Discussion of Fund Policy at Fourth Joint Session1
- International Monetary Fund. Secretary's Department
- Published Date:
- November 1991
Statement by the Governor of the Fund for South Africa—Barend J. Du Plessis
On behalf of the Government and the people of the Republic of South Africa, I wish to join in the appreciation expressed to our hosts for their warm hospitality and also in welcoming the new member of the Fund and World Bank Group, as well as recognizing those countries that have applied for membership.
I also wish to extend sincere congratulations to Mr. Michel Camdessus on his unanimous reappointment as Managing Director of the Fund for a second five-year term. Likewise, I would congratulate Mr. Lewis T. Preston on his appointment as President of the World Bank. We look forward to sharing in the benefits of the wise counsel and leadership of these two gentlemen. We acknowledge with gratitude the services rendered by Mr. Barber Conable.
The awareness of and concern about unemployment, poor living conditions, and extreme poverty, with millions of people now living close to the point of starvation, could hardly be greater than now. The gravity of the situation in many developing countries, including former socialist countries, has forcefully underscored the limitations of many of the approaches and remedies pursued in the past. To an increasing extent, it is being realized that, for economic growth to be successful in raising standards of living and reducing poverty over a wide front, a process of far-reaching restructuring is required. Ideally, this process should combine economic and political democratization.
Successful restructuring should, of necessity, include enhancement of the supply and productive use of savings and human skills, strengthening of institutional capacities, and ensuring the more efficient use of existing infrastructure. It should be borne in mind, however, that not all developing countries have the same ability to substantially increase domestic savings, at least not in the initial stages of economic restructuring.
It is clear from the recent experiences of many countries, particularly in Eastern Europe, that a market-oriented approach to economic growth and development, notwithstanding its shortcomings, is rapidly replacing a centrally planned or command-economy approach as the best way to serve overall economic objectives. This shift in opinion is a rising tide to which every responsible developing country should respond in a positive and timely manner especially those involved in political democratization. The solution does not, however, lie in mere emulation of a successful country’s strategies or association with a successful regional grouping. On the contrary, the road to success is normally individually tailored, touching the very fabric of the society involved. Indeed, it will be found that “prosperity begins at home,” often demanding drastic and unpopular choices. Many developing countries, including ourselves, have already experienced this in one way or another. The basic requirements for generating the means necessary to improve the quality of life of a society or a nation are universal. There are no easier methods available to some of us, regardless of the often widely differing circumstances prevailing.
To begin with, governments must recognize the need for reducing fiscal deficits and high inflation rates, and for reducing or avoiding excess foreign debt. Greater efficiency in public administration is essential, and a reorientation of public sector spending priorities, often in favor of socioeconomic development programs, must take place. Also, monetary and fiscal policies must be based on medium-term considerations, promoting an environment conducive to saving, investment, and the efficient and productive use of limited resources.
However, sustainable growth and optimum economic development can only be achieved under conditions of macroeconomic financial stability. The South African Government therefore supports the IMF’s continued emphasis on good financial housekeeping, involving the universally proven principles of monetary and fiscal discipline.
Structural economic adjustment programs forced on many developing countries by a changed international environment often involve more than the responses of the individual countries themselves. A further global liberalization of international trade and an orderly reduction of prohibitive import tariffs have become imperative ingredients of those drastic changes now demanded of many developing countries, but which, unfortunately, do not yet fully apply to all countries, even the larger ones. The delay in the Uruguay Round of General Agreement on Tariffs and Trade (GATT) talks is therefore regrettable and an early resolution of this matter is needed.
Finally, and very important, countries involved in economic and social restructuring programs of this nature must give prime importance to the development of human resources. Access to appropriate education, training, and full participation by the people of the country form basic elements of such programs. It is also incumbent on governments to provide for maximum affordable social security as well as interim measures to provide some alleviation of poverty until the more positive effects of the restructuring program can be realized.
In the initial phases of implementation, economic restructuring often produces more immediate “pain” than “gain.” The ultimate objectives are very difficult to achieve, especially if greater democratization is pursued at the same time. Consequently, in many developing countries a type of social accord—between government, business, and labor—has proven indispensable in this respect.
Taking account of both the complexity and the comprehensive nature of economic restructuring programs, developing countries need the wide-ranging support of the international community and, in particular, of multilateral institutions such as the International Monetary Fund and the World Bank Group in the design and implementation of such programs. South Africa therefore supports efforts within these institutions to provide maximum assistance to members in this regard.
As has become clear in the case of Eastern Europe (and this has been debated with regard to the Soviet republics in the past days and applies to many other countries as well), the question is not only what support should be given, but also when the support should be given. It can indeed come about too late. The mere embarkation on a course of economic restructuring leads to rising expectations that may thwart or abort the whole process unless timely external support is forthcoming to facilitate the early achievement of at least some of the goals or fruits of restructuring. Both economic and political democratization could easily be placed in serious jeopardy if premature disillusion with the adjustment process is experienced and through democratic means and translated into political rejection.
Greater access to foreign goods and financial markets and the correct timing of such access are equally important factors. The delay in the Uruguay Round of the GATT talks is therefore a matter of grave concern.
The task now facing a number of sub-Saharan countries in restructuring our economies simultaneous with major social and political reform presents an enormous challenge. To ensure success, appropriate and well-timed external support as well as intraregional cooperation will be essential.
We see it as part of our responsibility to join other countries in our region in the promotion and implementation of policies which, in the context of individual countries and the region as a whole, will justify continued international support and participation and, at the same time, secure our region’s fair share in the expansion of trade and new investment. Indeed, both domestic and regional prosperity begins at home.
Statement by the Governor of the Bank for Papua New Guinea—Thomas Nigints
I must join in with all of you in extending our heartfelt thanks and appreciation to the Government and the people of Thailand for the warm welcome and hospitality extended to all of us and the tremendous amount of effort put into the organization of such a large conference. Thailand is indeed a beautiful country and has great potential for economic growth. It is certainly an eye-opener for those of us who are trying to develop our tourist industry.
Let me also take this opportunity to congratulate Mr. Lewis T. Preston on his appointment as President of the World Bank Group. I am sure that the Bank will continue the good work it does in member countries and we can expect the best under his able leadership.
I welcome Mongolia and Albania and the delegations of Estonia, Latvia, Lithuania, Marshall Islands, Micronesia, Switzerland, and the Soviet Union. It is good to extend our membership of the Bank and the Fund, and I am particularly pleased that our neighbors in the South Pacific can join us.
It has been very encouraging and certainly a privilege that, in our lifetime, we have witnessed incredible changes in the world economy today—and I refer here mainly to the revolutionary changes that have taken place in the Soviet Union and in the countries of Eastern Europe. There is one strong message that comes out of these reforms and that is that people want to be free to express their minds and feelings, and people want to be free to enjoy the benefits of their hard work. Let us all encourage this spirit of freedom and lend support to those who are striving to achieve this freedom.
In an effort to improve economic performance, many countries have undertaken significant structural reforms in their bid to encourage more growth and create more employment opportunities for their people. We have joined all of you who have embarked on structural adjustment, and I must say that it is not an easy road to follow. It involves choices, sacrifice, and priorities.
A meaningful structural adjustment program will be one that is significant and far reaching. Experience shows that there are two very important elements to ensure success. The first is that the adjustment program must be carefully designed to ensure that it is appropriate and practical. The second and more critical element is the political will and determination to fully implement the structural adjustment program, and to ensure that the adjustment has resulted in improved efficiency and increased growth opportunities in the economy.
Our structural adjustment program began soon after the closure of our largest copper mine—Bougainville Mine—in 1989 and the continued downturn in our agricultural commodity prices on world markets. The adjustment process became necessary because we wanted to improve the performance of the economy, and we wanted changes that would be permanent.
The structural adjustment program addresses both the private and the public sectors. Reforms in the private sector appear to be fairly straightforward, and in simple terms all one needs is to put in place economic and financial policies that provide the proper environment and incentives and that will allow the private sector to grow. The other important element is to deregulate and leave the private sector alone to develop.
I cannot agree more with the President of the Bank, that each member country must find the appropriate balance between government and market. This balance involves technical, economic, and political considerations. In countries where the private sector is small, the government plays a larger role, like in Papua New Guinea. In countries where the private sector is large and provides plenty of healthy competition, the government can then concentrate on other issues.
Reforms in the private sector need to be integrated. In addition to sound economic and financial policies as well as deregulation, governments have a responsibility to ensure that the financial markets are reformed and strengthened. In smaller developing countries, our financial markets are underdeveloped and often dominated by conservative institutions. Reforms in this area must complement the efforts mentioned earlier.
The needs of smaller member nations differ a little from those of our major industrial member countries. When we talk about the private sector, we are talking about small-scale industry, and I find that International Finance Corporation (IFC) is not adequately geared to cater to the needs of smaller member nations. There is nothing wrong with small-scale entrepreneurship, and every effort must be made to encourage it.
We have commenced the process of deregulation, and already we have made significant progress in streamlining our foreign investment regulations and procedures. This task should be addressed by the end of this year. A tremendous amount of effort has been made toward streamlining and simplifying the procedures for obtaining land, and this task is well under way. In line with trade liberalization, we have removed most of our import bans and are replacing them with tariffs, and this move will ensure that domestic production remains competitive and efficient.
Privatization has become a worldwide fashion, and there are good economic and financial benefits that can be derived from this exercise. Some of us are fortunate that we can be guided by the experience of some of our member countries. We are in no hurry to privatize essential functions like telecommunications and electricity supply. These are crucial functions and must be carefully assessed before any divestment occurs.
The reforms in the public sector really revolve around one major question and that is, What is the role of government? It is an important question. The answer to this question is relative and varies in an industrial setting and again in developing countries, where often the private sector is very small and insignificant.
Our adjustment program has enabled us to improve our procurement procedures, and these will enable faster implementation of projects and programs.
When it comes to civil service reform, the exercise becomes more complex. Any reform in the civil service will aim to make it more efficient and effective in delivering goods and services to the people. It is not merely a numbers game. To achieve efficiency will require improving the terms and conditions of civil service and retaining and attracting well-educated and trained staff. We must be prepared to pay market rates to civil servants. Efficiency will also be brought about through well-established and well-run institutions with adequate capacity to perform.
We must also be prepared to provide more resources for training and I mean meaningful and practical training to enhance the capacity of the civil service. It is indeed not a productive exercise just to reduce the size of the civil service alone. All governments have a duty to provide basic services like education, health, law and order, and basic infrastructure. The efficient delivery of these services must be a prime consideration in rationalizing the civil service.
It is comforting to note once again that the Bank is committed to promoting sustainable growth and reducing poverty. Much effort has been made toward promoting sustainable growth, and it would be nice to see some real programs that work directly toward the reduction of poverty. We often assume that greater economic growth will automatically reduce poverty, and this is not often the case. As the saying goes “the rich become richer while the poor become poorer.”
Much of what we say about trade liberalization and efficiency rests on the shoulders of industrial nations. Let us be serious and fair in our efforts to improve the world economy. Industrial countries must be serious about liberalizing trade and minimizing subsidies. They owe it to the rest of the world. It would be good if they could free up more resources for development through lower defense expenditure. But we cannot insist on this. It is really up to each individual country to decide. We can, however, insist that they free up their markets and reduce subsidization. I call on the Bank and the Fund staffs to increase efforts in this area.
Let us not forget that any adjustment process requires change. We can develop wonderful programs for change, but let us not forget that change affects people and most do not readily and willingly accept change. It is our joint responsibility—the Bank and the Fund and the member country—to skillfully and carefully manage the change. Many adjustment programs will result in some loss of jobs in the short term, and we must ensure that the benefits in the long run far exceed the short-term losses. I call on the Bank and the Fund to provide mature and experienced staff to assist member countries in their adjustment programs. Real life is bigger and more complex than the economic textbook, and important lessons can only be learned and dealt with in the process of developing a country.
This is an exciting period in the world economy, and as we all strive to do our best in terms of economic growth and reduction of poverty through better education and training, I call on the Bank and the Fund not to neglect smaller nations that enjoy relative stability.
As a developing country, we are excited about the prospects we have, and the challenge for us is to properly manage our resources so that our grandchildren and great-grandchildren will enjoy a better world. Let us give up something today for a better tomorrow for our children.
In concluding, let me say that Papua New Guinea remains one of the promising investment opportunities, and it is my pleasure to invite the private sector to come and see for itself.
Statement by the Governor of the Fund for Chile—Andres Bianchi Larre
Changes Under Way in Latin America
It is a great honor for me to address this meeting on behalf of Latin America and Spain and to share our views on a number of recent regional and world economic developments and trends, whose significant economic and social implications are, in some cases, a source of concern and, in others, grounds for hope for the countries in our region.
Moreover, it is satisfying to fulfill this responsibility at a time when Latin America is beginning a new stage that represents not only the end of the period of prolonged stagnation and high inflation that began with the external debt crisis of the early 1980s, but also the beginning of a phase characterized by the introduction of profound structural reforms and application of firmer and more coherent adjustment and stabilization policies.
In fact, most Latin American countries have begun to apply policies aimed at asserting an export orientation, promoting the openness of trade, introducing greater fiscal austerity, conducting monetary policy more prudently, and reducing the controls and regulations applicable to private sector activities.
Of course, these policies have been applied with different degrees of intensity, perseverance, and consistency in the various countries of the region, and their effects to date have varied as well. But the overall trend is clear and promising, in that these policies are ultimately aimed at bringing about more open, more dynamic, and more competitive economies.
Because of the adoption of this new development strategy and the application of stricter macroeconomic policies, most Latin American countries are experiencing renewed economic growth and making substantial—though still insufficient—progress in the fight against inflation. In fact, in 1991 the per capita product of the region as a whole will increase for the first time since 1988, and it is expected to increase even more rapidly in 1992. At the same time, the average inflation rate has fallen markedly, largely as a result of the progress achieved this year in Argentina, Nicaragua, and Peru—which until a short time ago were facing the danger of hyperinflation—and of the gradual but persistent decline of inflation in such countries as Bolivia, Chile, Mexico, Paraguay, and Venezuela, which have continued to pursue strict stabilization policies.
These positive domestic changes have been accompanied by an improvement in the external situation and, in particular, by the resumption of external capital inflows and capital repatriation. But these quantitative changes in growth, stabilization, and the balance of payments are outweighed by qualitative changes in the behavior and expectations of economic agents—most tellingly reflected in the spectacular stock market booms that have recently occurred in Argentina, Chile, Mexico, and Venezuela—and, primarily, by qualitative changes in the orientation and consistency of economic policies.
In fact, it is in this area that the most profound and encouraging changes are taking place. Populist policies—which in the not too distant past helped trigger not only runaway inflation and external crises, but also economic stagnation—are being replaced by more pragmatic approaches that emphasize fiscal adjustment and containment of the money supply as essential prerequisites to attaining and preserving domestic price stability and external equilibrium. At the same time, it is increasingly recognized that trade openness and expanded exports are factors that are critical to the achievement of more dynamic, sustainable, and efficient growth.
Finally, many countries are reducing or abolishing government controls and subsidies, have begun or expanded public enterprise privatization programs, and have taken steps to focus government action on maintaining macroeconomic equilibria and promoting greater equality of opportunity through increased and more clearly targeted social expenditures.
Challenges and Opportunities of the New International Scenario
Precisely because of the spreading adoption in the region of structural adjustment programs—one essential component of which is the liberalization of foreign trade and the prioritization of exports as an engine of economic growth—we are concerned about the intensification of protectionist policies in the industrial countries and attach fundamental importance to the successful conclusion of the Uruguay Round.
In fact, we are concerned by the fact that the nontariff barriers set up by the industrial countries have increased significantly, quotas and voluntary export restraints have proliferated, and 20 of the 24 OECD economies are now relatively more protected than during the 1980s. Not only do these policies run counter to the basic principles of free trade and lead to less efficient resource allocation on a world scale, they also reduce the benefits Latin American countries can obtain by adopting a development strategy emphasizing the role of exports.
This is why we believe that efforts must be redoubled to take advantage of the historical opportunity represented by the Uruguay Round to prevent the distortions and negative economic effects generated by protectionism, subsidies for various sectors, and unfair international trade practices.
This is not, however, the sole opportunity for economic progress now available to the international community. Another no less significant area—and one with vast implications—is that offered by the new climate of peace and reduced tensions in the international arena. This new and auspicious state of affairs opens, like never before, the genuine possibility of significantly reducing the enormous expenditures heretofore devoted to defense and armaments and of reallocating to development the resources thus made available.
Last, there is a third historical event in our time whose possible economic impact on Latin America justifies some comment, namely the revolutionary process of transformation under way in the economies of Eastern Europe and the U.S.S.R. Advancing and consolidating this novel process will surely require considerable external financial support as well as extensive technical assistance. However, it would be unfortunate if these resources were to be channeled toward the countries in question at the expense of the support heretofore received by the countries of Latin America and other developing regions. In our opinion, these resources should stem from an additional fiscal savings effort on the part of the industrial countries and, above all, from the “peace dividend” generated by the end of the Cold War.
The External Debt Situation and Outlook, and the Cooperative Strategy for the Settlement of Arrears
Our assessment of the current status of the external debt problem is now more favorable than in the past. We cannot underestimate the progress made by several Latin American countries in implementing adjustment programs and restructuring their external commitments. Also noteworthy are the new and gradual access to voluntary credit achieved by some of them and the almost-generalized increase in secondary market quotations for their external debt instruments.
However, many developing countries continue to face serious problems owing to the continuing excessive indebtedness they still have, and resolving them will require the participation and support of all the parties concerned. In this regard, we appreciate the unprecedented debt reduction policy implemented for some middle-income countries, such as Poland and Egypt, in the context of Paris Club negotiations, and reiterate our appeal to its members for equivalent operations to be carried out with other countries at comparable levels of development and for furthering the recent progress achieved in the implementation of the Trinidad terms for heavily indebted, low-income countries.
We are also pleased that external debt and debt-service reduction operations, as well as the provision of guarantees and financial enhancements, have come to form an integral part of Fund programs, thereby contributing to reducing the premium paid for country risk and to reversing capital flight.
But to continue moving toward restoring our countries’ access to voluntary credit, it is essential that the institutions regulating banking activity in the developed countries acknowledge the headway made by the countries of Latin America, so that those which have made progress toward solving their debt problems can be removed from the list of countries for which special provisions are required, thereby facilitating the resumption of lending from the private international banking sector.
In sum, while there have been significant advances regarding debt, to resolve the issue definitively, it will be necessary to continue the approach that combines the essential domestic adjustments in the countries of Latin America with the equally irreplaceable contribution of the multilateral organizations, the governments of the creditor countries, and the international banking community.
It bears noting, finally, that the cooperative strategy for the settlement of arrears adopted in 1989 has been put to the test in the case of Peru and that it is therefore crucial for both Peru and the International Monetary Fund that this agreement be fully successful.
Indeed, it would be no exaggeration to maintain that had Peru’s attempt to normalize its relations with the Fund and the international financial community not succeeded, it would not only have called into question the Fund’s credibility as an institution catalyzing adjustment finance, but would also have undermined the strategy aimed at preserving its financial integrity as a privileged creditor of the system.
It is obvious that Peru is the only one of the four main countries with arrears that is in full compliance with the basic conditions laid down by the Fund to serve as proof of cooperation with the organization, namely: (a) to freeze the amount of arrears at a given date and strictly comply with new payment maturities and (b) to apply an economic policy consistent with the principles recommended by the Fund. The approval of Peru’s rights accumulation program on September 12, 1991, has thus made it possible to keep in operation the cooperative strategy aimed at preserving the privileged creditor status both of the International Monetary Fund and of other international credit organizations.
Quotas and SDRs
On the subject of quotas, we wish to emphasize the advisability of promptly approving and rapidly implementing the increase in quotas under the Ninth General Review, to better meet the financial requirements of a growing number of member countries. It is also important to ensure regional representation, which could be affected by the adherence of new countries and by the potential activation and application of the Third Amendment to some Latin American countries.
We wish to note also that, taking into account the adjustment programs now being implemented, we believe that the SDR should have greater relative importance in the reserve assets of the system. Accordingly, we support a new, unconditional, and sizable SDR allocation and urge those industrial countries that have yet to voice their support for this initiative to reconsider their positions, thereby making it possible to seek alternatives under which most of that allocation would be available to developing countries.
The Experience of Chile
In concluding, I would like to make a few brief observations about economic developments in my own country, Chile. In general, since the mid-1980s these developments have been favorable in terms of growth and as regards the control of inflation and the trends in the external sector. In 1991, gross domestic product will increase by about 5 percent—marking eight consecutive years of economic expansion—and it is hoped that a comparable increase will be recorded next year. At the same time, inflation has been kept at a relatively moderate level and this year will decline to 18 percent.
All in all, the most noteworthy advances have been in the external sector. Indeed, between 1984 and 1991 merchandise exports more than doubled, increasing from $3.6 billion to $8.7 billion. At the same time, the structure of exports has been extensively diversified owing to the vigorous expansion in sales of nontraditional products.
From 1986 to the present, it has also been possible to reduce the overall external debt from $19.5 billion to $16 billion, while the debt to commercial banks has declined to less than a third of its former amount, principally as a result of the debt-for-investment swaps. As a consequence, and owing to the expansion of exports, the debt-service ratio declined from 45 percent in the mid-1980s to only 15 percent in 1991.
These changes, of course, have required the introduction of far-reaching structural reforms and the application of strong adjustment policies that have had no small social costs in the short term. But it is precisely because of Chile’s perseverance in introducing and continuing to support structural change in the economy and in observing the fundamental macroeconomic equilibria, that it has consolidated significant growth and change and has been able to define a development strategy whose key components are accepted by almost all sectors of Chilean society.
Thus, Chile’s experience with opening, liberalizing, and modernizing its economy confirms two fundamental principles. First, in the final analysis, economic progress is basically dependent on domestic efforts and on the quality, persistence, and consistency of national economic policies. Second, as clearly illustrated by our experience in the past two years, it is also possible in Latin America to design and apply policies oriented toward simultaneously promoting economic growth, price stabilization, and social justice within the framework of open and fully democratic societies.
Statement by the Governor of the Bank for Czechoslovakia—Vaclav Klaus
When I first spoke to this gathering a year ago, my country had just rejoined the Bretton Woods institutions after 36 years of absence and stood on the threshold of the most comprehensive reform ever attempted by a centrally planned economy. Today, we welcome here another post-communist country, Albania, to our institutions, and we would like to wish them success in their courageous endeavors. Since then and after more than nine months of implementing the economic program undertaken by the Government of the Czech and Slovak Federal Republic and supported by the International Monetary Fund and the World Bank, we can speak here of our successes but also of problems that lie ahead of us on this unexplored path.
The execution of the Czechoslovak reform program coincides with an especially difficult economic situation in countries around us. The Czechoslovak economy was severely damaged by the collapse of the Council for Mutual Economic Assistance (CMEA), by the disintegration of the Soviet economy, and by instability throughout the whole region of Eastern Europe. In spite of all this, we believe that the only way we can resolve our situation today is to continue with our radical economic reform, which already has created basic preconditions of a market environment and which has visibly changed the behavior of all domestic economic agents. Only in this way is it possible to achieve the necessary structural changes without considerably prolonging the undesirable agony of an economy in an unfinished transition.
The first stage of the radical economic reform began with a far-reaching liberalization of all markets on January 1, 1991. Now approximately 90 percent of all prices are fully determined by the market on the basis of supply and demand. At the same time all remaining subsidies to consumer and intermediate goods were removed. Forty years of price distortions, together with the existing monopolistic structure of industries and of trading companies, resulted in 26 percent inflation for the first month of 1991 alone. However, the stabilization policy proved enormously successful and monthly inflation measured by the consumer price index (CPI) slowed down to a negative 0.1 percent in July and 0 percent in August. Preliminary results for September show monthly inflation at 0.3 percent. Though economic policy could never have averted the initial one-time price increase, reasonable macroeconomic policy can quickly neutralize it.
In addition to prices, foreign trade was also liberalized, and the Czechoslovak koruna was made internally convertible starting January 1, 1991. After three consecutive devaluations of the koruna in 1990, the exchange rate stabilized. The balance of payments has shown much better results than we originally expected. Gross official reserves doubled since the beginning of this year.
We can demonstrate that the successful liberalization of markets brings a dramatic change in the behavior of consumers and producers. The main change was brought about by the sudden switch from an economy with a regime of permanent excess demand to one of excess supply—the switch caused by sweeping price liberalization. Companies unaccustomed in the past to market conditions are finding themselves advertising, marketing, and competing in quality and price with other companies and products. A healthier environment was created under which the producer can no longer dictate his terms to the consumer. A balanced and stable macroeconomic environment is forcing the producers to behave in a market-like fashion even before privatization.
We can confirm that a necessary precondition for the liberalization of the markets is a cautious macroeconomic policy, which maintains macroeconomic stability by eliminating inherited inflationary pressures and by not producing new inflationary impulses. Appropriate tools for attaining that goal are fiscal and monetary restrictions to curb the aggregate demand through the budget surplus and only slow expansion of the money supply.
Our budget surplus was mainly accomplished by the elimination of price subsidies that for decades distorted the internal price structure and by our resistance to the acceleration of other budgetary expenditures. Expenditures for the social safety net are, however, rapidly growing. The social safety net in Czechoslovakia was developed in due time to provide adequate protection for those most adversely affected by the economic readjustments. The state budget has experienced considerable fluctuations as revenues increased during the price explosion in the first months of 1991, but it subsequently declined due to the drop-off in production and profits as well as to the necessary increase in expenditures and to the lowering of taxes. It is therefore essential for the fiscal policy to react quickly to the changing situation to be able to maintain the anti-inflationary role that the budget should play. We are confident that we will succeed in achieving the budget surplus that we originally planned.
We feel, with the benefit of hindsight, that the monetary policy during the first nine months of this year may have been too restrictive because it did not inject enough money into the economy. It was not caused by the administrative limits on the growth of credits imposed on commercial banks by the central bank, but rather by the very cautious approach of the commercial banks in granting credit to enterprises that were approaching privatization and were fighting with the burden of “bad loans.”
One of the most difficult problems to explain and to defend in Czechoslovakia now is the unprecedented drop in output. Over the first nine months industrial output fell by about 18 percent and unemployment reached 5.6 percent. In addition, we know that we have not yet reached the “transformation bottom” and that output will continue to decline—pushing the unemployment rate higher next year. It is not a very high level, using the standards for countries in this room today, but I have to say it was zero last September. The causes of the decline in output are both internal, which relate to the intentionally introduced reform measures, and external, which we could not and cannot influence. We estimate that as much as one half to two thirds of the decline in output was caused by exogenous external factors and would have occurred even without our economic reform.
Domestic economic problems reflect not only negative, unfavorable foreign economic influences, but also a large shortfall in effective demand at home. The drop in consumption was caused by lower real wages and other incomes resulting from the large price increase at the beginning of the year, as well as by the autonomous shift in consumption patterns. Another cause of the drop in aggregate demand is the reduction in the investment activities of companies resulting from the drop in consumer demand, the difficult financial situation (too much debt or insolvency), and pre-privatization expectations. Many companies are postponing their investment decisions until the ownership rights are cleared in privatization. Also, the Government expenditures as a percentage of gross domestic product (GDP) have decreased from 55 percent in 1989 to less than 50 percent in 1991, and this has caused a large decrease in the demand for goods and services traditionally purchased by the Government.
In addition, our decline in output was largely influenced by a number of external factors that had a serious impact on our exports, including the disintegration of CMEA, the adoption of convertible currencies for payments with other former communist countries, and the loss of most of the Soviet market because Soviet importers are unable to pay for our goods. Because of this, our exports to the U.S.S.R. over the first seven months of this year dropped by almost 40 percent compared with the same period in the previous year. Moreover, after the reunification of Germany, we lost a large part of our market in the former German Democratic Republic when demand for our goods disappeared, and exporters in the former Federal Republic of Germany seized most of the market. Our troubles were aggravated by our inability to increase our exports to the West.
To alleviate this, we could be helped by a greater openness toward our goods in Western Europe and other countries. Our exporters have an especially difficult time refocusing their exports from uncompetitive and insolvent markets to competitive Western ones, and if they have to overcome artificial trade barriers, it is a task above their heads. In this respect, the troubles with negotiating the Association Agreement with the European Community are disappointing; however, we believe that this agreement will be concluded in the near future. The countries that want to assist us in overcoming this difficult transition period must understand that financial assistance cannot substitute for the removal of protectionism. We especially need to find new markets for our goods.
As far as foreign investment in Czechoslovakia is concerned, we have created a legislative framework embracing it. Since the beginning of this year more than 5,000 joint ventures have been created. Foreign investors can own 100 percent of a Czechoslovak company and reinvest their profits or transfer them out of the country. They have even more generous tax treatment than their domestic counterparts, but we want to gradually abolish this difference. In the first half of this year, the flow of foreign capital into our economy amounted to more than $400 million. It is more than triple the amount of the previous year. These are all long-term investments.
Privatization continues very fast, and after its completion we expect a much larger inflow of foreign capital. Foreign companies have a unique opportunity to participate in the privatization process and to buy whole Czechoslovak companies or their shares through the privatization plans that each enterprise must prepare.
Privatization, next to the liberalization of markets, acts, therefore, as another major pillar of our economic reform. The whole privatization process began early this year with the so-called small privatization which involves the auctions of small businesses, retail stores, and services to Czechoslovak nationals. Giving domestic investors an advantage in small privatization over foreign investors enables the creation of a local class of entrepreneurs. The first results are very encouraging; 14,148 small enterprises had been sold in this way by the end of September.
The lack of domestic capital and the time frame available to us does not allow us to privatize all state property using the standard methods: auctions, joint ventures with foreign companies, tenders, or outright sales to foreign or domestic investors. Therefore, the so-called nonstandard voucher (coupon) privatization method was devised to enable a transparent and fair transfer of property rights to Czechoslovak citizens for a small registration fee. Vouchers are convertible for shares in companies of the registrant’s choice. The sale of voucher books has already begun this month, and voucher holders will have to register them starting November 1. The actual exchange of voucher points for shares in companies will begin in January. This method gives an equal chance to everybody, creates a securities market, speeds up privatization, circumvents the complicated issue of valuation and state-orchestrated restructuring, and enables privatization without significant domestic or foreign capital. The scope of this effort is unprecedented in Eastern Europe and probably in the whole world. Risk-averse citizens can deposit their vouchers with one of the many, just-created mutual funds. These funds will also play the role of institutional owners and will concentrate ownership and exercise control on behalf of the investors.
On the basis of our experience from the first stage of Czechoslovak radical economic reform, we conclude that the liberalization and stabilization phase was successful. It is apparent that the internal and external balance was achieved, but other problems—especially the drop in output, rising unemployment, and foreign trade decline—remain.
The assistance that Czechoslovakia receives from the Bretton Woods institutions is essential in overcoming external instability and in supporting the implementation of domestic reform. The stand-by arrangement and the compensatory and contingency financing facility provided by the Fund at the beginning of this year were a decisive factor in establishing internal convertibility of the Czechoslovak koruna and in obtaining additional financial support from the European Community and the Group of Twenty-Four. All performance criteria under all reviews were met with comfortable margins. The World Bank granted Czechoslovakia a structural adjustment loan, which we currently utilize. We are also working with the Bank on possible sectoral loans for the environment and energy sectors and are considering applying for a loan for trade promotion and development. The opening of the International Finance Corporation (IFC) office in Prague is proving to be useful. It is especially active in the privatization of companies, selection of foreign partners, and location of funding from abroad.
From what I just said, it is obvious that the activities of the Bretton Woods institutions are very important. Constrained by the lack of personnel, we were sometimes flooded with a variety of different missions that were not always effectively coordinated. We hope that the recent organizational changes in the Bank will improve the already useful assistance of this institution to Czechoslovakia.
We know well that “reform-neutral” or “reform-unsupportive” foreign assistance will not solve our problems, and we are, therefore, not asking for altruistic help. We know that the main responsibility for the success of our economic reform lies with us alone. We are ready to face it. However, international support and the opening up of world markets to our products will ease the reintegration of our country into the world economy. We have problems in Czechoslovakia, but I have to say that I have here with me two finance ministers inside Czechoslovakia, a Czech finance minister and a Slovak finance minister. And I hope you realize that they are not granting opposing interviews during the Annual Meeting. Such reintegration is a necessary precondition for the final success of our unprecedented economic transformation and of our economic rebirth.
Statement by the Governor of the Fund for Sweden—Bengt Dennis
First of all, I should like to express, on behalf of the five Nordic countries—Denmark, Finland, Iceland, Norway, and Sweden—our gratitude and appreciation to the Government and the people of Thailand for the generous hospitality extended to us here in Bangkok.
Let me also take this opportunity to join my colleagues in extending a warm welcome to Albania and Mongolia as new members of the Fund. And I want to offer my sincere congratulations and best wishes to Mr. Camdessus on his re-election as Managing Director of the IMF.
Assessing the world economic outlook, two aspects require special attention: inflation and savings.
As regards inflation, it is a matter of concern that the underlying rate of price increases has not come down more during the recent period of slow growth. Existing high levels of long-term interest rates suggest that expectations about resurgent inflation still exist. Since we are approaching an economic upswing in several industrial countries, it is now that we should lay the basis for a successful fight against inflation. Monetary policy, which is particularly suitable for long-term, anti-inflationary objectives, should be kept tight and not be geared toward stimulating demand in support of the recovery.
The relationship between savings and rising investment demand in many parts of the world has created upward pressures on real interest rates. The high rates are a symptom of underlying problems. In particular, structural budget deficits create an excessive pressure on interest rates. Budgetary policies should, therefore, be at the forefront in taking corrective economic policy action. Weak fiscal policies place an unduly heavy burden on monetary policy. A better policy mix would allow for lower inflation and would stimulate capital formation. The envisaged increase in revenues following the recovery should not be used as an excuse for delaying structural budget consolidation. Only with the budgetary situation under control can monetary policies be relieved and interest rates come down.
It follows from what I have said that the so-called shortage of savings is a problem of the real economy and should be treated as such and not as a financial one. Available global liquidity does not seem to be insufficient.
For many developing countries, 1991 will, unfortunately, be yet another year of stagnating or even declining output. However, it has become increasingly clear that countries which consistently implement stabilization policies and embark on structural reforms perform above average. Strict adherence to such adjustment policies is also a prerequisite for access to international capital markets as well as for a return of flight capital.
The poorest countries continue to depend heavily on concessional assistance, and it is obvious that they need additional debt relief in order to gain momentum in their adjustment efforts. Therefore, the creditor countries in the Paris Club should expeditiously implement a rescheduling, which goes well beyond the Toronto terms, for this group of countries.
An important aspect of international economic relations is the growing integration of financial markets. It has enhanced the possibilities to finance profitable investments and, hence, to promote growth. But, recent developments demonstrate that instability in one particular market can spread rapidly and distort the functions of the financial system. It is, therefore, essential to ensure a high degree of vigilance in public supervision of the financial sector. It is, furthermore, vital that prudential supervision apply equally in all countries. Closer cooperation between national supervisory authorities should be developed to ensure an effective adherence to the supervisory requirements. With such a cooperation in place the integration of financial markets will be advanced.
I would also like to comment briefly on the transformation to market economies of the previously centrally planned economies. First, I welcome the recent agreement on special association between the Soviet Union and the Fund and the way that this most important issue has been handled by the Fund.
Let me then make the general observation that the most valuable contribution that we in the industrial countries can make to assist the economies in transition is to ensure that their exports have access to our markets.
With respect to the countries in Central and Eastern Europe, I find it very encouraging that the international community—with the Fund being one of the front-runners—was able to react so swiftly to the economic and political changes by providing technical assistance as well as financial support. During the initial phase of the transformation process, it is understandable that exceptional official financial support is needed. Lending from the Fund has contributed significantly to this financial assistance. However, it must be emphasized that a continuation over the medium term of large-scale financial support from the Fund is not feasible. The high credibility of the Fund hinges on the revolving character of its resources. The main task of the Fund must be that of a catalyst for financing from other sources. The exceptional official financial support must be gradually replaced by financing from private sources.
An issue that is of general importance in this context, and which has particular significance for the assistance to Central and Eastern Europe, concerns the different roles of the multilateral financial institutions. The Nordic countries would like to reiterate that the role of the Fund is to assume the main responsibility, in close consultation with the recipient countries, for the design and monitoring of macroeconomic adjustment programs. As to the institutions that have primary responsibility for providing advice on structural reform, there seems to be a need for further clarification. It is vital that an agreement be quickly reached on their respective roles and on an appropriate division of labor.
It is a matter of great concern that the volume of arrears to the Fund remains so large. In this context, I want to express my strong support for the arrears strategy adopted by the Fund. It has encouraged countries with overdue obligations to cooperate with the Fund to solve their problems. However, it is of utmost importance that the strategy be strictly followed. If we allow exceptions, we will send wrong signals, both to countries already cooperating with the Fund and to potentially cooperating countries. I would also like to emphasize that it must be clear to everyone, including other international organizations, that rescheduling or writing off Fund claims is not a viable option. A strict adherence to the strategy by countries in arrears must, in my opinion, be complemented by a strengthening of the efforts by donor countries to make timely disbursements of already committed resources. If not, I fear that we put the strategy at risk, with serious repercussions both for member countries trying to cooperate with the Fund and for the Fund itself.
As to noncooperating countries, I believe that the time has come to start implementing decisively the sanctions that are available to us. This will include the suspension of voting and related rights agreed upon in connection with the proposed amendment of the Fund’s Articles of Agreement, as soon as it has been adopted by the necessary majority of member countries. It is equally important that countries that are prepared to cooperate with the Fund get the assistance they deserve. I am indeed concerned that this is not always the case. The principle of equal treatment of all Fund members must be respected in order to maintain the credibility of the organization.
Let me finally address the question of the Fund’s resources. The increases in quotas as resolved in the Ninth Quota Review are, in the view of the Nordic countries, to be regarded as the minimum required for the Fund in the coming years. Consequently, it is imperative that the acceptances of the quota increase—as well as the Third Amendment of the Fund’s Articles of Agreement—be swiftly concluded by members.
We have a fundamental obligation to safeguard the necessary level of resources for the Fund. Only then can the institution promote stability and order in international monetary and financial relations to the benefit of all its members.
Statement by the Governor of the Bank for Indonesia—J.B. Sumarlin
I would like to join with all my colleagues in welcoming our new members Albania and the Republic of Mongolia, and in greeting all those countries present here today that have made or plan to make application for membership in the Bank and Fund, especially the representative of the Soviet Union. We also would like to offer our very genuine appreciation to the Government of Thailand for the excellent and efficient arrangements they have provided for the success of this meeting and to the people of Thailand for the warm and generous hospitality that they have shown to all of us here. Once again, let me welcome Mr. Preston as the new President of the World Bank and assure him that we are looking forward to working with him in the coming years. At the same time, let me express our thanks to Mr. Conable for his contributions while President of the Bank and wish him well in his endeavors.
This is the third consecutive year in which I have felt compelled to open my remarks on a discouraging note. World economic activity has fallen to its lowest growth since 1982, with world trade for 1991 falling even more sharply. The recovery in the United States is weak, and in the United Kingdom it does not seem to have started. European economies and Japan are seen to be moving into a period of weakening activity. Unemployment remains high or is rising in the industrial countries. And all of this weakness persists against the background of interest rates that are quite low by recent experience, except in Germany. On these already weak economic fundamentals is superimposed the impact of two major strains: higher-than-expected costs both to reconstruct the areas affected by the Gulf crisis and to restructure and revive the economies of Eastern Europe and the Soviet Union.
The movement toward political freedom and democracy must be welcomed, as must be the recent announcement of the agreement setting out the Soviet Union’s special relationship to the Fund. However, we cannot stress too strongly that it is equally important to a growing world economy and trading system that the programs in Eastern Europe and the Soviet Union not be at the expense of the developing countries. After all, Eastern Europe and the Soviet Union have large natural resources and production facilities of their own. Largely what is needed is effective mobilization and allocation of those resources. It is necessary to make this point with great urgency, and it is not a hypothetical question. My country has already experienced the reassignment to programs in the Soviet Union of technical assistance experts on whom we set great store.
Let me now turn more specifically to the developing countries. There is some good news in parts of the developing world. For the developing countries, however, the situation generally remains discouraging. To the still burdensome debt situation and the inadequate and declining level of resource transfers is now added an adverse terms of trade impact. While the debt strategy has gained increased flexibility and a more versatile menu of options to deal adequately with the problem for many debtors, further evolution of the strategy is needed.
It seems ironic that the net flow of private finance to the developing countries should fall drastically over precisely the period in which a strong consensus emerged on the importance of a greater reliance on the private sector in the growth process. Ways need to be found to enable and encourage the private international financial markets to provide increasing resources to the developing countries.
The current historically low terms of trade are battering those countries heavily dependent upon the export of primary products. The only sustainable solution to their problem is to diversify their economies. This is a lesson my own country—once highly dependent on primary exports—learned long ago, a lesson that was reconfirmed for us by the decline in oil prices in the 1980s. But this solution requires an adequate flow of resources to finance the process of diversification.
Equally important, it requires an open international trading system. For this and many other reasons all members of the world community must be increasingly concerned with the continued failure to achieve a satisfactory conclusion to the Uruguay Round. Trade policy seems increasingly focused on forging regional trading arrangements. Such arrangements in a context of open trade can be virtuous—creating economies of scale as trade opportunities for all expand. However, in a protectionist world these regional arrangements can soon degenerate into inward-looking blocs. That is a danger we must all strive to avoid.
The leading parties to the discussions must show the political will to bring the Uruguay Round to a successful conclusion. If they fail, the credibility of adjustment programs based on outward-looking trade policies is at risk.
We all look to the private sector to play an important role in creating growth. There is a need to strike a proper balance between the public and private sectors. The central point here is that the market is an efficient allocator of resources. Efficiency is important. The demands on available resources of all kinds are ballooning at a time when global supply is not keeping up with demand. The free market’s allocative efficiency can ease this resource squeeze, if we get the price signals right on our markets and then make our economies more market driven. . . .
Statement by the Head of the Delegation of the U.S.S.R.—Alexeyevich Yavlinsky
I can hardly express the extent of the gratitude of my country, my people, my Government, for the opportunity to be here before you as the leader of the delegation of the new Special Associate of the Fund which will, I believe, have a similar relationship with the Bank in the very near future. I also want to express the gratitude of my delegation for the warm hospitality extended by our Thai hosts.
Changes in the U.S.S.R. and Eastern Europe in the last three to four years really opened a new era in the development of the world. The mere fact of my presence here is very significant. We are opening for the whole world new possibilities for constructing an absolutely new world in the next century, a more peaceful world in which we are more clear about the common problems we have to solve.
First of all, I want to tell you briefly what is going on at this time in the Soviet Union. The creation of new democratic institutions and elements of market relations is accompanied by a profound economic crisis. The future of the country’s peoples to a large extend depends on how we manage to overcome the economic problems. The decline in production has affected all sectors of the national economy. In 1991, the gross national product (GNP) will have declined by roughly 15 percent, industrial output by 9 percent, and agricultural production by 10-11 percent. Investment activities are on the decline, too: the overall volume of investment in 1991 will decline by at least 20 percent, and the volume of capital assets being put into operation by 25 percent. The volume of investment financed by the budget is declining especially rapidly.
The situation with the state finances remains very difficult. State budget revenues at all levels are on the decline due to the drop in production and the reduction in foreign trade profits. At the same time, social security expenditure continues to grow. Decentralization has resulted in a lack of coordination of budget policies among the republics. As a result, the deficit of the Union budget in 1991 will amount to more than 120 billion rubles, the aggregate deficit of the republican budgets will be about the same size, and the estimated deficit of extrabudgetary funds will be no less than 80 billion rubles.
For the time being, the country has no reliable system for determining price indices and rates of inflation. Official data do not fully reflect the scale of price increases. According to those official data, in 1991 the aggregate index of retail prices of consumer goods and services was 96 percent above the 1990 level. The majority of experts predict a dramatic acceleration of the inflation rate in the last quarter of this year.
Elements of market relations have developed vigorously in the economy. Due to a lack of adequate information, both Soviet and Western experts do not usually take into account the qualitative changes taking place in the Soviet economy. However, there are remarkable indicators of the rapid pace of development of individual elements of market relations, for instance, the establishment of over 400 exchanges during one year virtually without any state support, and a six-fold increase in the number of foreign companies in Russia during the first half of the year alone.
The number of commercial banks, shareholder companies, and other private sector structures is growing at the same rapid pace. However, of much greater importance are the factors changing economic behavior of the state sector, taking into account the fact that the state still remains the main property owner in the economy. The motivation of decisions in such enterprises is changing and commercialization is taking place as state paternalism weakens.
Do we know what to do in this situation? Do we have a plan? The answer is yes. We do know; we do have a plan.
The most immediate thing we have to do, and, we have to do it ourselves, is to make the economic treaty between the republics in order to bring about the desired transformation to a market economy in a coordinated way. The draft of the treaty which we have just prepared was initialled by the prime ministers and representatives of the 12 republics and signed by the heads of state of 3 of them. The treaty, together with the package of agreements, establishes the institutional basis for interrepublican economic relations and sets forth the purpose of and mechanisms for carrying out economic reforms. The sovereign states have already recognized as their common goals, radical economic reform, the overcoming of the crisis, and integration into the world economy. They have confirmed their desire to preserve the benefits of economic integration.
Under the treaty, the full members of the community shall jointly apply macroeconomic control on their territories. To this end, they shall maintain a single monetary system and the ruble as their common currency at least for three years; establish along the lines of a reserve system an independent bank union, bringing together the central banks of the member states of the community and pursuing common monetary and credit policies; pursue coordinated budgetary policies aimed primarily at limiting the state budget deficits and coordinating taxation policies; conclude a customs union, establish a uniform external customs tariff, and eliminate internal restrictions on the flow of goods; unify and harmonize the economic laws of the member states of the community; recognize that the treaty, the agreements of the treaty, and the community’s legislative acts take precedence over republican laws within the limits of the community’s terms of reference.
The member states of the economic community shall agree on their joint membership in the IMF, the World Bank, and other international economic institutions. Republics not wishing to accede to the treaty as full members may acquire the status of associated membership by joining the customs union, recognizing free enterprise, and protecting property rights on their territories. An associated member of the community shall coordinate its own monetary, credit and budgetary policies with the full participants in the treaty throughout special agreements. All republics shall ensure the fulfillment of the U.S.S.R.’s domestic and foreign obligations and have agreed on a common mechanism for foreign debt servicing. The full members of the community will pursue a common policy of transition to an internally convertible ruble.
The treaty is intended to start real economic reform and not to leave the situation as it is today. I want to explain the main steps of the economic reform that we can and must realize just now. First of all, macroeconomic stabilization. The system for controlling budget deficits defined in the treaty and the agreements will allow the stabilization of state finances. Expenditures will be cut by nominal freezing and decreasing defense spending in real terms, streamlining managerial staff, eliminating subsidies, and freezing social programs. A tax reform should also be carried out with an increase in the indirect taxation share as well as with stiffer responsibilities for tax evasion.
It is necessary to reorganize the banking sphere by merging central banks or republics to carry out a single monetary policy by means of bank union; dividing the accounts and capital of commercial banks; and reorganizing the central bank’s activities to permit the indirect control of money circulation and credit through discount rates, reserve requirements, and operations in securities markets. This will permit the establishment of a system that will implement a stringent policy aimed at limiting borrowing and the amount of money in circulation. The next step is to put an end to the financing of state expenditures by the central banks of the republics and the successor of the State Bank of the U.S.S.R.
The next point is the liberalization of economic relations. It is necessary to legalize immediately actual existing relations and place them on a sound legislative footing. Next, we should carry out an extensive liberalization of all kinds of prices. It is also necessary to carry out a wage reform to liberalize the labor market. The introduction of convertibility of the ruble for current operations, the liberalization of foreign trade, and the abolition of most quotas are extremely important. To this end, it is necessary to devalue the ruble and conduct currency intervention by the state in the foreign exchange market. Taking into consideration the low competitiveness of Soviet products and the need to stabilize the balance of payments, it is necessary to elaborate and put into effect a program of step-by-step reduction of customs tariffs.
Last, but not least, is privatization. Privatization will be largely influenced in accordance with the republics’ legislation. Considering that privatization laws have already been passed in a significant number of republics, and the fact that privatization is profitable for authorities, one can expect that the republican and local authorities will speedily launch the process of small-scale privatization.
Work is already under way to corporatize large-scale, state-owned enterprises, that is, to transform them into shareholder companies with a subsequent selling of state-owned shares. Also needed is a more active demonopolization policy as well as the conversion of military production. The scope of and participation in land reform will expand and a market infrastructure for agriculture will be developed.
In the next stage, the long-term institutional and structural transformation of the economy, related particularly to the increasing scale and deepening of privatization activities and of the private sector of the economy, and the formation of labor, housing, and financial markets, will take place.
The potential of the country, and the courage and determination of its people will be crucial during the transition to a market economy. The peoples of the country will carry out reforms in any event. The republics that have joined the economic community can and indeed should mobilize their tremendous potential of natural and human resources.
What is the role in all this transformation for such institution as the IMF, the World Bank, and others? First I want to express our personal gratitude to Mr. Camdessus for his personal impact on this process. In general, making available the great expertise of these institutions is crucial at this moment when we are preparing these elements of our economic transformation.
My statement today is based on the assumption that the efforts aimed at creating an economic community will be crowned with success. The consequences of a different turn of events are unpredictable. In such a case, it will be virtually impossible to work out real scenarios of a successful economic transformation of the country.
Statement by the Governor of the Bank for Peru—Carlos Bolona Behr
I am very pleased to address this meeting of the World Bank and the International Monetary Fund and am particularly delighted to do so as Minister of the Economy and Finance of the current government of Peru, which has recently rejoined the international financial community and decided to stabilize, modernize, and deregulate its economy in order to tap its vast economic potential for the benefit of the country’s population.
Decades of misguided and unrealistic economic policies, along with ineffective social and national security policies, had led us into the greatest economic crisis in our history, with hyperinflation equivalent to 2 million percent between 1985 and 1990.
Peru now joins the ranks of countries that are convinced that only through sound and realistic economic policy can a promising future be built for their peoples, leaving behind forever popularism and the quick fix. Peru understands today better than ever before the role played by the multilateral agencies and the international community in general, as partners in the process of economic growth of the developing countries.
The renewed credibility enjoyed by Peru’s current economic policy both within the country as well as abroad stems from three key aspects. The first of these is substantial progress in the economic stabilization program. The second is the country’s rejoining of the international financial community, and the third the implementation of sweeping structural reforms as a basis for the country’s economic modernization.
As regards the stabilization program, inflation has been reduced substantially from its shocking highs in 1989 and the first half of 1990. The decline from March of this year onward indicates that, by the end of the year, the monthly rate will be 3 percent and in 1992 inflation will not exceed 2 percent monthly. Thus, in line with the principle that a country cannot develop if it spends more than it produces, Peru has put an end to the scourge of hyperinflation that had buffeted the poorest economic segments of the population.
We will therefore continue our efforts in the fiscal arena, drastically cutting public spending, carrying out an across-the-board tax reform that broadens the base of taxpayers and improves the tax system and its administration, and following a policy of real prices determined by market forces.
In this respect, as indicated by President Alberto Fujimori several weeks ago, Peru, continuing along its peace-loving path, seeks to allocate its budgetary funds to increase the well-being of its population and avoid expenditures that do nothing to boost economic development.
As regards Peru’s rejoining the international financial system, I would like to mention four achievements that sum up the progress we have made in this area. The first is the formation of the support group composed of friendly industrial countries, which has enabled us to secure the financing required by our economic program. Thus, on December 9 of last year we obtained $1.1 billion. Second, on September 12 the International Monetary Fund approved our economic program, and its implementation began with the new year. Third, on September 16 Peru concluded an agreement with the Paris Club for an amount equivalent to $6.6 billion on extremely favorable conditions, enabling us to restructure our bilateral debt. The fourth achievement is the loan signed with the Inter-American Development Bank on September 16 for $425 million. This is the first loan Peru has received from that institution in more than seven years and the largest granted by it.
In recognizing that this major headway means a commitment to the international community to continue our efforts, I wish to express my gratitude for the support extended to Peru by the President of the Inter-American Development Bank, the Managing Director of the International Monetary Fund, the World Bank, the Chairman of the Latin American Reserve Fund, and all friendly countries of the support group.
Clearly, all these efforts to lead Peru toward growth based on solid foundations will be undermined if a long-term structural reform program is not undertaken. In this connection, Peru has already reformed its external trade to eliminate nontariff barriers and introduce two tariff schedules of 15 and 25 percent.
I join other Governors who spoke before me in calling for a prompt end to the Uruguay Round of multilateral trade negotiations, with a view to helping the development of the international market.
Peru has not limited its liberalization to trade, but has also eliminated all restrictions on foreign investment. As a result, foreign investors can invest in Peru on exactly the same conditions as those afforded any national investor, enjoying the guarantees under the agreement recently signed with the Multilateral Investment Guarantee Agency (MIGA). We are now revising all sectoral regulations that might discriminate against direct foreign investment, an effort we expect to be completed in the very near future.
Other reforms aimed at boosting investment, both domestic and foreign, include: (i) reform of the financial system, through a new banking law to liberalize the sector, replace obsolete provisions in force until recently, and promote competition among financial institutions; (ii) reform of “agrarian reform,” which is a major step in giving new life to agricultural activity by deregulating the real estate market, which had been frozen by agrarian reform in 1969 by the military regime; and (iii) reform of the labor market, beginning with the elimination of the so-called industrial community, also established by that same de facto regime, causing serious impediments to investment owing to the major distortions it produced in the cost structure. No less important is the long-term reform of the social security system, which we will begin shortly, with a view to channeling the system’s resources toward productive activities and having workers enjoy larger yields on their savings.
Any structural reform program for an economy where the state plays an overwhelmingly preponderant role would be incomplete without consideration of substantial privatization. It is neither plausible nor desirable for a country to maintain a vast number of public enterprises characterized by administrative inefficiency, widespread corruption, lack of investment, and technological backwardness, which makes them unviable. With this goal in mind, we very recently promulgated a law instituting an appropriate legal framework for imminently starting the privatization of major enterprises, while at the same time safeguarding the transparency and technical quality required for the success of any privatization process.
The Government of Peru thus feels that the private sector must play a key role in the future development of the country and must meet the challenge imposed by domestic and external competition within the context of a market economy. For its part, the state must focus on efficiently carrying out its responsibilities regarding health care, education, and public security, as well as developing and maintaining the infrastructure vital for development and the well-being of its population.
At this point, I would refer to the initiative taken by the ministers of the Group of Twenty-Four to establish a permanent technical assistance service for all member countries on a grant basis, financed through the net earnings and regular budget of the World Bank, as well as bilateral and multilateral cofinancing. This new service could be valuable in the immediate future in areas such as privatization, tax reform, and the establishment of capital markets.
Lastly, I would like to turn to the membership of Mongolia and Albania and the special association of the Soviet Union. Like the rest of the international community, we would like to extend a warm welcome to these countries.
We wish to congratulate the meeting organizers and express our thanks to Their Majesties the King and Queen and to the people of Thailand for their hospitality and kindness during our stay in the Kingdom of Thailand, whose culture, prosperity, and dynamism have impressed us profoundly.
Statement by the Adviser to the Governors of the Bank and the Fund for Mongolia—Dabaadorjiin Ganbold
It is a great honor for me to take the floor before the financial community of our world. It is the first time that the voice of my country has been heard at this forum, and, first of all, I would like to thank you on behalf of 2 million Mongols for the trust you have in us and for your support of our reforms.
Life has seen to it that we are making this first statement in Bangkok, and I would like to express our gratitude to the Government of the Kingdom of Thailand for the best possible organization of the Annual Meetings.
The documents of last year’s Annual Meetings include a statement made by distinguished Governor Vaclav Klaus from Czechoslovakia. On the example of his country he briefly, but very convincingly, described the situations in the countries of the former socialist bloc, the course of their reforms, and the difficulties and hardships they are encountering on the road toward market economies. Everything Mr. Klaus said applies 100 percent to Mongolia, the only difference being that Czechoslovakia was among the founders of the Bretton Woods institutions, whereas in Mongolia the idea of free-market development had been strangled by the late 1920s, when there was neither the World Bank nor the IMF.
Alongside this, Mongolia has a host of specific political, economic, and social features that distinguish the country from the rest of the former members of the Council for Mutual Economic Assistance (CMEA). First, no CMEA country was so dependent on one market as was Mongolia: the Soviet Union accounted for 85 percent of our foreign economic relations, and CMEA as a whole for 97 percent.
Second, it is rare that a country has been as isolated as Mongolia, not only from the seas but also from all major international routes. Our only immediate neighbors are the U.S.S.R. in the north and China in the south—the two powers with the greatest physical parameters in the world.
Third, for 300 years before its transition to socialism in the early 1920s, Mongolia had been one of the most backward countries in the world. Mongolia had an early feudal, natural economy, when a communist regime in its most rigid and most intolerant form installed itself in the country in 1924. This reign of totalitarianism with its economic analogue—central planning—lasted for the lifetimes of three generations, and this could not but leave deep imprints in every sphere of society. Not a single Eastern European country has such a background.
But these extremes of isolation and repression have only heightened the determination of today’s generation for change. Already, we have established a multiparty political system, conducted the first democratic elections, formed a parliament in its true meaning, and instituted the Presidency.
In the eight months of our membership in the World Bank and the IMF, we have carried out, as we believe, a broad range of measures as part of our government program for transition to a market economy. We have liberalized almost all prices, the exchange rate, and our foreign trade, which is being diversified with fully tax-exempt exports. We are building a completely new banking system and carrying out privatization on a rather large scale. Our plan is to denationalize about two thirds of all industries and other projects in the next two to three years. New forms of macroeconomic relations are coming into being, with the system of centralized supply and distribution changing and a network of stock and commodity markets taking shape.
A great burden is being borne by our young parliament, since all emerging relations have to be legally consolidated. In a span of only one year we have devised and adopted more than 30 laws that regulate new economic relations.
All this work started merely a year ago and has tested our strength, because we began moving toward a market economy across a broad front. We lack qualified personnel, we lack experience, and, most of all, we lack time. However, we are deeply aware of the impossibility of any other choice for our country, which needs an entirely new system to place it on the road of normal, rational, and sustainable development.
Of course, we are running into a multiplicity of hard-to-tackle problems. But too much resignation and excessive compromising only prolong the agony of the old centralized system and hamper the earliest assertion of new relations. To overcome all the hardship, we, naturally, need bilateral and multilateral cooperation.
Today, I can say confidently that Mongolia is completely open to new relationships and new ideas. This is evidenced by the successful Mongolian aid consultation meetings of the international donor community that took place recently in Tokyo and in Ulan Bator, the capital of our country. We gratefully note that the first one was organized by the World Bank and the Japanese Government and the latter by the United Nations Development Program (UNDP), both involving pleasingly large numbers of participants.
These meetings drew a common conclusion: that Mongolia is at a critical stage and would now benefit from large-scale aid, for it has every possibility and all the potential to become a productive partner in world economic relations in a short span of time.
Today we witness the birth of a new international order; people and governments are growing increasingly aware that cooperation and “mutual assistance are the basis of worldwide progress. A favorable external environment is important for everyone, not the least for Mongolia, with its unique geopolitical location. We hope that our neighbor and traditional partner, the Soviet Union, will soon stand on its feet with the help of the world community. For Mongolia, it has always been like this: if things go badly with our neighbors, we are also in trouble; if they are okay, we are okay.
All of humanity is moving slowly but assuredly toward a world that cares more about development and less about military and political competition. Here, Mongolia gratefully notes the contribution made to this process by the international organizations, among them the World Bank and the IMF. We acknowledge with gratitude, Mr. Preston and Mr. Camdessus, your personal involvement and the dedication of your staff. We are happy to start close cooperation with you and shall be true to our commitments and agreements, as befits a decent partner. Above all, we will do everything to make effective use of the aid coming to us from other nations and international bodies.
Little-known Mongolia, with its vast territory, a small but educated population, and abundant natural resources, is a new frontier, challenging and offering great opportunities to everyone seeking mutually beneficial cooperation. Welcome to Mongolia.
Statement by the Governor of the Bank for Nepal—Mahesh Acharya
It is a great pleasure and privilege for me to address this Forty-Sixth Annual Meetings of the World Bank and the International Monetary Fund. My delegation would like to put on record our sincere gratitude to the Honorable Anand Panyarachun, Prime Minister of the Kingdom of Thailand, for giving an inspiring opening address to this meeting. I would also like to express our sincere appreciation to the Government and the people of Thailand for their warm and generous hospitality extended to me and to the members of my delegation. We welcome the delegations from the new member countries and from those who have applied for membership to the Bretton Woods institutions.
I congratulate Mr. Lewis T. Preston on his appointment as the President of the World Bank and Mr. Michel Camdessus for his reappointment as Managing Director of the International Monetary Fund. I am fully confident that their experience and dynamic leadership will successfully steer the world economy toward enhancing growth and reducing poverty in developing member countries. I wish them every success in their efforts to meet the future challenges.
The world has witnessed extraordinary political and economic events in recent years, all of which have significant implications for the international economic order. These events have proved that democratic institutions are prerequisites to sustain economic development, to enforce accountability, and, above all, to give a definite direction to the economy, ensuring social justice for the people.
The dawn of democracy in many countries of the world heralded a new era of peace, amity, and universalism. Despite the fact that some of the economies are reeling under the impact of the Gulf war, the world today is a more secure and a safer place in which to live. We are farther away from the potential threat of nuclear holocaust, and there is now a ray of hope in the horizon for the teeming millions suffering from the lack of life’s basic necessities. The challenge before us, in the wake of democracy, is how to translate political gains and international reconciliation into tangible benefits for the less-privileged and undernourished masses.
Apparently, just as economic equality could not be sustained at the expense of political liberty, so democracy will not survive without economic and social justice. Helping the poor is, therefore, not necessarily a zero-sum game. This calls for a reorientation of current economic thinking. We should be sensitive to the political content of economic policies and their potential effects on political freedom. There is a desperate need to humanize impersonal economic policies and processes. We should add a “democratic” dimension to our economic thinking in which “people” are in the forefront of economic development. Unless we act in unison, both at national and international levels, with a similar concern and orientation, we cannot alleviate poverty and it will be yet another lost opportunity. Still worse, the political pluralism that we are experiencing may be placed in jeopardy.
In my own country, Nepal, developments of far-reaching consequence have occurred in recent years. After 32 years, democracy was restored in April 1990 and the Nepali Congress was elected to office in May of this year. Blessed with a gallant history of relentless struggle and sacrifice for the cause of democracy—a struggle that spanned nearly five decades—the Nepali Congress-led Government is committed to political pluralism, good governance, rule of law, and human rights. We are indeed proud to be in the mainstream of the democratic movement that has swayed the entire world. We drew strength from successful democratic crusades in other parts of the world. Recent events throughout the world proved beyond doubt that the people are sovereign and that they are the masters of their destiny.
The present level of resource transfer to developing countries has been widely considered to be far below the level required to achieve the objectives of existing programs relating to poverty alleviation, sound economic management, and protection of the environment. In addition, the international community is facing an extended development agenda and the number of countries claiming external resources is increasing. In such an environment, both industrial and developing countries have important responsibilities to shoulder if the objectives of the 1990s are to be realized. We earnestly hope that the donor community will come up with substantially increased funding for IDA-10.
The political and economic transformation in many countries, including the U.S.S.R. and Eastern Europe, has created many opportunities and risks. This change calls for increasing cooperation from developed countries. It has also required the Bretton Woods system to advance more assistance to emerging democracies in order to minimize the adverse impact of change and make the transition successful. We support initiatives undertaken by the Bank and the Fund to assist these countries’ move toward market economies. We emphasize, however, that in so doing, the Bretton Woods system should make additional efforts to mobilize and allocate resources and ensure that such assistance is not at the expense of the least-developed countries and low-income member countries.
In the area of trade, protectionism in the industrial countries has continued in spite of the need for its elimination. The world is now moving toward regional trading blocs. This closer regional integration may not lead to discriminatory trading prospects, but if it does, the long-term global prospects can be affected adversely and many developing countries outside these blocs will receive further setbacks. To avoid such an undesirable event, the success of the Uruguay Round is critical.
With regard to the debt problem of developing countries, the recent initiatives taken under the Paris Club and Brady Plan are commendable. In relation to the severely indebted, low-income countries, we feel that there is a heightened need for further concessional debt relief beyond the Toronto terms.
In my own country of Nepal, we are engaged, after a successful transformation to democracy, in a campaign to alleviate poverty. This is indeed a daunting task—a task that cannot be achieved without strong international support. The economy, which we have inherited from the past, is beset with many structural problems and economic anomalies. The Gulf crisis directly increased the import costs of oil. In response, the Government had to adjust the domestic prices of petroleum products and public utilities. The resulting increase in transport costs had multiplier effects on the economy. In addition, the receipts from tourism and exports of goods and services also declined. All these, in turn, resulted in recessionary trends in trade and industry and added to the miseries of the people. The Nepalese economy, already under heavy strain, had to devalue its currency. This again necessitated further price increases in petroleum products and public supplies including utilities. Consequently, inflation has gained momentum—hurting common people—and, therefore, has become a matter of great public concern.
In the face of economic difficulties, both internal and external, the policy focus of the present Government is to maintain fiscal and current account balances so as to ensure a viable macroeconomic environment for faster economic growth. We have already initiated a number of actions encompassing macroeconomic policies, public expenditure management, administrative reform, and privatization of some of the public enterprises to rectify the distortions and malpractice. The Government has slashed many unproductive expenditures and has set targets to increase revenue and contain fiscal deficits. The private sector and nongovernment organizations now will play the important role in economic and social activities, while the Government will focus its attention on poverty alleviation programs including education, health, safe drinking water, environmental protection, and other areas of national importance.
We have also implemented a reform program for restructuring the financial system to improve and strengthen the performance of commercial banks and restore their viability. The financial sector, including commercial banking, has been opened up to the private sector. Government is also committed to reducing the number of public enterprises through gradual divestment, and to improving the management capability of other public enterprises that are to be retained in the public sector. To attract foreign direct investment, necessary legal and administrative arrangements, with appropriate fiscal and regulatory reforms, are being undertaken.
The goal of protecting and developing the environment is one of the priority programs of the present Government. Our efforts to protect the environment will require massive programs for both poverty reduction and population control. This will add to our needs for external assistance. We, therefore, seek sympathetic and valued cooperation from all donor communities in our development and reform efforts.
Nepal has implemented the structural adjustment program with Bank-Fund support. The encouraging outcome of the program and the present economic situation call for the continuation of the adjustment efforts. However, it is our experience that the balance of payments support under the structural adjustment loan of the World Bank, and the structural adjustment facility of the International Monetary Fund, need to be tailored to our specific situation and should be more flexible in their conditionalities. We appreciate very much the management and staff of the World Bank and the International Monetary Fund for assisting us from time to time in our policy reform measures.
Finally, on behalf of the Nepalese delegation and myself, I would once again like to express our sincere appreciation to the Government of Thailand for the excellent arrangements to make these meetings a success.
Statement by the Governor of the Bank for Afghanistan—Mohammad Hakim
On behalf of the Afghan delegation and myself, I would like to express our heartfelt thanks to our hosts for their most hospitable welcome and for their excellent organization of these Annual Meetings of the World Bank and the International Monetary Fund. We would also like to extend a warm welcome to our newest members, Mongolia and Albania.
We are passing through a delicate but decisive upturn in our globe’s economic life. It appears that at the turn of the decade we are poised for a sequence of drastic changes of long-standing duration.
There are many factors that cause the underlying sources of economic instability and unpredictable tides of financial crisis. A large number of countries (the developing and the least developed, in particular) are experiencing economic shocks produced by such recent events as the war in the Gulf and the upheavals in the Soviet Union. It is not logical to assume, however, that such economic traumas are the only factors responsible, or that the suffering nations did not inherit their pains from preceding decades in which a large part of the developing world remained mired in relative economic stagnation, often accompanied by financial disorders.
This situation further widened the inequitable gap in the distribution of economic welfare, and increased the alienation between the wealthiest and the poorest parts of the world. This could be presumed to be one of the causes of the regional and global turmoil. The tasks of breaking the vicious circle of poor growth, over-indebtedness, and the consequent financial disorders, still remain critical problems for the developing world.
We have also noticed that general growth in world trade was accompanied by large fluctuations in the value of the major convertible currencies and by problems in marketing. However, there is a gradual but significant “opening of the door” to market economies in almost half of the world. This could bring about some profound changes and reevaluations of financial and monetary policies, which, even in the initial stages, would give a welcome boost to the total volume of trade.
It is worth mentioning that, for the developing countries, and particularly for the less developed ones, nontariff barriers still continue to shadow the prospects for export earnings and national incomes. Their effects could be substantial in relation to the level of official development assistance. My delegation supports the idea of the transfer of real resources to the developing countries, emphasizing the responsibility of advanced countries to reduce trade barriers and further liberalize the multilateral trading system so as to ensure export-oriented economic growth.
It can never be ignored that the insurmountable debt service, coupled with a scarcity of internal financial resources and external financial restraints, has the developing world on the verge of real catastrophe. It is unimaginable that countries in such a position would indulge in long-lasting regional wars, high military expenditures, and the large-scale exodus of refugees.
In recent years, the Government, in order to facilitate a political settlement of the Afghan issue, has presented a number of peace programs that have paved the way for a peaceful settlement both inside and outside the country. Among these are the following: the creation of a government of national unity; the introduction of changes in the constitution; practical steps toward the promotion of the private sector in the economic life of the country; the purification of the education system of all ideological vestiges; political freedom covering the establishment of political parties, freedom of speech, and the expansion of political and economic relations with all countries, particularly neighboring and Islamic countries; and steps for the protection of human rights and consolidation of law through the independence of the law protection agencies.
The position of the leadership of the Republic of Afghanistan toward the realization of national reconciliation and the ending of the war through discussion and political dialogue has provided the opportunity for the great powers and the United Nations (UN) to give preference to a political settlement and to initiate comprehensive measures to end the bloodshed in Afghanistan.
The world community, recognizing the necessity of a peaceful settlement of the Afghan issue in conformity with the objectives of national reconciliation, has declared its support through UN General Assembly Resolutions Nos. 44, 45, and 46. However, to our great regret, some of the countries involved in the issue have not spared any effort in supporting the forces of extremist warmongers. They continue their interference in the internal affairs of Afghanistan and still have not abandoned the enforcing of a military settlement. Their position is a great obstacle to peace, and is contrary to all the measures and steps taken by the UN and the great powers toward the political solution of the Afghan issue.
We have offered a sincere hand of cooperation to UN-sponsored initiatives aimed at untying the Afghan knot, including the most recent five-point statement of Secretary-General Perez de Cuellar. Our country, which, in fact, first proposed a peaceful, political settlement to the war, accorded a full welcome to the recent Soviet-American statement of a reciprocal arms cutoff to the conflicting sides; but the world continues to wait as the flow of arms from other sources continues.
In accordance with recent changes and amendments in the constitution, the Government has taken legal and administrative steps toward the liberalization and privatization of the economy. The newly promulgated foreign and domestic investment law fully guarantees and encourages foreign and internal investments in the country. The readjustment and modification of the money, banking, and insurance laws of Afghanistan sanction the operation of privately owned banks and insurance companies, as well as the setting up of branches of foreign banks and insurance companies in the country. By the recent decision of the Government, the traditional state monopoly on fuel and sugar imports has been abolished and their pricing is no longer controlled by the Government.
From the economic and financial points of view, the years 1990 and 1991 have been the most difficult period for our country. The budget revenues during 1369 (1990/91) declined because of diminishing incomes from domestic sources and the nonrealization of assistance from donor countries, who were facing their own economic difficulties. Meanwhile, budget expenditures have increased due to the continuation of the war and the rise in prices. The budget deficit was 70 percent higher than in 1368 (1989/90). The general price index during 1990/91 was up by 60 percent on a countrywide average basis, the gross domestic product in the same year indicated a decrease of 2.79 percent, and the national income declined by 4.02 percent.
As a result of the war, the agricultural sector has faced destabilization and insecure conditions in some areas, as well as the displacement of the agricultural population, and scarcity of agrotechnical services and facilities. The decline of assistance to farmers has decreased the land under cultivation and, therefore, agricultural production. Areas under cultivation of grains decreased from 2.8 million hectares in 1368 (1989/90) to 2.5 million hectares in 1369 (1990/91), and the wheat harvest fell from 2.20 million tons to 1.65 million tons. Likewise, cotton production decreased from 35 thousand tons to 28 thousand tons.
In 1369 (1990/91), our balance of payments recorded a deficit of $286 million, and the trade balance indicated a deficit of $130.4 million more than in the previous year.
Owing to 13 years of war, a great part of the infrastructure such as irrigation systems, roads, bridges, hospitals, schools, and mosques were destroyed. Reconstruction and rehabilitation of these losses will require, according to a preliminary estimation, up to $10 billion.
Although Afghanistan, in view of its prevailing extensive economic problems, is fully entitled to benefit from Fund resources and from the assistance of the World Bank, the said institutions, nevertheless, have hesitated again this year to extend necessary assistance to our country just as had been done in previous years. This, we presume, is not in conformity with their Articles of Agreement.
The plight of my country is now reaching a truly startling point, not only because of the afflictions of war, but also because of economic and social instability. While the Afghan people are on the march toward a national concord, in full conformity with the principles on which the entire world is pinning its hopes, my delegation invites all the prominent economic quarters, the World Bank and the International Monetary Fund included, not to miss any chance to support our hard struggle toward the salvation of a whole nation that is on the verge of economic disaster. This support would be remembered in history and would revive confidence in the idea that prospering humanity should never abandon a part of its own in times of severe austerity.
We are also thinking of our postwar reconstruction, which is unimaginable in the absence of coordinated high-level international assistance. The Bank’s share in this will be pivotal.
Once again, I take this opportunity to repeat my feelings of honor and gratitude for the attention given to my words here, and to wish this important gathering every success.
Statement by the Governor of the Fund for Albania—Gene Ruli
For a period of 45 years, under an extreme communist dictatorship dedicated to national isolation, Albania lost its connection to the world. Now this system has been overthrown, and we are determined to restore our links with the world. This meeting represents an important milestone in our reintegration into the international financial and economic community. We thank all the members for their support for our membership in the World Bank Group and the International Monetary Fund. I would like today to share with you our ambitions for the future and ask for your support in realizing them.
Albania is now in the process of creating an economic reform program that, with the help and support of the international financial community, will allow us to achieve our goal of establishing a market economic system in the not-so-distant future. Several important reform measures have already been taken:
• In September, we devalued our currency by 150 percent.
• Price liberalization and rationalization is under way, with tangible effects in consumer markets.
• A substantial portion of the agricultural sector has been privatized.
• The process of privatizing small-scale retail trade, services, and small-scale producers has begun.
• Enterprise reforms are under way; private firms can be established and the system of central planning is being dismantled.
• Residents are now allowed to hold and use foreign currencies.
• Important laws to establish the framework for a market economy have been enacted.
The day we left Tirane for Bangkok, we began the next step in the reform process by presenting a package of reform legislation to our Parliament covering the following areas:
• unemployment benefits;
• wage contracts;
• privatization of residential housing;
• joint-venture companies;
• competition law; and
• restructuring of the banking system.
The passage by our Parliament of this legislation will authorize the relevant ministries to begin implementation. These are only further steps in a program that is ambitious and far-reaching. Our next goals will be to bring about the convertibility of our currency and the liberalization of both the internal and external trade regime. We will work very closely with the World Bank and the International Monetary Fund, as well as with other multilateral institutions, in this process.
These reform measures are essential to ensure that our economy does not deteriorate further in the coming months. Already this year, we have had a 30 percent decline in production compared with 1990. Few factories are working and only a small percentage of agricultural fields have been planted because of a lack of imported inputs, including seed and fertilizer. We cannot import because we have almost nothing to export. We have no foreign reserves and no inflows from commercial banks. The fiscal deficit is roughly 43 percent of budget revenues. The balance of payments deficit is at a level of nearly 20 percent of gross domestic product (GDP). Our people will have enough food and medicine for the winter mainly owing to the generosity of many of the countries represented here today. We have also begun to receive technical assistance from several countries, which has been invaluable in helping to put in place an economic system that is completely new to most of the Albanian people.
In order for the reform program, which I have outlined above, to succeed, we need the confidence of our own people and foreign assistance to facilitate the transition period. In addition to continued food, medical, and technical assistance, we need financial support. We hope that we will be able to count on financial, as well as technical, assistance from the World Bank and the International Monetary Fund, and the European Bank for Reconstruction and Development within a very short time. We hope that we can count on further assistance from bilateral donors, and we expect to generate investment and commercial flows from the international business and banking communities. The Albanian public is now supportive of the reform process, but I cannot promise that this support will continue if international assistance for our effort is not forthcoming. As many of you know, young Albanians and our country’s intellectuals—the cream of our population—have been emigrating to seek a better life abroad. The intention of my Government is to make Albania a place where these people will want to establish their future. Foreign assistance is desperately needed before we lose our opportunity to provide a future for these people.
One of the final hurdles that we must overcome is our foreign debt situation. We pledge to begin discussion with our creditors as soon as we are able to do so, with a view to resolving our arrears situation.
I hope that I have not given you too gloomy a picture of the state of my country. I, myself, have great hopes because Albania has a lot to offer. Our population has a rich European cultural tradition, is well educated, youthful, and eager to learn new jobs and to work hard to keep them. Many people speak English and other widely spoken European languages. What we lack, owing to our isolation, is training in modern techniques of finance, business, management, banking, law, and other fields. We have rich natural resources, such as oil, chrome, and other materials, as well as beautiful, unspoiled beaches, pristine forests, lakes, and mountains, and magnificent historical monuments.
We thank the World Bank and the International Monetary Fund, the Group of Twenty-Four, and the many bilateral donors for the fruitful assistance they have given us thus far. We thank the Government and people of Thailand for making us feel so welcome here today. We also thank all the speakers for the warm welcome expressed for Albania’s membership in the Bretton Woods institutions. We are convinced that the objectives of the Albanian economic reform program, if properly implemented and financially supported, will contribute to the ability of the newest member of the World Bank and the Fund to become a welcome and productive member of the international community.
October 16, 1991.