Mohsin Khan, Morris Goldstein, and Vittorio Corbo
Published Date:
September 1987
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Pedro S. Malan

We have before us one important topic, two good papers, and four thoughtful comments. What is left for an “initial discussant,” as I am defined in the program, is to raise some points which might be taken up by the next speakers.

The first point is related to the dichotomy between import substitution and export promotion. I have always been uncomfortable with simple dichotomic views, which try to reduce a rather complex set of issues to “two schools of thought,” or in this case, into a conflict between import substitution diehards and export promotion triumphalists.

Most sensible people both in academia and in policymaking circles in developing and developed countries alike always interpreted this issue in terms of the best policies to increase an economy’s tradability, which comprises both exportable production and efficient import-competing activities. This requires, of course, getting prices right, particularly the exchange rate, which can be seen as the relative price of tradables vis-à-vis nontradables.

We should know—and I am glad to hear that Professors Sachs and Bhagwati recognized it—that export promotion does not exclude import substitution in selected sectors, neither should it be equated with the absence of government intervention.

I think the relevant policy discussion should center on how tradability can be increased. This could hardly be achieved solely through reliance on relative price changes. It is important to give appropriate market signals to the relevant economic agents, and often, during an adjustment program the price of tradables is to be increased relative to the price of nontradables. This should, in principle, shift demand, both domestic and foreign, in the direction of domestically produced goods and services. Nevertheless, there is a need for some broader governmental policies and interventions to give further indications that the change is sustainable and that a nominal devaluation will not be eroded very quickly by inflation, rising prices of nontradables, or by some wage reaction which it might generate. This is Mr. Karaosmanoglu’s point of view with which I fully agree: the importance of having a companion macroeconomic policy that allows for, among other things, a sustained shift in relative prices.

It is too easy to overdraw the distinction between inward- and outward-looking policies. I think pragmatism in policymaking has been and should continue to be the response, and Professor Sachs’s advice and appeal for humility and nondoctrinaire positions when it comes to conditionalities should be carefully considered by our organizations as well.

Although I don’t have time to go into history here, I just want to point out that so-called theoretical criticism often comes after the event. In the 1930s import substitution was a response to the prevailing beggar-your-neighbor situation. In the late 1940s and early 1950s it was a response to the significant share of trade undertaken with nonconvertible currency areas. In the 1960s it was easy to advise outward-looking policies when international trade was growing at nearly 9 percent a year in real terms and there was a remarkable resurgence of private international capital flows, which had been dormant for 30 years.

We must understand that we are dealing with pragmatic policymakers in both developed and developing countries who have their own perceptions about the current situation and future scenarios and are responding to the best of their knowledge using “theory,” but are also very mindful of the political constraints under which they operate.

I would have preferred that Professor Bhagwati would have started where Professor Sachs began. As a general matter, there is much to be said in favor of outward-oriented development strategies relative to inward-oriented development strategies. But—and I would like to quote Professor Sachs—”General observations such as these do not really justify the equation of outward orientation with market liberalization, nor the emphasis on liberalization as an instrument of crisis management into debtor countries, or even a lasting solution to the debt problem.”

It is in this sense that, despite the indisputable merits and insights of Professor Bhagwati’s paper, Professor Sachs’s paper and presentation are more relevant to the policy discussions now taking place within the Boards of our institutions and to the enhanced policy dialogue that the Fund and the World Bank are carrying on with member countries.

Mr. Chairman, you suggested to us in your initial intervention today that this discussion should ideally lead to some policy advice for both the International Monetary Fund and the World Bank. In the light of the concerns expressed yesterday so candidly by both Mr. Conable and Mr. Camdessus, I would like to reemphasize a statement made by Mr. de Larosière six months ago while addressing the U.N. Economic and Social Council and repeated yesterday by Mr. Camdessus: “Programs of adjustment cannot be effective unless they command the support of governments and of public opinion. Yet, the support will be progressively harder to maintain the longer adjustment continues without some pay-off in terms of growth and while human conditions are deteriorating.” This is an important point. It echoes Mr. Karaosmanoglu’s comments on the need to tailor policy advice to the level of institutional development and to the particular political and social experience of member countries. It also recognizes something that developed countries’ analysts take for granted, namely, that in industrial countries you have to make your point via political persuasion, through the domestic political process, congresses and all that.

We should not regard this as a luxury that only rich countries can afford. Developing countries’ governments also have to make their cases through political persuasion. Therefore, policy advice, even when it seems absolutely right from a theoretical point of view, has to be sold, so to speak, through the domestic political process. A better understanding of these issues involving persuasion will help considerably to enhance the two-way policy dialogue between governments and the Bretton Woods Institutions.

The papers by Professors Bhagwati and Sachs represent a useful contribution to this dialogue and fit very well into the general theme of this symposium, which is some years overdue. I hope it turns out to be the first of many to come.

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