Presentation of the Forty-Seventh Annual Report1 By the Chairman of the Executive Board and Managing Director of the International Monetary Fund, M. Camdessus

International Monetary Fund. Secretary's Department
Published Date:
November 1992
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I welcome you to the first Annual Meeting of a Fund that is now truly a global institution. The mere fact that we welcome today the Governors of 15 countries2 that have joined us since the Bangkok meetings illustrates the unprecedented transformation that is occurring. Our institutions—the Fund and the World Bank—will soon be enriched, both in their Executive Boards and in their staffs, by the experience and history of the new members.

In this transformation the Fund is a microcosm of the world at large. The number of independent countries has proliferated and the world has become one, as the old divides—North-South, East-West—have lost much of their significance. The distribution of economic power has also become more equal. Yes, the days of hegemonies have gone. And we see another fundamental change. Many nations have completely changed their minds about the way they wish to organize their economies and their relations with the rest of the world. The schism that divided the world for half a century has disappeared. We are entering a time of global interdependence that holds great potential to benefit mankind.

Yet, as we look around the world there is much that could jeopardize this promise. Armed conflicts in many regions, ethnic and national tensions that threaten to escalate. Starvation and deprivation that blight the prospects for millions of children. Endemic poverty and increasing evidence of widening income disparities within and between countries. High unemployment, even in the rich industrial countries. And widespread human suffering in the countries struggling to transform their economic systems....

This is our world, with its astonishing mixture of promises and problems! But people have the capacity to face these problems. The initiative and cooperation of governments and international institutions can achieve much and could create better prospects for all. We see opportunities for such action, and encouraging signs of serious efforts in this direction, in all parts of the world.

This morning, let us narrow our focus and consider how to give an added boost to sound policies and genuine cooperation in three areas:

  • in the industrial countries, which are striving to rekindle growth, create jobs, and restore confidence;

  • in the countries that formerly had central planning and are striving to carry out fundamental reforms; and

  • in the developing countries, where overall performance has been more encouraging and where a number of countries offer inspiring examples to all.

* * * *

In the industrial countries, the immediate need is for action to re-establish stability in financial markets and reinforce the basis for sustainable economic growth.

The recent turbulence in markets has been related partly to political circumstances but also to concerns about economic policies. There has been

  • a loss of confidence resulting from inadequate fiscal policies in several large industrial countries and the resulting overburdening of monetary policy;

  • the resulting wide gaps between short-term interest rates in Europe and in North America;

  • and market uneasiness because the key players had different views about the appropriate stance of policies.

What can we do now, after such turbulence?

First, of course, I am confident that our European colleagues will draw useful additional lessons from this experience, as they did on other occasions when their system experienced tensions. They can reinforce further their monetary cooperation. This system has clearly improved exchange rate stability in Europe; it has provided an effective spur to more disciplined monetary and fiscal policies; and it has the potential to contribute significantly to a stronger performance of the world economy.

And there is a broader lesson to be drawn—that we need more vigorous adherence to the fundamental principles of the medium-term strategy. The prospects for the future will be brighter if the industrial countries pursue monetary policies that consistently keep inflation low, fiscal policies that achieve budgetary balance over the cycle, and structural policies that enhance the growth of employment and productivity. In fact, the measures needed now to boost confidence and re-establish stability in the markets are precisely those that also have the potential to promote noninflationary growth and create jobs.

To create jobs! The industrial countries are anxious to find more effective ways to tackle the unemployment problem that threatens to erode the basic fabric of their societies. But, after all the efforts of so many years, what is missing from their economic strategy?

Some will tell you that it could be safe now to relax monetary discipline and so give a boost to activity, because inflation has been subdued, if not quite defeated. But this would be the most serious mistake we could make today. It is not tight monetary policy but rather the weakness of fiscal and structural policies that has undermined confidence, resulted in high long-term interest rates, and hindered growth. If this is true, the industrial countries should implement the medium-term strategy more effectively, not abandon it.

Let us start with the most basic tenet: fiscal consolidation. Everyone recognizes the central importance of this, to free savings for productive use and bring about a reduction in long-term interest rates. But, you may ask, is it sensible to take firm action to reduce fiscal deficits while the recovery is still so hesitant? I recognize this concern. Nevertheless, my answer is a firm yes. Yes, because each postponement of long overdue fiscal action adds to the severity of the problem. Any further postponement of fiscal retrenchment out of concern for possible short-term effects on activity would contribute to a worse environment rather than a better one.

Credible action to reduce budget deficits would improve confidence, lower inflationary expectations, and produce a downward adjustment of long-term interest rates. All these would, in time, more than offset any short-term contractionary impact. The main emphasis should continue to be placed on expenditure restraint, but increases in revenues will also be necessary, in several countries.

I urge prompt action to ensure speedy and lasting fiscal consolidation in the United States and Germany. I would also recommend firm fiscal action in other European countries, most notably Italy. I applaud the prudent fiscal policies that Japan has followed for many years. These have yielded a “prudence dividend” in the form of the scope for the authorities to announce a welcome economic package.

With a sounder fiscal position for the industrial countries, there would be less of a burden on monetary policy, which should remain focused on the basic objective of keeping inflation in check at a very low level. And monetary policies should be coordinated as effectively as possible. Markets are very sensitive to the quality of this coordination and quick to react if they doubt its effectiveness.

The job-creating content of the strategy will have to be reinforced. Labor market reforms are needed urgently in the countries where unemployment is most deeply entrenched. In particular, greater efforts are needed in three areas:

  • to decentralize wage bargaining so that wages reflect the financial performance of individual enterprises and local employment conditions;

  • to improve vocational training and provide stronger incentives for labor mobility; and

  • to address social concerns through the tax and welfare systems rather than through overly rigid wage structures.

I also see a significant potential to boost growth and confidence through action in the industrial countries to reinforce international cooperation. I will mention three priorities. First, there must be stronger and more effective coordination of their own policies, with due regard for their impact on the rest of the world. I believe that the Fund surveillance should play a larger role in this. Second, completion of the Uruguay Round without further delay and proper care to ensure that regional trade arrangements are supportive of the multilateral trading system. And third, more effective support to the many countries that are engaged in economic adjustment and systemic transformation.

* * * *

I now turn to the greatest challenge of our times—the transformation of the formerly centrally planned economies of Eastern Europe and the former Soviet Union.

The countries of Eastern Europe started their reform and stabilization efforts a few years ago. They have experienced an initial shock and face difficult problems. But they are showing encouraging results, including lower inflation, significant gains in export market shares, a rebuilding of foreign exchange reserves, and rapidly expanding private sectors. While most of them experienced very sharp initial reductions in output, there are signs that 1993 could show positive growth for this group.

Their adjustment efforts should lay the basis for sustainable recovery. The authorities will have to persevere with and intensify their reforms, and back them up with appropriate financial discipline. They must ensure that urgent structural adaptations such as reform of the enterprise sector and institution-building do not lag behind macroeconomic programs.

Governors, last year in Bangkok we welcomed a delegation from the Soviet Union. By the end of 1991 the Union had ceased to exist and was replaced by 15 independent states; all of them are represented here today. These countries are engaged in the immense task of creating new societies and institutions and integrating themselves into the global system. Their leaders know they will only succeed in creating a better life for their people if they act boldly from the outset—to put in place the necessary institutional framework and implement sound economic policies. They appreciate, all too well, the enormous risks and potential pitfalls that lie ahead. And they see no alternative to reform. I found vivid evidence of this in my visit to Estonia, Latvia, and Lithuania last month.

Helping to integrate them into the global system is now part of the Fund’s task. It is urgent, and daunting. The way ahead is largely uncharted. We do not pretend to have complete answers to their problems, some of which are unprecedented. But I can assure you that the staff is tackling this task with energy and enthusiasm. The IMF is assisting the new members with policy advice and technical assistance. This is particularly important in the early stages of the reform process, when institutions are being created and new skills have to be learned.

The Fund has also already started to extend financial assistance to some of the new members. A first credit tranche arrangement for Russia was approved in August, and last week the Executive Board approved stand-by arrangements for Estonia and Latvia. I hope that similar assistance in support of stabilization programs and structural reforms will soon come into place with others: Lithuania, for example; and I also have in mind especially Kazakhstan and Kyrgyzstan, which I will visit next week.

It is too early to assess the initial results. There have been setbacks, notably inflationary pressures—even the threat of hyperinflation—and a rise in inter-enterprise arrears. In addition, output has fallen sharply. This was inevitable, in view of the handicaps they inherited; the deep-seated distortions and structural weaknesses, the collapse of the old command system, and the lack of a well-functioning institutional framework.

But the momentous process of rebuilding the economies is under way. It will take time, but the first signs of transformation are now beginning to appear in those countries that pioneered the reform process. Shortages are disappearing. Private sector activity is growing. There is reason to believe that these early signs of a functioning market economy will spread quickly.

We should have no illusions. What is starting here will not be “business as usual” for any of us. There are no quick fixes, no easy route to building up a whole system. Our task is to help a basic transformation, in a way that is convincing and makes progress irreversible. To ensure this, the reform programs must be realistic, balanced, and coordinated:

  • Programs must be realistic. Realism calls for a bold and comprehensive approach. Full transformation will take time, but that is a good reason to start immediately, and to take advantage of the dynamism and enthusiasm of the present period to create, irreversibly, the basic structures of a market economy.

  • Programs must be balanced. Macroeconomic stabilization must go hand in hand, from the outset, with progress at the most basic level of the economy—namely, the enterprises—so that firms are bound by market discipline, respond to price signals, and take advantage of changing opportunities. Reform of the enterprise sector requires a major effort to adapt the legislative and regulatory framework within which enterprises operate, as well as a change in the attitudes and behavior of managers. In this respect, the contribution of our colleagues of the World Bank, the European Bank for Reconstruction and Development, and many national agencies is really crucial.

  • And finally, programs must be coordinated. The programs of all the new states should be designed to take account of the effects on their neighbors and partners. They could, and should, be mutually supportive.

It will be important, in the trying months and years ahead, that the authorities of the reforming countries—in Eastern Europe, the states of the former Soviet Union, and elsewhere—persevere with their systemic reforms, maintain firm financial discipline, and muster a popular consensus in favor of the reform process. This calls for courage and leadership on their part. But they cannot succeed on their own. Provided they implement good reforms to the best of their ability, the support of the community of nations must be extended to them. Their exports will need access to markets. Our financial and technical assistance support is essential. Never, since the reconstruction effort after World War II, have we seen such a need for cooperation in a shared enterprise that promises so much for the common destiny of mankind.

* * * *

The developing countries. There is a welcome paradox here! In the past, we would have expected the majority of developing countries to show a disappointing performance, whenever the industrial countries had suffered a cyclical slowdown and international prices for primary commodities were depressed. But on the contrary, their recent growth has been the highest for a decade. Their output rose by 3¼ percent in 1991 and is growing by about 6 percent in 1992. Similar growth is projected for next year. Growth has been particularly strong in Latin America and Asia and has been boosted by recovery from the war in the Middle East. This performance has been due to better policies. The results of different countries vary considerably, but the record shows convincingly that better policies, sustained over time, have produced a stronger economic performance, by any standard.

Look at the 35 or so countries that have steadfastly implemented stabilization and reform strategies over the medium term—which together account for about half of developing country output. These 35 countries have recorded a truly impressive performance.3 Where does it come from? In most cases their strategies rest on some combination of the following seven pillars:

  • fiscal consolidation, including a reduction of excessive military spending or subsidies, and efficient use of scarce resources;

  • a firm anti-inflationary monetary policy, liberalization of the financial sector, and realism in exchange rates;

  • a bold opening of the economy to international trade, foreign capital, and competition;

  • price liberalization;

  • reform of public enterprises;

  • a creative adaptation of social policies, to improve the working of labor markets and make social safety nets more effective; and

  • “good governance,” which brings together all of these essential elements.

As we see more and more clearly, sound economics, political democracy, and good governance go together.

With this approach, governments can achieve sustainable growth and link it to the broader aspirations of society, in particular by paying due regard to the ultimate sources of human progress and social equity, in a well-protected environment. This is the best way to earn the confidence of the people and of foreign partners.

The achievements of these successful countries are, above all, a testimony to the vision and courage of their leaders. Those who have shown this quality of leadership—and many of them are in this room today—deserve our admiration. Their examples deserve to be emulated. We all have much to learn from them.

Too many developing countries, however, are still in a critical situation. Too many people are still in the grip of poverty. And too many governments have persisted with weak or inadequate policies, or have postponed needed reforms. But why should they resign themselves to falling behind?

They should know that there are strategies that work. And they should be assured that the international community has appropriate instruments to support them when they embark on credible programs. Let me add just a few words on two of our instruments.

The debt strategy continues to produce significant results. The aggregate debt-export ratio of the developing countries has declined from 180 percent in 1986 to 120 percent in 1992. The debtor countries that pursued effective stabilization policies and economic reforms conducive to higher export growth have seen a marked improvement in their situation. In several cases, debt-reduction operations have contributed decisively. And I was delighted yesterday to hear good news about the term sheet for Brazil.

What remains to be done? All the participants in the debt strategy will have to persevere with their efforts for several years to come. And some further refinements to the strategy are desirable. In particular, the degree of debt relief extended by official bilateral creditors should be sufficient in light of the circumstances of each debtor country, especially the poorest countries. We also encourage faster progress to resolve the debt problems of certain countries whose commercial debt burdens are large for the country but small for the banks.

Among the IMF’s own instruments, the enhanced structural adjustment facility (ESAF) has served remarkably well to support fundamental transformation in low-income countries. But we will need to attend now to the future of ESAF, and I particularly welcome the recommendations on this from the Munich Summit and the Interim Committee.

Mr. Chairman, may I make a special plea on behalf of Africa. Several African countries, in the face of enormous obstacles, have implemented strong programs with the support of the Fund and the Bank; they are among the success stories that I mentioned already. But many more are experiencing tremendous difficulties, because of their limited resources, continued high debt burdens, the impact of the drought, or weak policies. We must redouble our efforts to help them to emerge from the poverty trap. The Fund stands ready to extend to all these countries its strong support, as soon as they are ready to embark on appropriate reforms and sound programs. I urge them not to delay.

* * * *

I have highlighted some of the challenges that the Fund’s members face. The Fund itself is trying to fulfill its mandate, in serving the membership as effectively as possible. But we have limited human and financial resources to serve an expanding membership.

The task of helping the new members has left the Fund hard pressed to meet its other responsibilities. Our staff is overstretched. This has forced us, as a temporary measure, to postpone or dilute some important Fund activities, including some policy surveillance through Article IV consultations. In addition, technical assistance to some developing countries has had to be curtailed or postponed temporarily. This has required some hard but unavoidable decisions. We are taking steps to overcome these difficulties. But the Fund will need to reinforce its human resources and to count on the invaluable support of many members—and especially their central banks and ministries of finance—for our technical assistance efforts.

The extension of financial assistance to the new members has not, so far, impaired the Fund’s ability to respond to any other country that has come to us with a good program requiring financial assistance. In fact, the level of Fund financial assistance to the membership at large is increasing. We now have programs in place with 52 member countries, and programs with some 30 more countries are at an advanced stage of preparation. We expect outstanding Fund credit to increase sharply in the next few months. This is now placing strains on our financial resources. The Fund remains firmly committed to the principle of uniformity of treatment of all members. But meeting the justified needs of members could very soon lead to a reduction in the Fund’s liquidity to a level that would not be sustainable. This lends unquestionable urgency to the implementation of the quota increase and the acceptances for the Third Amendment of the Articles. The Fund needs the increase in quotas, and I trust that it will come into effect very soon.

* * * *

We face formidable challenges. Recent turmoil in the exchange markets has reminded us how dependent we all are on each other. Our fortunes are interlinked. If Europe succeeds in strengthening its economic and monetary solidarity, that will also benefit the rest of the world. If the industrial countries can revive growth and create jobs, that will boost activity worldwide. If the countries in transition can create free and prosperous societies, and the developing countries are able to eradicate poverty and achieve sustainable growth, this will be a major success for all of mankind. We need success in all these endeavors, to create a better and more peaceful world.

Each of our countries has a major stake in the fortunes of the others and in the strengthening of our common multilateral framework for trade and financing. Only through a genuine acceptance of shared responsibility to tackle our common problems can we hope to enjoy the fruits of success. We share these aspirations. Let us work together to achieve them.

September 22, 1992.

Albania, Armenia, Azerbaijan, Belarus, Estonia, Georgia, Kazakhstan, Kyrgyzstan, Latvia, Lithuania, Marshall Islands, Moldova, Russia, Switzerland, and Ukraine. During the period of the Annual Meetings, San Marino, Turkmenistan, and Uzbekistan will also join the membership.

The record of the successful reforming countries, and the main common features of their strategies, are discussed more fully in Chapter IV of International Monetary Fund, World Economic Outlook, May 1992, (Washington, 1992).

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