Central Banking Technical Assistance to Countries in Transition

Statement of the Organization for Economic Cooperation and Development

Susana Almuina, Ian McCarthy, Gabriel Sensenbrenner, and Justin Zulu
Published Date:
December 1995
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The subject under consideration, namely, the complementarity of technical assistance to macroeconomic activities, might appear an uncontroversial truism if it is seen from the angle of whether or not there is a need for such a complementarity, since this has always been the case for any economy undergoing radical transformation for development. It is instead a much more debatable subject if it is framed in two questions: (1) whether such a complementarity has been adequate to deal with the difficulties that the new independent states (NIS) of the former Soviet Union (excluding, of course, the Baltic countries) have encountered in the macroeconomic area since the beginning of transition to a market-based system; and (2) how to enhance the effectiveness of technical assistance for the purpose of improving macroeconomic management. To these two broad issues, I will devote my brief remarks, while underscoring that a thorough analysis of them is beyond my intentions because this would require a long examination and access to a great amount of evidence that is not yet available.

The macroeconomic situation of all the NIS shows at present few improvements and big failures, together with uncertain prospects as to when and how macroeconomic balance will be restored. To have prevented inflation from becoming hyperinflation is no solace if inflation continues as it does currently at 20-30 percent per month, if credit expansion continues to exceed monetary plans and its allocation is distorted toward less creditworthy borrowers. To have slowed down the pace of output decline is a small achievement if an economic recovery is not yet in sight or still lacks strong foundations. The two main macroeconomic accomplishments have been the containment of the rise in unemployment rate and the trade surplus of the Russian Federation. But the former, albeit important to check social discontent, is not sustainable unless it reflects a reallocation of human resources toward expanding and competitive sectors. The trade surplus of the Russian Federation reflects mostly the depressed state of domestic demand due to the collapse of economic activity.

If the main macroeconomic objectives in terms of inflation, fiscal deficit, credit expansion, and economic recovery have not been achieved in any of the NIS, can this be blamed on the inadequacy of technical assistance? It is clear that the answer is no; the authorities’ lack of resolve has been the most important factor. But it cannot be overlooked that part of the failure is due to the fact that a number of critical instruments for macroeconomic management have been missing or have been rather weak. For instance, in the Russian Federation there has been almost no alternative to monetary financing of the large fiscal deficits that emerged; the structure of the banking system is still far from being a sufficient transmission mechanism for monetary policy impulses; most banks are still captives of industrial enterprises; effective mechanisms for controlling the expansion of federal expenditure are not yet in place; and the payments system has become a hindrance, rather than an underpinning, to domestic trade and output recovery.

Have the macroeconomic objectives of the NIS been too ambitious compared with the instruments available after dismantling the old ones? This is a question that begs an analytical answer after gathering more evidence than is available now. Or, would it have been impossible to attain these targets because the intermediate objectives were defined too narrowly or did not take into account some characteristics of the economy’s structure and behavior? For instance, while the central bank tried to slow down credit expansion, enterprises could offset this effect by inflating interenterprise credit in the form of arrears. The increase of interest rates to real positive levels or close to these levels has not made a dent on enterprises. In addition, has there been enough attention paid to the need for coherence and parallelism between macroeconomic objectives and structural reforms?

Instead of offering answers to these questions, I would like to underscore two points. First, the only two success stories that can be identified so far in macroeconomic stabilization in Eastern Europe, namely those of the Czech Republic and Estonia, cannot be taken as evidence that with the available instruments and the standard intermediate targets it would have been possible for the NIS to redress macroeconomic imbalances in the midst of radical, systemic changes. Both countries began their economic transformation from less unfavorable economic conditions than those in the NIS, did not face economic problems and shortages of instruments as severe as those of the NIS, and were characterized by less difficult sociopolitical conditions. Second, the NIS could not be expected to tackle all the above-mentioned problems by relying only on their own resources. They have limited know-how on macroeconomic management, limited alternatives to the old command-administrative controls pending the creation of effective market-based institutions and indirect policy instruments, very weak banking and financial systems, and an inadequate tax base. Under these conditions, would it not have been more appropriate to use pragmatism by retaining temporarily some of the old control instruments while the new ones are being consolidated? In the meantime, in order to make progress toward a new macroeconomic management, more resources should have been invested in technical assistance. To date, how effective has technical assistance been in filling these gaps in policy design and implementation? This question could be explored under different vantage points.

As to the quantity of technical assistance, the main piece of evidence we have in the Organization for Economic Cooperation and Development (OECD) data bank concerning technical assistance projects is that out of $412 million of demands for technical assistance in six NIS, $252 million remained unsatisfied and a large part of this is relevant for macro-economic policy. One should not, however, draw far-reaching conclusions from these two data for two reasons: (1) the absorption capacity of the NIS has proved to be rather limited; and (2) in the field of technical assistance, quality matters more than quantity, and quality cannot be measured just in money terms. Other factors have also to be taken into account. For instance, has assistance been focused on priority areas, has it had an impact on the different levels of policymakers and policy implementors, has it been coordinated so as to avoid wasteful duplications and to reduce gaps, and have the recipient countries shown full confidence in the foreign advice they have been given? On all these accounts the evidence is rather mixed and assessment uncertain. In some cases, assistance did not reach top policymakers who were responsible for policy strategy, including members of parliament, while in other cases it did not reach those responsible for policy implementation. In many instances, it did not change the attitudes of long-established and pervasive bureaucracies, which are afraid of losing their hold on the economy. Overall, it is evident that the assistance provided so far leaves ample room for seeking improvements on both sides, the beneficiary country and the donor.

This is not just a question of increase in technical assistance quantity but also of better focus on certain subject areas and better modalities for the delivery of assistance. As regards the subject areas, there is a need to concentrate efforts in a few priority areas rather than trying to spread resources too thinly over a wide range. The focus should be on macroeconomic instruments and legal and institutional infrastructures since these are the weakest points in the NIS in the pursuit of the macroeconomic objectives that have been adopted. In this context, the following areas seem of priority interest:

  • Improving statistical information on variables that are critical for policymaking, such as national accounts, fiscal accounts, balance of payments, and price and business trend indicators.

  • The internal and external payments and settlement systems, since they are the pivots of market-based trading.

  • The structure and management of both the central banks and commercial banks, including the supervision of the banking system.

  • Public expenditure planning and control mechanisms together with taxation.

  • Supervision of financial market’s structure and of the operations of nonbank financial institutions, since these are as important as banks in mobilizing private savings for the purpose of financing investment and fiscal deficits.

Improvements could also be considered in the forms of technical assistance. Lecturing has limited impact when it comes to dealing with policy choices and policy implementation. Advice in institution building, including legal aspects, counseling in policy design, and training for the implementation of measures are more effective than lectures. The training requirements of the NIS cannot be met through the reform of their formal educational system because the latter has a less specialized orientation and can bear its fruits only over the long term. Specially designed training programs are needed instead. In particular, they should aim at the entire scale of responsibility, from top management to implementors. They should also emphasize training on the job and involve not just officials providing the assistance; where appropriate, the private sector should also participate in such training, especially through collaboration and partnership in business operations or joint ventures in the banking and financial sectors. Technical assistance could also be provided by establishing a policy dialogue with senior officials and experts of developed countries, along the lines pioneered by the OECD.

I will conclude with a few considerations. First, it is time that the NIS scale back their ambitions of being able to carry out sophisticated macroeconomic management for now. They should instead focus on upgrading macroeconomic institutions and structures, and apply some pragmatism (even heterodox approaches) in restoring a minimum of macroeconomic balance without backtracking in price and economic liberalization. Second, technical assistance is a limited resource and should be concentrated on urgent policy problems. Third, massive doses of training are necessary but they should be linked to the operational requirements of policy implementation. Fourth, the NIS should play a more active role in coordinating external assistance and in spurring collaboration among different suppliers of technical assistance for the same project, with a view to exploiting synergies and avoiding inconsistencies in policy orientations or advice.

The OECD has oriented its technical assistance in these directions since 1991. Its program for the NIS, albeit modest in the monetary and financial fields, is highly focused and based on the direct participation of our member countries as well as of major international institutions. The main subject areas have been public debt management, financial markets, bank privatization, and accounting standards. The OECD is ready to deepen its technical assistance to the NIS in close collaboration with other monetary or financial institutions.

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