Jacques de Larosière
The economic (and in particular balance of payments) difficulties facing developing countries have focused attention on the need and importance to undertake adjustment, including its modalities, costs, timing, and other aspects. This has sometimes created the erroneous impression that economic growth had been forgotten in the process—that, indeed, a choice has to be made between adjustment and growth. Orderly adjustment and the reestablishment of financial stability may entail a reduction of growth in the short run. However, as the following excerpts from speeches by the Managing Director of the Fund stress, adjustment and growth are complementary and closely related. In fact, financial stability is essential for the resumption of sustainable growth over the medium term.
…adjustment as perceived by the International Monetary Fund is not synonymous with lower growth or economic retrogression. Many persons in the media, sometimes even individuals who should know better, insist upon identifying the Fund as an institution that advocates economic retrogression. This description is fallacious and at odds with the facts…. The objective of Fund [supported adjustment] programs…is to achieve a better balance of payments equilibrium in the medium term and a more efficient use of resources—which by definition are limited—by introducing a number of incentives and measures to generate more domestic savings, more investment, and more exports. These are not programs aimed at recession, but rather at a more rational combination of economic policies in order to achieve a better balance of payments equilibrium and thus open the way for more vigorous and lasting growth.
United Nations Administrative Committee
on Coordination, London,
April 16, 1984
For the indebted countries….key elements in an effective adjustment strategy include the following:
— More effective pursuit of greater domestic price stability to improve the climate for investment.
— Adequate control over budget deficits where they have been contributing to inflationary pressures or crowding out more productive resource use in the private sector.
— Realistic and flexible domestic prices (including especially the exchange rate, interest rates, and major administered prices) so as to improve the allocation of resources and promote growth.
— Continuous review of government expenditure, both current and capital, to insure that the resources thus absorbed are productively employed.
These are the policies that are recommended by the Fund. It would be hard to exaggerate their importance. Only such policies can rebuild confidence, serve to bring back flight capital, and attract new flows of direct foreign investment. Without such policies the present imbalances and external payments difficulties cannot be surmounted and a return to satisfactory growth will simply not be possible. They are not short-sighted or anti-growth policies as is sometimes contended. Far from it: they are consistent with growth and, indeed, indispensable to it. It is in that context that the collaboration between the Fund and the World Bank is so important. Indeed, the Fund works very closely with the World Bank to ensure that the requirements of balance of payments adjustment are cast in the light of balanced and sustainable development over the longer term; this collaboration is being intensified.
We can already see that many of those countries that have been most successful in implementing adjustment programs and in restoring external viability are also those where domestic growth is recovering most vigorously. Though the road of economic adjustment will continue to be bumpy, the adjustment programs that many developing countries are implementing, if adhered to, promise significant further benefits to economic performance over the medium term.
Annual Meetings of the IMF
and the World Bank, Washington, DC
September 24, 1984
The actions of the Fund, following the outbreak of the debt problems, decisively helped to alleviate the financial squeeze on the indebted countries, to contain the crisis, and to support trade and activity levels…. The actions of the Fund were geared not only toward restoring financial viability in problem countries but also at facilitating a resumption of sustainable growth. This point is sometimes missed. And there has been a misconception on the part of some observers that Fund-supported adjustment programs are rooted in austerity, that they involve import compression, and that they are anti-growth. In fact, if we look at the programs in effect with the Fund, it is clear that they are doing quite the opposite, they are facilitating a resumption of growth and helping to rebuild import capacity consistent with external viability.
May 22, 1985
Central to the task of increasing the momentum of development are effective policies in the indebted countries…. The necessary policies must…be based on certain common elements: the encouragement of productive investment; the mobilization and retention of savings; an appropriate structure of relative prices; and a restoration of confidence and domestic financial stability…. Where such policies have been followed, the results in terms of growth and development have been impressive…. The policies I have been describing are at the heart of the programs the Fund has been supporting. They are not anti-growth as is sometimes contended. Far from it. They are the pillars of sustainable growth. There are no alternatives. An economy beset with price distortions, rampant inflation, import restrictions, and capital flight simply cannot grow.
…A satisfactory growth of export earnings is at the heart of a strategy aimed at combining vigorous growth and improved creditworthiness. However, an enhanced flow of capital is also needed….I have been particularly struck by the emphasis placed [by Governors at the Meetings] on the interconnnections among financing, growth, and adjustment. Appropriate policy efforts can be frustrated if they are not supported by adequate flows of finance. Such flows enable the domestic capital stock to grow more rapidly and thus strengthen export capacity. In this way, they not only permit an acceleration of domestic growth, they underpin the long-term capacity of an economy to service its existing debt.
…The Fund will continue to work with its members to attain the optimal blend of adjustment and finance within the context of programs aimed at strengthening sustainable growth….
…The Fund and the Bank have and must retain distinct mandates. But they share a common purpose and there is an important degree of complementarity in many of their activities. In view of…the importance of growth-oriented structural actions, it will come as no surprise when I say that I have never been more convinced of the need for close collaboration between our two institutions.
Annual Meetings of the IMF
and the World Bank, Seoul
October 8–11, 1985
We believe that the movement of adjustment must be geared with more firmness to the resolution of structural problems and to alleviating obstacles to growth….I do not think [a country] can grow without adjusting when it has imbalances that are an obstacle to growth….the adjustment process is to make sustainable growth possible….A country that has very high inflation, a very large fiscal deficit, a very large inefficient public sector, with public enterprises making losses, a distorted exchange rate, and insufficiently attractive interest rates to mobilize domestic savings…is not going to attract foreign investment to enhance its investment programs, and is going to crowd out domestic resources in a way that will hurt growth. I look at adjustment not as an obstacle to growth, but as a condition for growth.
Press conference, Seoul
October 11, 1985