Front Matter

Front Matter

V. Jafarey
Published Date:
June 1992
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    © 1992 International Monetary Fund

    Cover design and interior by IMF Graphics Section

    Library of Congress Cataloging-in-Publication Data

    Structural adjustment and macroeconomic policy issues: papers presented at a seminar held in Lahore, Pakistan, October 26-28, 1991

    / moderator, V.A. Jafarey.

    p. cm.

    Includes bibliographical references.

    ISBN 1-55775-302-4 (paper)

    1. Economic policy-Congresses. 2. Structural adjustment

    (Economic policy)-Congresses. I. Jafarey, V.A.

    II. International Monetary Fund. III. Pakistan Administrative Staff College.

    HD73.S77 1992




    Price: US$17.50

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    An understanding of the macroeconomic issues surrounding structural adjustment is a vital part of the International Monetary Fund’s work and a crucial aspect of policy formulation in developing countries. Although at times differences have arisen between the Fund and developing countries in this area, a greater understanding of the need to sustain macroeconomic growth through reform has emerged. The Fund has increased its appreciation of the impact of adjustment programs on the wider economy and on the population at large, and has placed greater weight on the specific circumstances guiding each country’s reform efforts. For their part, developing countries have become more willing to endorse Fund approaches to macroeconomic reform. This is not to say that full consensus reigns, but the dialogue is more open, cooperative, and fruitful. In an effort to sustain the vitality of this collaboration, policy experts and academics from member countries and Fund staff members gather occasionally to discuss their experience with adjustment programs. The seminar held in Lahore, Pakistan, on October 26-28, 1991, was just such an exercise.

    The Fund was pleased to join with the Pakistan Administrative Staff College in sponsoring this seminar. We highly value the input of government authorities on macroeconomic and structural issues and are grateful to the Staff College for providing such a productive forum for the discussions. During the seminar, which focused on the qualities needed to create sustainable and successful reform programs, the Pakistani experience was used to illustrate many of the points made concerning structural reform. The important lessons learned by Pakistan as it has strived to meet its domestic concerns and those of the international community are clearly relevant to the developing world at large.

    It is hoped, therefore, that the frank exchange of theoretical argument, practical experience, and research at this seminar will prove useful to other countries. The diverse group of participants—from Bangladesh, India, the Islamic Republic of Iran, Pakistan, Sri Lanka, and Turkey, as well as from the IMF and World Bank—is encouraging in this regard. While the views expressed in this volume are not necessarily shared by the Fund, it is our wish that their dissemination can contribute to a more informed discussion of the issues.


    Managing Director

    International Monetary Fund


    This seminar was jointly sponsored by the International Monetary Fund and the Pakistan Administrative Staff College. The diverse group of seminar participants and their high level of policy expertise attest to the importance of this subject for Pakistan and other developing countries.

    I wish to express my gratitude to Azizali Mohammed, former Department Director, and Ahmed Abushadi of the External Relations Department of the International Monetary Fund for initiating, planning, and organizing this project as well as to Cyrus Sassanpour, the IMF’s Resident Representative in Pakistan, for his work as a liaison. I would also like to thank Saida Riaz for helping with the logistical arrangements in Lahore. Other assistance with the seminar proceedings was offered by Seeman Waheed, Khalid Ikbal, and Mohammad Bashir. Finally, I would like to thank Rozlyn Coleman of the Editorial Division of the IMF, who edited and prepared the volume for publication.

    V.A. Jafarey

    Karachi, Pakistan

    Welcoming Remarks

    Aslam Iqbal

    It is my pleasant duty to welcome today our distinguished guests, both from within and without Pakistan, who have taken the trouble to come to Lahore to participate in this seminar entitled “Structural Adjustment and Macroeconomic Policy Issues” as jointly sponsored by the International Monetary Fund and Pakistan Administrative Staff College.

    In 1981, the International Monetary Fund initiated a program of seminars for nonofficials, which was aimed at promoting a broader understanding of the role of the IMF. This end was to be achieved by addressing questions of significant importance and concern to the member countries and by an exchange of views among academic, professional, and other groups in such countries. The seminar program has also aimed to improve the IMF’s knowledge of what these groups think about the issues facing their countries. In organizing such seminars, the IMF has sought to maintain a regional balance. To date, 25 seminars on various critical topics have been held in Asia, Africa, Australia, Europe, and North and South America.

    Such a seminar is being held for the first time in Pakistan and will provide an opportunity for examining and analyzing the macroeconomic disequilibria besetting developing countries—an instability characterized by inflation, balance of payment difficulties, and increasing debt liabilities. Valuable suggestions aimed at the adjustment and restructuring of these economies, with a view to reducing the rate of inflation, improving balance of payments and exports, and promoting economic growth, will warrant serious consideration.

    A number of prominent journalists, businessmen, academicians, financial experts, and bureaucrats from Pakistan are attending this seminar. Top financial and monetary experts from the neighboring countries of India, Bangladesh, Sri Lanka, the Islamic Republic of Iran, and Turkey are also participating. In addition, a very strong group of the IMF’s own experts are here to take part in the proceedings, which augurs well for the seminar’s success.

    I sincerely hope that this seminar achieves the purposes for which it was held here. I also hope that our guests enjoy their stay in Pakistan. Thank you and welcome.

    Opening Statement

    Sartaj Aziz

    It gives me great pleasure to address this seminar, with its distinguished group of policymakers, academics, and international civil servants. I would like to welcome all the participants and especially Mr. Camdessus on his first visit to Pakistan. I am very pleased that he can be among us today after his grueling schedule at the recently concluded Annual Meetings of the International Monetary Fund and World Bank in Bangkok, Thailand. Much of Mr. Camdessus’ speech at the Annual Meetings was devoted to a set of issues and themes that form the subject of this seminar and that he has often addressed in the past, namely the most important ingredients of growth-oriented adjustment and the actions and policies required from both adjusting countries and the international community to ensure reasonable and sustained economic growth in countries making structural and macroeconomic adjustments.

    Since the mid-1980s, when Mr. Camdessus became the Managing Director of the IMF, there has been a growing concern in the international community about growth-oriented adjustment. Mr. Camdessus has made a significant contribution by raising awareness about the problem and encouraging the debate on how it might be achieved. This renewed emphasis on growth with macroeconomic stability has not only been a welcome improvement in the IMF’s approach to these issues but a very befitting response to the actual experience of the first half of the 1980s. The debt crisis, sharply higher interest rates, a substantial slowdown in the growth of world trade, adverse terms of trade, and the drying up of capital flows to developing countries, which marked the beginning of an era of large negative transfers, all combined to highlight the enormous difficulty of adjustment. This substantial deterioration in the international environment—arising mainly from the excessive reliance of the United States on interest rate policy to reduce its budget deficit rather than on a reduction in defense expenditure or an increase in taxes—generated an unprecedented economic crisis with enormous social costs. This crisis gave us new insights into the problems of adjustment, the sequencing of reforms, and most significant of all, the importance of maintaining the pace of economic growth by maintaining a minimum level of investment and import capacity.

    Growth-Oriented Adjustment

    While the requirements of growth-oriented adjustment in different countries are still being debated, a consensus on the following broad requisites seems to have been reached:

    • —balance between supply-side stimulus and demand management;

    • —reform programs that are country-specific, that is, tuned to the particular circumstances of a country rather than based on general nostrums;

    • —sustained commitment by the government to the economic policies of adjustment to generate the necessary confidence in and credibility of the reform program; and

    • —a supportive international environment in which flows of official and private capital are adequate, debt-service burdens are manageable, trade is not restricted by protection, and countries with strong economies follow appropriate policies to ensure adequate growth of the world economy, world trade, and global savings.

    Within these broad parameters, many features and policies may be particularly relevant for different countries or groups of countries. Before commenting on the process of reform and adjustment that Pakistan is currently undertaking, then, let me again emphasize that adjustment is not a unidirectional process with a set agenda for all countries at all times. It is a dynamic and flexible process that must be sustained. Its basic purpose is to remove any imbalances that may have arisen in the system, though, by definition, the removal of one imbalance creates or accentuates other imbalances which a dynamic adjustment process must deal with. For example, the most common imbalance is generally the fiscal one. If a government’s expenditures are persistently higher than its revenues, a fiscal imbalance is bound to develop. This can be corrected either by raising additional revenues or by cutting expenditures. However, if the adjustment process leads to such drastic cuts in new investment and such sharp curbs on credit that the rate of economic growth slows down, the adjustment would by itself lead to lower revenues in the following years, thus re-creating the fiscal gap. Sound demand management to correct fiscal and monetary imbalances must therefore be accompanied by adequate supplyside measures to achieve growth-oriented adjustment. This is the judicious balance Pakistan is seeking. I am confident that when we have achieved these goals in the coming years, with the help of the IMF and other agencies, it will go down as an outstanding example of dynamic, flexible, and successful adjustment, a process that was able to combine sustained stability with rapid growth. I hope the participants of this seminar will undertake a critical examination of the main ingredients of our program and offer suggestions for strengthening and improving it.

    Pakistan’s Economic Reform

    In November 1990, the new government launched an ambitious agenda of economic reforms to deepen, broaden, and accelerate the structural reform process initiated in 1988. The basic thrust of the accelerated reforms can be summarized as privatization and deregulation, in other words, unleashing the potential of the private sector to accelerate economic growth, while maintaining macroeconomic stability and self-reliance. At the same time, public sector programs were to be redirected toward human resource and physical infrastructure development and environmental protection, and they were to be made more efficient.

    This approach has involved a fundamental change. While in the short run one can correct the fiscal imbalance by raising additional revenues and restraining inessential expenditures, the longer-term solution lies in a drastic reduction in the scope of public sector activity. If the government continues to preempt a large amount of the resources available in the economy and persistently uses them less efficiently, the fiscal imbalance will become chronic. But if the government gets out of activities that it does not perform very well (like producing and selling cement or vegetable ghee) by privatizing them, it will not only cure the fiscal imbalances but will also have more resources for the activities it should undertake, like physical and social infrastructure building.

    The most important reforms, therefore, have been aimed at privatization and deregulation to revitalize a market-based economy. The privatization program has made good progress. The government has received acceptable offers for 24 industrial units and 2 commercial banks and hopes to sell most of them within 12 to 18 months. The government has also opened to the private sector many activities previously reserved for the public sector. These include power generation and distribution, shipping, airlines, and telecommunications. New commercial banks and several investment banks have also been allowed in the private sector.

    Pakistan has also undertaken far-reaching reforms in the financial sector by establishing an auction market for short-term treasury bills and long-term federal investment bonds and a secondary market for government securities. It is also planning to strengthen the role of the central bank in regulating and supervising the financial institutions.

    Exchange and trade reforms have removed most of the restrictions on foreign exchange transactions, travel, and foreign borrowing by the private sector. Import licensing has been eliminated and the maximum tariff has been reduced from 125 percent to 90 percent. Nontariff barriers are also being reduced.

    Many measures have been adopted to encourage foreign investment. Apart from deregulation of the procedures for setting up industries, there are no longer any restrictions on the share of foreign equity, payment of royalty or technical fees, or employment of foreign experts. Foreign parties can also participate in existing industrial ventures through the stock exchange.

    Thus, this wide-ranging reform program is aimed at creating a more open, liberalized, and privatized economy, which is more growth oriented and efficient. The reforms are expected to stimulate private savings, private investment, and private sector initiatives and divert them from “rent seeking” activities of dubious economic merit to more productive arenas. Moreover, by reducing the scope of public sector activities, the reforms are intended to make the government more effective when undertaking the activities that it can most usefully accomplish. These include the development of human resources, the alleviation of poverty through social sector programs, the provision of infrastructure, and the protection of the environment.

    Macroeconomic Stability

    The strong growth impulses imparted by the supply-side reforms have to be accommodated within a framework of macro economic stability. This requires bringing down the fiscal and balance of payments deficits to sustainable levels. At the same time, adequate resources must be mobilized for development expenditure, and its effectiveness must be increased in order to ensure accelerated economic and social progress.

    In this way, Pakistan aims to achieve a truly growth-oriented adjustment: a considerable acceleration in investment and growth while maintaining stability by reducing the fiscal deficit and not allowing the rate of inflation to reach double digits. The basic goal is to make Pakistan a middle-income developing country before the end of this century. It has been at the threshold of middle-income status for the past two decades but has been unable to cross it. This time the country is determined. Mr. Camdessus in his opening remarks at a symposium held in February 1987 on growth-oriented adjustment said that “growth can best be combined with adjustment if adjustment takes the form of increases in export capacity, in savings, and in economic efficiency, and if high-quality investment projects are allowed to survive.” Mr. Camdessus also stressed the importance of the country’s own commitment to the reform program rather than its viewing the program as imposed from outside. He remarked, “No program can succeed without the support of governments and of public opinion.”1 These ingredients of successful adjustment are present to an ample degree in Pakistan.

    In this context, I would like to stress another notable feature of Pakistan’s reform program. First, unlike many countries in Africa, Latin America, and Eastern Europe, Pakistan’s adjustment program was not delayed until a full-blown economic crisis had emerged. In fact, Pakistan was one of a handful of countries whose economic growth actually accelerated in the 1980s to about 6.5 percent a year from an average 5.5 percent in the 1970s. This rate of growth, however, was not sustainable unless Pakistan corrected its large fiscal deficits, removed constraints on physical infrastructure (notably transport), and paid more attention to social sectors. These imbalances, then, formed the focus of our adjustment program.

    A second notable feature of Pakistan’s adjustment program is that of strong government commitment to the reforms. This is evidenced by the fact that the government on its own initiative launched an ambitious agenda of reforms that went well beyond what was envisaged in the original adjustment program of 1988, which the IMF and World Bank supported.

    Third, because of its strong commitment to reform and despite the acute difficulties caused by the Middle East crisis and the lack of any special external assistance to deal with it, the government not only continued its program of exchange and trade liberalization but actually accelerated it. And it did so while honoring its debt and debt-servicing commitments in the face of acute balance of payments difficulties caused by the crisis.

    International Environment

    Before concluding, let me emphasize the importance of a positive international environment for the success of adjustment programs being undertaken by developing countries like Pakistan. At present, the environment is not very positive. Net official development assistance is declining in real terms, private capital flows are scarce, and international trade in the face of the deadlock in the Uruguay Round is affected by growing protectionism. Textile trade, a particularly important export for Pakistan, remains outside rules governing the General Agreement on Tariffs and Trade.

    After three decades of intense debate on alternative development strategies, there is now an emerging consensus about the vital importance of market-friendly policies for the process of development. Many developing countries have already demonstrated their resolve to implement such policies. It would be a tragedy of historic proportions if adverse international forces were to frustrate these “unprecedented opportunities,” as Mr. Camdessus has called them, by denying developing countries better access to trade opportunities or capital markets. It would also be somewhat ironic that, after persuading developing countries to follow liberal economic policies, the developed countries did not follow these same policies and instead continued to impose restrictions on trade and other factors of production. I believe that Pakistan is doing its part. I hope that the international community will provide an adequately supportive environment for developing countries, like Pakistan, to undertake vigorous and far-reaching programs of economic reform.

    In conclusion may I thank the IMF and the Pakistan Administrative Staff College for organizing this seminar. The timing could not have been better. I look forward to its recommendations.

    Both remarks are taken from Corbo, Goldstein, and Khan (1987, pp. 7-8)

      Corbo, Vittorio, MorrisGoldstein, and Khan, Mohsineds., Growth-Oriented Adjustment Programs (Washington: International Monetary Fund and World Bank, 1987),


    Michel Camdessus

    It is a pleasure to be with you today for the opening of this seminar. And allow me to express my thanks to all who changed carefully prepared arrangements to offer me the opportunity to address this opening session. It is particularly appropriate that we are discussing the joint issues of structural adjustment and macroeconomic policy in Pakistan, and I am gratified that the Pakistan Administrative Staff College has joined with the IMF in sponsoring these proceedings.

    The program that the Pakistan authorities have been implementing in recent years, with the support of the IMF, is based on a policy approach that seeks to establish a sound basis for long-term efficiency and growth by dealing with long-standing structural weaknesses. At the same time, the policies address the pressing problems of macroeconomic imbalances. The Pakistan authorities are courageously implementing a comprehensive program, and although they have encountered difficulties, owing to unforeseen developments, they have also shown a commendable willingness to adapt to changing circumstances and to persevere with the thrust of the reforms. They have risen to the challenge, and the IMF for its part has worked out appropriate modifications so that the program has stayed broadly on track.

    As the seminar discussions will undoubtedly focus at length on macroeconomic adjustment and structural reforms both in Pakistan and in other countries, I will begin my remarks by referring to the salient features of the structural adjustment facility (SAF) program that Pakistan has been implementing for the past several years, before drawing more widely applicable conclusions. Through most of the 1980s, Pakistan experienced strong economic growth and a steady rise in per capita income, despite its high rate of population growth. During this period, Pakistan maintained an impeccable record of external debt service at a time when many other developing countries were experiencing debt-servicing problems. Nevertheless, by 1988 Pakistan faced severe macroeconomic difficulties, superimposed on historical structural weaknesses. The domestic saving rate remained low by international standards, and this was closely associated with rising fiscal deficits, which reached 8.6 percent of gross domestic product in 1987-88. Inflation approached double digits, and the external current account deficit widened to more than 4 percent of gross national product. The major structural weaknesses included a narrow and inelastic base for domestic taxation and a highly restrictive external payments and trade regime. In addition, a weak financial system, a distorted domestic price structure, and a range of restrictions and regulatory bottlenecks inhibited domestic and foreign private sector investment and activity, including foreign direct investment.

    The authorities recognized these problems and in 1988 introduced a macroeconomic adjustment and structural reform program supported by a 15-month stand-by arrangement and a 3-year SAF. Together these resource commitments amounted to about $900 million. The key policy objectives of this program have been:

    • —to strengthen the fiscal position through durable structural reforms that improve tax revenue performance and expenditure control;

    • to achieve external viability while liberalizing the external trade regime;

    • —to enhance the competitiveness of local industry; and

    • —to ensure a sound and healthy financial system.

    Considerable progress has been made in achieving these objectives under the first two annual SAF arrangements. This progress has been achieved despite some policy slippage and an inhospitable international environment, which caused substantial declines in Pakistan’s terms of trade in both 1988-89 and 1990-91.

    In the light of these accomplishments, I am particularly pleased that agreement has been reached on the final phase of the current program in the context of a third annual SAF arrangement, which will be presented to the IMF’s Executive Board in December 1991. This arrangement encompasses ambitious policy action on several fronts. It also balances an emphasis on macroeconomic adjustment with an increased emphasis on social welfare. The implementation of such a program should keep the economy on a path of sustained growth. Pakistan very much needs that growth, and although there will be many more challenges to overcome, I believe that Pakistan cannot afford to eschew the measures needed to accomplish the transformation. The international environment is increasingly competitive: Pakistan is not alone in pursuing the path of structural reform. At present, some 70 countries have programs with the IMF either in operation or under negotiation, and several more—notably in Asia—are pursuing similar programs of structural change, frequently with IMF technical assistance in key areas but without IMF support for their balance of payments. Be assured that the IMF will do its utmost to facilitate the process of change in Pakistan. We are confident that the successful implementation of the three-year SAF program will provide a sound basis for even deeper and more comprehensive reforms, which can, in due course, be supported by additional IMF resources. Of course, rapid economic changes may imply adverse transitional effects for some groups in society, even though, in the medium term, everyone gains from stronger growth performance. That is why the IMF, in cooperation with the World Bank and other international institutions, attaches great importance to the design of efficient and effective social safety nets for the poorest and most vulnerable groups. In many countries, the twin demands of economic stabilization and essential social expenditure require modernization of the tax system, with several important priorities: sufficient revenue, minimal distortions to the domestic economy and to trade, and a combination of efficiency and equity. I am delighted that this seminar will have an opportunity to consider this important issue in depth as it draws on international experience.

    I must stress that the IMF does not have a standard blueprint for economic reform. None of us should pretend to have that. Nor do we have any simple formulas for good economic management. Anyone who pretends to have one, or an abstract model that can be applied to all countries alike, is ignoring the special circumstances, different culture, and unique political and social realities of each country. What the IMF can offer to a particular country is advice based on the experience of all its other members, experience stretching over more than forty years and now encompassing practically the entire community of nations.

    This long experience of the IMF membership includes many successes and not a few failures. Indeed, the entire postwar era has seen an extraordinary range of experiments with economic systems, growth strategies, and economic ideologies. We have seen the development of more effective techniques for handling severe economic difficulties, and the IMF has been part and parcel of that long, complicated learning process, although there is still much to discover. All this varied experience has been accompanied by lively debate, sometimes leading to heated controversy. This is only appropriate, because the interests involved are very important—what is at stake is human well-being, not just economic abstractions. Our technical advice rests on this continually enriched experience, but in each new case it has to be complemented by a considered judgment as to whether the recommended policies, in their totality, will be regarded as credible by the rest of the world. In other words, is the program strong enough to boost domestic and foreign confidence? In the final analysis, a program will only succeed if it attracts strong support not only at home, by a country’s own citizens, but also abroad, by the creditor governments and the international capital markets. This support will come readily enough if people believe that the economic program will contribute to the country’s long-term stability and prosperity. It takes steady and firm application of sound policies to foster the kind of confidence that will make people willing to save and invest, to commit themselves to productive activities, and to take a long-term perspective. It is also important to foster the confidence of foreign investors, so that foreign direct investment and portfolio capital is attracted from overseas, including the repatriation of funds held abroad by the country’s own citizens. This confidence in a country’s potential and in its policies is essential, and the IMF’s candidly expressed opinion can make a useful contribution in this regard.

    In addition to its direct contribution, helping to design and finance adjustment programs and to build confidence, the IMF has another important contribution to make—improving the global economic environment within which Pakistan and all member countries must operate. Indeed, that is the ultimate object of the IMF’s work in the field of policy coordination among countries, including the major industrial countries which bulk so large in the global economy. And that is the aim of surveillance, a major component of the IMF’s responsibilities. Let me expand on this. You will recall that the founders of the IMF, at the Bretton Woods conference in 1944, started from the basic belief that a cooperative solution to any global problem is always better than a “go it alone” or confrontational approach. Their aim was to avoid a repetition of the evils of the 1930s. So they established a set of rules of the game, with the IMF as a kind of referee. The IMF is acutely aware that the problems and policies of any one country are important for the rest of the world. A key feature of the IMF setup, then, is that countries share responsibility. This is the basis for the IMF’s involvement in policy formulation in each of its member countries, developing and industrial alike. For example, the IMF endeavors to ensure that the major industrial countries take proper account of the consequences of their policies for the rest of world. The IMF also promotes trade liberalization and greater efficiency of capital markets because it is important for Pakistan, or any country seeking to modernize its economy and achieve higher growth, to have ready access to export markets and foreign capital. Clearly a supportive global economic environment is essential for the healthy growth of the Pakistan economy and is needed to create employment opportunities, support the rapidly growing population, and achieve a lasting improvement in living standards.

    Now, to come to the present day, how do we in the IMF see the global environment? First, in the short run, we see a moderate recovery in global economic activity, primarily because the short and shall low recession in the industrial countries will likely be followed by an upturn in 1992 of about 2.75 percent, the average rate of growth over the past decade. Second, we see a potential problem with global savings and investment because of two factors. On the one hand, the growth of savings has been sluggish in the main industrial countries for some years, and this trend is expected to continue. On the other hand, we face increased demands for investment in many countries. We expect to see strong new needs for capital worldwide—to reconstruct the economies most damaged by the Middle East war, to finance the Eastern European countries undertaking systemic reforms, and to help finance the fundamental transformation in the former U.S.S.R. These new demands will come on top of pressing and important existing needs—to assist developing countries, including the poorest and those emerging from debt difficulties, and to finance the expansion of the industrial countries. In the absence of strong measures, this impending imbalance between low savings and a high demand for investments will be corrected by the classic operation of markets, namely an increase in real interest rates.

    There is no need to spell out how a shortage of global savings would work to the disadvantage of developing countries like Pakistan. This prospect is indeed a leading issue on the IMF’s agenda, not least because it has important ramifications for all the other problems facing the world economy. There is, fortunately, a cooperative solution to this challenge. I have been explaining it extensively to both the industrial and the developing countries in recent months. This solution—the only practical one-—is for all countries to make stronger efforts to improve their own saving and investment performance. On the saving side, most countries have considerable scope for promoting higher saving by reducing their budget deficits. Clearly this is as urgent a task in those developing countries, such as Pakistan, where the deficit is large in relation to GDP, as it is in some industrial countries (the United States and several others) that loom large in the global financial picture and that face a similar problem. In every country there is scope to reexamine public spending, eliminate waste, reduce all kinds of unproductive spending, and align spending more closely with the main priorities of national policy. To contribute to this, I take every opportunity to emphasize the urgent need to reduce substantially the agricultural subsidies of the industrial countries and hopefully to eliminate them before too long. This must be a key element of a successful Uruguay Round in the GATT negotiations; it would both improve the prospects for many developing countries’ exports and stimulate greater efficiency in the industrial countries.

    Our best estimates suggest that the problem of global savings is manageable provided that all countries make the necessary effort. There is no good reason why the pressing needs of the developing countries of Asia, Africa, the Middle East, and Latin America should suffer because of the new demands stemming from Eastern Europe and the states of the former U.S.S.R.

    One particular element of the global economic picture deserves a special word. The recent political changes in the U.S.S.R. and Eastern Europe are creating a very different world—a world in which the reduction in East-West tensions is creating the prospect of substantial reductions in military spending and a rechanneling of human and financial resources toward better uses. This view was widely endorsed by many delegates at the recent Annual Meetings of the IMF and World Bank in Bangkok. It is not my aim here to comment on what is or may be the optimal level of defense spending for any country; that depends on many factors, particularly the regional context, and involves a complex value judgment by those responsible for each country’s security. Rather, I wish only to stress that the large military cutbacks now envisaged by certain countries (notably the United States, the former U.S.S.R., and the countries of Eastern and Central Europe) will have important economic consequences for those countries and for the rest of the world. And surely every developing country should also reassess carefully its military spending to see whether it can transfer human and financial resources to more productive uses, such as investment that would underpin its growth strategy. I had interesting discussions on this subject a few days ago in India, where the authorities are already engaged in meaningful reductions in defense expenditures. And I hope that Pakistan also will show leadership in this direction. What a fine example it would be to the rest of the developing world, if these two great nations could each transfer substantial human and financial resources to activities that more directly contribute to growth and to the reduction of poverty! What a prospect for a better life that could create for everyone in the subcontinent! Cuts in military spending are obviously desirable for any country, where this is consistent with maintaining national security. And at the global level such cuts, by a sufficient number of countries, could help to solve the problem of inadequate savings.

    In conclusion, I have described the efforts that the IMF is making to improve the global economic environment within which Pakistan must operate as well as those it is making to support the far-reaching program of structural reform that Pakistan has undertaken. The most important contribution, however, will be that made by the government and people of Pakistan. This seminar will provide an opportunity to discuss the many challenges that arise in such comprehensive reform programs, and it can therefore make a timely contribution to the process of change in this country and indeed in the region. I welcome this discussion warmly and wish you every success in your deliberations.

    Structural Adjustment and Macroeconomic Policy: An Introduction to the Main Issues

    V.A. Jafarey

    The past few years have seen an increasing convergence between the thinking of the International Monetary Fund and the concerns of the Third World. The movement toward greater agreement appears to have occurred from both directions. The IMF has gained new perspectives on development issues, and developing countries have acknowledged the validity of certain IMF approaches to economic adjustment and reform. This mutual recognition promises to improve the quality and durability of future adjustment efforts, and it is hoped that this seminar will prove another step along the path to such cooperative efforts.

    The change in the IMF’s outlook and policies began in the mid-1980s and has been characterized by an increased awareness of the need to sustain a basic standard of living during adjustment programs. In other words, growth cannot simply be sacrificed to adjustment. Moreover, a concern for income distribution, which was never absent, is now emphatically expressed. The duration and concessionality of IMF loans have also increased as have the linkages between World Bank and IMF lending. These cross conditionalities imposed by the two bodies have not proven as serious a problem as developing countries had anticipated. In addition, a number of IMF lending programs allow for modifications in the case of exogenous shocks or other exigencies; this flexibility had been among the developing countries’ most persistent demands. The IMF also now recognizes the importance of public support for adjustment programs, as evidenced, in part, by the presence of Michel Camdessus, the Managing Director of the IMF, at the inauguration of this seminar.

    As for the developing countries, their approach to development issues has been significantly revised as well. First, the notion that nationalization is a panacea for economic ills has been abandoned. There is now a consensus that the role of the state in the economy should be reduced through privatization and other reforms. Second, countries have grown more willing to rely on prices and markets for the allocation of goods and services and have become less tolerant of direct market intervention by the government. Third, the importance of export promotion has been recognized. Fourth, Third World countries are taking a more pragmatic and less ideological approach to global economic issues.

    Yet, although the IMF and developing countries have approached consensus on several issues, their views on adjustment strategies and development philosophy are far from full agreement. The developing countries feel that some of the changes in the IMF’s thinking have yet to be reflected in lending programs. These countries also still lack some faith in IMF-supported adjustment strategies because success is not guaranteed and past experience does not provide conclusive evidence to support these strategies.

    Still, there does seem to be some agreement, particularly on specific issues. For example, the belief that macroeconomic disequilibrium is a principal impediment to growth appears unanimous. It is also agreed that removing the disequilibrium requires global action. The developing countries have long complained that the IMF does not pressure industrial countries to rectify imbalances in their economies as vigorously as it pushes less developed countries to do so. The developing countries argue that the weight of the adjustment effort is thrown unfairly upon them. It appears that the IMF and other international organizations are beginning to recognize this problem. A final issue on which there is agreement is the need for low inflation: price stability is essential for both growth and equity.

    Elements of Adjustment Strategies

    As mentioned above, the IMF has recently adopted a comprehensive approach to the problem of economic imbalances, emphasizing the importance of structural change and the protection of development priorities. This agenda contrasts with its previous, narrower strategy, which focused on removing fiscal, external, and monetary imbalances. Thus, the most recent IMF-approved adjustment programs come close to the kind of comprehensive approach long favored by less developed countries. Some aspects of these new strategies are described below.

    Trade and Exchange Rate Policy

    One important area of structural reform is trade policy, in particular import liberalization and exchange rate management. A discussion of these issues must not only review current strategy but also analyze previous experiences with import-substitution policies. Although opinions differ on the merits of Pakistan’s earlier import-substitution strategy, it is nevertheless agreed that this phase was unduly prolonged. A consensus has now evolved on the importance of export growth as a dynamic element of economic strategy, although developing countries have expressed some reservations regarding exchange rate depreciation as an instrument for promoting exports. It is felt that exchange rate adjustment is a soft option and is used too frequently. On the question of the feasibility of rapid export growth, more mixed assessments have been offered. According to some arguments, structural changes in the economy, including diversification of the export base, must precede any attempt to stimulate exports through exchange rate measures. It has been noted, however, that structural adjustment programs do not rely solely on exchange rate changes for achieving export expansion. Exchange rate flexibility is helpful only in support of stabilization policies. In addition, there could be distortions in export policies. In Pakistan, quantitative restrictions exist on many agricultural exports. These restrictions have been part of a shortsighted strategy to protect consumers; they have resulted, in the long run, in stagnating output and higher prices.

    As for the process of liberalizing imports, it may be useful to summarize the merits and demerits of import substitution, a development with which Pakistan has had to contend.

    • —Import-substitution policies may have been helpful to Pakistan in the early stages of industrialization. Some industries, set up under the import-substitution regime, have now become major exporters. Nonetheless, heavy protection, even in the initial stages of industrialization, can be considered inappropriate when protection encourages industries in an indiscriminate manner. Import substitution carries the risk of inhibiting the development of genuine export industries.

    • —The enthusiasm for import-substitution strategies appears to have subsided considerably. Pleas for protection are now confined to capital goods and high-technology industries.

    • —Developing countries face a conflict between the need for import liberalization and the need for reducing the budget deficit. Because import duties offer a quick and politically convenient way of raising revenue, there is a temptation to postpone tariff reforms.

    • —External resources are needed to help developing countries in the initial phase of their adjustment programs. Developing countries should be able to liberalize imports without risking the depletion of foreign exchange reserves.

    • —The liberalization of global trade is essential if developing countries are to be persuaded to reduce tariffs and remove restrictions on imports and open their markets fully.

    Fiscal Policy

    In the fiscal sphere, it is generally agreed that a reduction in the public sector deficit is a key step in the removal of macroeconomic imbalances. Yet, measures to reduce the deficit should not be judged solely on a quantitative basis. The quality and durability of a deficit reduction program must also be considered. Developing countries maintain that actual lending programs of the IMF tend to overemphasize quantitative change. On the flip side, though, these types of changes are easier to specify and monitor objectively.

    Both the IMF and developing countries agree that social sector programs, with their long-term significance, should not suffer in the process of fiscal retrenchment. Developing countries point out that the fiscal adjustment required by an IMF program is usually so large that it cannot be achieved solely by raising revenue or by cutting nondevelopmental expenditure. They argue that deficit reduction should be spread out over a longer period in order to avoid the painful squeeze on social programs.

    The scope for a reduction in nondevelopmental expenditure exists through the curtailment of subsidies. Only those subsidies that are accurately targeted at low-income groups and administered in a cost effective manner would need to be retained. A saving in government payroll expenditures should be sought through a reduction in the public sector work force rather than through a cut in real wages. In addition, possible cuts in military spending are now being discussed. (In the past, the IMF had been reluctant to engage in this debate publicly.) Developing countries are being advised to emulate the superpowers and reduce their defense outlays. It does not appear, however, that any international institution is contemplating the extreme step advocated by Robert MacNamara—that external assistance be formally linked to a reduction in defense expenditures.

    On the revenue side, IMF and Western aid donors have been advocating a shift from taxes on trade to taxes on consumption. They also emphasize the importance of charging adequate prices for public utilities in order to keep abreast of inflation and provide resources for the expansion of infrastructure. Developing countries have voiced concern that increases in consumption taxes and utility charges would put pressure on the cost of living, impose an unfair burden on the poor, and erode competitiveness in export markets. The differences in the two viewpoints appear related to the speed and scale of adjustment rather than the program’s underlying principles. Indeed, there is general agreement on positions relating to direct taxes, such as increasing their share in total revenues, minimizing tax evasion, and improving tax administration.

    Monetary Policy

    In the sphere of monetary policy, it is generally agreed that controls over interest rates and credit allocation should be considerably reduced. On balance, a greater market orientation to monetary policy is welcome, and the development of capital markets should be given greater importance.

    Developing country representatives argue that a total reliance on the market mechanism would neglect less developed areas, small borrowers, and weaker sectors of the economy, such as agriculture. In addition, they believe the pace of reform, under pressure from international lending agencies, is often too rapid. Reforms need to be adjusted to the realities of the situation in each country. The sequence of liberalization is also important. Premature liberalization is risky, as evident from the experiences of several developing countries. Further, it is essential to strengthen both the regulatory system and the general legal framework for market development. Indeed, one argument given for slowing down the pace of reform is that institutional change takes place slowly.

    With regard to financial sector reform, observers maintain that if the central bank is to be effective it must be given complete autonomy, not only with respect to the conduct of monetary policy but also with respect to the exit and entry of enterprises into the financial system. It might be noted that the financial reforms being undertaken in Pakistan have been based on a gradual approach. Simultaneous with the liberalization of the financial system, efforts have been made to improve regulatory procedures, extend their coverage, and strengthen the position of the State Bank of Pakistan.

    Issues in Privatization

    The debate on privatization has been wide ranging and intense, covering both the general concepts guiding privatization schemes and Pakistan’s current program of accelerated privatization. Sharp differences are evident between the views of developing country representatives and those from international institutions—though not necessarily along the expected lines. Individual differences appear more related to the scope, pace, and sequence of privatization than to the principle itself.

    Pakistan’s strategy of rapid privatization, the Great Leap Forward, has come in for considerable criticism. There are reservations regarding the program, and many observers agree that gradual change would have been more appropriate, as would an approach based on clear guidelines, adequate preparatory work on individual units, and a strengthening of the regulatory framework for public utilities. In defense of the government’s program, it has been recognized that a bold and accelerated strategy may have been necessary because of the urgent need for structural reform and because difficult economic reforms are best accomplished when executed rapidly and decisively. The government, it has been argued, could learn while doing.

    On the scope of privatization, it is generally agreed that the public sector should withdraw from the manufacturing of consumer goods and from the provision of services. Chronic loss-making enterprises should also be divested. More controversial has been the privatization of public utilities. Because the prices that utilities are generally allowed to charge are not sufficient to meet the marginal cost of production, private investment may not be forthcoming for these projects. The need for improved regulation of utilities is clear, but opinions differ about whether regulatory arrangements must be strengthened before privatization or whether this can wait. In the case of utilities financed from foreign loans, international lending agencies would have to be consulted before the assets could be disposed of. Several other concerns have also been raised: the insufficient methods for valuation of public assets, the dubious sources of funds being used by the private sector for the purchase of public assets, the danger of private wealth becoming concentrated among a few owners, and the failure to develop a capital market.

    IMF-Supported Adjustment

    Adjustment programs are essentially colloborative efforts between the developing country, which is guided by a variety of imperatives, and international lending agencies and creditors, which have their own sets of considerations. Although the IMF’s original mandate emphasized short-term balance of payments assistance—eschewing structural reform issues as being too close to the development work of the World Bank—the Fund has more recently adopted a longer-term approach. The introduction of structural adjustment facilities in the 1980s was a recognition that many developing countries would be better served by more concessional lending and deeper macroeconomic reform. This reformulation of IMF programming has increased the institution’s flexibility and made it more responsive to developing country needs.

    An IMF program is now likely to consider country-specific conditions, supply-side effects, and the program’s impact on the population, especially on the poor. In implementing IMF-supported programs, various options regarding the pace and sequence of reform, the quality of the macroeconomic targets being employed, and the extent of restructuring are debated within the context of the individual country undertaking adjustment. It is recognized that, when correcting macroeconomic disequilibria, one size does not necessarily fit all.

    Experience with IMF-supported programs has varied. Programs that draw on the structural adjustment facilities (SAF/ESAF) have tended to achieve their growth targets more often than they have achieved their inflation targets. Programs funded from the stand-by and extended arrangements performed rather better on the inflation front. Both sets of programs have a mixed record with regard to other variables. It should be noted, however, that it can be difficult to measure the impact of adjustment programs, since macroeconomic data may not be well constructed and the causal links between the program and other influences on the economy may be difficult to untangle.

    Concluding Remarks

    The need for adjustment programs brings into focus the long-standing dilemma of choosing between rapid growth and the need for stabilization. Stabilization programs sometimes result in stagnation; yet macroeconomic disequilibrium can also frustrate growth and lead to declines in output and per capita income.

    Regarding the appropriate strategy for structural reform, the option is between a gradual step-by-step approach and a quick, sweeping change. The pace and sequencing of liberalization programs are also extremely important. As to the advantages and disadvantages of the two approaches, each country must decide for itself, depending on its circumstances. There is no standard adjustment program available to meet the requirements of all developing countries. It is essential to have country-specific solutions.

    The concern for income distribution and protection of low-income groups needs to be translated into concrete provisions in adjustment programs and financing arrangements. There is also an increasing recognition of the importance of economic management skills and judgment to ensure quick adjustment to changing circumstances. In addition, a favorable external environment, with respect to resource inflows and opportunities for export expansion, is essential to the success of adjustment strategies.

    To be sure, there are serious problems in evaluating the effect of adjustment programs undertaken by developing countries. Macroeconomic results are influenced by so many factors that it is difficult to determine the exact role of the adjustment program in the failure or success in meeting targets. Nonetheless, continuity in government policy should be maintained to ensure the success of the adjustment strategy. The policies will be credible and effective with the public only if the government itself displays full confidence in the program and is capable of sustaining it.

    In Pakistan, there has been public criticism that agreements between the IMF and the government are kept secret. No public debate has occurred either before or after agreements are concluded. It is felt that this secrecy adversely affects the acceptability of the program by the general public and by private enterprises. However, it should be recognized that it would be difficult for the government of a developing country to negotiate with the IMF when the press, opposition parties, and general public are looking on. The government might need to take up positions during the discussions that it would wish to modify later in order to reach a compromise. Yet it is possible, and probably desirable, for the government to publish a document outlining the broad features of the agreement and the strategy underlying it; of course, details involving possible taxation policy and other specific reforms would have to remain secret to avoid speculation.

    On balance, then, structural reform in developing countries must take account of both local and universal concerns. Country-specific solutions are required in order to meet the needs and demands of a nation’s population. Yet larger principles and the general lessons learned from other adjustment efforts must also be acknowledged. Finding ways to satisfy both elements in an adjustment strategy means effective communication and implementation of policy. It is the aim of this seminar to provide the forum for such an exchange. Perhaps the discussion here will illuminate the “middle ground” that Pakistan and other developing countries are seeking.

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