Opening Address by the Chairman of the Boards of Governors, The Governor of the Bank and the Fund for Ecuador1, Pablo Better
- International Monetary Fund. Secretary's Department
- Published Date:
- November 1991
It is an honor for me to welcome you to these Forty-Sixth Annual Meetings of the World Bank Group and the International Monetary Fund in Bangkok, the City of Angels. Thank you, Mr. Prime Minister, for your kind words of welcome. We are grateful to the Government of Thailand for its generous and untiring efforts to assure the success of these meetings, especially the provision of this magnificent setting. To the people of Thailand, on behalf of all of us assembled, I offer heartfelt appreciation for the hospitality shown us since we arrived. We have truly experienced the warmth of the famous Thai smile.
I am particularly gratified to end my chairmanship of the Boards of Governors of the World Bank Group and the Fund, initiated by Mr. Jorge Gallardo, former Minister of Finance of Ecuador, in the capital city of a country that exemplifies the realization of many of the objectives of programs and projects assisted by the two institutions. In this context, we salute His Majesty, King Bhumibol Adulyadej, for initiating a significant number of development programs throughout the Kingdom aimed at improving the well-being of his people and protecting the environment. While other countries have experienced economic slowdowns in recent periods, Thailand has seen double-digit rates of growth over the past few years, and all indications are that the long-term prospects for the economy remain favorable. We congratulate the Government and people of Thailand for this remarkable performance.
Let me take this opportunity to extend a warm welcome to the delegation from Mongolia, the newest member of our two institutions. We also warmly welcome the delegations from Albania, Estonia, Latvia, Lithuania, Marshall Islands, Micronesia, and the U.S.S.R., which have applied for membership in the Bretton Woods institutions. We also extend special greetings to the delegation from Switzerland, with which we have enjoyed a long relationship and which has also applied for membership in the World Bank and the Fund. new President of the World Bank. I wish him success in the tasks ahead and assure him on behalf of the Board of Governors of our fullest support and cooperation during his tenure.
My pleasure in welcoming Mr. Preston is tempered by the need to bid farewell to Barber Conable. After five years as President of the Bank, Mr. Conable has retired. I am confident that all of you will join me in expressing deep appreciation to him for his dedication to and guidance in strengthening the commitment of the World Bank Group to its goals, in particular those of improving the quality of life of the disadvantaged and sustaining the environment.
I also take this opportunity to express my sincere satisfaction for the unanimous appointment of Mr. Michel Camdessus for a second five-year term as Managing Director of the IMF. His presence will continue to guarantee the effective and efficient attainment of our short- and long-term objectives. With your permission I will now proceed in my native tongue, my country’s official language, Spanish.
World Economic Outlook
The opening years of the 1990s have been and may well continue to be turbulent. We have witnessed the profound effects of a series of disparate but related events on the international economic scene, notable among which are the slowdown of the economies of the United States, Canada, and the United Kingdom; the mounting costs of resource transfers from the former Federal Republic of Germany to the former German Democratic Republic; the difficulties in reforming the economies of Eastern Europe; the extraordinary changes in the U.S.S.R. and the unfortunate deterioration of the Soviet economy; the disappointing lack of progress in the Uruguay Round; and the crisis in the Middle East. The combination of these events has created major uncertainties in such key areas as financial markets and global savings, oil prices, and financial flows. Developments in these four areas will have a significant effect on the world economic outlook over the next few years.
Allow me to refer briefly to the world economic outlook. Overall growth is estimated at a lackluster 1 percent in 1991 and is expected to rebound to about 3 percent in 1992. However, no clear distinction exists between the prospects of industrial and less developed countries. For example, growth is expected to increase in Japan and Germany, in Africa, Asia, and Latin America, while the economies of Canada, the United Kingdom, and the Middle East are expected to experience a decline in growth this year, but will probably rebound in 1992. The other industrial countries will experience moderate rates of growth this year, while in Eastern Europe domestic output has fallen drastically and may not show signs of recovery for some time.
World trade is projected to follow the overall trend of economic growth, declining by 2.5 percent in 1991 and then rising by 5.5 percent in 1992. We continue to have a worldwide shortage of savings, a situation that is not likely to correct itself without much stronger policies to promote savings mobilization. Global inflation, after hitting a peak in 1990, will slow this year and next, partly on the strength of the projected decline of inflation rates in Latin America. It appears that we are now past the trough of the recession which, for the most part, has not been too deep.
Economic developments since we met in Washington last year have been directly or indirectly affected by two major events: the economic changes in Eastern Europe and the U.S.S.R. and the crisis in the Middle East. We are witnessing exciting changes in Eastern Europe and the U.S.S.R. We must acknowledge the efforts being made by the Eastern European countries to transform their centrally planned economies into market economies, with major institutional and policy reforms. All of them are putting into practice the principles on which our two institutions are based—some more successfully than others. It is our responsibility to support them in this venture by providing technical and financial assistance to encourage their development effort. The U.S.S.R. faces an immense task: to carry out radical economic reform while simultaneously undergoing a period of substantial political change. We congratulate the U.S.S.R. for its effort to become a part of the international economic and financial community.
The crisis in the Middle East led to a sharp, if brief, increase in oil prices and to a distortion of oil trade. The affected areas of the Middle East are now in reconstruction, both physically and economically. Less developed countries in other parts of the world have also been affected, some because of their dependence on oil imports, and most by the economic slowdown in their major industrial trading partners. The fall in the prices of most non-fuel commodities has exacerbated the situation. Our institutions have risen to the occasion, extending significant assistance both during and after the war.
These important developments combined with the external financing shortage and the persistence of the debt problem, require a response from the international community on three major fronts. First, global trade can most directly be improved through a meaningful reduction in tariff barriers. We all know that wealth can be maximized by specialization and free trade. In practice, however, there exist factors that often require setting up barriers that prevent attaining the objectives of a global economy. What better objective could we set than one that will benefit others while helping ourselves at the same time? I urge each one of you to work tirelessly toward the successful conclusion of the Uruguay Round by influencing your countries’ positions on this issue. After all, domestic economic reforms will be insufficient and possibly ineffective if the industrial countries’ markets are not opened to the goods efficiently produced by developing countries; failing this, much of the latter’s efforts will have been for naught. True, a reforming country may enjoy the advantages of a competitive and efficient domestic industry, but that is not enough. Difficult reforms deserve commensurate rewards, and this can be achieved only through cooperation among interdependent nations.
Second, it is critical that worldwide savings be increased so as to free resources to meet more important investment needs. We are in a period of increased worldwide demand caused by the events I have just outlined, but the problem is made more acute by the strength of current demand, in the United States and Germany in particular. And it is not only the Eastern European countries and Middle Eastern countries that need help in restructuring; the needs of other less developed countries of Africa, Latin America, and Asia have not diminished. Hence, overall investment resources must be increased, not diverted. Only if global savings accumulation improves can a downward trend in real interest rates take hold. In this context, it might be well to consider the potential for increasing savings by reducing defense spending, given the easing of world tensions that we are witnessing. The investment resulting from this increase in savings is the precondition for faster growth.
Third, each country has a responsibility to maximize its own growth potential by increasing its competitiveness, which requires adopting specific structural reforms and implementing sound macroeconomic policies. I am thinking here of a wide variety of measures, ranging from reform of the state based on a better definition of its role, the implementation of antipoverty programs, financial sector liberalization, the introduction of environmental projects, and greater openness, to strengthening of the economic and social infrastructure. Of course, each country’s case is unique, and the same prescription cannot be prescribed for all countries; rather, the individual nature of each must be respected.
Barely two weeks ago, in his address to the General Assembly of the United Nations, the President of Ecuador, Rodrigo Borja, said:
The cold war ended, but today we must wage war against poverty. We must finance peace instead of war. We must work for life and not for death. We must create a more ethical and rational world. The economic and social challenges are at the forefront of our task. Improving the quality of life of our peoples is an imperative, and international social justice is a prerequisite to establishing peace in the world.
On the same occasion, President Borja also said:
As regards Latin America, we are living through the paradoxical and tragic situation of a political democracy achieved after many years of great endeavor and of economic underdevelopment resulting in social injustice, want and dependency on the outside world. In reality, we have but scraps of democracy—that is, political democracy—but we lack economic and social democracy.
Indeed, never before have the frontiers of political democracy been as wide as they are today in Latin America; never have so many countries lived under democratic regimes in our region. Virtually all Latin American countries have Governments elected by popular vote. But political progress has, not been translated into economic prosperity and social well-being. On the contrary, our democratic systems have inherited the heavy burden of crisis: reduced income, deterioration in the quality of life of the peoples, disproportionately high debt as compared with ability to pay, decrease in the influx of fresh capital for our economic development, serious problems in the external sector, worrisome macroeconomic disorders, long-suppressed social demands—and all this hand in hand with well-known structural deficiencies.
Despite the differences among us, there are common problems that persist in our economies. High rates of inflation and low levels of production are endemic evils in most of our countries. Furthermore, significant proportions of the populations of many of our countries live in abject poverty, entailing a tremendous problem that limits economic and social development. High rates of population growth and continued degradation of the environment threaten the attainment of sustained growth. However, there are signs of hope as we emerge from the “lost decade” of the 1980s into the 1990s. Whereas per capita income in the region declined in the 1980s, it is expected that economic growth will recover significantly in the 1990s from the depression of 1980-89, when it averaged less than 2 percent.
This is a period of profound change. The models that guided much of our economic, social, and political development in the 1960s and 1970s have lost their appeal. Theories that appeared then to be the answer to our economic woes must be reassessed for applicability to the realities of the 1990s. I believe we will all agree that the priority objectives of social and economic development are the achievement of sustainable growth, reduction of poverty, improved income distribution, and protection of the environment. Whether we attain those goals will depend on the progress we make in three important areas: improving human resources—which is indeed a goal for all developing countries, not just Latin America; the effectiveness of economic and trade policies in industrial and in less developed countries; and the availability of financial resources.
How can this progress be effected? What conditions must be met before the entire region is back on the path to sustainable development?
We know that macroeconomic stability must be achieved as a condition for other policies to succeed. Latin American authorities have begun to take some of the steps necessary to achieve both stability and growth. We must recognize the efforts made by several countries to undertake demanding programs of fiscal and monetary tightening to combat the pernicious effects of inflation and external payments imbalances. Among other things, these countries have come to realize that excessive or poorly aimed involvement of the state in the productive sectors of the economy is often a hindrance to rapid economic growth, as confirmed in the World Bank’s recently published 1991 World Development Report. Latin American governments are examining their own domestic situations to determine what is the most appropriate mix of state and private sector participation in their economies. In most of them, spending priorities are being examined and state involvement in commercial activities is being reassessed.
At the same time, structural measures must be taken to create incentives for production factors to be used more efficiently and to encourage productivity increases in low-productivity sectors. After ten years of adjustment, our experience is that such structural reforms often have extremely harmful transitional effects on the population, particularly the poor and disadvantaged. In order to instill confidence in the ability of adjustment programs to improve people’s lives, it is important that measures be taken to reduce the temporary harmful effects of adjustment on the most disadvantaged sectors of society through an appropriate reallocation of human and financial resources. This will require greater efficiency in the public sector, which in turn will make it possible to increase direct public expenditure so as to improve the access of the poorest to the education, health, and infrastructure ultimately required to raise productivity and income for all. We must not forget that the goal of adjustment programs goes beyond stability; it is social and economic development.
The investment climate in our countries must be improved, in order to reduce the motivation for capital flight. An enabling environment must be created in our economies to encourage domestic and foreign direct investment.
The debt burden continues to loom large as a threat to our economic recovery. Some Latin American nations have succeeded in refinancing and reducing their debt and debt service, and this progress is evidenced by the renewed access of some countries to international financial markets. However, the debt crisis is far from over. We must persevere in our efforts to ensure that all countries regain their creditworthiness.
Latin American countries are increasingly committed to opening their economies to the rest of the world. However, these initiatives must be accompanied by reciprocal actions on the part of our major industrial trading partners.
Within the region, a number of economic integration initiatives have been undertaken which, in the long run, will benefit all their participants. The Southern Cone Common Market, the Andean Pact, and the plans of the Central American countries to eliminate all tariff and nontariff barriers to trade among themselves are all examples of the various countries’ renewed effort to cooperate among themselves to achieve common goals.
Increasingly aware of the connection between the environment and economic development, most Latin American governments are initiating programs geared to protecting the environment. Brazil will host the upcoming United Nations Conference on Environment and Development in 1992, from which will emerge an Earth Charter and an environmental agenda for the twenty-first century.
The initiatives I have mentioned are positive steps toward the goal of sustained growth and development. But Latin America, like most other parts of the less developed world, continues to have many problems, and the ultimate responsibility for their solution lies with us. Nevertheless, given the interdependent world in which we live, our need for reciprocal treatment is indispensable, and we need help from our friends in dealing with the external debt burden. We must reduce the flow of financial resources to creditor countries, and we must have access to foreign markets. Without the necessary cooperation in this undertaking, we are doomed to remain in crisis and to embark on another “lost decade.” The opening of markets cannot be one-sided; in order to be effective, it must be reciprocal.
My own country, Ecuador, is among those that have recognized the need for reform. Since President Rodrigo Borja took office in 1988, the Government has taken consistent measures to stabilize the economy and promote its growth. A number of reforms have been implemented, including significant trade liberalization, fundamental tax reform, labor reforms, a more open foreign investment policy, and measures to promote the efficiency of financial markets. Greater economic integration with members of the Andean Pact is also being sought.
While we have made significant progress on some fronts, we recognize that there is still much to be done. As in all countries undergoing adjustment, the immediate political and social consequences of reforms are often traumatic. In support of our own efforts to establish sound macroeconomic policies and implement structural reforms, the international community must recognize that adjustment is a lengthy and arduous process. In order to succeed, Ecuador and all other countries in similar circumstances will require a favorable international economic environment and substantial support from the international financial community, including effective relief of the debt burden. . . .
The International Monetary Fund
The Fund, too, has strived over the past year to meet its obligations to its membership in the context of the current world economy. The Fund has made useful and imaginative innovations to its facilities in response to the Middle East crisis, increasing access under stand-by and extended arrangements, increasing the financing under and the length of arrangements under the enhanced structural adjustment facility, and introducing a temporary oil element in the compensatory and contingency financing facility. At the same time, it has continued to support less developed countries with more traditional needs, such as those arising from debt-related problems. Reflecting that fact, drawings from the Fund rose substantially over the past year.
The Fund also coordinated the groundbreaking study of the Soviet economy prepared jointly with the World Bank, the Organization for Economic Cooperation and Development, and the European Bank for Reconstruction and Development in close cooperation with the European Community. It is a testament both to the cooperative nature of our institutions and to the openness of the Soviet authorities that such a useful study could be completed so quickly.
Surveillance is the Fund’s primary responsibility, a unique role whereby each member’s economic policies are considered in terms of how they influence the rest of the world. This macroeconomic perspective ensures consistency of purpose among the various groups of members.
But the Fund cannot continue to fulfill its increasing responsibilities unless it is adequately financed. It makes its resources available to its members—which does not mean that they will necessarily be used—to give them confidence, but in today’s climate even a catalytic financing role requires sufficient resources. To this end, I urge countries that have not yet done so to consent to the quota increases in time for the end-of-1991 deadline.
As we begin these Annual Meetings, let us rededicate ourselves to the building of a strengthened world economy. Each of us must do his part and bear his rightful responsibility for achieving the priority economic and social goals we have agreed upon. After all, adequate growth in developing countries, in Eastern Europe, and in the U.S.S.R. will benefit the entire world. The alleviation of poverty among 1 billion human beings is surely something that affects us all. And protection of the environment is paramount, because without sound, coordinated policies to do so we may lose the very resources on which we base our global wealth. At the same time, nations must be willing to take the necessary measures to achieve fiscal balance and thus to free resources for investment in productive processes. Without stable domestic conditions and an orderly matching of resource needs to available resources, active pursuit of a sustained development policy is not possible. The determining factor will be how well the harmonious relationship between industrial economies and less developed economies works. That will depend on how willing all parties are to work together toward greater well-being. Let us pledge ourselves to the goal of making the next ten years not only a decade of hope, but one of achievements for the entire world.
Going still further, without prejudice to the objectives of our organizations, we must all work together to intensify democracy, understood not merely as a formal political system but as human freedom in the context of social justice. There can be no full development of individual and collective well-being without justice and liberty. We know the conditions for pursuing these objectives. Let us make their achievement the greatest challenge of this last decade of the twentieth century.
Delivered at the Opening Joint Session, October 15, 1991.