Yet trade remains distorted by restrictive practices in many countries. Pressures to restrict market access remain strong. This is harmful to all countries. Restrictions work to the disadvantage of those who impose them: vested interests are protected and perpetuated, consumers pay higher prices for a smaller choice of goods and services, and the efficiency of their economies is eroded by continued rigidities. And, of course, restrictions harm the countries against whom they are aimed, because they are prevented from producing according to their comparative advantage.
The resilience of the world economy, and the success of countries’ market-oriented reforms, hinges on a liberal and open trading system.
The international trading system is now at an important crossroad. Its future is tied to the outcome of the Uruguay Round of multilateral trade negotiations. It is the most ambitious Round in recent history, and rightly so. Trading rules need to be clear, predictable, and nondiscriminatory. They need to support the worldwide move to allow market signals to allocate resources. And they must cover all major sectors of economic activity that in the past have largely escaped the multilateral framework. The Uruguay Round seeks to devise trading rules and disciplines that will take the GATT into the twenty-first century.
A successful conclusion of the Round would have far-reaching favorable consequences. It would significantly enhance the efficiency of agriculture production. It would improve market access. And it would improve existing multilateral disciplines and extend them to important new areas, such as services, intellectual property rights, and trade-related investment measures and make trade in textiles and clothing subject to normal GATT disciplines. This would unlock new trading opportunities, to the benefit of all countries.
It is therefore of concern that much remains to be resolved in the negotiations, in a very short time. Member governments have it in their power to make the necessary political commitment and provide their negotiators with the guidance needed to complete the Uruguay Round successfully by the end of this year. It is of high importance that they do so.
Second, the international monetary system has been improved. We have established, over time, a more effective set of arrangements for policy consultation and coordination between countries. This is most noticeable in the improved collaboration among the main industrial countries, including the policy coordination within the Group of Seven, to which the Fund contributes: this is a complement to, not a substitute for, the Fund’s broader surveillance role. If one reviews the evolution of the policy consultation process, including the Plaza Agreement of 1985 and the Louvre Accord of 1987, one can see it as a series of pragmatic steps toward more meaningful and effective collaboration on such issues as exchange rates, interest rates, adjustment of external imbalances, and the structural policies of the major industrial countries.
The world is moving gradually toward an international monetary system that will be different and hopefully better:
It will be reinforced by the move toward monetary unification in Europe;
It will be more truly universal, thanks to the expected progress of the Eastern European countries and the Soviet Union toward convertibility of their currencies. The IMF will, of course, assist this important transition, in accordance with our basic mandate.
It will be a system that gives sufficient emphasis to the correction of excessive exchange rate volatility, by careful monitoring. And, by making better use of the techniques of surveillance and policy coordination, it will help to establish a “low inflation club” among the major industrial countries. This movement toward a monetary system with a growing area of stability should help to sustain world growth.
It could be further strengthened by a more careful monitoring of the creation and distribution of international liquidity and of international capital flows2 and a more effective coordination of policies to allow the world to benefit more fully from greater freedom of capital movements.
This outline of some of the emerging features of the international monetary system of the 1990s also suggests an agenda for the future work of the Fund itself. The role of the Fund, as the central institution of the system, must be to ensure that the efforts of the member countries are mutually compatible and complementary. The Fund must maintain a constant vigil so as to be able to respond to possibly disruptive movements. It must promote a cooperative response to the major problems of any members, or to unexpected global shocks. These functions are as essential today as when the Fund was established.
Governors, when you approved the quota increase for the Fund, you demonstrated again the importance you attach to the Fund as the guardian of the stability of the international monetary system. The timing of each of the last three quota increases has been fortuitous. Each of them was soon followed by an unexpected challenge to the global system which gave rise to exceptional demands on the Fund’s resources. To help us face the present challenge, it is important that all Governors do all that is needed to expedite the legislative and other processes in their own countries, so that the quota increase and the associated Third Amendment of the Articles will come into effect as soon as possible, and preferably before next spring, when our provision of assistance to countries affected by the present crisis will probably be reaching its peak.
* * * *
Mr. Chairman, I would like to close on a personal note. One year ago, just after addressing the Governors, I had a visit from a friend—a friend of mine and indeed of all of us, Alfred Herrhausen. He wanted to share his enthusiasm for, and his vision of, a new Europe in the making. He was putting his heart and soul into it. He was acutely conscious of the need for action. I was impressed by what he told me, and I immediately wrote, in this notebook, a few of his words. Let me share these with you: “never refrain from telling the world what you think we need to hear.” And then, as he was about to leave he added, “Let us continue working as good trustees of the Universal Good.” Let us remain faithful to the friendship of this great man and to his message.
September 25, 1990.
I am most grateful to former Governor Godeaux for agreeing to chair a high-level task force to investigate the problems of the measurement of international capital flows.