The Web edition of the IMF Survey is updated several times a week, and contains a wealth of articles about topical policy and economic issues in the news. Access the latest IMF research, read interviews, and listen to podcasts given by top IMF economists on important issues in the global economy.


The Web edition of the IMF Survey is updated several times a week, and contains a wealth of articles about topical policy and economic issues in the news. Access the latest IMF research, read interviews, and listen to podcasts given by top IMF economists on important issues in the global economy.

Drop in World Military Spending Yields Large Dividend

The decline in military spending that began in the mid-1980s continued through 1995, with potentially important implications for nonmilitary spending and fiscal adjustment. Previous studies indicated that world military spending declined by 1.3 percentage points of GDP between 1985 and 1990, with declines in all regions and for both industrial and developing countries (Daniel Hewitt, Military Expenditure: International Comparison of Trends, IMF Working Paper 91/54, May 1991; and Daniel Hewitt, Military Expenditures 1972-90: The Reasons Behind the Post-1985 Fall in World Military Spending, IMF Working Paper 93/18, March 1993). This decline, in sharp contrast to the previous 25 years, was attributed to a combination of factors, including a slowdown in world economic activity, increased democratization, improvements in world security, and a fall in military aid.


Military Expenditure

(Billion U.S. dollars)

Citation: IMF Survey 25, 001; 10.5089/9781451937442.023.A011

Data: IMF, World Economic Outlook database

More recent data, for the period 1991 through 1995, show that this downward trend in military spending has continued. Data for 130 member countries from the IMF’s World Economic Outlook database indicate that military spending worldwide dropped to a low of 2.4 percent of world GDP in 1995 from 3.6 percent in 1990 (see table, page 182). Data from the Stockholm International Peace Research Institute (SIPRI) show similar results for a sample varying between 73 and 107 countries: a fall in military spending to 2.7 percent of GDP in 1994 from 4.2 percent in 1990. In a sub-sample of 67 countries (excluding the former USSR) for which SIPRI data are available for all years, military spending falls to 2.7 percent of GDP from 3.3 percent in 1990.

Michel Camdessus Selected for Third Term

On May 22, the IMF’s Executive Board unanimously selected Michel Camdessus, of France, to serve an unprecedented third five-year term as Managing Director of the IMF, beginning January 16, 1997 (see press release, page 191).

Aggregating the World Economic Outlook data for 1990-95 with data for the previous five-year period reveals that worldwide military spending has fallen by almost 3 percentage points of GDP during the decade through 1995.

A Large Peace Dividend

The dramatic reduction in military spending during the last decade implies a large and growing global resource savings—or “peace dividend.” If military expenditure as a share of GDP had been maintained at 1990 levels, spending in 1995 would have been some $345 billion higher. And if the ratio of military expenditure to GDP had continued at its 1985 level, such spending would have been at least $720 billion higher in 1995. Nominal military spending declined by $121 billion between 1990 and 1995, reflecting mainly cuts in spending by transition economies (see chart, page 181).

How have countries used the peace dividend? The links between military spending and other aspects of government behavior are complex and difficult to observe directly. Nonetheless, countries that have made sharp cuts in military spending have also tended to reduce their nonmilitary spending and their overall fiscal deficits while at the same time boosting social spending. This suggests that the peace dividend may have been used in part to finance social expenditures and in part returned to the private sector, potentially boosting private investment. On the other hand, countries that have raised military spending have also tended to increase nonmilitary spending and the fiscal deficit while cutting capital spending—suggesting that military spending may crowd out both private and public investment.

Spending Cuts Are Broadly Based

The decline in military spending has been widespread both geographically and by level of development (see chart, page 183).

  • Military spending by industrial countries as a group fell consistently over the period, to 2.4 percent of GDP in 1995 from 3.2 percent in 1990. In nominal terms, industrial countries reduced their military spending by some $14 billion over the period.

  • Developing countries as a group (including transition economies) cut their military spending nearly in half as a share of GDP—to 2.6 percent in 1995 from 4.9 percent in 1990. Notably, small, low-income countries reduced their military spending sharply over the last three years, to 3.2 percent of GDP in 1995 from 4.2 percent in 1993.

  • The transition economies—including the countries of the former Soviet Union—registered the most dramatic decline in military expenditures; they trimmed such spending by nearly 5 percentage points of GDP during 1990-95, to 3 percent of GDP from 7.9 percent. Military expenditures in these countries in 1995 were $125 billion lower than in 1990.

  • African countries steadily reduced their spending to 2.1 percent of GDP in 1995 from 3 percent five years earlier, implying a savings of about $3 billion last year. Sub-Saharan Africa—which had raised military spending during 1985-90—reduced it sharply during the last five years, to 2 percent of GDP from 3.2 percent.

  • Asian countries sustained their reduction in military spending during 1990-95, lowering these expenditures by the equivalent of 0.5 percentage point of GDP—to 2.3 percent in 1995. In nominal terms, Asian countries’ spending increased by $15 billion, with $9 billion of the total reflecting higher spending by the newly industrializing economies.

  • Latin American countries, which spend on average the lowest share of GDP on the military of any region, maintained their military spending at about the equivalent of 1.2 percent of GDP; this implied a rise in nominal spending of $6 billion during 1990-95.

  • Developing countries of the Middle East and Europe, which historically have recorded the highest levels of military spending, reduced such expenditures by nearly 2 percentage points of GDP during 1990-95; spending fell to 7 percent of GDP by the end of the period.

Military Expenditures

(percent of GDP)

article image
Note: Data weighted by country GDP.Data: IMF, World Economic Outlook database

Military spending data for individual countries underscore the degree to which declines are a worldwide phenomenon. Comparing military spending in 1990 with the average for 1991–95 reveals that 90 countries reduced military spending as a share of GDP by an average of 1.6 percentage points of GDP; over the same period, only 25 countries increased spending, with an average gain of 0.8 percentage point of GDP. Among the industrial countries, 17 reduced spending, while only 1 country raised it. In Africa, the picture is mixed: 13 countries boosted military spending, while 23 reduced it.

Military Spending in Program Countries

The implementation of stabilization and structural adjustment programs supported by the IMF might be expected to lead to a change in countries’ expenditure priorities, but has this occurred? Program countries (that is, countries with at least one IMF-supported adjustment program during 1991–95) reduced their military spending to a low of 2.0 percent of GDP in 1995 from 5.1 percent in 1990. This represents a larger decrease than for all developing countries. (In the SIPRI data set of 67 countries, military spending for program countries fell slightly to 2 percent of GDP from 2.2 percent during 1990-94, compared with a decline to 3.3 percent of GDP from 3.4 percent for all developing countries.) In addition, program countries may have relied more heavily than other countries on cuts in military spending to achieve the needed fiscal adjustment. A subsample of 51 countries, for which more complete expenditure data are available for the period 1985-92, shows that countries with IMF-supported programs decreased their share of military spending in total spending by 2.9 percentage points, compared with 1.7 percentage points for nonprogram countries. These results should be interpreted with caution, however, since program and nonprogram countries may differ in other ways that could independently influence military spending.


Reduction in Military Expenditure, 1990-95

(Percent of GDP)

Citation: IMF Survey 25, 001; 10.5089/9781451937442.023.A011

Data: IMF, World Economic Outlook database

Future Trends

What are likely future trends in military spending? The answer will depend on many variables, including the future state of world security, that are difficult to predict. Nonetheless, some minimum level of spending for national defense is likely to remain necessary for the foreseeable future. Reductions in military spending relative to GDP are thus not expected to continue, at least not at the same pace seen since 1985. Further, the decline in military spending over the last five years reflects, in part, a sharp cut in nominal spending by countries of the former Soviet Union, which are not expected to be repeated. This makes it all the more imperative that the savings from cuts already made be used efficiently and equitably.

Sanjeev Gupta, Jerald Schiff, and Benedict Clements

IMF Fiscal Affairs Department

Worldwide Military Spending, 1990-95, by Sanjeev Gupta, Jerald Schiff, and Benedict Clements, will be published as an IMF Working Paper in late June. Copies will be available for $7.00 from Publication Services, Box XS600, International Monetary Fund, Washington, DC 20431 U.S.A. Telephone: (202) 623-7430; fax: (202) 623-7201; Internet:

Liberal Trade and Regional Integration: A Prescription for Africa

The following article summarizes the main conclusions of a recent seminar on trade liberalization and regional integration in Africa. Participants included senior officials from seven Anglophone and Francophone African countries and senior staff of the IMF, World Bank, and World Trade Organization; the French Ministry of Cooperation; the universities of Abidjan, Oxford, and Paris; and national and regional authorities. The seminar took place March 27-29 in Grand Baie, Mauritius, and was organized by the IMF Institute, with the support of the French Ministry of Cooperation and the European Union, and the assistance of the Bank of Mauritius.

Trade liberalization, along with macroeconomic stability and private sector initiative, is a key ingredient for long-term growth. Openness in the context of globalized markets enhances economies of scale and maximizes benefits from comparative advantages. On these principles there is general agreement, as evidenced by theoretical and empirical studies and the views expressed by participants at the Mauritius seminar on trade liberalization and regional integration. Seminar participants noted that development strategies had shifted from import-substitution to export-oriented policies and that developing country experience showed a positive correlation between trade liberalization, export growth, and economic growth. According to an empirical study cited at the seminar, the shortfall in economic growth in Africa attributable to trade restrictions was about 1 percent of GDP each year during 1965-90.

Unilateral trade liberalization had progressed in Africa, participants agreed, but the speed and depth of reform had been uneven. Although trade reform had accelerated since 1990, only a few countries had achieved sustainable progress. Reliance on trade taxes remained excessive, and speakers cited the need for African countries to undertake trade and taxation reforms simultaneously. They stressed the importance of further widening and deepening of trade reforms. The issue of the speed of reforms was seen as critical, especially in light of the globalization of markets. If African countries did not take quick advantage of the opportunities to integrate into the world economy, they faced the risk of marginalization.

The investment and supply response to trade liberalization in Africa has so far been weak, participants generally agreed. The limited supply response stemmed from insufficient trade liberalization but also reflected other factors. Among these were weak regulatory frameworks and missing or inefficient capital markets to finance investment, as well as inadequate or inconsistent macroeconomic policies and the lack of credibility of governments’ commitment to reform. Participants recognized that a favorable supply response resulting from long-term investment decisions required social consensus on policy, consistency and continuity of policy to foster credibility, and administrative capacity.

Ouattara Stresses Value of Trade Liberalization for Africa

Following are excerpts of a March 27 address by IMF Deputy Managing Director Alassane Ouattara at the opening of the Mauritius seminar on trade liberalization and regional integration in Africa.

The link between growth and trade underlies many policy discussions. Although trade policy is complex and involves many dimensions, an important lesson from experience is that there is no prosperity if trade is hampered. Today, for African countries, growth—and hence trade as an engine of growth—is more central than ever. African countries need sustained high-quality growth. In the absence of high-quality growth, Africa’s rapid demographic expansion will lead to deteriorating living standards. A coherent strategy for high-quality growth requires several elements, including sound macroeconomic, structural, and social policies, and liberal trade. Liberal trade, fostering competition and private sector initiative, can contribute significantly to overall efficiency gains in resource allocation. Furthermore, Africa’s development now takes place within the context of the globalization of world markets. Rapid integration of the world economy has created a global marketplace for information, goods, services, and capital. The global markets offer new opportunities for larger capital inflows and higher investment, improved technology, more competitive imports and expanding export markets.

Integration through trade has been the cornerstone of the world order that emerged from the disruptions caused by the depression of the 1930s and World War II. The vision of our predecessors who created the institutional framework to support freer trade—including the General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization (WTO)—was not based only on economics: trade would also promote peace. As you all know, the IMF strongly supports trade liberalization as a means to improving economic efficiency and enhancing welfare. The IMF’s mission, spelled out in Article I of its Articles of Agreement, is “to facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy.” The IMF’s special responsibilities in promoting exchange stability, in assisting in the establishment of a multilateral system of payments and the elimination of foreign exchange restrictions, and in making available resources to finance balance of payments deficits, all work toward facilitating open markets and promoting prosperity.

Trade liberalization can be undertaken unilaterally, regionally, or multilaterally. IMF policy advice, whether in the context of its surveillance or use of IMF resources, has emphasized unilateral liberalization on a nondiscriminatory, most-favored-nation basis. This is because the largest beneficiary of trade liberalization is the economy of the liberalizing country. Furthermore, as an international institution, the IMF needs to promote policies in member countries that do not adversely affect other members.

Nondiscriminatory, multilateral liberalization is undertaken normally in the context of multilateral trade negotiations formally under the GATT and now under WTO auspices. Over the past several decades, such negotiations have been instrumental in bringing down trade barriers among many countries and developing rules and discipline for the multilateral trading system. Multilateral liberalization may be easier to sell domestically compared with unilateral liberalization because of the perception that market access gains are being achieved across a larger spectrum.

Another route to trade liberalization could be via regional trade agreements. Trade agreements among a limited group of countries can provide their members with many benefits similar to those of multilateral liberalization. They are also easier to negotiate than multilateral agreements because of the smaller number of players. Moreover, they can in principle—and have in practice—set new standards for multilateral agreements and spur them on. However, regional trade agreements also carry dangers. As well as creating trade among the members of the arrangement, they may divert trade away from non-member countries by discriminating against them, to the detriment of global efficiency and to the cost of both members and nonmembers. They may also distract attention from multilateral liberalization efforts. A key question, therefore, is how to make regional trading arrangements consistent with the multilateral system and essentially outward looking and to avoid defensive regional devices that damage third parties and, ultimately, the participants themselves.

Several speakers emphasized that trade liberalization could be pursued unilaterally or multilaterally. The first-best policy was unilateral liberalization because the largest beneficiary is the economy of the liberalizing country. African countries had not fully availed themselves of the opportunities offered by the framework of multilateral liberalization undertaken in the context of the Uruguay Round trade agreements; speakers stressed that had African countries made more binding commitments within this framework, the credibility of their trade reforms could have been reinforced.

Regional Trade Arrangements

Another route to trade liberalization is through regional trade liberalization under regional trade arrangements. While trade among African countries was increasing, participants agreed, its growth was not commensurate with the proliferation of regional arrangements. Numerous arrangements had been agreed to, many in recent years, but they had failed in most cases to provide tangible results—in terms of trade creation, factor mobility, or policy coordination. The reasons included the excessive number of participating countries with differing agendas, governments’ weak commitment to overall liberalization, and the lack of compliance enforcement mechanisms.

Despite the mixed record, participants saw regional trade arrangements as offering potential benefits by providing members with larger markets and economies of scale and with incentives for adopting appropriate policies—thereby enhancing the credibility of reform. In this respect, participants discussed new forms of regional cooperation whose modalities varied from institutionalized (the West African Economic and Monetary Union) to flexible (the Cross-Border Initiative to Promote Private Investment, Trade, and Payments for Eastern and Southern Africa and the Indian Ocean). They agreed that regional arrangements should have the following features:

  • small number of initial participating countries;

  • strong commitment to liberalization by their governments, both within the region and externally;

  • binding commitments and enforcement mechanisms to establish credibility;

  • not too stringent rules of origin; and

  • simple and effective regional institutions.

All seminar participants considered the credibility of trade liberalization as key: one of the biggest deterrents to national or foreign investment was the possibility of policy reversal. Some speakers believed that credibility could be strengthened by regional arrangements that involved both developed and developing countries, but others disagreed. All were of the view that regional arrangements had to be consistent with the World Trade Organization framework; they should be building blocks toward global trade liberalization, rather than stumbling blocks perpetuating, at the regional level, the inefficiencies of import-substitution policies.

Speakers agreed that regional integration was not sufficient to generate growth commensurate with Africa’s needs, but it could help. Some believed that in a world of increasing regional arrangements, Africa needed to form its own effective regional entities to consolidate bargaining power, gain market scale, and establish common efficient institutions. Others thought that countries belonging to regional arrangements were more likely to implement sound macroeconomic policies because of peer pressure. These sound macroeconomic policies, supplemented by a regulatory framework and political stability, would in turn attract capital flows that could generate strong long-term growth. Seminar participants agreed that efforts toward regional integration should not be at the expense of unilateral liberalization. Deputy Managing Director Alassane Ouattara concluded that Africa had made progress with trade liberalization and should continue these efforts with vigor and determination.

Roland Daumont

IMF Institute

CFA Franc Countries: Progress and Challenges After Devaluation

In January 1994, the 13 countries in west and central Africa that comprise the CFA franc zone and the Comoros collectively decided to undertake a new adjustment strategy (see Special Supplement to the IMF Survey, March 21, 1994). A key element of the strategy was the devaluation of the CFA franc by 50 percent in foreign currency terms and 33 percent for the Comorian franc. (The CFA franc zone consists of Benin, Burkina Faso, Côte d’Ivoire, Mali, Niger, Senegal, and Togo, which make up the West African Economic and Monetary Union (WAEMU); Cameroon, the Central African Republic, Chad, the Congo, Equatorial Guinea, and Gabon, which form the Central African Economic and Monetary Community (CAEMC); and the Comoros.)

Photo Credits: Denio Zara and Padraic Hughes for the IMF.

Since the creation of the CFA franc zone almost 50 years ago, the CFA franc has been freely convertible into French francs at a fixed rate of 50 CFA francs per 1 French franc and has been supported by the operations accounts with the French Treasury of the zone’s regional central banks. These arrangements provided an anchor for the economic and financial policies of the member countries and lent the CFA franc exceptional international credibility. After 1985, however, the economic and financial situation of the zone deteriorated, owing to substantial and prolonged drops in the world market prices of their principal exports and a marked appreciation of the French franc against the currencies of the zone’s major trading partners and competitors. The January 1994 devaluation of the CFA franc was aimed at restoring macroeconomic viability in the individual countries while preserving the monetary cohesion of the CFA franc zone and enhancing the momentum of economic integration.

A recent IMF study reviews the post-devaluation experience of the CFA franc countries since January 1994 and assesses developments under the modified adjustment strategy.

Modified Adjustment Strategy

The realignment of the CFA franc parity in January 1994 represented a major reinforcement of the adjustment strategy that had been followed until then to address the rapidly deteriorating economic situation of the member countries of the CFA franc zone. A key consideration in the design of the new strategy was to ensure that the devaluation would be sufficiently large, and supporting policies sufficiently strong, to address the loss of competitiveness experienced during the years 1986-93 and thus give credibility to the new exchange rate. Before the end of September 1994, comprehensive adjustment programs supported by the use of IMF resources were in place in all member countries.

The design of individual country programs had to take into account the participation of member countries in the two regional economic and monetary arrangements—the WAEMU and the CAEMC—and the need to preserve the new peg of the CFA franc to the anchor currency, into which it remains freely convertible. In this environment, monetary policy can be formulated and implemented only at the regional level.

The adjustment programs undertaken by the individual countries aimed at achieving an early stabilization of prices after the initial wave of price correction, a resumption of growth, a rapid rebound of domestic savings to help strengthen external current account positions, and a re-constitution of net foreign assets.

The Adjustment Experience

On the whole, according to the IMF study, in 1994 the CFA franc countries had largely met the objectives of their programs for economic growth, inflation, and the external position. Furthermore, restraint in wage policy helped to restore competitiveness. Progress was aided by a favorable international environment, good rainfalls, and financial support from the international community. But, as the IMF study emphasizes, policies played the principal role, and the firm control broadly exercised by CFA countries over nominal wages was particularly important.

Despite these achievements, performance was uneven in two crucial areas—fiscal adjustment and structural reforms. Contrary to program intentions, sizable shortfalls in tax revenues meant that the brunt of fiscal adjustment in the first year fell disproportionately on nonwage primary expenditure and on capital outlays.

Monetary developments were characterized by a much faster reconstitution of real money balances than anticipated. With low credit demand, the banking system became very liquid, which posed new challenges for the monetary authorities.

Challenges Ahead

Overall, the economic policy mix envisaged in the medium-term strategy to validate the new level of the exchange rate anchor and spark the recovery of the economies in the zone remains appropriate, according to the IMF study. But a number of challenges remain—in particular, the un-sustainability of the fiscal policy mix pursued in 1994 and the sluggish implementation of structural reforms. Corrective actions are necessary to keep the adjustment strategies on course.

Fiscal Policy. Correction of past government revenue shortfalls is needed, as well as a steady improvement in revenue performance, notably through a strengthening of tax collection and a reduction in exemptions and fraud. Far-reaching changes in the structure of property and income taxation are also needed, as well as a reduction in the reliance on export taxes.

On the expenditure side, the authorities need to guard against relaxing public sector wage policy and to ensure an adequate level of outlays geared to fostering human resource development.

Structural Reforms. Governments will first need to strengthen public sector administrative capacity. Areas requiring immediate attention include the civil service, public enterprises, the labor market, and sectoral reform.

Financial intermediation at the regional level needs to be deepened, and the instruments of monetary policy at the disposal of the two regional central banks should be improved. Finally, the pursuit of structural reforms should be supported by the adoption of a stable and predictable legal and regulatory environment to improve the investment and business climate and, more generally, enhance private sector development.

Other important areas requiring attention include:

  • The momentum of regional economic integration and economic cooperation should be stepped up, particularly through the development of regional instruments of surveillance to foster economic convergence.

  • Most countries in the franc zone continue to shoulder a heavy debt burden. The timely and determined implementation of their adjustment programs, stock-of-debt operations tailored to each country’s capacity to meet its foreign financial obligations, and appropriate new financing on concessional terms should help alleviate the existing debt burden.

  • Improving the quality and timeliness of data is crucial to strengthening program design, implementation, and monitoring.

Aftermath of the CFA Franc Devaluation, by Jean A.P. Clement, Johannes Mueller, Stephane Cosse, and Jean Le Dem, is No. 138 in the IMF’s Occasional Paper series. Copies will be available in mid-June for $15.00 (academic rate: $12.00) from Publication Services, Box XS600, International Monetary Fund, Washington, DC 20431 U.S.A. Telephone: (202) 623-7430; fax: (202) 623-7201; Internet:

IMF, World Bank, and ILO Meet with Southern African Labor Leaders

The IMF, together with the World Bank and the International Labour Organization (ILO), recently sponsored a regional seminar for 34 leaders of national labor unions of the Southern African region (including Kenya and Uganda) on policies for economic growth and development in Southern Africa. The labor seminar—co-sponsored by the Southern Africa Trade Union Coordinating Council and the Nairobi-based International Confederation of Free Trade Unions/African Regional Organization—took place in early April in Harare, Zimbabwe. It was preceded by a seminar to familiarize the Southern African media with the work of the sponsoring institutions.

Ouattara Discusses Labor Issues, African Challenges

Following art excerpts of a talk prepared for delivery by IMF Deputy Managing Director Alassane Ouattara at the Harare seminar on growth and development in Southern Africa.

Because the IMF’s main task, as mandated in its Articles of Agreement, is to promote in its membership sound macroeconomic policies in the context of an increasingly interdependent world economy, its contribution to social development, while powerful, is necessarily indirect and its role in social policy advice limited. The IMF’s involvement in social issues has evolved over time, however, drawing not only on its own experience but on that of member countries and other agencies.

IMF-supported programs attach considerable importance to social expenditure policies. These programs have sought to include both short-term social protection mechanisms and long-term improvements in the level and cost-effectiveness of government spending on basic social services, such as primary health care and education.

The IMF recognizes the leadership that trade unions can exercise in creating a consensus in favor of sound macroeconomic policies. A deepening of the dialogue with trade unions needs to take place in a pragmatic way within existing constraints. Through its mandate, the IMF is constrained to limit its activities mainly to issues of macroeconomic policy—that is, policies that affect the country as a whole and not merely individual sectors. Choosing economic and social policies is the prerogative of individual member countries, who at present give no sign of willingness to concede these choices to the IMF. In its surveillance of member countries’ macroeconomic policies, however, the IMF has no hesitation in discussing and giving policy advice on such labor issues as employment, labor-market rigidity, privatization, and the social safety net, as these issues are directly related to the macroeconomy. It has no authority, however, to force a member government to accept this advice.

And what of the relationship between the IMF and the ILO? Over the past few years, the IMF, in its endeavors to help member countries attain “high-quality growth,” has made special efforts to enhance collaboration with the ILO so that members may benefit from the comparative advantage of each institution.

The Managing Director of the IMF and the Director General of the ILO have met on several occasions during the past two years. IMF staff members have participated in meetings convened by the ILO, and vice versa. Collaboration on country level work is envisaged with the ILO to integrate further social and labor dimensions into macroeconomic policy advice to governments.

The IMF and Africa

The most significant challenge facing Africa today is that of achieving economic growth consistent with its burgeoning population and with the legitimate aspirations of its peoples. Although Africa is more successful today than in the past in meeting this challenge, economic progress is still much too slow to reduce poverty quickly and to make credible headway toward sustainable growth.

More recently, encouraging firsthand evidence suggests that some African countries are doing very well. While real GDP growth rates in 1995–96 are likely to be in the range of 3–4 percent in Nigeria and South Africa, the recovery in real GDP growth could reach 5 percent in the rest of sub-Saharan Africa. The challenge for the successful countries—and a central concern of the IMF—is to assist countries that are slower off the mark by sharing their ideas about what is required to achieve sustainable growth.

What can one country learn from another? The basic message is that development begins when a few fundamental conditions are met. The crux of the matter is that for countries to take their place in a globalized economy they must first function well domestically. To do so, they must overcome an enervating sense of economic uncertainty about the domestic economy, the direction of macroeconomic policy, the permanence of the regulatory system, the enforceability of contracts and property rights, and the reliability of public services. For an economy to be competitive in the global economy, it must first establish an environment of domestic economic stability. How is this to be achieved?

Getting the Fundamentals Right. The first requirement for domestic economic stability is to get the economic fundamentals right, beginning with the stability of prices. In this context, IMF Managing Director Michel Camdessus often quotes President Museveni’s two-part answer, when asked the formula for Uganda’s remarkable success: “First, eliminate inflation. Second, eliminate inflation.” Fiscal deficits have to be reduced to the point where they can be financed in a noninflationary way and do not crowd out private activity. This presupposes, of course, a major effort to mobilize domestic resources in such a way that health and education, agriculture, appropriate social safety nets, and basic infrastructure can be provided for. To mobilize these resources, a strengthening of tax administration and enforcement is often necessary and always preferable to inexorably raising taxes. On the revenue side, there is a pressing need for the introduction of broadly based and equitable tax systems and reductions in tax exemptions. On the expenditure side, the implementation of a transparent system of public expenditure allocation and control and reductions in the budgetary burden of public enterprises are also important. Reducing unproductive expenditure is an inescapable step in increasing investment and essential services. In this regard, when unproductive enterprises are privatized, there is need for equity and transparency, including consultations with labor, and, where necessary, the establishment of adequate mechanisms for severance payments and retraining displaced workers.

An important relationship exists between reducing labor market rigidities, attracting foreign investment (as well as stimulating domestic investment), and fostering economic growth. Getting the fundamentals right is key to providing an environment conducive for investment. Unfortunately, investment—or, more specifically, labor-intensive investment—may not be forthcoming if labor rigidities make it unduly costly for businesses to adjust the size of their labor force to changing market conditions.

It is important to establish a market-based exchange rate policy to eliminate parallel markets. Trade liberalization is also an important part of the process of creating an attractive environment for investment, increasing competitiveness, and integrating sub-Saharan Africa into the world economy [see page 184].

Good Governance. The second requirement for domestic economic stability is good governance—that is, establishing an institutional framework, including an economic and political environment, in which businessmen have the confidence to invest. This confidence will flourish only if the businessman values the government’s role in the economy. A positive perception will be generated and sustained if the government concentrates on doing a few things well: ensuring law and order, providing reliable public services, and establishing a simple, transparent, and equitably enforced regulatory system.

Experience suggests that policies must be reasonably consistent and achieve a critical mass of reform if they are to convince economic agents that the reform is irreversible and that the country is serious about integrating itself into the global economy. Partial reform may not elicit much response if substantial impediments to economic activity remain in place. In some countries, the domestic consensus does not yet permit the degree of reform required to attain this critical mass. In these cases, it is up to the national leaders to build the required consensus.

Regional Solutions. With these preconditions for a well-functioning domestic economy in place, other economic initiatives are likely to bear fruit. In particular, sub-Saharan African countries can spur regional activity and attract more foreign capital by strengthening the links among their economies. Moreover, regional solutions to providing public services, such as regional power grids, transport networks, and universities, may be more cost-effective and provide better service than national programs. Domestic policies aimed at simplifying tax and tariff systems and establishing common business codes and common regulatory frameworks will facilitate cross-border transactions, create larger areas of stable economic conditions, and engender an environment conducive to regional free trade consistent with comparative advantage and without excessive reliance on trade protection.

These reforms are clearly beneficial to achieving sustainable development, but a constructive partnership with the rest of the world is indispensable. The international community needs to open its markets more fully to the products in which developing countries—such as the countries of sub-Saharan Africa—have or are likely to develop comparative advantage. It must continue to support, on appropriately concessional terms, countries undertaking serious reform.

A prominent theme of the recent labor seminar was the need for rapid economic growth to permit sustained development, redress the consequences of past economic policy errors, and address poverty alleviation. Participants thus recognized the need for structural reforms to promote growth. Labor participants nonetheless maintained that reform programs should ensure that all segments of the population will share in the benefits of reform and argued that structural adjustment should be adapted to take account of any adverse social effects. For their part, Bretton Woods participants emphasized that when structural adjustment was fully and effectively implemented, the positive results were unambiguous. They acknowledged the need to help member governments build a consensus for reform.

Labor’s Perspective

Labor participants at the seminar made the following main points:

  • Structural adjustment programs have failed to boost growth and improve social and economic conditions in most African countries.

  • Social perspectives should be incorporated explicitly into the design of adjustment programs, and social safety nets should be more effectively implemented.

  • Reforms in the public sector are inevitable, but they have adverse effects on employment; moreover, job creation in the private sector has not provided sufficient alternative employment during economic reforms.

  • National consensus should be ensured before and at all stages during implementation of programs. The international financial institutions should ensure that consultations with all “stakeholders” are carried out by government and that financial support is conditioned on effective national dialogue and agreements.

  • The international financial institutions should deal more explicitly with governance issues, including through conditionality if needed. Transparency in economic policymaking and publication of policy framework papers (papers prepared jointly by the country and IMF and World Bank staff for low-income countries engaged in IMF- and Bank-supported adjustment) and other relevant documents are vital.

IMF and Bank Perspective

IMF and World Bank participants reiterated a number of macroeconomic requirements:

  • the centrality of economic growth to redressing poverty and income distribution issues;

  • a comprehensive approach to economic reform, which includes sound macroeconomic and structural measures implemented in a way that achieves a “critical mass” of reform and sustains growth over the medium term;

  • specific policies to ensure an equitable distribution of the benefits; and

  • targeted social safety nets and transparent and participatory governance.

As to the contention that structural adjustment in Africa has not succeeded, both IMF and Bank staffs pointed to success cases—including Uganda, Kenya, Malawi, and Ghana. They maintained that in most cases the countries faced with crisis situations today had in fact failed to adjust their policies and economies in the past; indeed, the less-than-full implementation of many adjustment programs, as well as institutional and governance weaknesses, was the source of failure in many countries. IMF and Bank participants underscored the importance of countries’ creating confidence that their adjustment will be sustained.

Anupam Basu, Deputy Director in the IMF’s African Department, noted that while international institutions can encourage governments to consult widely, they cannot either make assistance conditional on consultation or force changes in a society’s political arrangements. Citing the limits of the IMF’s mandate and expertise, Basu indicated that the IMF nonetheless wants to do its part to improve the chances of reform programs through consensus building. In this connection, he indicated that country-level efforts could now be undertaken by IMF staff heading missions to member countries and resident representatives (IMF staff based in selected member countries), with the consent of the governments involved. The IMF’s new openness, particularly its recommendation to publish policy framework papers, could be helpful in this connection.

From the Executive Board

Tajikistan: Stand-By

The IMF approved a stand-by in the first credit tranche for the Republic of Tajikistan of SDR 15 million (about $22 million), equivalent to 25 percent of quota, to support the government’s economic reform program through the end of 1996. This is the first use of IMF financial resources by Tajikistan, which joined the IMF on April 27, 1993, and has a quota of SDR 60 million (about $87 million).

Tajikistan was one of the poorest republics when it formed part of the former Soviet Union and, after independence in September 1991, suffered severe external shocks from rising energy prices, the discontinuation of union transfers, and the breakup of traditional trade and payments arrangements. Because of prolonged domestic instability, Tajikistan was also one of the last former Soviet republics to begin serious economic reform. Its economic performance was, furthermore, severely affected by the civil war and its aftermath and by natural catastrophes.

The government that took office at the end of 1994 made efforts to stabilize the economy and to revive structural reforms. It introduced a national currency in May 1995 but was not able to take advantage of the opportunity this created to reduce inflation sharply.

The 1996 Program

To lay the foundation for sustained economic growth over the medium term, the authorities framed a program in January 1996 designed to eliminate macroeconomic imbalances relatively quickly while making significant progress on structural reforms. The 1996 program, which is supported by the stand-by credit, aims at reducing monthly inflation to about 4 percent by September; making progress toward a viable external balance of payments by building up convertible currency reserves to the equivalent of nearly six weeks of nongrant, nonalumina imports by the end of 1996, normalizing relations with external creditors, and slowing the decline in output and real income.

To these ends, the authorities intend to pursue a tight monetary policy that will strictly limit domestic bank credit financing to the budget and the rest of the economy. They are targeting an overall budget deficit for 1996 equivalent to 5.4 percent of GDP, compared with 11.2 percent of GDP over the eight-month period after the currency introduction in 1995. This will be accomplished while integrating all previously extra-budgetary foreign exchange transactions into the budget. The reduction in the budget deficit will be achieved, on the revenue side, by transparent presumptive taxes on cotton and aluminum (which have replaced the extrabudgetary taxation of these sectors) and other tax measures, and by strengthening tax administration. On the expenditure side, there will be a real decline in nearly all spending categories, except the social safety net and certain priority categories.

Tajikistan: Selected Economic Indicators

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Data: Tajik authorities and IMF staff estimates



Data for 1995 refer to the period of May 10 (the date of the Introduction of the national currency) to December 31, 1995

Structural Reforms

On the structural side, the objectives of the program include the initiation of land reform and further progress in privatization. In the banking sector, the authorities intend to introduce legislation that will enable the National Bank of Tajikistan to exercise full and independent control over monetary and credit policies. The government intends to build on the progress already made in liberalizing domestic and foreign trade and to maintain a unified exchange rate.

Addressing Social Costs

To shield the most vulnerable groups of the population from the effects of increases in the prices of energy and public transportation, as well as the price of bread, which was freed on March 1, 1996, the Government has increased compensating cash transfers. The program envisages a strengthening and better targeting of the social safety net, consistent with the overall budget objective and the financial program. The Government also plans to reform the Pension Fund.

The Challenge Ahead

There are risks to the program that arise from Tajikistan’s heavy external debt burden, limited donor interest, and low foreign exchange reserves. The authorities have, however, in recent months implemented a comprehensive set of strong prior actions, successfully adhered to the targets of an IMF staff-monitored program, and secured the necessary financing assurances from creditors and donors. The first credit tranche arrangement is an initial step and is expected to lay the foundation for economic growth and generate momentum for further reform. Continued assistance on highly concessional terms, however, will be needed for years to come.

Press Release No. 96/22, May 8

Recent Use of IMF Credit

(million SDRs)

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Note: EFF = extended Fund facility.CCFF = compensatory and contingency financing facility.STF = systemic transformation facility.SAF = structural adjustment facility.ESAF = enhanced structural adjustment facilityFigures may not add to totals shown owing to rounding.Data: IMF Treasurer’s Department

Camdessus Selected for Third Term as Managing Director

Following is the text of Press Release 96/26, issued May 22. The Executive Board of the IMF unanimously selected Michel Camdessus to serve a third five-year term as Managing Director and Chairman of the Executive Board of the IMF, beginning January 16, 1997.

In accepting the appointment, Mr. Camdessus said that it would be a privilege to continue to be associated with the IMF. He noted that his appointment to a third term as Managing Director took place at the time of the celebration of the fiftieth anniversary of the first meeting of the Executive Board. He looked forward with great pleasure to continuing to work closely with the other members of the Executive Board in serving the purposes of the IMF.

Mr. Camdessus assumed his duties as the seventh Managing Director of the Fund on January 16, 1987.

Prior to his appointment as Managing Director, Mr. Camdessus was Governor of the Bank of France (1984–87), Director of the French Treasury (1982–84), Chairman of the Paris Club (1978–84), and Chairman of the Monetary Committee of the European Economic Community (1982–84). Mr. Camdessus was named Governor of the IMF for France in 1984. He was educated at the University of Paris and earned postgraduate degrees in economics at the Institute of Political Studies of Paris and at France’s National School of Administration.

Mr. Camdessus was born in Bayonne, France, on May 1, 1933. A French national, he is married to Brigitte d’Arcy; they have six children.

IMF Executive Board Marks Fiftieth Anniversary

Following are excerpts of comments by IMF Historian James Boughton, Dean of the Executive Board Alexandre Kafka, and Managing Director Michel Camdessus at a May 6 meeting marking the fiftieth anniversary of the Executive Board.

James Boughton. We began the anniversary commemoration nearly two years ago, on the anniversary of the July 1944 Bretton Woods conference. During this anniversary biennium, we have held two major conferences: one at the October 1994 Annual Meetings in Madrid and one—the Seminar on the Future of the SDR—at the IMF just two months ago.

The SDR seminar coincided with the anniversary of the inaugural meeting of the Board of Governors in March 1946, in Savannah, Georgia. There, the Governors took three decisions that were essential to get the IMF started as an institution.

  • They resolved the long-simmering debate about whether we should be located in Washington or New York.

  • They held the first election of Executive Directors. There were only seven to be elected back then, representing 33 countries, in addition to the Directors that were appointed by the five largest members: the United States, the United Kingdom, France, China, and India. India was a surprise addition to that list; at Bretton Woods, it was expected that the Soviet Union would be one of the five, but Joseph Stalin decided at the last minute not to ratify the Articles of Agreement.

  • The Governors appointed a Temporary Secretary to organize the first meeting of the Executive Board. On May 6, 1946, 20 people—all men except for the Chairman’s secretary—gathered at the Washington Hotel at 11:00 a.m. for the first Board meeting. Eleven of the 12 Directors were there, along with 6 Alternates and 3 staff members. The meeting was chaired by the U.S. Director, Harry Dexter White.

The primary business conducted on May 6 was the selection of Camille Gutt, former Finance Minister of Belgium, to be Managing Director of the IMF. White opened the meeting with a memorable speech in which he called on his colleagues to adopt the “spirit of humility which our difficult task and our profound obligations to the world evoke.”

Mr. Gutt, accepting his selection as Managing Director, paid tribute to “our departed friend [John Maynard] Keynes who proved, at [Bretton Woods and Savannah], such an inspiration to all and who died at his task only two weeks ago.”

Alexandre Kafka. After the selection of the first Managing Director and the tribute to Lord Keynes, the first few meetings of the Board were taken up by organizational matters. Since then, we have been engaged in our expanding and evolving business: temporary balance of payments financing, surveillance, and innovation. The role of innovation is perhaps a particularly delicate matter, but it is a fact, and I do not think that on the whole it has been a mistake. In that context, this fiftieth anniversary year charges us with the obligation not just to remember but to learn from our experiences. I am sure that we have shown we can do so, to the benefit of our institution and the entire international community.

Managing Director Camdessus. Alexandre Kafka came to the Board as an Alternate Executive Director on June 5, 1966, and was elected Executive Director a few months later; so we are celebrating his thirtieth anniversary here as well as the fiftieth anniversary of the IMF! Mr. Kafka has seen many changes in the Board, and he has described a few of them to us. One other that I would add is the increase in the diversity of those who sit around this table. Mr. Boughton reminded us that the original Executive Directors were all men. That remained true until the German authorities appointed Lore Fünfgelt to be their Alternate Executive Director in 1968. Today, 5 of the 48 Directors and Alternates are women; never again will we be a “men’s club,” and we are much the richer for it, even though all of us here would welcome in the Executive Board—and on the staff—a more balanced gender distribution.

Let me emphasize another aspect of diversity in the evolution of the Executive Board. Fifty years ago, there were 12 members of this Board; today the number has doubled. That growth reflects the IMF’s evolution into a truly global institution. During the last ten years, the membership of the IMF has grown by 30 countries—many of which have had to make difficult transitions to join or rejoin the world economy—while the size of the Board has grown by just two seats. The way the Board has evolved and adapted to meet this tremendous challenge has certainly been a source of great satisfaction for all of us and, I suspect, for our governors as well.

By celebrating the anniversary of the birth of the Executive Board, we are, in a very real sense, celebrating the birth of the IMF as a living institution. As we do so and as we start our next 50 years, I am full of great hopes. Since I came to the IMF nearly a decade ago, we have made some small changes in our procedures, and we have become even “leaner and meaner” in an effort to stay on top of a rapidly changing world. There are only 24 Directors, but they represent virtually the whole world. The Executive Board provides a very effective two-way communication between the IMF and our 181 capitals. This constituency structure has always served us well, and it conveys a valuable legitimacy to our work. Let’s hope that sometime during the next 50 years, leaders of the world will find some way of drawing even more from the wisdom of this body and the value of its structure.

GCC Countries Confront Adjustment Challenges In Face of Uncertain Oil Market Outlook

For many countries, the fiscal realities of the 1990s place them at an economic crossroads. The member countries of the Gulf Cooperation Council (GCC)—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates—are increasingly aware that well-designed policies and economic diversification are necessary to adjust to lower levels of oil income and facilitate self-sustaining growth to provide for their growing populations. With oil revenues likely to remain subdued over the medium term, it will be important to raise non-oil revenues, bring expenditures in line with receipts, develop human resource skills through investments in education and training, and encourage a vigorous private sector. This article, based on a pamphlet prepared by Cyrus Sassanpour of the IMF’s Middle Eastern Department, examines the region’s looming policy challenges and opportunities.

Policy Evolution

In the years following the 1970s oil boom, economic policy in the GCC countries has evolved in four broad, but distinct, stages (see table, page 196).

1981–85. With oil prices still high but beginning to decline, the GCC countries experienced record current account surpluses and built up substantial foreign reserves, which permitted them to strengthen their social and physical infrastructure and expand hydrocarbon-based industries. To insulate themselves from foreign inflation, the GCC countries established a de facto peg of their currencies to the appreciating U.S. dollar. Overall, the region recorded an annual average budget deficit of only 1 percent of GDP and an external current account surplus of 7 percent of GDP.

1986–89. Continued declines in oil prices began to exacerbate budget deficits and led to the emergence of large external imbalances. In response, the authorities sharply cut back capital expenditures. Adjustment efforts were bolstered by a significant real effective depreciation of the GCC currencies along with the U.S. dollar. But the drop in oil revenues gave rise to a sharp increase in the aggregate budget deficit and an external current account deficit equivalent to 1 percent of GDP.

1990–91. The regional conflict interrupted adjustment efforts in 1990-91, significantly worsening fiscal imbalances and severely aggravating current account pressures in several of the most directly affected GCC countries.

1992–94. The GCC countries emerged from the conflict with weaker macro-economic balances but cognizant of the importance of resuming adjustment. A further decline in the price of oil and a recession compounded the difficulty of the adjustment task.

Issues and Strategies

For the GCC, adjustment efforts are intertwined with oil price movements and oil revenues. Oil and gas account, on average, for 65 percent of the region’s total exports and 75 percent of total government revenue. Medium-term forecasts suggest a slow increase in global demand for oil, higher oil output elsewhere, and increased market penetration from non-OPEC (Organization of Petroleum Exporting Countries) sources. These indicate a reduction in the GCC’s average oil export price in real terms and constraints on an increase in its export volume—which is projected to rise modestly through the remainder of the decade.

Given the generally subdued outlook for oil revenue, the region’s estimated 2 percent annual growth rate through the remainder of the decade would fall short of the projected 3.5 percent annual population growth rate. Without corrective steps, worsening imbalances would further drain foreign reserves and increase indebtedness.

Operating without benefit of favorable oil price forecasts, a number of countries intensified their adjustment efforts in 1995-96. In particular, Kuwait, Oman, and Saudi Arabia have committed themselves to eliminating budget deficits by the end of the decade; they are emphasizing the use of market-based policies and structural reforms to promote private sector activity and are employing manpower and incomes policies to facilitate the absorption of burgeoning indigenous labor forces. These steps are mutually reinforcing, in the right direction, and properly cast within a medium-term context, according to the IMF study. The policies are expected to reduce the vulnerability of the GCC countries to fluctuations in the oil market and position them to take advantage of positive developments in the world economy. The shift in policies acknowledges two fundamental changes in underlying economic conditions within the GCC:

  • the structural nature of the region’s fiscal deficits; and

  • the increasing importance of private sector development.

Selected IMF Rates

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The SDR Interest rata, and the rate of remuneration, are equal to a weighted average of Interest rates on specified short-term domestic obligations in the money markets of the five countries whose currencies constitute the SDR valuation basket (the U.S. dollar, weighted 39 percent; deutsche mark, 21 percent; Japanese yen, 18 percent: French franc, 11 percent: and U.K. pound, 11 percent). The rate of remuneration is the rate of return on members’ remunerated reserve tranche positions. The rate of charge, a proportion (currently 109.4 percent) of the SDR Interest rate, is the cost of using the IMF’s financial resources. All three rates are computed each Friday for the following week. The basic rates of remuneration and charge are further adjusted to reflect burden-sharing arrangements For the latest rates, call (202) 623-7171.

Data: IMF Treasurer’s Department

Stand-By, EFF, SAF, and ESAF Arrangements as of April 30

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Note: EFF = extended Fund facility.SAF = structural adjustment facility.ESAF = enhanced structural adjustment facility.Figures may not add to totals owing to rounding.Data: IMF Treasurer’s Department

Broadly, the needed reforms encompass financial, growth and diversification, and labor market policies.

Financial. A durable fiscal consolidation will need to balance an appropriate level of spending with revenue enhancement. Typically, pressures on current expenditures derive from the government wage bill, defense spending, and subsidies and entitlements. While several GCC countries envisage some reduction in defense spending, larger expenditure reductions are likely to be drawn from civil service reform and reductions in the wage bill and from subsidy reform. Subsidies traditionally ensured low prices for food and basic social services and encouraged economic diversification. Explicit subsidies amounting to approximately 2–3 percent of GDP are not large by international standards, but there are implicit subsidies that introduce distortions into the economy. Rationalizing these subsidies over the medium term will involve adjusting agricultural procurement prices to international levels, raising utility rates, and introducing or increasing fees and charges for government services. The needs of vulnerable groups can be more efficiently met by targeted transfer programs.

Currently, the GCC’s tax revenues rely almost exclusively on import duties, limited income taxes, and fees and charges. These non-oil revenues represented only 8 percent of GDP in 1992-94—decidedly below the average of 27 percent tax-revenue-to-GDP ratio recorded in middle-income developing countries. Significant scope still remains to eliminate tariff exemptions, expand excise taxes, and introduce a selective tax on luxury goods. The tax structure and receipts could also benefit from a broad-based consumption tax, a turnover tax, and an expanded scope and coverage of existing income taxes.

The GCC’s monetary policy is aimed at maintaining exchange rate stability, which, in turn, has ensured low inflation and instilled private sector confidence. Pressures on monetary policy would increase, however, in the absence of a significant fiscal correction. And even a strong fiscal consolidation will need to be buttressed by an appropriate monetary policy that ensures price and exchange rate stability.

Growth and Diversification. In diversifying their economies, the GCC countries have focused on developing downstream activities, expanding the non-oil sector, and acquiring assets abroad. Domestic investment has largely concentrated on oil-related industries, but these are prone to the same cycles the oil market experiences. Large industrial projects have also tended to remain in the public sector.

A major challenge facing these economies is to maintain a high rate of growth through market-based policies at a time when the growth impulse from the oil sector is likely to weaken. The private sector offers significant potential for growth, but its development is contingent upon an array of mutually supportive policies that create a stable macroeconomic setting and strengthen market signals. These include a reduction in subsidies, reduced public sector activities, and an appropriate pricing of public services and utilities (which have been identified in several GCC countries as possible targets for privatization but need prior price adjustments to ensure self-sufficiency).

These initiatives also require deeper and more efficient domestic financial and equity markets. As private sector activity increases, the GCC’s small domestic equity markets will be called upon to play a more dynamic role in mobilizing resources and in expanding equity financing. Larger and more active markets would quicken the pace of privatization, which, in turn, would expand and deepen these markets. Increased investment opportunities might also attract the substantial savings currently held abroad.

Increased capitalization and efficiency will also depend on certain enabling conditions. These include an appropriate regulatory framework, broader participation from among the region’s domestic enterprises and from foreign investors, and greater coordination of regulatory and supervisory frameworks to facilitate increased integration of the region’s equity markets and permit an easier flow of capital between the countries.

The GCC’s banking systems are lending support to equity market development, effectively mobilizing and allocating domestic savings. Supervisory and regulatory frameworks have been strengthened and capital positions have improved to meet international standards. To provide crucial support for economic diversification and growth, however, the domestic financial system will need to strengthen its intermediation role, through:

  • expanded participation by foreign banks to increase diversification;

  • possible auctioning of short- and long-term government debt instruments to tap private savings;

  • greater autonomy and encouragement of a more explicit commercial orientation for the region’s specialized credit institutions; and

  • possible expansion of alternative instruments of asset diversification.

Labor Market Policies. Traditionally, the region’s indigenous workforce preferred high-paying and prestigious public sector positions, with imported labor largely filling the lower-paid private sector jobs. Changing demographics are rapidly redrawing this labor market profile. Several GCC countries are limiting expatriate hires, establishing minimum quotas for nationals, and raising the cost of employing nonnationals.

Fischer Underlines Role of Sound Policies in GCC Countries

Stanley Fischer, First Deputy Managing Director of the IMF, addressed the Fourth Gulf Economic Forum Annual Conference in Bahrain in early April, underscoring both the vital role played by the GCC countries in the world economy and the importance of adjustment and reform.

The GCC, Fischer noted, possesses 50 percent of the world’s proven oil reserves, 25 percent of the world’s production, and 40 percent of the world’s exports. It also holds 14 percent of world natural gas reserves. Abundant oil and gas have permitted these countries to enjoy one of the highest living standards among developing countries. And prudent macroeconomic policies have long encouraged liberal exchange and trade regimes, low inflation rates, and stable exchange rates. But heavily dependent upon a single commodity, the GCC countries have also been vulnerable to fiscal and other strains introduced by developments often beyond their control.

Fischer commended the GCC countries for responding to changed economic realities and designing medium-term adjustment strategies that seek to capitalize on macro-economic stability and minimize vulnerability. He cited the three pillars of GCC adjustment and reform:

  • macroeconomic stability, based on balanced budgets and an appropriate monetary policy;

  • market-based structural reforms to promote private sector activity; and

  • human development policies to facilitate the absorption of the growing national labor force.

These reforms are taking place at a time of rapid regional and global change. Fischer cited prospects for a durable solution to the Arab-Israeli conflict, noting the entire region stood to benefit from increased trade and investment. Sound policies, Fischer concluded, hold the key to meeting current challenges and making the most of future regional and global opportunities.

GCC: Economic Indicators1

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GDP-weighted averages.

Excluding Kuwait.

Data: IMF, World Economic Outlook, International Financial Statistics, and staff estimates

Over the long run, though, improved labor market flexibility rather than regulation offers the potential to provide jobs for the region’s growing populations. Over time, public sector wages will need to adjust to market conditions; productivity gains will stimulate a better match of local skills and available private sector jobs, and education and training will equip job applicants with the skills an expanding private sector will require.

In sum, the GCC countries share a growing commitment to the need for designing balanced, medium-term adjustment strategies that enable them to leverage their resource and financial strengths, lessen their vulnerability to oil price fluctuations, redress macroeconomic imbalances and structural rigidities, and adapt their economies to meet the needs of growing populations.

Copies of Policy Challenges in the Gulf Cooperation Council Countries, prepared by Cyrus Sassanpour, IMF Middle Eastern Department, are available free of charge from Publication Services, Box XS600, International Monetary Fund, Washington, DC 20431 U.S.A. Telephone: (202) 623-7430; fax: (202) 623-7201; Internet:

David M. Cheney, Editor

Sara Kane • John Starrels

Senior Editors

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Assistant Editor Editorial Assistant

Lijun Li

Staff Assistant

Philip Torsani • In-Ok Yoon

Art Editor Graphic Artist

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