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IMF Survey: Vol.25, No.19 1996

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 1996
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Annual Meetings: Ministers Update Global Growth Strategy, Agree on Interim ESAF Financing

Gathering in Washington on October 1-3 for the Fifty-First Annual Meetings of the IMF and the World Bank, finance ministers and central bank governors welcomed the recent agreement on ways to finance a continuation of the IMF’s enhanced structural adjustment facility (ESAF) for the interim period 2000-2004, after which it will become self-sustaining. This clears the way for the IMF to participate fully in the joint IMF-World Bank initiative to help highly indebted poor countries put their external debt burdens on a sustainable basis.

Ministers and governors at the Meetings shared the IMF’s cautious optimism about global economic prospects through the medium term. They reaffirmed the cooperative strategy to strengthen the global expansion, which they acted to broaden, and agreed on the need for a strong and effective IMF to help members carry this expansion out. In this connection, they strongly supported the IMF’s development of a Special Data Dissemination Standard to guide members in publishing economic and financial data. And they gave new prominence to the objectives of high-quality government expenditure, good governance (including the fight against corruption), and sound banking systems.

The Meetings also produced a consensus on the need to expedite the commitment of additional financial resources to enable the IMF to fulfill its mandate in the increasingly globalized economy. Ministers called for action to reach a conclusion on an increase in IMF quotas under the Eleventh General Review as soon as possible and endorsed a doubling of borrowed resources under the General Arrangements to Borrow (GAB) through the establishment of new arrangements to borrow. They also endorsed a onetime “equity” SDR allocation, with the exact amount to be determined later.

Commenting on the good performance of the world economy and generally favorable prospects, IMF Managing Director Michel Camdessus, at a September 26 press conference, emphasized that there was no room for complacency. He underscored the need for the IMF to step up efforts to meet the challenges of the global economy by continuing to sharpen the focus of its surveillance through more continuous and candid dialogue with member countries, more attention to capital account developments and to countries where economic and financial developments could have spillover effects, and to regional surveillance. Other recent steps have included the introduction of mechanisms to provide emergency financing to member countries facing financial crises, to help members stabilize currencies, and to support countries emerging from conflicts.

The October 1–3 Annual Meetings were preceded by meetings of the IMF’s principal advisory body, the Interim Committee of the IMF’s Board of Governors on the International Monetary System (the Interim Committee) on September 29; the Joint Bank and Fund Committee on the Transfer of Real Resources to Developing Countries (the Development Committee) on September 30; and earlier meetings of various groups including the Group of Ten and Group of Seven industrial countries and the Group of Twenty-Four (G-24) developing countries.

The Annual Meetings opened on October 1 with addresses by Eduardo Aninat, Chile’s Finance Minister and Chairman of the Annual Meetings; IMF Managing Director Michel Camdessus; and World Bank President James D. Wolfensohn. U.S. Vice-President Albert Gore also addressed the plenary.

The World Economy

At its September 29 meeting, the Interim Committee welcomed the generally encouraging world economic and financial situation and the prospects for a strengthening and broadening of the expansion in 1996 and 1997. Committee members noted the progress toward price stability and in reducing fiscal deficits in many countries, the improved exchange market conditions among the major currencies, the continuing rapid expansion of trade and financial flows, and the growing reliance on market forces worldwide.

Developing countries were playing an increasingly significant role in generating growth and expanding trade, according to the Interim Committee communiqué, with emerging market economies—especially in Asia—reaping the benefits of consistent implementation of market-oriented policies, supported by capital inflows. Per capita incomes and growth prospects in an increasing number of African countries were improving as a result of sound policies, although serious problems remained. In Latin America, many countries were recovering and experiencing lower inflation, while stronger adjustment efforts have enhanced growth prospects in several Middle Eastern countries. In the countries in transition to market-oriented economies, continued implementation of broad-based reforms was expected to lead to a further strengthening of growth, while inflation, though still high, was declining. And in the industrial countries, inflation was subdued: strong expansion of output and employment had continued in the United States and some other countries; Japan’s recovery was more firmly established; and in continental western Europe, the standstill in growth had ended, with conditions now in place for a resumption of more satisfactory growth.

The Interim Committee credited the favorable developments in the world economy to the implementation by many countries of policies consistent with the strategy set out in the October 1994 Madrid Declaration on Cooperation to Strengthen the Global Expansion. Acknowledging the continuing validity of this strategy—which emphasizes sound macroeconomic policies and structural reforms—the Committee acted to update and broaden it to reflect new challenges in the changing global environment and called for a strengthening of its implementation. The result is a new “Partnership for Sustainable Global Growth” (see page 327).

The new Declaration, as outlined by Interim Committee Chairman Philippe Maystadt at a press conference following the Committee’s meeting:

• stresses the importance of the complementarities between macroeconomic policies and structural reforms;

• calls for fiscal discipline (defined as fiscal balance over the medium term) while drawing attention to the quality and composition of the fiscal adjustment and the need for greater transparency in government finances;

• emphasizes the need for good governance in all of its aspects; and

• attaches particular importance to ensuring the soundness of banking systems and to the need for more action to prevent money laundering.

The new Declaration constituted, said Camdessus, the “11 commandments” of good governance of the world economy. It is unique, he said, because it represents a distillation of the IMF’s surveillance experience with its 181 member countries.

The issues of high-quality fiscal spending, good governance, and banking soundness in the new Declaration were the focus of much attention at the Annual Meetings. Meetings Chairman Aninat, in his opening remarks, called on countries to increase the efficiency of, and better target, their social spending—giving priority to human capital development and re-engineering public social security and health care systems. With regard to governance, both Camdessus and World Bank President Wolfensohn emphasized the need to root out corruption to permit efficient resource allocation, create a climate of confidence for savers and investors, and improve external competitiveness. As to banking soundness, both Camdessus and Wolfensohn pointed to the risk of banking crises in many countries in the absence of sound macroeconomic policies; Camdessus called the fragility of national banking systems the “Achilles’ heel of the global economy.”

The IMF’s strength as a cooperative institution derives from the strength of its quota subscriptions.

IMF Surveillance

Interim Committee members welcomed IMF efforts to strengthen its surveillance and the report of the Managing Director on the review of IMF policies in the context of its surveillance of its members’ policies. Three themes emerged from the latter report that held valuable lessons for the IMF and its members:

• The composition of fiscal adjustment matters. There is broad agreement that medium-term fiscal adjustment measures should be high quality, although difficult trade-offs exist on the timing of fiscal reforms.

• Actions to reduce inflation and keep it at low levels should be pursued. There is a general consensus on the primacy of achieving a high degree of price stability over the medium term.

• Transition economies should move quickly toward establishing liberal and transparent trade systems.

Ministers at the Annual Meetings strongly supported the Special Data Dissemination Standard and the broad mix of industrial and emerging market countries among its first subscribers (38 industrial and emerging market countries had subscribed by the end of the Meetings). The Interim Committee urged other countries in a position to subscribe to do so and asked the Executive Board to complete work on the general standard for data dissemination, which will apply to all countries, so that it would be in place before the Interim Committee’s spring meeting.

IMF Funding Issues

Quotas. In his opening remarks to the Annual Meetings, Managing Director Camdessus pointed out that the IMF’s liquidity position was on a relatively sharp downward trend and that its liquidity ratio (usable financial resources to liquid liabilities) was expected to fall below what has traditionally been regarded as the critical threshold of 70 percent by the end of 1997—the ratio’s lowest level since 1983. Camdessus explained how important it was for the IMF to maintain sufficient liquidity to “give confidence” to all members to undertake bold programs of adjustment and reform. Ministers speaking at the Meetings emphasized that the IMF must remain a quota-based institution. Only maintaining the size of the IMF relative to the world economy, Camdessus said, would require a quota increase of at least two-thirds from the current level of SDR 140 billion. A majority of the Executive Board supported a “substantial” increase in quotas, which, in Camdessus’s view, meant between 50 and 100 percent.

Borrowed Resources. The Interim Committee welcomed the progress made in establishing the new arrangements to borrow, which would double the credit lines now available to the IMF under the GAB to about SDR 34 billion, for use in case of a threat to the global monetary system. The Committee asked industrial and developing country participants in the new arrangements, and the Executive Board, to wrap up their work to bring the new arrangements into effect as soon as possible. In his opening remarks, Camdessus called the new arrangements a “key supplement” to the IMF’s own resources in a time of systemic crisis, but he reiterated that the IMF’s strength as a cooperative institution derived from the strength of its quota subscriptions.

ESAF and Debt Initiative

The Interim Committee’s endorsement of a self-sustaining ESAF underscored the ESAF’s role as the centerpiece of the IMF’s strategy to help poor countries that adopt sound policies. Camdessus hailed the “remarkable spirit of compromise” that produced the agreement. Both the Interim and Development Committees endorsed the joint IMF-World Bank initiative to ensure that the heavily indebted poor countries with a sound track record of economic adjustment attain a sustainable debt burden over the medium term.

Financing of the ESAF for the interim period, explained Camdessus in his opening address, would come from bilateral contributions and, if needed, through the IMF’s “optimization of its reserve management.” The Development Committee emphasized that coordinated action by all creditors was critical to the success of the debt initiative. In this connection, both Committees welcomed the readiness of Paris Club official creditors to go beyond Naples terms in providing debt reduction of up to 80 percent for countries qualifying for additional relief under the new debt initiative, on a case-by-case basis according to their usual rules. The Development Committee asked the IMF and the World Bank to begin implementation of the initiative before the end of 1996.

Equity Allocation of SDRs

The Interim Committee welcomed the consensus reached in the Executive Board that all IMF members should receive an equitable share of cumulative SDR allocations. This would require an amendment of the IMF’s Articles of Agreement providing for a onetime allocation of SDRs, based on a common benchmark ratio of cumulative allocations to current quotas. The Committee did not agree on an amount, but in his opening plenary speech, Camdessus repeated his suggestion that an allocation of SDR 26.6 billion would equalize all members’ cumulative allocations relative to their quotas (at 33 percent).

An amendment of the IMF’s Articles would not in any way affect the IMF’s existing power to allocate SDRs on the basis of a finding of long-term global need to supplement reserves should the need arise, Interim Committee members agreed. They asked the Executive Board to complete its work on the amendment by the time of the Committee’s next meeting. In their communiqué, G-24 ministers called for a two-year deadline for the amendment.

Development Financing

At their September 30 meeting, Development Committee members reiterated their strong support for the World Bank’s highly concessional lending arm, the International Development Association (IDA), and urged all donors to fully respect their commitments to IDA’s eleventh replenishment and to secure adequate future funding as well.

David Cheney

Editor, IMF Survey

Managing Director’s Opening Address: Building a New Global Partnership

Following are edited excerpts of the opening address by IMF Managing Director Michel Camdessus on October 1 in Washington.

When I see the 181 members of the IMF gathered here in this hall, I am reminded of what has brought us all together: the very purposes of the IMF—the desire for greater economic stability in the world and the desire for stronger, more sustained, and more broadly shared growth. But we do not have to think back very far to recall major challenges to these goals: Africa’s protracted decline in per capita income; hyperinflation in Russia; and Mexico and its spillover effects and the unprecedented level of IMF support for that country’s adjustment efforts. These were tremendous challenges, indeed, but they were met. Who would have dared hope, for example, that as early as this year, Russia would have strengthened its macro-economic policy stance to such an extent that it would even achieve one month of zero inflation; or that economic recovery would be sufficiently under way in Mexico that it would begin early repayments to the IMF—and that Africa would already be in its third year of per capita growth, thanks to the rigor of the programs that many countries follow!

Well, these are not minor accomplishments. But we all know that lying just below the surface in all of our economies are powerful trends toward globalization. And we know that the relatively satisfactory results of the last few months would be fleeting if, at the same time, we were not striving to meet these fundamental challenges decisively.

Economic Strategies and Performance

First, about your strategies and how far we have come in achieving global stability and growth. There are encouraging signs of progress: world economic and financial conditions are generally satisfactory and the outlook is favorable. In the countries in transition, economic activity is projected to stabilize this year after five years of decline. For the world as a whole, I would also mention the continued growth in the volume of world trade, progress toward trade liberalization and current account convertibility, the trend toward increased freedom of capital movements, the rebound in private capital flows to developing countries, and developments in exchange markets, which have brought the relationships among major currencies more closely in line with economic fundamentals.

These developments are not happenstance. They reflect a growing consensus among IMF members on the need for adjustment and reform. They are also the result of the courage shown by many countries in undertaking efforts to strengthen their economic and financial policies—and of the fact that the IMF has been in the position to provide countries with an appropriate level of support for their efforts.

Yet, we also know that macro-economic and structural weaknesses persist in all of our countries. Moreover, we know that the forces of globalization can magnify the adverse effects of policy weaknesses, pose new risks for all of our countries, and raise difficult policy dilemmas even when policies are sound. This is why I particularly welcome the broadening and strengthening of the Madrid Declaration, which has been endorsed by the Interim Committee. I should emphasize that this Declaration is something quite special: it is the distillation of the IMF’s surveillance lessons by the world’s most representative body of financial policymakers. The Declaration contains 11 commandments; let me emphasize four of them.

• Fiscal consolidation. We must adopt a more ambitious approach to fiscal consolidation. Many countries could achieve faster, more sustained growth if they could substantially reduce their large budget deficits and the sizable claims these deficits place on private savings. But reducing budget deficits cannot be the only concern; the composition of fiscal adjustment also has profound effects on economic welfare, capital accumulation, and growth. Thus, fiscal adjustment must also improve the quality of expenditure by reducing unproductive outlays to make more room for spending on such critical areas as health and education and by improving incentives for private sector activity.

• Bolder approaches. For countries to benefit fully from globalization, they must also take a bolder approach to structural reform in general. In every country, we can point to ways in which comprehensive structural reform—not just tinkering at the margin with this measure or that—would improve the effectiveness of macroeconomic policies, help create jobs, and protect against the risks I mentioned earlier.

• Reform of the state. There can be no sustainable development without the responsible management of public affairs. This means that governments must demonstrate their intolerance for corruption in all its forms. They must also fulfill those tasks essential to retaining the confidence of private savers and investors, such as maintaining public safety, protecting property and contract rights, establishing a simple, transparent regulatory framework, and guaranteeing the professionalism and independence of the judiciary.

• Banking reform. We must take urgent care of the Achilles’ heel of the global economy today—the fragility of national banking systems. In many countries, a banking crisis is an accident waiting to happen. Why? Because weak macroeconomic policies and poor economic performance undermine banking sector health and, conversely, weak banking sectors stand in the way of effective macroeconomic policymaking. Failure to take early action can be costly—not only for the country concerned, but also because of the systemic consequences that such crises can entail. In working closely with all other interested institutions on banking reform, we will not fail to respond to the call for particular vigilance that this implies for the IMF. In this connection, I am happy to report that Jim Wolfensohn and I have decided to join our financing and surveillance forces to address these risks in a strongly coordinated way.

The IMF’s Agenda

You certainly remember the agenda that we established last year. The purpose was to adjust, so that the IMF could help ensure that globalization truly becomes an opportunity for the world. Let’s see where we are.

Strengthened Surveillance. The first item of business was to strengthen surveillance. To this end, we have continued to sharpen the focus of Article IV consultations, giving greater attention to capital account developments, to countries where developments could have spillover effects, and to regional surveillance. We have also encouraged all countries to improve the quality, comprehensiveness, and timeliness of the basic statistical data they provide to the IMF and to the public. As regards the latter, the IMF has helped develop and disseminate a set of standards regarding the coverage, frequency, and timeliness of data; their quality and integrity; and their availability to the public. Thirty-seven industrial and emerging market economies have now subscribed to this Special Data Dissemination Standard, and many others are preparing to do so.

Stand-By, EFF, SAF, and ESAF Arrangements as of August 31
MemberDate of ArrangementExpiration DateAmount ApprovedUndrawn Balance
(million SDRs)
Stand-by arrangements16,739.046,523.76
ArgentinaApril 12, 1996January 11, 1999720.00642.00
AzerbaijanNovember 17, 1995November 16, 199858.5024.57
BelarusSeptember 12, 1995September 11, 1996196.29146.28
BulgariaJury 19, 1996March 19, 1998400.00320.00
CameroonSeptember 27, 1995September 26, 199667.6039.40
Costa RicaNovember 29, 1995February 28, 199752.0052.00
DjiboutiApril 15, 1996June 14, 19974.601.73
El SalvadorJuly 21, 1995September 20, 199637.6837.68
EstoniaJuly 29, 1996August 28, 199713.9513.95
HungaryMarch 15, 1996February 14, 1998264.18264.18
LatviaMay 24, 1996August 23, 199730.0030.00
MexicoFebruary 1, 1995February 15, 199712,070.203,312.18
PakistanDecember 13, 1995March 31, 1997401.85214.32
PanamaNovember 29, 1995March 31, 199784.3035.00
Papua New GuineaJuly 14, 1995January 13, 199771.4838.14
RomaniaMay 11, 1994April 24, 1997320.50226.23
TajikistanMay 8, 1996December 7, 199615.00
UkraineMay 10, 1996February 9, 1997598.20263.20
UruguayMarch 1, 1996March 31, 1997100.00100.00
UzbekistanDecember 18, 1995March 17, 1997124.7088.88
VenezuelaJuly 12, 1996July 11, 1997975.65625.65
YemenMarch 20, 1996June 19, 1997132.3848.38
EFF arrangements10,083.138,169.88
AlgeriaMay 22, 1995May 21, 19981,169.28675.28
EgyptSeptember 20, 1993September 19, 1996400.00400.00
GabonNovember 8, 1995November 7, 1998110.3066.18
JordanFebruary 9, 1996February 8, 1999200.80134.70
KazakstanJuly 17, 1996July 16, 1999309.40309.40
LithuaniaOctober 24, 1994October 23, 1997134.5541.40
MoldovaMay 20, 1996May 19, 1999135.00123.75
PeruJuly 1, 1996March 31, 1999248.30248.30
PhilippinesJune 24, 1994June 23, 1997474.50438.00
RussiaMarch 26, 1996March 25, 19996,901.005,732.87
SAF arrangements181.75
ZambiaDecember 6, 1995December 5, 1996181.75
ESAF arrangements3,464.751,523.81
ArmeniaFebruary 14, 1996February 13, 1999101.2584.38
BeninAugust 29, 1996August 27, 199927.1827.18
BoliviaDecember 19, 1994December 18, 1997100.9650.48
Burkina FasoJune 14, 1996June 13, 199939.7833.15
CambodiaMay 6, 1994May 5, 199784.0042.00
ChadSeptember 1, 1995August 31, 199849.5633.04
CongoJune 28, 1999June 27, 199969.4855.58
Côte d’IvoireMarch 11, 1994June 13, 1997333.4847.64
GeorgiaFebruary 28, 1996February 27, 1999166.50138.75
GhanaJune 30, 1995June 29, 1998164.40109.60
GuineaNovember 6, 1991December 19, 199657.9011.58
Guinea-BissauJanuary 18, 1995January 17, 19989.455.78
GuyanaJuly 20, 1994July 19, 199753.7626.88
HondurasJuly 24, 1992July 24, 199747.4613.56
KenyaApril 26, 1996April 25, 1999149.55124.63
Kyrgyz RepublicJuly 20, 1994July 19, 199788.1532.13
Lao P.D.R.June 4, 1993May 7, 199735.195.87
MalawiOctober 18, 1995October 17, 199845.8130.54
MaliApril 10, 1996April 9, 199962.0151.68
MauritaniaJanuary 25, 1995January 24, 199842.7521.38
MozambiqueJune 21, 1996June 20, 199975.6063.00
NicaraguaJune 24, 1994June 23, 1997120.12100.10
NigerJune 12, 1996June 11, 199957.9648.30
SenegalAugust 29, 1994August 28, 1997130.7935.67
Sierra LeoneMarch 28, 1994March 27, 1997101.9020.29
TogoSeptember 16, 1994September 15, 199765.1632.58
UgandaSeptember 6, 1994September 5, 1997120.5146.87
VietnamNovember 11, 1994November 10, 1997362.40181.20
ZambiaDecember 6, 1995December 5, 1998701.6850.00
Total30,468.6716,217.45
Note: EFF = extended Fund facility.SAF = structural adjustment facility.ESAF = enhanced structural adjustment facility.Figures may not add to totals owing to rounding.Data: IMF Treasurer’s Department
Note: EFF = extended Fund facility.SAF = structural adjustment facility.ESAF = enhanced structural adjustment facility.Figures may not add to totals owing to rounding.Data: IMF Treasurer’s Department

Expanded Resources. The second essential part of our agenda consists of strengthening our resources so that the IMF can continue to support bold programs of adjustment and reform and be equipped to face unexpected and potentially disruptive developments. We have made decisive progress on three fronts.

Emergency Resources and Quotas. The Group of Ten industrial countries and a number of other IMF members are about to finalize arrangements to double the lines of credit previously available to the IMF, thereby bringing the total amount of these credit lines to about SDR 34 billion. These arrangements are very important, because they could become a key supplement to IMF resources in a time of systemic crisis. However, the IMF is a cooperative institution, based on quotas, and its strength and credibility depend on its maintaining its quota strength. With relatively strong demand for IMF resources, the IMF’s liquidity ratio is currently on a relatively sharp downward trend. This makes it a matter of urgency, particularly at a time of increased uncertainty in the global economy, to finalize the negotiations on a substantial quota increase without further delay.

Special Drawing Rights. We all have been concerned that members have not been able to participate fully in the SDR system. Thanks to the highly cooperative spirit from all our members, the Executive Board has reached agreement on a way for all members to receive an equitable share of cumulative SDR allocations, thereby placing all participants on the same footing in the SDR system.

Assisting the Poor. Finally, a truly remarkable spirit of compromise by members of the IMF’s Executive Board has allowed us to find a constructive solution to the complex issue of financing the continuation of the enhanced structural adjustment facility [ESAF] and the IMF’s contribution to a joint World Bank-IMF initiative in favor of the heavily indebted poor countries. All of us have given in somewhat to reach consensus. And all of you—including even the poorest countries—have accepted a part of this burden to help those suffering from the most adverse conditions of poverty, demonstrating that a new partnership is emerging.

In doing this, you have endowed the IMF with a self-sustained—and de facto, permanent—instrument that will allow it to continue to play its role in addressing decisively, whenever it may be necessary in the future, the problems of the countries in the most distressed situations, provided they show their readiness to make their own efforts to stand again on their own feet.

Each of the above illustrates a decisive new dimension of our partnership—namely, the greater share of responsibilities in the global economy that many countries, including emerging market economies, are now willing and able to accept. This, no doubt, has the full potential—provided we continue to adapt our institutions and procedures to reflect it—to forge greater international cohesiveness in meeting the common goals of a stable world monetary system and a growing global economy.

We have a challenging agenda. In looking to the future, let us bear in mind that many of the challenges in today’s global economy are much greater than any single country or group of countries can cope with alone. But when we, the international community, work together, our tasks become more manageable and our objectives, easier to reach. So let us redouble our efforts to achieve our common goals: greater stability in the world economy and stronger, more sustained, more broadly shared, and higher-quality growth. This is what our partnership is now all about.

Chairman’s Opening Address: The Benefits of Economic Growth Must Extend to All

Emphasizing the “human dimension” of economic development, Eduardo Aninat, Minister of Finance of Chile, opened the Fifty-First Annual Meetings of the IMF and the World Bank. The current world economic picture—characterized by stability and economic progress—would have little lasting consequence, he said, unless it opened up opportunities to all citizens. At the core of the challenges ahead was the question: will the engine of progress become an instrument of integration and social enhancement, or merely a vehicle to benefit the few?

The “virtuous” combination of democracy and a market economy is coming to be accepted as a necessary basis for economic and human development, Aninat said. Accordingly, efforts are now increasingly centered on deepening and reinforcing market mechanisms and social and political institutions to boost the economic system’s growth potential and the political system’s ability to respond to the needs of the people.

Promising Prospects

Current world economic and financial conditions are “quite satisfactory,” Aninat said, and the prospects for the immediate and medium term are encouraging. The performance of the emerging market countries has been particularly impressive, especially in Asia. The implementation of stronger macroeconomic and structural policies had considerably brightened the prospects for other developing countries in Latin America and in Africa. The transition economies, too, had achieved “remarkable progress” in their push toward stabilization and reform. Nonetheless, in many countries, economic conditions remained difficult.

The achievements of the past year and the bright prospects for the future, said Aninat, were testimony to the successful implementation of the policy strategy outlined in the Interim Committee’s 1994 Madrid Declaration. The past years have also witnessed an unprecedented expansion of investment and trade and increasingly rapid dissemination of information and technological innovation. “Our overriding task,” he said, is now to “consolidate the gains achieved so far.”

Policy Agenda

Aninat outlined the issues that should be the focus of the coming year’s policy and institutional agenda:

• macroeconomic stability;

• efficient targeting of social spending;

• re-engineering of public social security and health care; and

• deepening of economic integration.

Finally, ways need to be found to promote responsible and representative political structures that lend legitimacy to the formulation of global economic strategies. Lack of adequate standards of accountability and the modernization of public institutions are pending issues for many countries.

An Agenda for the IMF

The IMF has an active role to play in support of each of these general policy issues, Aninat said.

• surveillance. The need for heightened surveillance in a world of potentially destabilizing capital flows could not have been more completely vindicated than in the aftermath of the Mexican financial crisis in late 1994.

• data provision. The effectiveness of IMF surveillance depends critically on the capability of its members to provide timely and high-quality data. The new Special Data Dissemination Standard will better equip market participants to evaluate a country’s economic health and creditworthiness.

• technical assistance. This role is critical to the development of sound policy frameworks and the process of institutional reform.

• use of IMF resources. In particular, low-income countries will benefit from the enhanced structural adjustment facility and the joint IMF-World Bank initiative to help heavily indebted poor countries.

• IMF’s financial resources. If the IMF is to continue to support its members’ adjustment efforts, its financial resources need to be secured. Accordingly, the Eleventh General Review of Quotas needs to be completed as soon as possible. In addition, Aninat said he welcomed the progress made in establishing the new arrangements to borrow.

“We have a profound obligation to work decisively” toward improving the quality of life for all, Aninat concluded. The primary aim and final goal of economic and social development should be to fulfill this obligation by working to free all peoples from exclusion, marginalization, and deprivation.

World Bank President’s Opening Address: World Bank Adopts New Development Paradigm

Following are edited excerpts of the opening remarks of World Bank President James D. Wolfensohn on October 1 in Washington.

When we met last year, I set out six immediate priorities:

• bringing ID A-11 [the eleventh replenishment of the International Development Association] to a successful conclusion;

• addressing the debt problems of the poorest countries;

• building and expanding partnerships;

• accelerating private sector development;

• doing more to help in post-conflict situations; and

• creating a “results culture” within the Bank Group.

I have significant progress to report.

First, the agreement reached last spring on IDA-11 should enable IDA to lend close to $22 billion over the next three years. At the same time, the agreement is fragile. It depends crucially on donors’ understandings of each other’s individual positions on the replenishment and, of course, on commitments being honored as speedily as possible. Beyond this, we must all intensify our efforts to ensure IDA’s long-term future.

Second, as to the problem of unsustainable debt in the poorest countries, the proposal developed by the Bank and the IMF is flexible, comprehensive, and responsive to debtors and creditors alike.

Third, I said we would build stronger partnerships. This past year, I met with the leaders of the other multilateral banks to explore better coordination of our programs. We have expanded our links with the United Nations, the World Trade Organization, and the European Union. We have forged new relationships with the major foundations and with nongovernmental organizations. We are also deepening partnerships with our shareholders and, above all, with our clients.

Fourth, we have stepped up our efforts to promote private sector development and to rationalize the Bank Group’s activities with the private sector.

Fifth, we have organized ourselves for post-conflict work and have made great strides in improving our programs. In Bosnia-Herzegovina, for example, 14 projects are being implemented, with Bank Group financing of over $325 million.

Sixth, our effort to build a “results culture” at the Bank is showing tangible progress. We will not measure our performance by dollars lent or projects approved but by our development impact results on the ground. By putting quality ahead of quantity, we have fundamentally changed the incentives that guide our staff.

This is just the beginning. Together, we need to look toward the challenges facing us in the new millennium. Last year, I suggested four major themes, which have evolved but remain valid.

The New Compact. We are fashioning a new compact between donors, investors, and recipients to ensure that resources are sufficient to meet the needs of the world’s poorest people and are used efficiently and transparently. Our new world of open markets raises the stakes for developing countries. Investment is linked to good policies and good governance. Simply put, capital goes to those countries that get the fundamentals right. And we are working with our clients on those fundamentals.

If the new compact is to succeed, we must also address transparency, accountability, and institutional capacity. And let’s not mince words: we need to deal with the cancer of corruption. Corruption is a problem that all countries have to confront. Solutions, however, can only be home grown. Working with our partners, the Bank Group will help any of our member countries to implement national programs that discourage corrupt practices. And we will support international efforts to fight corruption and to establish voluntary standards of behavior for corporations and investors in the industrialized world. The Bank Group cannot intervene in the political affairs of our member countries. But we can give advice, encouragement, and support to governments that wish to fight corruption, and it is these governments that will, over time, attract the larger volume of investment. The Bank Group will not tolerate corruption in the programs that it supports.

The New Paradigm. A broader, more integrated approach to development is needed to ensure sustainability. Poverty reduction remains at the heart of everything we do. Reducing poverty clearly involves the interplay of a number of issues: macroeconomic policy, private sector development, environmental sustainability, and investments in human capital, especially girls’ education and early childhood development. But at the end of the day, people make policies and projects work. Social, cultural, and institutional factors are key to success and sustainability. Without the social underpinnings, it is difficult for economic development to succeed and virtually impossible for it to be sustained.

I see this as a critical challenge—in fact, the most critical challenge before us.

The New Knowledge Partnership. We are strengthening and expanding partnerships, both global and local. I want to focus on a specific form of partnership as we enter the new millennium—a partnership for creating and sharing knowledge and making it a major driver of development. Development knowledge is part of the “global commons.” It belongs to everyone, and everyone should benefit from it. The Bank Group’s relationships with governments and institutions all over the world and our unique reservoir of development experience position us to play a leading role in this new global knowledge partnership. We need to invest in the necessary systems to enhance our ability to gather development information and experience and share it with our clients. We need to become, in effect, the “knowledge Bank.”

The New Bank. We are continuing to pursue change in the Bank’s culture, to build a culture based on results, accountability, and excellence. We must be absolutely tough minded. Sometimes in the past, we set overly ambitious targets and committed ourselves to objectives that were simply not realistic. That must change. We have to promise only what we can deliver and deliver what we promise.

Joint Press Conference: New Declaration Seen as Policy Guide, SDR and Debt Initiatives Hailed

Following are edited excerpts from the joint press conference given by Philippe Maystadt, Chairman of the Interim Committee, and Michel Camdessus, Managing Director of the IMF, on September 29 in Washington.

Maystadt: The Interim Committee has had a productive meeting and has taken three important steps.

First, we have updated the Madrid Declaration, adopting a new Declaration on “Partnership for Sustainable Global Growth.” The strategy set out in the Madrid Declaration—which emphasized sound macroeconomic policies and structural reforms—remains valid. Nevertheless, all Committee members saw a need to broaden this strategy in several critical areas to take into account new challenges and lessons drawn from a review of member countries’ economic policies.

The new Declaration stresses the importance of the complementarities between macroeconomic policies and structural reforms, which are mutually reinforcing. It reiterates the need for fiscal discipline but also draws attention to the quality and the composition of the fiscal adjustment and the need for greater transparency in government finances—particularly the reduction of off-budget transactions.

The new Declaration also emphasizes the need to promote good governance in all its aspects and pays attention to the soundness of banking systems and to the need for more action to prevent money laundering.

We agreed that the realization of this common strategy will help to avoid significant exchange rate misalignments and to provide a foundation for reasonable exchange rate stability.

We think this Declaration can serve as a guide, which is why we have sent a copy of the Declaration not only to the 24 members of the Interim Committee but also to the finance ministers of each IMF member country.

Second, we have endorsed the approach that has been agreed by the Board to resolve the so-called SDR equity issue: an amendment to the IMF’s Articles providing for a onetime allocation of SDRs. This agreement has been made possible because the group of developing countries, in a true spirit of compromise, has accepted the proposal for this equity amendment. I welcome this gesture and hope that all industrial countries will, in turn, show flexibility about the amount of this special allocation.

Third, we reached agreement on the initiative to assist the heavily indebted poor countries [HIPCs]. I am very much encouraged by the full support expressed by all Committee members for the implementation of this initiative. In October 1995, the Interim Committee encouraged the IMF and the World Bank to continue their work on ways to address the burden of multilateral debt. Few observers would have thought a credible strategy could have been devised and endorsed by the international financial community as early as today. Even fewer observers would have found it likely the IMF could be a key partner in this strategy. Today, I am delighted we have reached an agreement on a set of proposals to help the poorest countries achieve an exit from unsustainable debt. I am also pleased the Committee endorsed the IMF’s participation in this initiative through the ESAF [enhanced structural adjustment facility], with grants or loans carrying longer maturities.

For the IMF to move forward, it was crucial that understandings exist on the commitment to secure the needed financing. I can assure you, unanimous commitment is there. Many of my colleagues—and I must tell you that more than I expected—have expressed today their firm intention to make bilateral contributions. I am confident that those countries that have not yet committed to do so will ultimately be prepared to contribute as well.

It is also understood that, if the need arises, the IMF should be prepared to optimize the use of its reserves. The Managing Director will be able to tell you more about this. He was the main architect of this breakthrough, and I am very grateful to him.

Camdessus: I would like to call your attention to what makes this Declaration unique. It is the distillation by the Interim Committee—the group of the most qualified and responsible policymakers in financial matters—of the results of the IMF’s surveillance exercise with its 181 member countries. Every day, the IMF has an average of 30 missions in the field analyzing what is going on and how governments react to realities. It is quite impressive to see that, even with a diversified membership, we can come up with these “11 new commandments” for the good governance of the world’s economy. Please read this document—not as something coming down from the heavens, nor coming down from the minds of the world’s key policymakers, but as something coming up from the grass-root economic realities of our member countries.

Question: Mr. Camdessus, are you now confident that the G-7 [Group of Seven] will be prepared to move beyond its proposal for an SDR 16 billion allocation and toward the SDR 26 billion that you have proposed? And second, how many countries at the Committee pledged to hand over their money in SCA-2 [the IMF’s second Special Contingent Account] to help finance the ESAF and HIPC initiatives?

Camdessus: On the amount of the onetime SDR allocation to resolve the equity problem, no precise decision was taken today. A decision was taken to endorse the Executive Board’s proposal to make a onetime SDR allocation through a change of the IMF’s Articles of Agreement. This will be brought to parliaments, together with the quota increase. It provides for an SDR allocation to equalize for all members the ratio of the SDRs allocated to them to their quotas. It has been said that this agreement will be finalized in language and for an amount broadly in line with the proposals of the Managing Director. My proposal is to provide for a ratio of 33 percent, which translates into SDR 26.6 billion.

There is a very clear trade-off between the agreement of many countries to change the Articles and the amount I have proposed. I am confident that the final amount will certainly be above SDR 16 billion. Possibly it will be SDR 26.6 billion. Possibly a little bit less or a little bit more—but in a close range around this figure.

On the SCA-2, many—almost all—countries have pledged to leave with the IMF the resources they would receive if the SCA-2 were liquidated. A number have said they are also willing to make an outright grant of it. Others have said that they will make a long-term deposit with no or a very low interest rate. The final modalities have not been settled, but these SCA-2 resources will be a significant part of bilateral contributions to the overall funding mix.

Question: Mr. Camdessus, I understand the issue of IMF gold sales has been postponed. From a German perspective, it looks like the battle about the IMF gold will be faced in a year, a year and a half, maybe in two years. What do you think will be the factor that will lead to a situation in which we get voted down, with a French Managing Director arranging the vote, with American help, where the Americans are really the main cause of the whole disaster because they are not contributing to IDA [the International Development Association]? If the Germans are voted down, could this have major repercussions in other areas where we should cooperate with the IMF, like other bilateral contributions?

Camdessus: What you call sales of gold, we call optimization of the management of IMF reserves. The decision taken has nothing to do with the nationality of the Managing Director of the IMF. It reflects an extraordinary spirit of compromise in the Executive Board, to which your [German] countrymen have admirably contributed. We have not postponed anything here. As I explained to the press corps a few days ago, the financing of the continuation of ESAF and of the HIPC initiative is a done deal.

What we have done is the following. First, we decided we would try to collect as much as possible in bilateral contributions. The SCA-2 is one of the key elements of that. In addition, all Directors considered that they must be prepared, if needed, to optimize the use of the reserves of the IMF. Directors were unanimous in considering that this decision would be premature today, but they were also unanimous in considering that there had to be a clear understanding now of what optimizing the use of our reserves would mean if and when this was needed.

The agreement on an SDR equity allocation reflects an extraordinary spirit of compromise.

In view of the dynamics of the negotiation, I was able to note in my official conclusions that there was the needed majority of Board members who consider that such optimization would entail sales of an amount of gold up to 5 million ounces. At the same time, I was also able to express my confidence that any decision on optimization of our reserves would be taken with a desirable Board consensus. This means we will not be in the business of outvoting one group or the other.

Last, you are telling me the IMF is in the development business. What we are doing is not at all development financing. But what we are doing for developing countries is the job for which we were created—to provide our members with the necessary resources to face temporary payments crises or deeply rooted structural problems without resorting to measures destructive of national or international prosperity in the context of strong, solid, credible adjustment and reform programs. Nothing more, nothing less.

Maystadt: In its communiqué, the Committee explicitly endorsed the conclusions of the Executive Board on financing the continuation of ESAF and the IMF’s participation in the HIPC initiative. By endorsing the Board’s conclusions, the Committee agreed that if the need arises, we must be prepared to optimize the use of the IMF’s reserves. This was accepted by all members of the Committee, which is why I said there is a unanimous commitment to securing the financing of the HIPC initiative.

Question: Mr. Camdessus, should we see this Declaration as an explicit recognition that coordination of exchange rates in its narrower sense has failed? How will you accommodate the unhappiness of the Group of 24 at the inclusion of good governance in the communiqué? And, third, are you confident it will be possible to put in place quickly institutional arrangements for representing the new countries contributing to the General Arrangements to Borrow?

Camdessus: We are not renouncing our job of overseeing the international monetary system and paying particular attention to developments in exchange markets. The Declaration sees exchange rate stability and the avoidance of significant misalignments among currencies as the natural consequence of the implementation of sound macroeconomic policies and efforts at avoiding large imbalances. This is applicable to the whole membership.

Then you have, of course, the special responsibilities of the countries with reserve currencies, or countries whose currencies are traded more frequently in the markets. This is more particularly the responsibility of the Group of Seven. We work with them. We monitor their efforts. When needed, we encourage them—not only to coordinate their action but to undertake coordinated intervention to consolidate stability. What is important is that for the first time in a long time, the Interim Committee believes there are no significant misalignments among currencies. The issue is now not so much to bring the currencies into a better constellation but to preserve the good constellation we have through appropriate macroeconomic policies.

On good governance, Chairman Aninat will tell you the developing countries have not objected at all to this point here. On promotion of good governance in all its aspects—including the rule of law, improving the efficiency and accountability of the public sector, tackling corruption—there is a consensus of the membership.

Last, you will soon have disclosure of the agreements that are being finalized for the creation of the new arrangements to borrow, including the appropriate structures for their coordination with the General Arrangements to Borrow. These agreements will allow these countries not only to participate in the financing of the IMF but also to have a commensurate share of the responsibility for decisions. I am certain this will be finalized promptly.

Question: Mr. Camdessus, the communiqué states that you want to achieve an exit from unsustainable debt for the HIPC countries. One benchmark for sustainable debt is up to 25 percent debt service. Germany would not have been able to recover after World War II if the London debt settlement agreement had imposed a benchmark of 25 percent debt service. How can you possibly—by economic theory and practice—say that with a 25 percent debt-service ratio, the indebted poor countries will really recover?

Camdessus: You tell me that Germany’s recovery was due to certain attitudes of its creditors. But it was also the result of America’s generosity under the Marshall Plan—something you are suggesting to have, I presume, for the highly indebted poor countries—and I join you on that. It was also the result of Germany’s remarkable efforts to tackle its own problems and to rebuild its economy. We must start with that. This HIPC initiative invites all these countries to build a solid track record of tackling their problems. It is in view of these efforts that creditors and multilateral institutions will provide their contribution.

On the ratio of 25 percent, it is conventional wisdom, particularly among the members of the Paris Club, that the ratio of 20 percent signals a situation in which a yellow light flashes. Here, you have 25 percent, but you have also the other 200–250 percent debt-to-exports benchmark. These benchmarks reflect the experience of countries we see as being in a sustainable debt situation.

I do believe the approach is valid. A country that performs well for a few years, maintains good policies, and benefits from this effort of the creditors and the special contribution of the World Bank, the IMF, and the regional multilateral development banks will be truly in a sustainable situation.

Question: World Bank calculations on the debt initiative indicate that 80 percent nominal debt relief by the Paris Club results in only 17–20 percent effective relief, because big chunks of the bilateral debt of the Paris Club are left out. What are you going to do about that problem?

Camdessus: Mr. Wolfensohn and I have been suggesting that, for eligible countries, the Paris Club should be prepared to reduce debt by 90 percent. This might suggest that we should be disappointed by 80 percent, but with such a level of contribution, a large number of the cases we have analyzed can still be settled satisfactorily.

If the contribution of other creditors were a little bit below expectation, we will have to see case-by-case if we can nevertheless get sustainability through other compensatory measures. We see a great probability for that. If this is not possible, we have agreed to sit together once again to find a cooperative solution that would simultaneously put this debt situation on a solidly sustainable footing and preserve the preferred creditor status of the institutions.

I welcome the good news from the Paris Club. A few months ago, you would have heard that it was impossible to go beyond Naples terms of 67 percent debt reduction. Now they are prepared to go up to 80 percent. This is good news, and an extremely good basis for getting this new initiative started immediately.

Interim Committee Communiqué: Ministers Broaden Global Strategy, Call for Strong IMF

Following is the text of the communiqué issued after the September 29 meeting of the Interim Committee.

1. The Interim Committee held its forty-seventh meeting in Washington, D.C., on September 29, 1996, under the chairmanship of Mr. Philippe Maystadt, Deputy Prime Minister and Minister of Finance and of Foreign Trade of Belgium.

2. The Committee welcomed the generally encouraging world economic and financial situation and prospects for a strengthening and broadening of the economic expansion in 1996 and 1997. It noted the progress toward price stability and in reducing fiscal deficits in many countries, the improvement in exchange market conditions among the major currencies, the continuing rapid expansion of trade and financial flows, and the growing reliance on market forces worldwide. The Committee observed that:

• Developing countries are playing an increasingly significant role in generating growth and expanding trade, with many emerging market economies reaping the benefits of consistent implementation of market-oriented policies, supported by capital inflows including sustained foreign direct investment. The performance of many Asian countries remains impressive: in a number of cases, moderating growth is helping to alleviate inflationary pressures. In an increasing number of African countries, per capita incomes and growth prospects are improving as a result of sound policies, although serious problems remain. Many Latin American countries are recovering and experiencing lower inflation, after the difficulties associated with the Mexican crisis. In the Middle East, strengthened adjustment efforts have enhanced growth prospects in several countries.

• In the transition countries, continued implementation of broad-based reforms is expected to lead to a further strengthening of growth performance, and inflation, though still high, is declining.

• In the industrial countries, inflation is subdued: sound expansion of output and employment has continued in the United States and some other countries; Japan’s recovery is more firmly established; and in continental western Europe, the standstill in growth has ended and conditions are now in place for a resumption of more satisfactory growth.

3. The Committee noted that favorable developments in the world economy reflect the implementation by many countries of policies consistent with the common strategy set out in the October 1994 Madrid Declaration on Cooperation to Strengthen the Global Expansion. It noted that this strategy remained valid. It saw, however, a need to update and broaden it to take account of new challenges in the changing global environment, in the attached Declaration on “Partnership for Sustainable Global Growth.”

4. The Committee welcomed the strengthening of Fund surveillance and the report of the Managing Director on the review of policies in the context of surveillance, which provides valuable lessons for the membership and for the Fund on the conduct of surveillance in the new global environment.

5. The Committee welcomed the Special Data Dissemination Standard and was encouraged by the broad mix of industrial and emerging market countries among its first subscribers; it urged other countries that are in a position to subscribe to do so. It noted the recent initiation of the Data Standards Bulletin Board (DSBB). It looks forward to further enhancement of the DSBB, including the possible establishment of electronic links to country data. It requested the Executive Board to complete work on the general standards for data dissemination, which will apply to all countries, so that they are in place before the spring 1997 meeting of the Committee.

6. With respect to the IMF’s financial resources and assistance to members, the Committee:

• Welcomed the progress made by the Executive Board in its work on the Eleventh General Review of Quotas. In view of the evolution of the Fund’s prospective liquidity position and other factors, the Committee requested the Executive Board to continue its work on the Review and to do its utmost to reach a conclusion as soon as possible.

• Welcomed the progress made in establishing the new arrangements to borrow. It noted that these arrangements would effectively double the resources currently available to the Fund under the General Arrangements to Borrow and improve the Fund’s ability to meet requests for balance of payments assistance by members in circumstances that could have systemic implications. It requested the participants in the new arrangements, and the Executive Board, to complete their work promptly. The Committee urged the participating members to complete the domestic processes needed to bring these new arrangements into effect as soon as possible.

7. The Committee warmly endorsed the program of action proposed by the Fund and the Bank to ensure that the heavily indebted poor countries (HIPCs) that have shown a sound track record of economic adjustment can attain a sustainable debt situation over the medium term. It endorsed the conclusions by the Executive Board on financing the continuation of ESAF and the Fund’s participation in the initiative to assist the HIPCs to which all members are committed. It also welcomed the agreement to transfer a portion of the ESAF reserves to support the Fund’s participation in the HIPC initiative with grants or loans on longer maturities. The Committee also welcomed the commitment by the World Bank to the initiative and the President’s willingness to allocate an overall contribution to it. It welcomed the indication that the Paris Club creditors are ready to go beyond Naples terms in providing debt reduction of up to 80 percent for countries qualifying for additional relief within the HIPC initiative, on a case-by-case basis according to its usual rules, to achieve an exit from an unsustainable debt. It urged other creditors to participate in the initiative on an equitable basis. It also reaffirmed the importance of the Fund’s preferred creditor status. The Committee requested the Executive Board to proceed quickly with implementation and to report on progress to the Committee in spring 1997.

8. The Committee welcomed the consensus reached in the Executive Board that all members should receive an equitable share of cumulative SDR allocations through an amendment of the Fund’s Articles of Agreement providing for a onetime allocation of SDRs, based on a common benchmark ratio of cumulative allocations to present quotas. The Committee endorsed this approach and requested the Executive Board to finalize its work on the amendment by the time of the Committee’s next meeting. The Committee emphasized that such an amendment of the Articles would not in any way affect the Fund’s existing power to allocate SDRs on the basis of a finding of long-term global need to supplement reserves as and when that need arises.

9. The Committee asked the Executive Board to continue its analysis of capital flows and their implications, to examine possible changes in the Fund’s Articles, and to report to the Committee at our next meeting.

10. The Committee will meet again in Washington on April 28, 1997.

Interim Committee Declaration

Partnership for Sustainable Global Growth

Following is the text of the declaration issued after the September 29 meeting of the Interim Committee.

The Interim Committee has reviewed the “Declaration on Cooperation to Strengthen the Global Expansion,” which it adopted two years ago in Madrid. It notes that the strategy set out in the Declaration, which emphasized sound domestic policies, international cooperation, and global integration, remains valid. It reiterates the objective of promoting full participation of all economies, including the low-income countries, in the global economy. Favorable developments in, and prospects for, many industrial, developing, and transition economies owe much to the implementation of sound policies consistent with the common medium-term strategy.

The Interim Committee sees a need to update and broaden the Declaration, in light of the new challenges of a changing global environment, and to strengthen its implementation in a renewed spirit of partnership. It attaches particular importance to the following:

• Stressing that sound monetary, fiscal, and structural policies are complementary and mutually reinforcing: steady application of consistent policies over the medium term is required to establish the conditions for sustained noninflationary growth and job creation, which are essential for social cohesion.

• Implementing sound macroeconomic policies and avoiding large imbalances are essential to promote financial and exchange rate stability and avoid significant misalignments among currencies.

• Creating a favorable environment for private savings.

• Consolidating the success in bringing inflation down and building on the hard-won credibility of monetary policy.

• Maintaining the impetus of trade liberalization, resisting protectionist pressures, and upholding the multilateral trading system.

• Encouraging current account convertibility and careful progress toward increased freedom of capital movements through efforts to promote stability and financial soundness.

• Achieving budget balance and strengthened fiscal discipline in a multiyear framework. Continued fiscal imbalances and excessive public indebtedness, and the upward pressures they put on global real interest rates, are threats to financial stability and durable growth. It is essential to enhance the transparency of fiscal policy by persevering with efforts to reduce off-budget transactions and quasi-fiscal deficits.

• Improving the quality and composition of fiscal adjustment, by reducing unproductive spending while ensuring adequate basic investment in infrastructure. Because the sustainability of economic growth depends on development of human resources, it is essential to improve education and training; to reform public pension and health systems to ensure their long-term viability and enable the provision of effective health care: and to alleviate poverty and provide well-targeted and affordable social safety nets.

• Tackling structural reforms more boldly, including through labor and product market reforms, with a view to increasing employment and reducing other distortions that impede the efficient allocation of resources, so as to make our economies more dynamic and resilient to adverse developments.

• Promoting good governance in all its aspects, including by ensuring the rule of law, improving the efficiency and accountability of the public sector, and tackling corruption, as essential elements of a framework within which economies can prosper.

• Ensuring the soundness of banking systems through strong, prudential regulation and supervision, improved coordination, better assessment of credit risk, stringent capital requirements, timely disclosure of banks’ financial conditions, action to prevent money laundering, and improved management of banks.

The Committee encourages the Fund to continue to cooperate with other international organizations in all relevant areas. It welcomes the recent strengthening of Fund surveillance of member countries’ policies, which is an integral part of the strategy. It reaffirmed its commitment to strengthen the Fund’s capacity to fulfill its mandate. It will keep members’ efforts at achieving the common objectives of this strategy under review.

Development Committee Communiqué: Ministers Strongly Support Joint IMF-World Bank Debt Initiative

Following is the text of the communiqué issued after the September 30 meeting of the Development Committee.

1. The fifty-third meeting of the Development Committee was held in Washington, D.C. on September 30, 1996, under the chairmanship of Mr. Mohamed Kabbaj, Minister of Finance and Foreign Investment of Morocco.

2. Resolving Debt Problems of the Heavily Indebted Poor Countries (HIPCs). The Committee expressed its appreciation to the Bank and the Fund for the progress made since its last meeting and endorsed the action program for the HIPC initiative. It urged the Bank and Fund, working closely with donors and other creditors, to move swiftly to implement the initiative.

3. Members reiterated their support for the initiative’s basic objective—ensuring that HIPCs demonstrating a track record of sustained strong policy performance are able to achieve overall external debt sustainability, enabling them to exit from the rescheduling process and to strengthen their poverty reduction programs. They recognized that the HIPC initiative commits the international financial community to take additional action to reduce eligible countries’ debt burdens to sustainable levels where full use of existing debt-relief mechanisms is unlikely to be sufficient.

4. Members agreed that coordinated action by all creditors was critical to the initiative’s success. The assistance to be provided by each group of creditors should be consistent with the guiding principles agreed at the Committee’s April 1996 meeting and would be based on the need to deliver debt sustainability, share broadly and equitably the cost of the initiative, and preserve the preferred creditor status of the multilateral financial institutions. Ministers stressed that the initiative should be implemented flexibly, on a case-by-case basis, and with full participation by debtor governments.

5. Ministers also welcomed the commitment of the IMF, reflected in the statement of the Interim Committee on September 29, to participate in the enhanced assistance to be provided under the HIPC initiative through special ESAF [enhanced structural adjustment facility] operations, including long-maturity loans or grants.

6. Members supported the World Bank’s proposed $500 million initial contribution, and noted [World Bank] President Wolfensohn’s announced readiness to recommend to the Board of Executive Directors additional contributions, provided that future net income of the Bank would so permit, that there is equitable burden sharing by creditors, and that these funds are needed to meet the Bank’s own share of the burden. Members supported as well the enhanced assistance (including IDA [International Development Association] grants) the Bank intends to provide in selected cases when needed.

7. Given the significant share of debt owed by the poorest and most indebted countries to bilateral creditors, Ministers welcomed the indication from the Paris Club that it was ready to go beyond Naples terms to provide debt reduction of up to 80 percent for countries qualifying for additional relief within the HIPC initiative, and that its decisions will be made on a case-by-case basis according to its usual rules, to achieve an exit from unsustainable debt. They suggested the Paris Club, the international financial institutions, and all involved creditors coordinate their actions to deliver needed debt relief consistent with the initiative’s basic principles noted in paragraphs 3 and 4 above.

8. Ministers welcomed the readiness to participate in the initiative indicated by several multilateral agencies and urged other multilaterals to define their participation as soon as possible. The Committee agreed that the proposed multilateral HIPC Trust Fund, to be administered by IDA, would make an effective contribution to the success of the initiative. Members expressed appreciation to those bilateral donors that had indicated at this early stage their intention to contribute to the Trust Fund and encouraged others to do so as well.

9. Ministers requested the IMF and World Bank to begin implementation of the initiative for the first potentially eligible countries before the end of 1996 and to report back to the Committee at its next meeting on progress achieved in implementing the initiative.

10. International Development Association. Ministers reiterated their strong support for IDA and its central importance to the global effort to reduce poverty; therefore, it is important that all donors ensure the success of ID A-11 by fully respecting their commitments on time. The Committee welcomed the increased IBRD [International Bank for Reconstruction and Development] grant to IDA of $600 million this year.

11. Ministers recognized that the IDA-11 agreement reflects a significant reduction in donor contributions from previous levels. They asked IDA management and donor representatives to work together in the next several months to help ensure adequate and secure future funding for IDA. Ministers will discuss these and related matters as they consider the prospects for IDA funding at their next meeting.

12. Multilateral Investment Guarantee Agency (MIGA). Ministers noted that MIGA’s activities had grown appreciably along with the expansion of foreign private investment in developing countries. They welcomed the recent rapid expansion in demand for MIGA services and recognized that, as a result, MIGA is quickly approaching the limits of its financial capacity. Ministers requested that the MIGA Management and Executive Board address MIGA’s resource constraints soon and report on this subject at the Committee’s next meeting.

13. World Trade Organization (WTO). The Committee expressed its appreciation to WTO Director-General Renato Ruggiero for his valuable briefing on key issues likely to be addressed at the first WTO ministerial meeting in December. Ministers agreed with Mr. Ruggiero on the importance of trade as a formidable engine of economic growth for all nations and on the opportunities and challenges offered by globalization. They requested the Bank and the Fund to assist those countries not yet members of the WTO to join the organization, and to assist all members, particularly the poorest, to become more fully integrated into the multilateral trading system. Ministers expressed their support for closer collaboration between the WTO, the Fund, and the Bank and offered the Director-General and the WTO best wishes for a successful ministerial meeting.

14. Next Meeting. The Committee’s next meeting will be held on April 29, 1997, in Washington, D.C.

New Executive Directors Elected

Seven new members of the IMF’s Executive Board were chosen by member countries during biennial elections held in Washington at this year’s Annual Meetings. The 24-member Executive Board is the IMF’s permanent decision-making body and meets in continuous session at IMF headquarters in Washington. The Executive Directors and the member countries that elected them are as follows:

Thomas A. Bernes of Canada: Antigua and Barbuda, The Bahamas, Barbados, Belize, Canada, Dominica, Grenada, Ireland, Jamaica, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines;

Zamani Abdul Ghani of Malaysia: Brunei Darussalam, Cambodia, Fiji, Indonesia, the Lao People’s Democratic Republic, Malaysia, Myanmar, Nepal, Singapore, Thailand, Tonga, and Vietnam;

Dinah Z. Guti of Zimbabwe: Angola, Botswana, Burundi, Eritrea, Ethiopia, The Gambia, Kenya, Lesotho, Liberia, Malawi, Mozambique, Namibia, Nigeria, Sierra Leone, South Africa, Swaziland, Tanzania, Uganda, Zambia, and Zimbabwe;

Aleksei Mozhin of the Russian Federation: Russian Federation;

Juan José Toribio of Spain: Costa Rica, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Spain, and Venezuela;

Koffi Yao of Côte d’Ivoire: Benin, Burkina Faso, Cameroon, Cape Verde, the Central African Republic, Chad, Comoros, Congo, Côte d’Ivoire, Djibouti, Equatorial Guinea, Gabon, Guinea, Guinea-Bissau, Madagascar, Mali, Mauritania, Mauritius, Niger, Rwanda, São Tomé and Príncipe, Senegal, and Togo;

A. Guillermo Zoccali of Argentina: Argentina, Bolivia, Chile, Paraguay, Peru, and Uruguay.

The two-year terms of these Executive Directors, and those of the 12 Executive Directors re-elected by their constituencies, begin November 1, 1996; 5 other Executive Directors are appointed by individual member countries—the United States, Germany, Japan, France, and the United Kingdom.

Group of Ten Communiqué: G-10 Urges Quick Wrap-Up of NAB, Attention to Banking Soundness

Following is the text of the communiqué issued after the September 29 meeting of the Finance Ministers and Central Bank Governors of the Group of Ten (G-10) industrial countries.

1. The Ministers and Central Bank Governors of the countries participating in the General Arrangements to Borrow (GAB) met in Washington on September 29th, 1996, under the chairmanship of Mr. Wataru Kubo, Deputy Prime Minister and Minister of Finance of Japan. They took note of reports from Mr. Mario Draghi, Chairman of the Deputies of the Group of Ten; Mr. Michel Camdessus, Managing Director of the IMF; Mr. Lawrence Summers, Chairman of Working Party 3 of the OECD; and Mr. Andrew Crockett, General Manager of the BIS [Bank for International Settlements].

2. The Ministers and Governors welcomed the progress that has been made toward the establishment of new arrangements to borrow (NAB) and recommended that the process be brought to a rapid conclusion. Under the NAB, countries with the capacity to support the international monetary system will make supplementary resources available to the IMF to cope with an impairment of the international monetary system or to deal with an exceptional situation that poses a threat to the stability of the system. The establishment of the NAB will double the resources currently made available to the IMF under the GAB by the G-10 countries. The Ministers and Governors noted the value of existing arrangements for consultation and cooperation on economic, monetary, and financial matters of concern to the G-10 countries and welcomed the opportunity afforded by the NAB for additional dialogue among a broader range of countries on questions of mutual interest.

3. The Ministers and Governors emphasized the need to give attention to issues relating to international monetary and financial stability. They stressed that adherence to sound and consistent policies was crucial to maintaining financial stability and fostering strong and sustainable macroeconomic performance. In this context they underscored the importance of the soundness and safety of banks and other financial institutions and of the robustness of financial market structures for the stability of the international financial system. They noted the value of both enhanced cooperation among authorities responsible for the promotion of financial stability and further efforts to strengthen the financial systems of emerging market economies. They invited their Deputies to give priority to work in these areas, making use of existing material and in cooperation with other bodies considering such matters, and to report on their progress in April 1997.

4. Mr. Gerrit Zalm, Finance Minister of the Netherlands, was elected Chairman of the Group of Ten for the coming year.

Selected IMF Rates

Week BeginningSDR Interest RateRate of RemunerationRate of Charge
September 233.883.884.24
September 303.773.774.12
October 73.753.754.10

The SDR interest rate, and the rate of remuneration, are equal to a weighted average of interest rates on specified short-term domestic obligations in the money markets of the five countries whose currencies constitute the SDR valuation basket (the U.S. dollar, weighted 39 percent; deutsche mark, 21 percent; Japanese yen, 18 percent; French franc, 11 percent; and U.K. pound, 11 percent). The rate of remuneration is the rate of return on members’ remunerated reserve tranche positions. The rate of charge, a proportion (currently 109.4 percent) of the SDR interest rate, is the cost of using the IMF’s financial resources. All three rates are computed each Friday for the following week. The basic rates of remuneration and charge are further adjusted to reflect burden-sharing arrangements. For the latest rates, call (202) 623-7171.

Data: IMF Treasurer’s Department

Group of 24 Communiqué: G-24 Backs “Equity” Allocation, Urges Full Donor Contributions to Debt Initiative

Following is the text of the communiqué issued after the September 28 meeting, in Washington, of the Ministers of the Intergovernmental Group of 24 (G-24).

World Economic Outlook

1. Ministers noted that global prospects were encouraging, with growth and price stability in the industrial countries outside Europe, robust growth in many of the developing countries in Asia, and recovery in the Western Hemisphere and Africa. They noted that there were substantial downside risks to the global expansion and that the external environment for developing countries appeared less favorable than had been anticipated at their previous meeting, and called on the industrial countries to take into consideration their responsibility to provide growing markets for developing countries’ exports. Long-term interest rates remained high in real terms in international capital markets, pointing to the need for further progress in fiscal consolidation in major industrial countries. At the same time, in view of the deflationary fiscal policies required to meet the Maastricht Treaty’s convergence criteria, there was a need for more flexible monetary policies. There was also a need to address the unemployment problems in Europe, which were due to labor market rigidities and other structural constraints, but which were often wrongly attributed to greater openness in the global trading environment and generated calls for protectionism. These protectionist pressures were particularly egregious when disguised under calls for environmental security, human rights, or higher labor standards in developing countries.

2. Ministers stressed that growth rates were still low in many developing countries. Given the long periods of low or negative per capita income growth rates in many African countries, it was imperative that more determined efforts be made to achieve high growth throughout the continent. Ministers called for a more supportive response by the international community to the bold and far-reaching adjustment programs being implemented under difficult circumstances in Africa and other parts of the developing world. The design of adjustment programs and their associated conditionalities should emphasize the growth imperative and provide an adequate social safety net.

Surveillance

3. Ministers noted that the financial policies of the major industrial countries determine to a large extent the stability of international capital markets, and that a lack of balance in macroeconomic policies and insufficient policy coordination can result in sharp fluctuations in interest rates and exchange rates. When interest rates in major industrial countries rise, capital flows to developing countries tend to decline, and might even be reversed, resulting in disruptions for developing countries. Moreover, instability in interest rates and exchange rates among the industrial countries impose costs on developing countries, owing to their limited opportunities to hedge against movements in these rates. In noting these aspects, Ministers stressed the need for strengthening Fund surveillance over industrial countries.

4. Ministers welcomed the launching of the Special Data Dissemination Standard (SDDS) and viewed it as a positive step in enhancing global economic transparency. They noted that the SDDS should focus on those countries that have the greatest impact on the international economic environment, namely the industrial countries and some large emerging market economies. Many developing countries would need time and considerable technical assistance from the Fund to be in a position to subscribe to the SDDS.

IMF’s Financial Resources

5. In a spirit of solidarity, Ministers were prepared to support a onetime move to equalize the ratio of cumulative SDR allocations to present quotas, while insisting that the provisions for general allocations under the Articles remained relevant under current circumstances. Recalling the proposals made by them at the 1994 Annual Meetings, Ministers regarded the Managing Director’s suggestion for a benchmark ratio of 33 percent of quotas as a minimum figure for providing a modest contribution to meeting world liquidity needs. Ministers considered it essential to set a deadline of two years for an amendment of the Articles, and if the process of legislative approvals were not completed by then, they proposed that the Fund membership be prepared to reconsider the need for a general allocation under the existing Articles to help move the SDR system at least part of the way to meeting the accepted need for equity.

6. Ministers stressed the need for the Fund to have adequate resources to meet its increasing responsibilities. Noting the projected decline in the liquidity ratio to its lowest level since 1983 and in the context of globalized financial markets, Ministers called for an early completion of work on the Eleventh General Review of Quotas. Ministers reiterated the need for a doubling of quotas, and they stressed that an increase in quotas should be predominantly equiproportional.

7. Ministers were concerned about the relative decline in the quota share of developing countries, and they underlined the importance of maintaining the existing balance in the representation of members and regions in the Executive Board. Ministers noted that a review of the number of basic votes was overdue.

8. Ministers noted the progress made on the Fund’s borrowing arrangements but emphasized that the establishment of the new arrangements to borrow should not be regarded as a substitute for a quota increase.

9. Ministers reiterated their opposition to attempts to raise charges on the use of Fund resources, either as a means of strengthening the institution’s financial position or for any other purpose. They stressed that this measure would be inconsistent with the cooperative character of the Fund.

Enhanced Structural Adjustment Facility (ESAF)

10. Ministers noted progress made on issues relating to the financing of the ESAF during the interim period and looked forward to its timely finalization. Ministers were convinced that an appropriate division between bilateral and multilateral sources of funding remained critical to a successful outcome. Several developing countries had indicated their willingness to contribute to subsidizing the use of the General Resources Account or other loan resources, but stressed that burden sharing by the industrial countries should be equitable. In order to meet the remaining subsidy requirements, the Ministers supported Fund gold sales, along the lines proposed by the Managing Director.

Heavily Indebted Poor Countries Initiative (HIPC Initiative)

11. Ministers welcomed the progress made by the Bretton Woods institutions in the joint initiative for the heavily indebted poor countries, but were deeply concerned at the tendency among major bilateral donors and creditors to curtail their own contributions, while pressing the multilateral institutions to assume a greater share of the burden. Welcoming the leading role of the World Bank in funding the HIPC initiative and its initial contribution of $500 million, Ministers urged all other creditors to take the necessary steps to finalize their funding arrangements by the end of the year. They urged the Paris Club to provide up to 90 percent reduction of debt stock on a net present value basis. Ministers encouraged the IMF to mobilize promptly its contribution to the initiative. They stressed that the application of the framework for resolving the debt problems of the HIPCs with respect to eligibility criteria, the timetables, and the scale of relief should be handled with a high degree of flexibility. In particular, they emphasized that the burden of debt on public finances should be accorded the same weight as the traditional balance of payments criteria in the evaluation of debt sustainability. Ministers found it crucial that debtor governments be assured full participation in all the analyses and reviews to be carried out by the Bretton Woods institutions over the adjustment periods. Furthermore, those periods should be shortened for countries that had already built up a good track record.

International Development Association (IDA)

12. Ministers reiterated their deep concern that IDA-11 donor contributions were not adequate to support even current levels of lending. Moreover, several IDA-eligible countries that were inactive at present might need IDA support in the coming period, thereby exacerbating the problem of inadequate funding. Ministers urged the Development Committee to work toward modalities that provide for adequate long-term financing for IDA.

Official Development Assistance (ODA)

13. While private capital flows to developing countries have attained high levels, they have been directed to a small number of emerging market economies, and the need for ODA remains pressing for a large number of countries whose access to private capital remains uncertain. Ministers noted that the OECD countries’ official development assistance had declined to 0.27 percent of GNP in 1995, its lowest level in over a decade, and they reiterated their call to industrial countries to increase substantially their ODA to the internationally agreed target of 0.7 percent of GNP.

Multilateral Investment Guarantee Agency (MIGA)

14. Ministers welcomed the important contributions made by MIGA in promoting foreign investment in member countries but were concerned that MIGA was running out of resources to cover the increasing demand for its guarantees. Ministers emphasized that, unless MIGA’s capital base was augmented urgently, its catalytic role in mobilizing private capital flows would be seriously curtailed.

Partnership for Capacity Building in Africa

15. Ministers welcomed progress made in the Partnership for Capacity Building in Africa initiative under the continued leadership of the African ministers. As outlined in the proposal by a group of African ministers for an African-led and -owned program of action, the Bank should continue its supportive and coordinating role among donors.

Post-Conflict Development

16. Ministers welcomed the leading coordinating role being played by the Bank in moving post-conflict areas from emergency financing to funding development projects, but noted that progress on disbursement has been slow and much more needed to be done in a nondiscriminatory manner. There remains an urgent need for a further increase in financial resources earmarked for the post-conflict situations to expedite project implementation and disbursement to meet adequately the development challenges in Bosnia and Herzegovina, the West Bank and Gaza Strip, Lebanon, and other countries that are engaging in post-conflict reconstruction.

World Trade Organization (WTO)

17. In welcoming the participation of the Director-General of the World Trade Organization in the deliberations of the Interim and Development Committees, Ministers encouraged the WTO to pursue cooperation agreements with the Bretton Woods institutions to help developing countries take part in a fast-globalizing economy. Ministers urged that the Marrakesh decision on measures in favor of least-developed and net food-importing developing countries be fully implemented, especially the provisions for food aid. Looking beyond it, Ministers urged an acceleration in the implementation of market access measures for developing country exports. Ministers emphasized the need to strengthen WTO technical assistance programs in trade and trade-related areas, especially through the use of new technologies. Ministers cautioned that coordination between the WTO and other multilateral organizations should not result in commercial considerations assuming primacy over developmental objectives. Ministers stressed that application of unilateral trade restrictions on political grounds ran counter to the spirit underlying the WTO framework.

Conditionality

18. While reiterating their commitment to the principles of good governance, Ministers stressed that, in accordance with their charters, the Bretton Woods institutions should proceed with extreme caution in the application of conditionalities in the governance area. They emphasized that the international financial institutions should augment their technical support for the indigenous efforts of the developing countries aimed at improving efficiency and accountability in state institutions.

New Publication Series Launched

The IMF’s Economic Issues series, inaugurated in September 1996, makes available to a broad readership of nonspecialists some of the economic research being carried out at the IMF. The papers, three of which have already been issued, cover a wide range of topics, are written in concise, nontechnical language, and are intended to introduce the reader to current interests in the IMF’s research program. Currently available are Growth in East Asia: What We Can and What We Cannot Infer, Does the Exchange Regime Matter for Inflation and Growth?, and Confronting Budget Deficits.

Economic Issues are free and may be ordered from Publication Services, Box XS600, International Monetary Fund, Washington, DC 20431 U.S.A. Telephone: (202) 623-7430; fax: (202) 623-7201; Internet: publications@imf.org

Managing Director’s Closing Address: Camdessus Lauds Members’ Sense of Common Purpose and Shared Responsibility

Following are excerpts of the concluding remarks by IMF Managing Director Michel Camdessus delivered on October 3 at the plenary session.

In the course of these Meetings, I have been struck by four recurring themes:

• your cautious optimism about your countries’ future in the global economy;

• your strong consensus on the most effective economic strategies for securing this future;

• your desire to have a strong, effective IMF to help members in this process; and

• finally, your sense of common purpose and shared responsibility for your mutual prosperity in the global economy.

Let me take each of these themes in turn.

You have noted with satisfaction that the world economic situation is favorable: world economic growth has become stronger and more widespread, inflation has been brought under better control, and the prospects for continued global economic expansion are good. As you rightly point out, today’s encouraging economic situation and outlook is due to the fact that so many of your countries have strengthened their economic policies. Indeed, in the words of the Governor from India, “We should recognize that the relatively favorable economic situation is not a fortuitous outcome but the product of many years of hard work and sacrifice in pursuit of sound economic policies at both the national and international levels.”

Yet your optimism is guarded because you know that weaknesses remain in each of your economies and that the forces of globalization can accentuate them. Many of you have been quite frank about the problems you face—in reducing fiscal deficits, creating more jobs, strengthening the banking sector, and eliminating the structural problems that stand in the way of fuller integration into the global economy. Many of you are also concerned about the uneven distribution of private capital flows and their potential volatility, about the fact that some countries have not shared in the expansion of world trade and capital flows and that aid flows are declining; and about the unmet needs in health and education in many countries. A number of you have also mentioned the risks that protectionism could pose to the global economy. Indeed, we must all be concerned about these issues and find ways to address them.

At the same time, I think all of us have sensed a new dynamic in the world economy. The rapid pace of global integration and its impact on world trade and finance has inspired many countries to accelerate reform. Increasingly, countries are realizing that, in the words of our Chairman, “Reaping further gains from globalization requires a firm commitment to even further opening of our economies.”

Indeed, the reform process does appear to be gaining momentum. And why is this so? Because of the broad consensus on economic strategy—the second theme emerging from our discussions.

Governors, so many of you have spoken eloquently about the visible payoffs for macroeconomic and structural reform! I particularly recall the Governor from the Philippines speaking of his country’s “progress from being the ‘sick man of Asia’ to being its rising star”; and the Governor from Korea’s reminder that, “though once one of the world’s poorest countries,” his country had “managed to transform its simple agrarian economy into an industrial economy within a short period of time.” The vibrant economy of your own country, Mr. Chairman, is also a monument to the benefits of sustained adjustment and reform.

In this context, many of you have pointed to the continuing validity of the strategy set out in the Madrid Declaration and its emphasis on macroeconomic stability and structural reform. But increasingly, you are also bringing other issues to the table—such as the importance of investing in health and education; the role such investments can play in increasing social equity; the link between social equity and the sustainability of the reform process; and yes, what U.S. Vice President Gore has termed “the challenge of good government.”

As you recall, this latter point was one that I stressed in my opening address, and I am gratified that a number of you insisted on its fundamental importance for sustained, high-quality growth. Colleagues from such diverse countries as Bangladesh, Chile, and Denmark have remarked on this. The essential point is this: good governance is inextricably linked to the efficiency of resource allocation, to incentives for savings and investment, and, increasingly, to external competitiveness—for capital inflows tend to be attracted to countries where investors can count on transparent and responsible conduct of public affairs. Indeed, for all of these reasons, good governance is central to the basic economic objectives that the Bretton Woods institutions are trying to help their members achieve.

Governors, you have laid out an ambitious reform agenda for your countries. In the words of the Governor from Australia, “None of this is easy. But it is important to accept the challenge.” It is gratifying to see how many of your countries have accepted the challenge, and how much progress you have achieved toward stronger, more sustained, more broadly shared growth.

In turning to the third theme—your desire for a strong, effective IMF—let me assure you that we at the IMF also “accept the challenge.” We hear your call to continue strengthening IMF surveillance—in industrial, developing, and transition countries alike—and we will continue our efforts in full evenhandedness. Indeed, as Chairman Aninat has said, surveillance is now “more relevant than ever.” For this reason, I particularly welcome the Interim Committee’s new Declaration on the “Partnership for Sustained Growth” in light of the challenges of globalization.

You have also expressed very strong support for the Special Data Dissemination Standard; indeed, we will build on this initiative by establishing a general data standard. As part of our surveillance activities, we will also take up your call to help strengthen members’ financial systems, especially the soundness of their banks, and to give further consideration to the role the IMF could play in encouraging capital account convertibility.

We have also heard your call to strengthen IMF resources. I think the Governor of Sri Lanka expressed the conviction of the entire membership when he said, “Countries that take this difficult [adjustment] path…deserve help and encouragement from the international community to sustain their efforts and soften the severe hardships and dislocation that would inevitably accompany them.”

All of you have welcomed the agreement that will permit a self-sustained, and therefore de facto permanent, enhanced structural adjustment facility [ESAF], and the IMF’s contribution through ESAF to help relieve the debt burden of the highly indebted poor countries. Many of you have mentioned your intention to make a bilateral contribution to ESAF, and I encourage others to join them. This is a superb demonstration of what a new partnership is all about. Industrial countries and advanced developing countries must also make room in their budgets for increased official development assistance. I can think of no better expression of our new partnership and certainly no better investment in the future than supporting in this way the development efforts of poor countries.

Good governance is central to the economic goals we are trying to help our member countries achieve.

We must also thank the countries participating in the new arrangements to borrow for their help in doubling the credit lines available to the IMF. You have also expressed satisfaction at the progress toward agreement on an equity allocation of Special Drawing Rights [SDRs]; I trust that a final agreement will be reached in good faith before the spring meetings.

Yet, all of you have emphasized that the IMF is a quota-based institution and must remain so. I have heard the call of many members for early progress on the Eleventh Review, and I assure you that this will be our priority in the coming months. I am also mindful of the concern of many members that quotas should better reflect the new economic realities in today’s global economy while ensuring an adequate increase for all members; we will need to address these issues in the coming months.

Finally, I would like to highlight the sense of common purpose and shared responsibility that have guided our deliberations here this week. At the end of the day, all of our countries are seeking similar goals, and each of our countries has a stake in the success of all the others. In the words of Vice President Gore, “If we have learned anything from the second half of the twentieth century, we have learned this: that we cannot achieve peace and prosperity in isolation or in the absence of a healthy international economic system.”

So, let us keep our sights on our common goals: greater stability in the world and stronger, more sustained, more broadly shared, and higher-quality growth. And let us return to our daily tasks with a commitment to our new partnership and with a renewed sense of purpose, which you, Mr. Chairman, expressed in such visionary words. You said: “The context of stability and economic progress we are experiencing is a promising sign. But it shall not take profound root in the history of mankind unless it serves to open up clear opportunities for all of our citizens.… Let us not confuse ourselves. There is one key enhancing task for development: providing clear-cut and down-to-earth opportunities for raising the dignity of each and every one of our fellow countrymen. It is the crucial link between economic and social development and efforts at the dignification of mankind that make our work a truly meaningful task.”

Managing Director’s Closing Press Conference: IMF Given New Mandate to Help Members Strengthen Banking Sector and Governance

Following are edited excerpts from the closing press conference given by IMF Managing Director Michel Camdessus in Washington on October 3.

Camdessus: I must apologize, first, for a very dull Annual Meeting. We had only very good news. Four points seemed to me of importance:

First, the Governors have shared our cautious optimism about the current global picture of the world economy and the medium-term perspective.

Second—and this also was quite impressive—there is a strong consensus on the most effective economic strategy for securing this better future, which has been endorsed unanimously by the Interim Committee and is summed up in the “11 commandments.”

Third, there is a very encouraging consensus on the desire to have a strong and effective IMF serving our members and putting into force the agreed strategy.

And, fourth, there is a sense of common purpose and renewed partnership. This is illustrated in many respects, but particularly in the fact that developing and transition economies do not want to wait until they are prosperous countries to share in the burden and responsibilities for the good working of the system. We want to build on such a basis.

All of this is very rewarding, indeed, for the staff and the management of the IMF. It imposes on us an even stronger responsibility for doing our job well.

Question:You have spoken frequently of the fragility of the banking sector all over the world and have said the IMF will strengthen its cooperation with the World Bank in that sector. Could you be more precise about the areas in which you will be moving, together with your other partners, and especially with the BIS [Bank for International Settlements]?

Camdessus: When I referred to our cooperation in this domain, naturally I referred initially to our cooperation with the World Bank. Cooperation with the World Bank is our daily experience. But during my opening remarks I also referred to our cooperation with the regional development banks and the very constructive relationship we have with the BIS. We had this experience, in particular, in Eastern European countries and the former Soviet Union, where they helped us to assemble and mobilize an enormous effort of technical assistance from the central banking community. Now, we intend—and this is also the desire of the BIS—to apply this kind of practical relationship to this new concern. We will also work with the regulators for banking and financial activities to see how to work together to avoid the recurrence of the dramatic events we have seen in so many countries.

When one sees dangers looming on the horizon, this is certainly not a situation for “fighting for turf.” Even if we put together all our resources, we will be too small for the task. Be assured all the heads of these institutions will try to make sure that each institution works to its best comparative advantage and that our cooperation will be credible enough for all authorities around the world to add to the modest means we have.

As far as cooperation with the World Bank is concerned, this is extremely simple. The IMF has both financing and surveillance competence of a universal dimension. The World Bank has important financing means. Pooling surveillance and financing with the technical assistance and financing means of the other institutions can create a critical mass of instruments and actions to start making a difference. I am sure that when we meet again next year, we will be able to announce more precise details about the first steps in this cooperative framework.

Question: For some time now, both the IMF and the Bank have been promoting private sector investment as a desirable and even unavoidable ingredient of enhanced economic development. The problem is that when privatization is too rapid, it leads to a kind of economic and social Darwinism, with the weak falling by the wayside. You have been promoting safety nets, which can mitigate the problem to an extent, but are the safety nets wide enough or applied widely enough to keep the pain of privatization within bearable limits?

Camdessus: This is an immense question. We have a wide variety of experiences in privatization in almost all countries now, but particularly in developing countries and countries in transition. We have had extremely good and extremely bad experiences. We—the countries and ourselves with them—have not always been successful in putting together at the appropriate time, for the appropriate amounts, and with the appropriate design, the necessary safety nets. Such safety nets are needed not so much because you privatize, but because very frequently in the public sector you have some in-appropriateness in management, which needs to be replaced by enterprises becoming profit oriented. This requires a high degree of streamlining to recover competitiveness. This requires safety nets, which requires retraining people. Indeed, the staff of the World Bank and the IMF always try to influence the countries to make sure that the safety net instrument will be in place at the appropriate time. It has not always been the case, and this has led us to redouble our attention on this front.

Privatization is normally positive for the country in question and for its people after some transition time. Privatization adds efficiency to the system and helps improve the allocation of resources. This normally translates—sooner or later, and frequently sooner—into an improvement in the conditions of those working in these sectors.

Question: Both you and Mr. Wolfensohn have this year stressed the importance of fighting corruption. Will IMF surveillance in future include good governance, including the fight against corruption? And, in view of the fact that the press has been in the front line of the fight against corruption, will the IMF tell us what it discovers in the course of surveillance about corruption, so that we can strengthen your hands to fight this problem?

Camdessus: Thank you for this offer of good support. The international press plays an enormous role in helping contain bad governance and corruption in many of its aspects. I have emphasized these issues, as indeed has my colleague Chairman Aninat. It is not the first time that we have talked about this, and it is certainly not the first time that we have acted on these matters.

The IMF has not always called this a good governance strategy. Often it has spoken of assisting member countries in moving to a market-based system, with a leaner and more effective government, with less scope for discretionary and ad hoc decision making, less state interference, less preferential treatment, and reduced scope for rent seeking. All of this boils down to a very significant reduction of the scope for corruption. Each time you create a regulation, you create an opportunity for corruption. Each time you reduce a regulation to the minimum, you reduce the scope for corruption. If, in this new effort to streamline regulation, you draw lessons from experience precisely in order to have these regulations transparent and evenhanded, then you are already in the business of fighting corruption in the most effective way. Indeed, you know that we have always advocated transparency and accountability in public finance and continue to do so. You know about our efforts in institution building, particularly in the domains of treasuries and of central banks. All of this is nothing less than support for good governance. Indeed, we will intensify our work in this area, but our action will not change in nature. We are now backed in this endeavor by the universal endorsement of our membership. Now a minister of finance is no longer able to tell the staff, addressing a corruption issue, “This is none of your business.” We will be able to show him the Declaration, “Partnership for Sustainable Global Growth,” and tell him, “Sir, you have signed this, and it is my duty to enforce it.” I hope this stronger backing will help make a difference.

Can we go further and make a kind of explicit conditionality on these issues, adding this kind of conditionality to the possibly already too numerous performance criteria we monitor in borrowing countries? My answer is no, except when there are specific instances in which we are confronted with clearly identified issues of corruption or bad governance having an impact on the county’s macroeconomic performance. Except for these very specific cases, we will continue acting by persuasion and joining forces with the World Bank and the regional development banks to progressively lead the countries to put their deeds behind their words.

Question: Has there been a change this year regarding debt relief for the poorest countries, and, if so, what message of hope would you like to convey to the poorest inhabitants of the planet?

Camdessus: After having addressed the problem of commercial bank debt and having contributed thereby to the recovery of a large number of middle-income indebted countries, we at the IMF are now addressing the debt problem of the poorest countries in close conjunction with the World Bank and the Paris Club. The new debt initiative will aid the poorest countries provided they take the necessary steps to put their own economic houses in order. This is the HIPC initiative, which has been endorsed both by the Development and the Interim Committees. Moreover, the Executive Board of the IMF, supported by the Interim Committee, has taken all the requisite steps so that there will be a de facto continuation of ESAF, which will also support this new HIPC initiative.

IMF Web Site Now on Internet

The IMF has opened a web site on the Internet. The public now has on-line access to IMF press releases, information on IMF lending, the complete text of the IMF’s 1996 Annual Report, the IMF Survey Supplement on the IMF and selected articles from regular IMF Survey issues, and a range of other material about the IMF. The IMF’s Dissemination Standards Bulletin Board may also be accessed through the IMF’s Home Page.

The IMF’s Internet site also contains a directory of IMF publications that allows users to search for publications by author, title, or subject. An e-mail address is provided for those wishing to request free publications, and an order form for priced publications may be downloaded from the site.

The address of the IMF web site is: http://www.imf.org

I am not claiming that everything is going to be absolutely rosy for the future; this is not a complete reversal of the situation. But you can be certain that our institutions will do their utmost to see that this additional assistance for the most heavily indebted countries blends in with homegrown efforts to form the basis for better living conditions for the future.

Question: The recent report of the IMF said that money laundering affects the macroeconomics of countries and, therefore, was of concern to the IMF. What is the role of the IMF in this area?

Camdessus: The IMF did make such an affirmation. In many countries, the fact that there is quite intense money laundering, or suspicion thereof, means that you have a kind of uncertainty, which reigns over the overall economic climate and the government. This can have a paralyzing effect for all those who endeavor to improve economic performance. This is why at a time when we are striving to strengthen and step up our actions to improve banking and financial systems and make them less vulnerable, we believe we can look to ways to help reduce the scope for money laundering.

It is clear, for example, that money laundering can thrive in a country in which you have very weak or nonexistent banking regulation, or where banking regulation is not applied. We want to make life a little bit more difficult for these money launderers. We do not believe that we, along with the World Bank, are going to make a decisive change in the situation all alone, but when we work together in partnership we create greater hopes for the future, and we awaken certain forces that perhaps have been sleeping up until now. This is the direction in which we want to move.

Question: This week there were some renewed tensions in the European Union, with some back and forth between France and Italy about whether Italy is going to be able to meet the Maastricht criteria. Do you think such public discord threatens the viability of EMU [economic and monetary union], and are enough of these countries going to be able to meet the deficit requirements to make EMU a viable enterprise?

Camdessus: Let me reassure you immediately that public disputes—words across the Alps—are the daily bread of a long history in Europe. This does not threaten at all the viability of the EMU process. All of that is part of life.

But what is important, and what I would like to emphasize, since you referred to Italy, is the fact that Italy is making important efforts to stabilize its economy and to put in place for 1997 a budget that, if fully implemented, would make it possible for Italy to meet the Maastricht criterion of a budget deficit of 3 percent of GDP.

Question: Will the IMF and the World Bank programs to strengthen financing situations cover measures such as banking secrecy?

Camdessus: We have not recently discussed matters of banking secrecy. What we have in mind is far more modest and much closer to our specific sphere of competence. We want to ensure that the central banks and the banking regulatory and supervisory bodies have the necessary legislation and instruments at hand—and, if not, to understand why not and by what measures they can begin to create such a structure. The central banks need not only the necessary regulations, but also the instruments, the human resources, the methods, and the procedures. All of these have to be put into place to ensure that banks will abide by the regulations that may exist.

If we are able to achieve this—and we have now been endowed with the mandate to press forward with this—we shall be able to make great strides forward. Together with the World Bank, we will provide not only the financing but also the requisite technical assistance to endow member countries with the expertise they need.

Private Capital Plays Key Role In Stimulating Development

Following is a summary of remarks delivered in Washington on September 29 by the President of the European Bank for Reconstruction and Development, Jacques de Larosière, on the occasion of the Per Jacobsson Lecture on financing development in a world of private capital flows.

“Private capital flows to developing countries have exploded over the past four years,” said de Larosière. There is every indication that these flows are not a short-term phenomenon. Indeed, developing country markets could represent a genuine and lasting market for investors worldwide.

Net capital flows to developing countries, he said, reached an all-time high of $247 billion in 1995—an almost fourfold increase over 1990. While earlier flows were composed largely of commercial bank credit channeled to the public sector, recently the level of private sector portfolio flows and direct investment have increased sharply. These flows, however, remain focused on a small number of developing countries. And the role of commercial banks as intermediaries has diminished while that of mutual and pension funds has increased as the investor base has broadened.

Two major events have largely shaped this new environment, said de Larosière.

Shift in Policy Orientation. In the aftermath of the disappointing experiences of central planning and protectionism, de Larosière observed, the past 15 to 20 years have witnessed a worldwide shift in thinking regarding the sources of economic growth and policies to promote it. Market-based systems and open economies supported by sound macroeconomic policies have come to be seen as the most potent, perhaps the only sustainable, vehicles for growth, he said.

The main reasons for this policy shift stemmed from two interrelated experiences: the poor economic performance under statist and protectionist regimes and the mounting crises of debt and the growing deficits arising from years of fiscal laxity. There is a visible link, said de Larosière, between the shifts toward market reform and macroeconomic stability, on the one hand, and growing capital flows, on the other. Those countries most advanced toward becoming open, market-based economies have attracted the majority of the capital inflows over the past five years.

Globalization of Markets. The other major event shaping the new environment, said de Larosière, has been the removal of capital controls and the development of new technology. As a result, investors have been able to look further afield. Developing countries, many of which have growth rates of 6 percent or more compared with 2 percent in industrial countries, are becoming particularly attractive. The expansion of international trade has gone hand in hand with growing foreign investment.

How will the multilateral development banks fit into this economic development? asked de Larosière. They must, he noted, take a fresh look at how they can assist more directly in establishing the conditions for the expansion of the private sector. In doing this, the multilateral development banks must recognize the increasing—and understandable—reluctance of governments to provide sovereign guarantees; this reluctance stems from the pressures on public finances and the acknowledged need for firm fiscal restraint. The multilateral development banks should support this resolve and avoid sovereign guarantees wherever possible.

As participants in the process of private sector development, multilateral development banks can combine their funds, instruments, independence, and experience with the know-how, management capabilities, and capital of the private sector. Provided these institutions take account of the characteristics of the project, the market environment, and the needs of its partners, this combination is a powerful force for private sector development, said de Larosière. For example, the multilateral development banks can work with private companies to form joint ventures, by providing either equity or loan financing, said de Larosière. Such collaboration, he continued, need not be restricted to international companies but can involve purely local enterprises as well. Multilateral development banks can also contribute to private sector growth by promoting venture capital.

Recent Use of IMF Credit(million SDRs)
Aug.Jan.-Aug.Jan.-Aug.
199619961995
General Resources Account439.13,917.111,983.1
Stand-by arrangements154.01,934.510,134.7
EFF arrangements285.11,808.01,315.8
CCFF0.0174.60.0
STF0.00.0532.6
SAF and ESAF arrangements16.1389.5356.6
Total455.24,306.612,339.7
Note: EFF = extended Fund facility.CCFF = compensatory and contingency financing facility.STF = systemic transformation facility.SAF = structural adjustment facility.ESAF = enhanced structural adjustment facility.Figures may not add to totals shown owing to rounding.Data: IMF Treasurer’s Department
Note: EFF = extended Fund facility.CCFF = compensatory and contingency financing facility.STF = systemic transformation facility.SAF = structural adjustment facility.ESAF = enhanced structural adjustment facility.Figures may not add to totals shown owing to rounding.Data: IMF Treasurer’s Department

A viable partnership between the multilateral development banks and the private sector, concluded de Larosière, should be based upon the following operational principles:

• Sound banking to ensure that the financial return to the multilateral development banks is commensurate with the risk. By ensuring that the projects they support are financially sound and viable, multilateral development banks can set an example and establish important standards in accounting, financial disclosure, and corporate governance.

• Additionality to stimulate the private sector to operate in areas where it would not operate on its own by, for example, contributing financing that is not available on reasonable terms elsewhere. Rather than competing with the private sector, the multilateral development banks must instead be encouraged to complement and catalyze it.

• Wider application to help ensure that the small contributions of multilateral development banks strengthen the effectiveness of markets and market institutions as a whole—by, for example, enhancing competition and breaking up monopolies. Alternatively, a project may transfer market skills, enhance institutional development, or set important standards of corporate governance.

Sound Banking Systems Are Critical for Latin America

Following is a summary of remarks by IMF Managing Director Michel Camdessus at a conference on the requirements for sound financial systems in Latin America, delivered at the Inter-American Development Bank (IDB) in Washington on September 28.

“Banks form the core of financial systems. Thus, whether a country’s financial system is safe and sound or not depends in large part on the soundness of its banking system,” said Managing Director Camdessus. Since the late 1970s, virtually every country in Latin America has experienced banking sector problems, as have more than two thirds of all IMF members. These problems can be costly for the countries concerned and, through spillover effects, for the international community. Thus, said Camdessus, they are a concern for the IMF, the IDB, and their member countries.

The IMF’s experience with its 181 member countries, Camdessus said, has shown that banking sector problems—in both industrial and developing countries—can generally be traced to:

• lax management within individual banks and a lack of legal and judicial infrastructure;

• lack of transparency about banks’ operations and financial conditions, which makes it difficult to compare relative performance;

• weak domestic banking supervision;

• in developing countries, a more volatile economic and financial climate; and

• increased international capital inflows, which can strain already unsound banking systems.

In light of the various causes of banking sector weakness, said Camdessus, a successful attack on the problem must be launched on several fronts. He cited the following constructive steps under way:

• the updating of banking laws throughout Latin America and, in some countries, the strengthening of bank supervision, bank restructurings, mergers, and privatization;

• the adoption of Basle Committee standards in most countries of the region and, beyond this, the development of regional standards by such regional bodies as the Association of Bank Supervisory Agencies in Latin America and the Caribbean Supervisors Group; and

• the IMF’s efforts to promote bank surveillance through its surveillance, lending, and technical assistance activities. Since Mexico, more attention has been given to banking sector issues, and we intend to continue with and build upon these efforts.

Despite these initiatives, major gaps remain in national and international efforts to strengthen banking systems, Camdessus cautioned. At the national level, problems persist, including poor governance and lack of transparency, weak supervision, and complacency about problem banks. And at the international level, standards for international banking are insufficiently comprehensive, with lack of consensus, even among industrial countries, in such areas as accounting, loan valuation, provisioning rules, and exit policies. Also, developing countries may require more stringent standards than those applied by industrial countries.

So where to go from here? From the IMF’s perspective, Camdessus answered, the main emphasis should be on strengthening internal bank governance and reinforcing market discipline in banking practices. At the same time, external oversight and support must be improved, at least until internal governance and market discipline become more effective.

Photo Credits: Denio Zara and Padraic Hughes for the IMF.

A promising avenue is to identify standards and practices (“best practices”) that have served particular groups of countries well—whether industrial or developing—and consider how they may be adapted and applied in other countries, said Camdessus. International guidelines should help national authorities improve domestic regulation and supervision and provide strong incentives to improve internal bank governance. While these guidelines would be voluntary, the prospect of a positive market reaction for countries implementing them should provide strong incentives for reform. Beyond developing international guidelines, ways need to be found to deal with other difficult issues, such as how to help countries take corrective actions against problem banks early and how to shut down insolvent banks, design payments systems that limit contagion, and ensure that lender-of-last-resort facilities do not prolong the lives of unsound banks or lead to moral hazard.

The IMF is ready to help with these tasks in several ways:

• by contributing to the development of internationally agreed standards and making sure they suit the circumstances of developing countries;

• by helping disseminate the standards;

• by monitoring progress in the implementation of the standards and/or in implementation of the policies aimed at the same objectives; and

• by helping restructure banking and financial systems.

All of this will need to be done in close collaboration with other international, regional, and national organizations involved in this work, concluded Camdessus.

World Economic Outlook: Global Expansion Likely To Continue

The news from the October 1996 World Economic Outlook is encouraging—for both the short term and the medium term. The IMF’s biannual survey of global economic prospects and policies envisages satisfactory growth or recovery for most countries—industrial, developing, and transition—all over the globe. At the same time, many countries will need to address persistent or potential weaknesses and imbalances to share fully in the current expansion.

World output growth slowed slightly to 3½ percent in 1995 from 3¾ percent in 1994 (see chart, page 344). The slight faltering of growth in 1995 reflected a significant weakening in many industrial countries in western Europe as well as in the developing countries of the Western Hemisphere. Elsewhere in the developing world, growth was generally well maintained, notably in Africa. In Asia, growth, though remaining rapid, has moderated somewhat since 1994, allaying concerns about overheating. Among many countries in transition to market-based systems, output declines abated further, while others, having successfully turned the corner, grew vigorously.

Short and Medium-Term Prospects

Notwithstanding the disappointing performance in western Europe in 1995, the World Economic Outlook sees the global economic expansion continuing at a satisfactory pace in 1996-97 and over the medium term. The near-term outlook is for a slight pickup to 3¾ percent in 1996 and a further strengthening to about 4 percent in 1997. These projections are based on expectations that the United States will grow at or near potential and that activity in much of Europe will strengthen in the second half of 1996 and in 1997. Among the Western Hemisphere developing countries, the recovery from the Mexican financial crisis of late 1994 is projected to gain momentum. Economic conditions in other developing countries, in Africa, the Middle East, and Europe are also expected to improve—although growth will remain uneven across countries. Growth in the Asian developing countries is expected to moderate but remain high. For the countries in transition, aggregate output is projected to stabilize in 1996 and grow significantly in 1997 for the first time since the process of transition began.

Scanning the medium-term horizon, the World Economic Outlook predicts reasonably encouraging prospects for the world economy. Assuming that established policies of national authorities remain unchanged, IMF staff projections call for a strengthening of world growth to an average annual rate of 4½ percent during 1998-2023, fueled mainly by the expected resumption of growth in the transition economies. This projection compares with the long-term trend growth rate of 3½ to 4 percent observed over the past quarter century.

Industrial Countries Need Fiscal Consolidation, Labor Reform

The industrial countries have met with continuing success in containing inflation, but growth and labor market performance remain uneven. Economic growth slowed in most industrial countries in 1995, with the notable exceptions of Japan, Italy, and some of the smaller European countries. In 1996, growth is expected to strengthen slightly to 2¼ percent, with expansions in the United States and Japan offset by continuing sluggishness in most of continental Europe, including France and Germany.

Many countries in the European Union (EU) have yet to share fully in the current expansion. These countries need to address deep-seated structural and macroeconomic weaknesses, including, in some cases, difficulties in their banking systems. In much of continental Europe, the policy mix has shifted toward tighter budgetary policies and easier monetary conditions—in response to the faltering of growth in the second half of 1995 and in view of the approaching deadline for bringing budget deficits to 3 percent of GDP (1997 is the test year for deciding which EU member countries meet the criteria for participation in the third and final stage of economic and monetary union, which begins in 1999).

Of immediate and continuing concern is the need to make further progress toward reducing fiscal imbalances over the medium term. Not only does the maintenance of an adequate pace of consolidation offer the best prospect for a sustained improvement in economic performance over the medium term, according to the World Economic Outlook, but the short-term costs may also be smaller than those arising from a failure to address persistently large deficits.

For many countries in Europe, fiscal balances are related to problems in the functioning of labor markets. These shortcomings have contributed to a substantial upswing in the EU’s unemployment rate over the past 25 years—to 11 percent, of which as much as 8 to 9 percent is structural (that is, not likely to be absorbed through cyclical recovery). Together with discouraged job seekers and a high rate of early retirement, these unemployment figures represent considerable underutilization of labor resources. This, in turn, has reduced potential output and exacerbated budgetary pressures through revenue losses and outlays for income support.

There is a real risk in Europe, according to the World Economic Outlook, that in the absence of comprehensive labor market reforms, unemployment rates could rise further. So far, however, European countries have demonstrated excessive timidity in implementing labor market policies, and reforms have been mostly piecemeal and ineffective.

The essential aim of labor market reforms, according to the World Economic Outlook, must be to allow market forces a greater role in helping to clear the labor market at much lower levels of unemployment. Policymakers need to mobilize public support for reform while overcoming fears that a deregulated labor market would seriously jeopardize Europe’s social fabric. Several measures could be taken to foster reductions in unemployment while still maintaining some level of protection:

• substantial scaling back of passive support measures, including lower benefit levels for the unemployed;

• shorter durations and tighter eligibility criteria and job-search requirements for unemployment benefits;

• replacement of passive income-support measures, with a negative income tax conditional on employment or job search;

• reductions in payroll taxes and minimum wages; and

• substantial scaling back of job security legislation.

Developing Countries Need Sound Financial Systems

Continuing the solid expansion under way since the beginning of the decade, developing countries grew by nearly 6 percent in 1995, despite a marked slowdown in Latin America in the wake of the Mexican financial crisis. Sunny prospects also characterize the World Economic Outlook’s projections for 1996 and 1997: aggregate growth will likely remain at about 6 percent as Mexico and Argentina recover, growth in Africa strengthens, and the expansion in several Asian countries moderates. Inflation, which slowed substantially to 20 percent in 1995, is expected to ease further in most countries. Further progress is also expected in reducing fiscal imbalances throughout most of the developing world.

Despite the sustained overall improvement in economic performance of the developing world, individual countries have shown marked divergences. Some have made only limited progress and continue to fall behind in relative income positions. Among the strong performers, fiscal imbalances have been generally contained, and the role of the public sector has been geared mainly toward promoting private sector development. Macroeconomic stability and market-oriented structural reforms, including more open trade and payments regimes, have laid the basis for substantial increases in their shares of world trade and income and for their greater access to international capital markets.

Less successful countries, in contrast, are often characterized by persistent fiscal imbalances aggravated by support for loss-making public enterprises; extensive government intervention in the economy through regulations and restrictions on the private sector and foreign trade; poor control of inflation; and financial repression, including policies that hold interest rates at artificially low levels and maintain overvalued exchange rates, which discourage saving and distort resource allocation.

Activity in emerging market countries is generally expected to remain buoyant on the basis of strong domestic fundamentals and continued large capital inflows, especially of foreign direct investment. But a pressing issue in many emerging market countries has been how to deal with the risk of overheating, which can result in unsustainable macroeconomic imbalances, rising inflation, and strains in financial markets—and ultimately affect the confidence of domestic and foreign investors. The importance of addressing such problems at an early stage, according to the World Economic Outlook, is underscored by concerns about the vulnerability of banking systems to foreign exchange and financial market crises and domestic policy reversals. In the past several years, a number of emerging market countries have experienced disruptive and costly banking crises, and the fragility of banking systems in many other countries suggests that similar difficulties may occur in the future. To reduce such risks, the emerging market countries need to enhance the soundness of their financial sectors through strong prudential standards and supervision.

Weaknesses in banking systems have also held back economic growth in countries that have not received private capita] flows. These countries share with the strong performers the need to strengthen domestic financial systems, both to promote the mobilization and efficient allocation of domestic saving and investment and as a prerequisite for the successful liberalization of restrictions on cross-border financial flows. In many poor countries, external debt burdens have reached unsustainable levels. This situation will need to be resolved quickly with concerted assistance from the international community, so that the debt burdens do not detour these countries from continuing on the path of sustained structural reforms and macroeconomic adjustment.

Transition Economies Face Demographic Challenges

Overall activity in the transition economies is projected to stabilize in 1996, after five years of decline, and several countries are expected to grow by 5 percent or more. Further gains in reducing inflation are also projected, with four countries registering annual inflation in the single digits. Although strong domestic demand has been the main engine for growth in some cases, rapid expansion of exports has continued to play an important role. In addition, many of the advanced transition economies are receiving substantial inflows of foreign direct investment.

Emerging market countries must strengthen their financial sectors with prudential standards and supervision.

The countries more advanced in the transition process—such as Poland, the Czech Republic, the Baltic countries, and Croatia—can expect sustained growth and further progress toward financial stabilization. Among the countries less advanced in transition, delays in reforms, lack of macroeconomic discipline, and policy slippages have in some cases led to financial market instability and further output declines.

Many other late bloomers, however, have made encouraging progress. Russia has made great strides in reducing inflation, and growth is expected to begin to pick up in the second half of 1996. Weaknesses in government finances, however, continue to be a concern. Armenia, Georgia, and Ukraine have made considerable progress toward moderate inflation; the Armenian and Georgian economies are both expected to grow by about 7 percent in 1996.

Some important lessons can be drawn from the experience of the transition economies over the last five years, according to the World Economic Outlook:

• Reduction of inflation from high levels is critical for halting and reversing the sharp contractions in output that are an unavoidable feature of the first phase of the transformation process.

• Growth is unlikely to resume without substantial progress with structural reform in a broad range of areas, including in banking systems that are plagued by mismanagement and massive bad loan problems.

• Restructuring the enterprise sector may result in temporarily high unemployment. Governments need to support the process, not by allowing enterprises to maintain soft budget constraints, but by fostering labor mobility and wage flexibility, setting up retraining schemes, and establishing affordable, well-targeted safety nets to lessen the hardships associated with unemployment.

The longer-term growth prospects for the transition economies, according to the World Economic Outlook, may not be as favorable as in many of the dynamic emerging market countries. Despite high levels and quality of education, which suggests an advantage in terms of human capital, most transition economies have rapidly aging—and slowly growing—populations. These unfavorable demographic trends translate into rising dependency ratios, which imply little improvement in an already weak saving performance. Moreover, weak banking systems in many countries may impair the mobilization of domestic saving and hamper the efficiency of resource allocation through the financial system. Much will depend, notes the World Economic Outlook, on governments’ ability to cope with three main policy challenges:

• striking an appropriate balance of fiscal consolidation and provision of social safety nets;

• ensuring prudent use of foreign capital to augment domestic savings; and

• putting the banking system on a sound footing in order to mobilize and effectively allocate domestic saving.

World Indicators1

1Shaded areas Indicate IMF staff projections.

Data; IMF, World Economic Outlook. October 1996

Global Strategy: The Path to Success

Countries differ according to category of development, as well as within categories; and each has its peculiar and characteristic problems. But, as the World Economic Outlook notes, the achievements of recent years underscore the validity of the cooperative strategy to strengthen the global expansion set out by the IMF’s Interim Committee in 1993 and reaffirmed in its October 1994 Madrid Declaration.

At the same time, the IMF study concludes, continuing problems in many countries suggest a need to broaden the strategy and strengthen its implementation. Recent experience has confirmed that economic success requires sustained efforts at both structural reform and macroeconomic stabilization. Failure to tackle serious weaknesses in some areas may increase the short-term costs—and delay the positive effects—of those policies that go in the right direction. More comprehensive and better balanced policy approaches are necessary if a greater number of countries are to realize their full growth potential.

The fall 1996 edition of the World Economic Outlook will be published on October 18. Copies will be available for $35.00 (academic rate: $24.00) and may be ordered from Publication Services, Box XS600, International Monetary Fund, Washington, DC 20431 U.S.A. Telephone: (202) 623-7430; fax: (202) 623-7201; Internet: publications@imf.org

David M. Cheney, Editor

Sara Kane • John Starrels

Senior Editors

Sheila Meehan • Sharon Metzger

Assistant Editor Editorial Assistant

Lijun Li

Staff Assistant

Philip Torsani • In-Ok Yoon

Art Editor Graphic Artist

The IMF Survey (ISSN 0047-083X) is published by the International Monetary Fund 23 times a year, in addition to an annual Supplement on the IMF, an annual Index, and other occasional supplements. Editions are also published in French and Spanish. Opinions and materials in the IMF Survey, including any legal aspects, do not necessarily reflect the official views of the IMF. Address editorial correspondence to Current Publications Division, Room IS9-1300, International Monetary Fund, Washington, DC 20431 U.S.A. Telephone: (202) 623-8585. The IMF Survey is mailed by first class mail in Canada, Mexico, and the United States, and by airspeed elsewhere. Private firms and individuals are charged an annual rate of US$79.00. Apply for subscriptions to Publication Services, Box XS600, IMF, Washington, DC 20431 U.S.A. Telephone: (202) 623-7430. Cable: Interfund. Fax: (202) 623-7201. Internet: publications@imf.org.

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