F&D What is really new about the so-called Baker initiative, and where does the Fund fit in?
Erb I see the Baker initiative as an important step in strengthening the debt strategy that has been followed since 1982; indeed that is the way Treasury Secretary Baker himself cast the proposal at the October 1985 Annual Meetings of the Fund and the Bank in Seoul. It is an initiative that builds on the experience to date, yet faces up to the continued efforts that need to be made in the future, and finally identifies and lays out the cooperative roles that the various parties must play in the process.
I think we need to look back and recognize the progress that a number of countries have made in dealing with their debt problems. We also need to appreciate that many countries are having a more difficult time than had been anticipated in dealing with their internal and external imbalances, and with their external debt problems. In particular, we need to face up to the additional efforts that are required in a number of major debtor countries. In that connection, under the Baker plan, the Fund would continue to play a central role in dealing with the economic imbalances and the debt problems that countries face, a role that would continue to include the analysis and policy advice that the Fund brings to discussions with member countries. The Fund’s role will also be to continue to help countries obtain new external financing from commercial banks as well as from official sources. I would also emphasize the joint role of the Bank and the Fund in the areas of analysis and policy advice as well as in bringing external funds to assist a country.
F&D Many people speak (and write) as though until the Seoul meeting, the key to debt problems was adjustment, and after Seoul, growth. Do you see any conflict between adjustment and growth?
Erb No, I don’t see any conflict between adjustment and growth. Indeed, I think they go together. Adjustment got a bad name because of a misperception, in the early days of the financial crisis, of the initial need for a number of countries to respond to the sudden drying up of external financing. They did that by drastically cutting government expenditures—with emphasis on investment expenditures—and in many cases by adopting exchange controls and by putting restrictions on imports. In several cases, the adjustments were more severe because governments had delayed making appropriate policy responses to deteriorating economic conditions.
That is not the desirable path of adjustment in the way we view it at the Fund. When economic conditions begin to deteriorate, adjustment from a Fund perspective means an appropriate and timely policy response to prevent severe imbalances from building up. In cases where conditions have deteriorated sharply—for whatever reason—adjustment involves adopting policies that will lay the basis not only for restoring external creditworthiness and external financial flows but also for re-establishing the domestic basis for economic growth by encouraging more savings and a more efficient use of resources.
What we call adjustment includes, for example, reducing fiscal deficits when they have been a source of a major imbalance in an economy. The effort to reduce the fiscal deficit is an effort to provide more resources for investment and to reduce pressures on monetary authorities to finance a deficit with inflationary money creation, thus laying the basis for economic growth. Without investment, economic growth is not going to be very durable or very sustainable. A high or accelerating rate of inflation is not going to instill much confidence in the business community to make new investments. Capital will likely flee the country. So it is important to get inflation down. The Fund also places a great deal of emphasis on achieving an exchange rate that permits the elimination of exchange controls and import restrictions, thus encouraging a more efficient use of resources. Where a government has put restrictions on trade, those restrictions must be reduced, in order to allow imports, especially of goods that will form the basis for productive investment.
F&D Given the greater emphasis on growth, is there a danger that the growth rate for a country will become a target, to which everything must adjust?
Erb The way to look at various targets—including growth—is by recognizing that economies are integrated. By that I mean that one can’t set a particular target without taking into account all the other constraints and other targets that a country may have. The relationship between, say, growth and external financing may be positive, but if the external financing is not adequate to support the domestic growth target, then the only way you are going to achieve it is, first, through more domestic savings (to support more investment and permit a higher growth rate) and, second, through more efficient use of a country’s resources.
As we look at the growth prospects in a country, we don’t necessarily set a target for growth, although we recognize that a government has a certain growth objective. We try to help frame the policies in a way that will enable the country to achieve its growth objective, while recognizing the constraints that it may face, constraints related to the availability of external financing, domestic savings, and domestic investment. We don’t view a particular growth rate as an abstract magnitude or target. If better conditions can be created to foster investment, make more efficient use of resources, and attract foreign resources, then the growth rate can be very high. If these conditions are not there, the growth rate is not going to be as high. This is not because a target was not set, but because of the absence of underlying policies. The objective is to achieve as high a rate of growth in the country as possible; putting in place appropriate micro and macro policies will improve the chances of achieving that growth.
F&D Promoting better micro, as well as macro, policies implies a more activist role for the Fund. Is the Fund ready for such a role?
Erb I think the real question is whether the members are ready for a more active role for the Fund in growth-oriented policies. There is a widespread misperception that growth-oriented policies are easy to implement. Our experience has been that in many countries those policies that would have the most immediate, dramatic, and sustained impact on growth are often the most difficult ones for countries to implement. Exchange rate adjustments, which would make a country more competitive, open up export opportunities, and create the potential for import-competing industries, are sometimes very difficult for countries to undertake. Changes in relative prices, which would encourage flows of resources to sectors that can utilize them more efficiently, are difficult for countries to make.
Generally, countries find it easier to cut investment budgets than to restrain consumption expenditures, even though it is investment that lays the basis for economic growth. These are policy areas in the hands of governments. I can cite numerous examples. For instance, shutting down an inefficient state enterprise and using the resources that go into that enterprise in a more productive activity, where you have positive rates of return, is a growth-oriented policy. But it is not easy to shut down an inefficient and deficit-running state enterprise. The challenge for many countries and for international institutions is to implement policies that are indeed growth-oriented and that would have a sustained impact on economic growth. Now, there is, to be sure, a “growth-oriented” strategy that some advocate which, in our experience, is not sustainable. This consists simply, at a moment in time, of increasing government expenditures and increasing money creation. But unless the external resources increase to support that sort of general policy it is not going to last very long; its main impact may be on inflation rather than on economic growth. That kind of “growth” policy really isn’t growth-oriented; it, in fact, may be detrimental if it encourages financial flows to sectors that are not productive.
F&D What do you say to those who claim that the Fund applies the same program package to all countries, in all conditions?
Erb Our experience has been that we have different combinations of policies in different countries depending on their problems and the constraints in their economies. In some countries it is necessary to focus on a fiscal deficit that may be very large. In other countries it may be necessary to put the emphasis on an exchange rate and producer prices that are out of line. As a practical matter we find that when a country is faced with economic problems—slow economic growth and external financing constraints—there is usually more than one manifestation of that problem. Often, fiscal deficits are high, inflation is rising, and the exchange rate is out of line. If our policy advice appears perhaps too uniform across countries—a notion I would challenge—it may be because the problems that countries face are very similar. Countries that are in trouble often have the same kinds of policy problems. By its nature and mandate, the Fund focuses on broad macroeconomic policy targets, and governments have been reluctant to allow the Fund to become too deeply involved in the micro structure of their economies. So we are, in a way, constrained by what we can focus on. But by saying that I would not want to imply that these variables are unimportant: they are extremely important. Credit creation, the fiscal deficit, exchange rate policy, and producer pricing policies have a major impact on an economy and they should rightly be the focus of the Fund’s work.
F&D Is it fair to say (as some have done) that Fund surveillance is essentially asymmetrical, that it is mainly applied to developing countries?
Erb I think there is considerable confusion on this matter. For one thing there is confusion between conditionality, which the Fund associates with the use of its resources, and surveillance. They are two separate activities of the Fund. When we lend, we do apply conditionality; we require policy adjustments and have leverage, in effect. When we engage in an Article IV surveillance discussion, however, whether it is with an industrial country or a developing country, we don’t have any leverage other than the analysis and quality of the policy advice that we bring to the discussion. Indeed, if one looks at the surveillance activity in the context of surveillance discussions alone, to the extent that there is asymmetry, it is because of the relatively greater degree of attention that is focused on the major economies of the world, relative to the economies that have less of an impact on the world economy. This is already embedded in our consultation procedures whereby we have regular annual consultations for countries (developing as well as developed) that have a larger impact on the world economy, and less frequent consultation with those that may have a smaller impact, assuming that their economies are working reasonably well. In the World Economic Outlook exercise, which is part of the surveillance process in the Fund, a great deal of attention is focused on the United States and the other major industrial countries, and an effort is being made to develop greater analysis of the interrelationships among the major currency countries. In many ways, therefore, the surveillance process is focused on the larger industrial countries.
There is another way in which people think of the surveillance process as being asymmetrical. I think that the perceived asymmetry is not a result of the surveillance process but a result of the nature of the exchange regime. Under the current exchange rate system one could argue that there is asymmetry between, for example, those countries that can borrow and are not subject to any external discipline on their policies, and those that have limited ability to borrow and are subject to external pressures. It is also suggested at times that a country may run a large external surplus without being under pressure to adjust. According to this view, a more symmetrical exchange rate regime would be one that might force adjustments in surplus countries as well as in deficit countries. But that is a different issue from surveillance. Asymmetry under the current system gets confused with the process of surveillance per se, and it is really a function more of the structure of the exchange rate system than of surveillance.
F&D The Fund is not an aid institution, but its work affects economic development in member countries. How can it assist the development efforts of members and multilateral aid agencies?
Erb The Fund is not an aid agency in the sense that it does not provide long-term balance of payments financing. But the policy analysis, the policy advice, and the short-term financing that the Fund provides can be extremely important in helping countries achieve their development objectives. The Fund’s analysis—in its emphasis on fiscal, monetary, exchange rate, and pricing policies that will help to reduce imbalances and create better conditions for economic growth—is very much growth-oriented. When a developing country is faced with an external financing problem, and the Fund steps in and provides short-term financing, it helps the country adjust.
The advantage that the Fund has over a development agency or development bank is that we can provide a country with fairly large-scale, quick-disbursing, and untied resources in a short period. When a country is suddenly faced with, say, a shift in its external circumstances, a decline in the terms of trade, or perhaps an internal problem, such as a drought, the Fund is able to help it through the early phases of the adjustment. This should ideally give development institutions time to mobilize more resources so as to provide medium-and longer-term financing on a sustainable basis. Even in providing temporary resources, the Fund is contributing to the country’s development efforts, because without the temporary resources the country would need to make even more drastic adjustments.
F&D Fund-Bank cooperation has been much talked about. How practicable is it at the country program level, given the different mandates of the two institutions?
Erb I don’t think one should exaggerate the differences in mandate between the two institutions. As a practical matter, we both are providing analysis and policy advice to countries whose economies are, in fact, integrated. You can’t artificially carve up an economy because two institutions may have different mandates. Through the sharing of analysis and views on policy advice, and through the efforts that the two institutions make in providing external resources, both institutions should be working closely to help a country. I don’t think that one can draw fixed lines between macro policies and micro policies, or the short run and the long run. In many countries a very large fiscal deficit is a result of, for example, state enterprises that may be inefficient and inappropriate. The resolution of the fiscal problem, in part, depends on inputs from the World Bank in helping a country better manage its enterprises. To the extent that the country is using its public resources for better investments it is improving the general macro environment of the country. So the two institutions need to work closely together in the field, while recognizing that each brings differences in perspective and expertise that are important to a country’s situation. We shouldn’t try to become one homogeneous institution, obviously, but build on our separate mandates and strengths in the ways that we work with and assist governments.
F&D Speaking of low-income countries, can you say something about the problem of payments arrears to the Fund and the difficulties it poses for the institution?
Erb It is true that we have some arrears but the number of countries with arrears problems with the Fund is relatively small. We have acted, and will continue to act, to protect the Fund’s financial integrity and to take all steps dictated by financial prudence. As regards countries in arrears, what we seek to do is to help the country adopt economic policies that will strengthen its ability to grow internally as well as increase its exports over time. A country cannot service its external debt, including that owed to the Fund, if it is following policies that are causing the economy to deteriorate and decline. It is important for the country to implement, as quickly as possible, policies that will reverse the deterioration and decline that, in part, cause the external arrears problem. In helping countries implement better policies one of the things we also do is work with external donors so that external financial assistance will support those policies, thus enabling a country to clear up any arrears it may have, not only with the Fund but also with other institutions.
F&D Your appointment to this post continues a tradition—of the Executive Director becoming Deputy Managing Director. Was it a difficult adjustment, from being the representative of the largest member of the Fund to working as a member of its secretariat?
Erb I found it a relatively easy adjustment to make. I think any Executive Director would tell you that being an Executive Director is not an easy job in that you are in between the authorities you represent, whether it is a single country or a multi-country constituency, and the institution that you are helping to guide, through the work of the Executive Board. As an Executive Director you are always seeking to balance the interests and perspectives of your member countries with the interests and objectives of other countries that are represented on the Executive Board. You are neither of the institution directly nor really of your own country. In some ways, as an Executive Director, you are perhaps viewed in your own country as part of the institution, while in the institution you are viewed as belonging to your country. In reality you are in between.
I think it is easier to be part of an institution and working to strengthen and enhance the work of that institution, recognizing full well the important role that the Executive Board plays in representing the views of countries in the workings of the institution. In some ways I find it easier now, although the work is extremely demanding.
F&D What has impressed you most during your period as Deputy Managing Director about the Fund as an institution?
Erb Something I saw as an Executive Director, and see even more intimately in the position I am in now, is the workload and the dedication of the staff. When a country is faced with a problem and a mission must go out to that country, vacations get postponed, annual leave gets put off, weekends get put aside. That dedication in responding to the needs of the member countries, being able to cope with very difficult situations, and often doing so regardless of personal considerations, is what makes the institution a strong one. And of course one must not overlook the quality of the staff. The Fund has made an effort over time to draw the best people from the membership at large and I think it has succeeded in doing so. That is the reason why the Fund has been very effective, especially in the difficult circumstances of the past few years, in responding to the problems that have arisen. Most people on the outside give the Fund a great deal of credit for having been responsive to the debt problems that arose. I think that that credit goes very much to the staff, to its quality, intelligence, capabilities, and commitment.
From the Fund …
External Debt Management
Edited by Hassanali Mehran
This volume of papers presented at a seminar organized by the IMF Institute and the Central Banking Department of the International Monetary Fund places external debt management in the context of broad economic and fiscal management. Drawing together contributions by commercial bankers, national debt managers, and debt specialists from the Fund and the World Bank, it emphasizes the importance of coordinating the management of external debt in individual countries with broad macroeconomic policymaking, particularly fiscal policy.
A special feature of this volume, reflecting a perspective that is not often provided by such reviews of debt issues, is a section that combines contributions from 22 national debt managers on their debt management systems.
Price: US$11.50 (cloth); $17.50 (hard cover)
Available from: Publications Unit, Box A-861
International Monetary Fund • 700 19th Street, N.W.
Washington, D.C. 20431, U.S.A. • Telephone: (202) 623-7430