As has been clear from the experience of the past decade, the process of transforming centrally planned socialist economies is very complex, with far-reaching changes in the political, economic, and social relations within these countries. In every case, key reform measures have included macroeconomic stabilization; price and market liberalization, including that of the exchange and trade systems; restructuring and privatization; and redefinition of the role of the state so that it provides and enforces a level playing field and corrects market imperfections.
The IMF—along with the World Bank and other national and international agencies—has been heavily involved in assisting with the transformation of centrally planned economies. All of our efforts have centered around achieving and consolidating macroeconomic stabilization and accelerating structural reform. IMF efforts, along with those of the World Bank, have in many respects broken new ground in advising on why structural reforms were essential and how they could be carried out. Our technical assistance program has played a key role in helping the authorities adapt their monetary, exchange rate, fiscal, and statistical systems to the requirements of a market economy. The training of officials and the provision of technical assistance have also made important contributions to institution building.
The key lesson we have learned is that financial stabilization is necessary for growth, but comprehensive progress on all fronts of a broad structural reform agenda is indispensable for sustained growth. The most successful transition economies are those that have undertaken more and faster reform.
There are also areas where we have faced considerable challenges. For example, while privatization is a key element in the reform process, both the absence of hard budget constraints and the existence of insider privatization have posed obstacles to self-induced restructuring. Similarly, poor governance—ranging from insufficient government pullback from economic intervention to inadequate law and order—has often delayed and even impeded reform by discouraging foreign investment and encouraging the flight of capital.
What is the agenda ahead? Most Central European and Baltic countries, whose reform process is very advanced, face issues similar to those of many middle-income market economies. There are, for example, the challenges of joining the European Union, a strong recovery running ahead of itself, possible reversals of capital inflows, efficient inter-mediation by the financial sector, and rationalization of expensive social programs.
For other countries in the former Soviet Union now in varied stages of recovery, the agenda ahead remains quite large. In particular, there is a need to consolidate macrostabilization, push ahead with key structural reforms, provide for an effective rule of law and fair tax and regulatory systems, strengthen the financial system so that it conforms to internationally accepted codes and standards, and improve governance. Too many resources continue to be devoted to unproductive expenditure, and corruption is at unacceptably high levels. Finally, a handful of countries in the region have scarcely begun reform; they are in danger of backsliding.
Reforms in policymaking and at the IMF
The IMF is a cooperative institution of 182 members. On an ongoing basis, our membership sets priorities for the institution, and the IMF adapts its policies and operations to reflect these conclusions. The recent debate outside the IMF has been matched in intensity by the debate and actions within the IMF about reforms in economic policymaking and reforms within the IMF itself.
For the work of the IMF, surveillance—policy dialogue with the authorities of each country and the implications of these policies for the international financial system—remains at the core of IMF operations. This core activity has been transformed significantly since the Asian crisis. The focus now is on new sets of codes and standards—relating to financial sector soundness; transparency in fiscal, monetary, and financial policies; data provision; and corporate governance—to guide the conduct of economic policy in a variety of areas. This emphasis, which is supported by a significant amount of technical assistance, increases policymaking accountability and allows for better-informed lending and investment decisions. In particular, the IMF, together with the World Bank, has embarked on an ambitious Financial Sector Assessment Program to assess financial sector vulnerabilities as well as observance of financial system standards. These new directions for the IMF also pose new challenges in cooperating with other standard-setting bodies that possess substantial expertise in developing assessment methodologies, refining standards, and conducting assessments.
In recent times, there has also been much discussion about the virtues and pitfalls of pegged exchange rates. Experience shows that getting the exchange rate right is an essential element of a sound macro package. It is also clear that the macroeconomic and structural policy requirements of maintaining a pegged rate are demanding, particularly in an environment of increased capital mobility. At the same time, a number of economies with fixed exchange rate arrangements, including under currency boards, have successfully maintained exchange rate parities. All in all, experience has shown that countries that have maintained consistent monetary and exchange rate policies and have supported liberalization with financial sector reform have been better able to handle capital inflows and their subsequent reversals.
The Asian crisis also aroused a spirited debate over capital account liberalization. The IMF has emphasized an orderly and well-sequenced liberalization process, supported by an adequate institutional setup to strengthen the ability of financial intermediaries and other market participants to manage risk. Introducing or tightening capital controls is not an effective means to deal with fundamental economic imbalances. Any temporary breathing space such measures provide has to be used wisely and needs to be weighed against the long-term damage to investor confidence and the distorting effects on resource allocation.
Role of private sector
This brings me to the role of the private sector in crisis prevention and in a crisis. Private capital markets are the engines of growth around the world. Good business practices on the part of the country and the lender mean the implementation of sound policies and good risk appraisal, respectively. There is thus a need for cooperation—or constructive engagement—among borrowing countries, the private sector, and the official sector to develop broad rules that would apply in a crisis and are—and are perceived to be—fair to both creditors and countries.
An essential element of the reform of the international financial system is the provision of comprehensive, timely, high-quality, and accurate information to the markets. The IMF releases a vast array of information to the public, such as its assessment of countries’ economic policies. In addition, countries borrowing from the IMF are encouraged to release to the public their policy commitments under the program. Transparency on the part of the IMF itself can also contribute to a better understanding of policies of member countries. Here, too, important progress has been made. Regular internal and external evaluations of IMF operations are also released to the public, providing another assessment of our work.
Over time, the IMF’s financial operations have been adapted to the changing economic environment. In the period ahead, we will review whether our current facilities fully meet the needs of our members. In this review, we will be guided by a number of underlying principles, including preserving the IMF’s ability to provide and catalyze support for individual countries, retaining the IMF’s ability to respond quickly and effectively to short-term balance of payments problems; continuing to support reforms that deal with structural problems closely related to the IMF’s area of expertise; and being in a position to respond rapidly and on an appropriate scale to crises of confidence in the capital markets. Clearly, the long-run goal must be to discourage undue reliance on the use of IMF resources and encourage countries to move toward sustainable access to, and reliance upon, private capital.