Carlos Massad

Gerald Helleiner
Published Date:
March 1986
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I believe that my role is to bring the perspective of the Latin American experience into the discussion, and I have a good deal to say about its most relevant aspects; namely, the vital importance of external factors in the crisis, both in the upturn as well as in the downturn; the expansionary fiscal policies that could not be sustained; the absence of sufficient pragmatism to appreciate the adaptations required in traditional policies to make them more effective; the inappropriate timing of certain policies; the unexpected consequences of others; the case (and there is at least one) where the traditional indicators of good economic behavior—fiscal balance, domestic credit, and reserves—were all showing results that gained the praise of many observers while in reality overwhelming imbalances were building up in the economy and finally brought on disaster. The next issue of the Journal of Development Planning, which I have been invited to edit, will review some of the experiences in Latin America, and in Africa, as analyzed by distinguished economists from all over the world.

But let me begin by telling you what I have learned here.

First, let me say that the mere fact that this meeting has been organized highlights the preoccupation of central bank authorities with their search for new solutions to a new problem: the superimposition of recessionary adjustment on a trend of slow growth (or even economic deterioration in some cases) and the tragic results of a prolonged drought. Such a coincidence of negative factors can only bring, in the short run, immense human suffering that cannot be ignored.

I have learned that, as in the case of Latin America, present adjustment needs are mainly the result of external factors whose negative behavior was not adequately predicted.

I have learned that, as in Latin America, the African countries found that those factors cannot be influenced by their governments, but are the result of policies that the industrial countries found to their advantage to put into effect: terms of trade that deteriorated dramatically, interest rates that rose to unprecedented levels, protectionist policies that prevent or limit the expansion of exports, and drastic changes in the structure and direction of capital movements in the world economy, capital movements that are now absorbed by the richest members of the international community.

I have learned that, once again as in the Latin American case, international organizations have put their resources at the disposal of the deficit countries, but it is the implacable constraint of the inadequacy of such resources and the need to ration them, rather than purely objective analysis and recognition of present realities, which dictates the nature as well as the speed of adjustment.

Finally, I have learned that there is diversity in Africa, just as there is in Latin America. So, the solutions to problems that are substantially shared by all may legitimately differ from one country to another because of differences in structure, resource endowments, or political preferences.

What can be done to overcome this set of circumstances? Obviously, at the core of the problem lies the foreign exchange constraint, and this must be overcome either by increasing the pool of financial resources available or by making external support less necessary.

The Fund and the World Bank are helping the countries obtain additional resources by prompting commercial banks to maintain or even to increase their commitments. Such efforts must continue, but more is needed, particularly in the form of concessionary loans or grants. Governments provide such resources, and the Fund and Bank could use their influence to secure these resources. Obviously, an increase in the capital of the Bank, the resources of IDA, and in Fund quotas could go a long way to alleviate the present problems. It is the task of the less developed members of both institutions to continue pressing for such an increase, as well as for additional substantial allocations of SDRs. I must say that I am not very optimistic about the probability of success of this particular course of action, however, unless desperate reactions by some country or countries highlight the urgency of providing additional concessionary resources. I do hope that solutions will be found before desperation inspires actions that in the end will damage the whole international community.

There are two ways of reducing the need for external assistance. First, and most important in present circumstances, is to secure the recognition by industrial countries of the global effects of their policies and, in particular, of their negative effects on the developing countries. Such recognition should lead to a modification of these policies or to compensation for their negative effects on others. The Fund and the Bank have only moral suasion to offer in this regard, whereas they are well equipped with strong incentives for action by debtor developing countries.

Expansionary policies in the industrial countries could bring the terms of trade of African countries into more normal ranges, thereby wiping out a substantial proportion of their present need for assistance. Protectionist measures could be rolled back, helping both the price and quantity of African exports. Decreases in interest rates would help to alleviate the foreign exchange constraint. In other words, a monetary system that is more symmetrical in incentives and disincentives is a necessity if we want to minimize the danger of recurrence of present problems. Positive action could be expected in this general area, but most projections emphasize the great uncertainty as regards future growth rates of the world economy. Anyway, here again it is up to the developing countries to continue pressing for a reform of the international monetary system that would bring about a more balanced and stable economic environment for all. Some new thinking is required to find ways to create incentives capable of inducing the industrial countries to assume their due role in the adjustment process of the world economy.

An objective assessment of probabilities indicates quite clearly that the courses of action mentioned above will not yield results in the short run. Again, the main burden of action to overcome the foreign exchange constraint seems to fall upon domestic adjustment policies designed to redress large imbalances, to promote the allocation of resources to the production of tradables, to alleviate food scarcities, and to improve the general efficiency of the economy.

Adjustment is not made in a vacuum and is not painless. It would be a mistake to adjust without keeping in mind the strategic objectives of the economy. Unless this is done, such objectives will never be achieved. What happens is that lack of financing alters the normal relationship between short-term and long-term policies: while short-term policies should normally be conceived as tactical measures necessary to achieve strategic objectives, this concept requires financing in order to overcome short-term deviations without making substantial policy changes. When financing is not available, the relationship between short-term and long-term policies is severed, and the long-term result becomes the consequence of short-term policies aimed at solving emergencies rather than setting a general course for the national economy. Here the Fund and the World Bank could make a decisive contribution by recognizing and accepting the long-term economic strategies of African countries and placing short-term assistance and policy recommendations within that context.

Integration has been mentioned as a strategic objective and as such should be supported and promoted by international organizations. The Bank and the Fund must make a special effort to explore ways of explicitly recognizing, in their conditionality, the long-term strategic economic objectives of developing member countries. Of course, for the institutions to recognize such long-term objectives, the countries themselves must be able to set out such objectives meaningfully, not just as a set of good wishes and particularly without contradicting their declared objectives with their own policies. Such contradictions will eventually destroy the credibility of the countries.

Within the limitations of present resources, I believe that much could be done to enhance the pragmatism and the flexibility of the Fund and the Bank. For example, the question of the distribution of the cost of adjustment domestically could be pointed out, and if results are found undesirable, means could be designed to modify them. Recognition should be made of the common practice of covering payments arrears through unofficial channels or through overpricing or underpricing in external trade, so that what is registered as an “arrear” is actually nothing but a prospective capital flight. Growth rates and employment levels could be set, when feasible, as explicit goals of adjustment programs in the medium run, and explicit allowance could be made for changes in external variables or others outside the control of the authorities in order to avoid the need for frequent renegotiations and waivers. The distribution of Fund support could be changed during the program, if necessary, in order to obtain better results in supplies and in confidence generated.

These, as well as many other ideas, have been put forward during these three days, and I am convinced they merit closer attention by the international organizations of which our countries are members. They are not presented in ways that lend themselves to immediate application, but we can certainly reflect upon them. I believe there is no impediment to the establishment by Fund and Bank staff, under the authority of the Managing Director of the Fund and of the President of the Bank, task forces specially assigned to reexamining resource use and policies within the institutions with a view to introducing into them additional pragmatism and flexibility—two words that Mr. Ouattara used to characterize the work of the Fund. Institutions must always be reviewing their policies. This is the occasion, I believe, to initiate a special review—formulated by the Governments of African Central Banks and conveyed to the highest officials of each institution by the African Executive Directors—that will allow the institutions to serve their members better.

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