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. www.imf.org/external/pubs/ft/survey/so/home.aspx

Abstract

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. www.imf.org/external/pubs/ft/survey/so/home.aspx

MENA Conference Stresses Economic Potential of the Region

The third economic conference of the Middle East and North Africa nations (MENA), cosponsored by the United States and Russia, with the support of Canada, the European Union, and Japan, was held in Cairo on November 12-14. The conference, whose theme was “building for the future: creating an investor-friendly environment,” emphasized the importance of regional economic reform and global integration. It attracted more than 1,500 representatives from the international business community, as well as senior government officials. IMF First Deputy Managing Director Stanley Fischer also attended and addressed the conference (see page 395).

The Cairo conference, according to a declaration released on November 14, provided an opportunity for the MENA economies to encourage international and regional investment in the Middle East and North Africa. The conference highlighted the region’s economic, commercial, and trade potential. In several MENA countries, this potential has recently been enhanced by important economic reform programs. These programs, which include privatization, structural reform, and trade liberalization, are helping create a business-friendly economic climate throughout the region.

On December 9, the heads of the IMF and the World Trade Organization signed a cooperative agreement to strengthen their relations. See page 404.

At the same time, conferees discussed a broad agenda of reforms still needed in the MENA countries. These included an environment conducive to higher private investment, fiscal restructuring, monetary reform, and further trade liberalization.

No Country Is an Island

“There are no longer island economies, isolated blocs, and closed systems,” said Egyptian President Hosni Mubarak in his opening address. “The principles of globalization govern the order of the planet,” he continued, and those that would “join the global economy and share in its prosperity must abide by its rules.” The laws and institutions of economic management that each country and region adopts, therefore, must conform to the “principles of global efficiency.”

The process of integration into the global economy has already started in the Middle East, said Mubarak. Several countries in the region have opted for “sound economic and financial policies, flexible institutions, market-based management, and a vital role for the private sector in economic growth.” Egypt, for example, is pursuing economic reform aimed at achieving sustained high economic growth. The three policy mainstays of its reform, which is supported by a recently concluded stand-by arrangement with the IMF (see IMF Survey, October 28, page 354), will continue to be enhancing an investor-friendly environment to attract both foreign and domestic investment, opening the economy further through the elimination of trade barriers, and increasing productivity growth.

Creating a Business-Friendly Climate

In the course of the three-day conference, individual countries provided detailed descriptions of their investment and macroeconomic programs, giving members of the international business community the opportunity to assess the region’s commercial and economic potential. Cross-border opportunities were also highlighted.

In a session considering the role of government in creating an action-oriented business environment, participants agreed on the importance of:

  • simplifying intracompany transactions, bureaucracies, and administrative procedures;

  • introducing and adhering to international standards, including global accounting practices and quality control; and

  • increasing investor confidence by improving transparency and accountability, adopting rigorous and professional “rules of the game,” and reducing market entry costs.

An ongoing regional concern has been the development of economic institutions. Further progress was made during the conference in making the new Bank for Economic Cooperation and Development in the Middle East and North Africa operational. Participants underscored the potential contribution the bank could make in:

  • promoting the development of the private sector;

  • attracting capital flows to the region;

  • identifying viable financing mechanisms for infrastructure development and supporting infrastructure projects; and

  • introducing mechanisms to enhance regional economic cooperation.

Responding constructively and efficiently to infrastructure needs was another major concern at the conference. In a session assessing the respective roles of government and the private sector in prioritizing projects and mobilizing resources, participants concluded that private financing for infrastructure will need to play a much more prominent role if MENA countries are to meet the infrastructure challenge.

Another important issue was the development of the West Bank and Gaza economy. At a discussion session, participants noted with concern that the already weak West Bank and Gaza economy was further hampered by restrictions and closures that hindered the daily movement of labor and trade. They stressed the need to facilitate the flow of goods and labor, as well as to provide timely external assistance.

Other topics covered at the conference included an assessment of the Euro-Mediterranean partnership and the role of the business community in the economic development process of the Middle East and North Africa.

Many of these themes were also reflected in a report by the IMF’s Middle Eastern Department, Building on Progress: Reform and Growth in the Middle East and North Africa, released on the eve of the conference. The report notes that unprecedented opportunities have opened up for MENA countries to transform their economies through accelerated growth. The potential benefits for the region are enormous, but for them to become reality, the MENA countries need to ensure that the necessary conditions are in place.

Over the past decade and a half, economic performance in the MENA countries has been disappointing, with per capita income stagnating. Although external factors contributed, insufficient economic policies played a major role, according to the IMF study. Preliminary estimates indicate, however, that economic and financial conditions in the MENA countries will improve in 1996, with growth likely to average 4 percent, owing partly to better policies and an improved external environment, including higher oil prices.

The magnitude of, and reasons for, the improvement vary from country to country. Several countries in the region have embarked on reform programs that are beginning to pay off in the form of improved fiscal balances. Other countries have stepped up structural reforms, particularly in the areas of privatization, deregulation, and trade liberalization.

The region cannot depend on favorable external developments, including high oil prices, to sustain a high growth rate and improve financial balances, according to the IMF study. Domestic policies will have to take the lead. This means consolidating the gains from financial stabilization and deepening and widening structural reforms. The IMF study analyzes in some detail four key policy challenges for the MENA countries:

  • higher and more efficient investment;

  • continuing improvement in public savings;

  • financial reforms to enhance private savings and resource allocation; and

  • further trade liberalization.

MENA and the IMF

Several countries in the region have embarked on comprehensive reform programs consistent with the policy agenda laid out in the IMF study. Others are in the process of formulating such programs. At a press briefing given on the eve of the conference, IMF First Deputy Managing Director Stanley Fischer said that the MENA countries should use the current climate of favorable external conditions and higher growth to tackle the main issue on the economic policy agenda. He stressed that the IMF has assisted and will continue to assist MENA countries in the design of their structural reforms through a range of channels, including:

  • regular annual consultation discussions with all countries in the region;

  • financial assistance in support of policy implementation (the IMF currently has arrangements with Algeria, Djibouti, Egypt, Jordan, Mauritania, and Yemen); and

  • technical assistance, particularly in the areas of tax reform, monetary policy, exchange and payments systems, and strengthening of data bases.

Copies of Building on Progress: Reform and Growth in the Middle East and North Africa are available for $15.00. Also available free of charge is the IMF pamphlet Growth and Stability in the Middle East and North Africa. Please send orders to Publication Services, Box XS600, IMF, Washington, DC 20431 U.S.A. Telephone: (202) 623-7430; fax: (202) 623-7201; Internet: publications@imf.org

Malawi’s Adjustment Program Is on Track Malawi’s Public Finances Show Strong Improvement

Malawi’s pursuit of stabilization and sustained growth over the past several years has been bumpy but determined. Now, as the country moves into the second year of an enhanced structural adjustment facility (ESAF) arrangement with the IMF, Malawi’s prospects for success are promising.

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Malawi: Selected Economic Indicators

Citation: IMF Survey 0025, 001; 10.5089/9781451937442.023.A024

1Annual percent change.2Percent of GDP.3Annual average percent Change.Data: IMF staff estimates and Malawian authorities

In late 1991, following three years of good performance, based on the successful implementation of a previous three-year ESAF, Malawi’s economic performance began to deteriorate. The principal cause was a series of external shocks, including a major drought, a severe worsening of the terms of trade, and the suspension of non humanitarian aid associated with donor concerns about governance. A recovery in 1993 was short-lived, as drought re-emerged the following year.

In consequence, average real GDP growth fell from 6 percent a year in 1989-91 to minus 3 percent a year in 1992-94, while inflation accelerated and the external accounts deteriorated.

In the spring of 1994, the country held its first multiparty elections in a climate of sagging confidence. Large expenditures associated with the elections and administrative problems in revenue collection led the government to borrow heavily from the banking system. The resulting sharp acceleration in inflation was further fueled by a combination of strong pressures on food prices caused by drought-induced supply shortages and the pass-through effect of a major exchange rate adjustment following the introduction of a market-based exchange rate system.

The adjustment program adopted by the new government and supported by an eight-month IMF stand-by arrangement was unsuccessful. It was stalled to a large extent by a breakdown in expenditure control, continuing effects of the drought, and shortfalls in disbursement of balance of payments support. In the event, real GDP declined by 11.6 percent in 1994, the fiscal deficit (excluding grants) rose to 27.8 percent of GDP in 1994/95, and the 12-month rate of inflation rose to 75 percent by the end of March 1995. Meanwhile, the external position weakened markedly. Gross official reserves fell to less than the equivalent of 1 month of imports of goods and nonfactor services, and external arrears amounting to the equivalent of about 0.3 month of imports of goods and nonfactor services were accumulated.

Back on the Adjustment Track

In 1995, the authorities adopted a comprehensive series of measures to reverse the economy’s downward slide. Implementation of these measures established the basis for a medium-term structural adjustment program, supported by the IMF through an ESAF arrangement, approved in October 1995. The medium-term program aims at establishing the conditions for sustainable economic growth within a framework of financial stability. To this end, the authorities have been pursuing prudent financial policies and making efforts to deepen structural reforms. Their goal is to create an environment conducive to private sector activity, promote domestic saving and investment, and accelerate the pace of economic diversification, while taking further steps to alleviate poverty.

In light of Malawi’s strong performance thus far, the original objectives of the program have been strengthened and include:

  • annual real GDP growth averaging 7 percent during 1996-98;

  • a reduction in the annual rate of inflation to 6 percent by the end of 1998;

  • a further strengthening of the balance of payments position; and

  • accommodation of pressing social needs—within the constraint of fiscal sustainability—through appropriate prioritization of expenditure.

Macroeconomic Stabilization and Fiscal Consolidation

Malawi’s adjustment program has been underpinned by strong fiscal consolidation and tight monetary policy. The overall fiscal deficit (excluding grants) was reduced to 13.6 percent of GDP in 1995/96 (April/March) from 27.8 percent in 1994/95, and is programmed to decline to 9 percent in 1996/97. Most of the improvement in the government’s financial position has come from a sharp reduction of spending to levels similar to those prevailing in the years before 1994/95 because of stronger expenditure control through the effective implementation of a cash budget system. There was, in addition, improved customs and tax revenue collection.

Malawi: Main Economic Indicators

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Program

Fiscal year ending March 31 of the year indicated.

Data: Malawian authorities and IMF staff estimates

Stand-By, EFF, SAF, and ESAF Arrangements as of October 31

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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

Among the several measures being taken to strengthen public finances on a sustained basis are more efficient collection of import duties, the planned introduction of a value-added tax, and the establishment of an autonomous National Revenue Authority. Expenditure priorities are being established in the context of the medium-term expenditure framework that will cover 12 ministries in 1997/98. In addition, the authorities are institutionalizing spending control and monitoring mechanisms in the context of an improved budgeting process aimed at safeguarding spending discipline.

The substantial reduction in the fiscal deficit facilitated the conduct of a tight monetary policy, as the government reduced its outstanding bank credit. During 1995, the Reserve Bank of Malawi curtailed the government’s access to the ways and means advances, raised the discount rate, and engaged in substantial open market operations to absorb excess liquidity. Monetary policy was further tightened in early 1996 when government deposits were included in the base for commercial bank liquid reserve requirements. For the year ending March 1996, broad money grew by about 39 percent, less than projected the program.

Malawi’s economic performance improved substantially in 1995, largely the result of prudent financial policies, the implementation of wide-ranging structural reforms, and good weather. Real GDP growth rebounded, rising by 9 percent in 1995 and by an estimated 11 percent in 1996. Inflation is projected to fall sharply, to an estimated 4 percent at the end of 1996 from about 75 percent in the previous year. On this basis, in recent months treasury bill yields and interest rates have declined substantially. This allowed the Reserve Bank of Malawi to reduce its discount rate in stages from 50 percent to 27 percent in November 1996. The external position has also improved significantly, with the current account deficit declining from 9.2 percent of GDP in 1994 to 3.7 percent in 1995, and to an estimated 2.1 percent in 1996. Gross official reserves increased from less than the equivalent of one month of imports to more than four months in 1996. And the exchange rate for the Malawi kwacha, which had depreciated by almost 250 percent in domestic currency terms during 1994, has remained stable since December 1994.

Structural Reforms

In tandem with its stabilization efforts, the Malawian government has implemented substantial structural reforms—notably in the agricultural, external, and financial sectors and in the restructuring of key public enterprises, privatization, and civil service reforms. In addition, the government introduced free primary education in 1994 in an effort to improve human capital development.

These reforms have had a considerable favorable impact, resulting in a major supply response in agriculture—which provides employment and livelihood to most Malawians. The reforms have contributed to the alleviation of poverty and have begun to reduce the scope of the public sector and the highly concentrated ownership structure in the economy. Moreover, they have led to improved efficiency in the provision of public goods and services and facilitated private sector development.

Agriculture. To liberalize agricultural marketing and production arrangements, the Special Crops Act was amended, the Agricultural Produce and Livestock Act was repealed, and the smallholder burley tobacco quota was raised before the 1995/96 crop season. As a result, smallholders gained access to cash crops, the Agricultural Development and Marketing Corporation (Admarc) lost its rights as sole purchaser of smallholder crops, and private traders flourished. The opening of a third tobacco auction floor located in Mzuzu and the lifting of export licensing requirements for beans and groundnuts further improved smallholder access to markets. Finally, the removal of regulatory restrictions on seed and fertilizer trades, including the removal of import licensing requirements for fertilizer, enhanced the availability of inputs. These measures, helped by good weather, yielded a 34 percent increase in smallholder production in 1995, followed by a 40 percent rise in 1996.

These improvements have been accompanied by a substantial diversification into nontraditional crops. In addition, the authorities are pursuing further reforms, including elimination of the smallholder burley tobacco quota ahead of the 1996/97 season, reform in land policy to improve the efficiency of land utilization, increased access of private traders to storage facilities, and improved access to credit for smallholders.

External Sector. The exchange and trade system has also been reformed. A market-determined exchange rate system was introduced in February 1994, and a formal interbank foreign exchange market was opened in September 1996. On December 7, 1995, Malawi accepted the obligations of Article VIII of the IMF’s Articles of Agreement and no longer maintains restrictions on current external transactions. Restrictions on capital flows are being removed gradually. At the same time, the average tariff rate has been reduced to about 15 percent in 1996 from about 20 percent in 1994; export taxes on tobacco, tea, and sugar, which were introduced in 1995 as a temporary source of revenue, are being phased out; and import and export licensing requirements are being removed. These policies and reforms have generated a strong response from nontraditional exports, which have been growing at over 150 percent a year in volume terms in 1995–96, albeit from a small base.

Financial Sector. Financial reforms have included a shift to indirect instruments of monetary control in the early 1990s, the entry of two new banks into Malawi’s relatively small financial market, and the introduction of the book-entry system for treasury bills in 1995, which facilitated the development of a secondary market for government debt instruments and resulted in large increases in the demand for treasury bills among nonbanks. Bank supervision has also been strengthened through more regular bank inspections and the introduction of foreign exchange exposure limits for commercial banks. The planned listing of companies on the stock exchange and the introduction of a securities bill, which provides a regulatory framework for the securities industry, will facilitate the development of the country’s emerging capital market.

Public Enterprise Sector. The process of reforming and privatizing public enterprises gained momentum in 1995–96 with the passage of the Privatization Act and the formulation of a divestiture sequence plan, which established a framework for the privatization program. Privatization, which started in early 1996, aims at bringing to the point of sale 26 public enterprises in 1996/97. Their net assets are equivalent to about 15 percent of the combined net assets of all publicly owned commercial enterprises and government equity holdings in private companies. An additional 20 enterprises are to be ready for sale in 1997/98. Substantial progress has been made in restructuring some key public enterprises—including Malawi Railways 1994, Air Malawi, and Admarc—and preparing them for eventual privatization.

Civil Service. Reforms of the civil service gained momentum in 1995, with the discharge of about 20,000 temporary and nonestablished workers, and a civil service census conducted in October 1995. Currently, the authorities maintain a freeze on staff recruitment except for essential functions and project-related areas where posts are to be filled through redeployment. They have announced that 2,220 civil servants who have reached retirement age will be separated by March 1997. In addition, a comprehensive civil service reform program, which seeks to make the government more efficient, is under preparation. Key elements include:

  • eliminating duplicate functions and outsourcing;

  • setting civil service priorities; and

  • reviewing the compensation system, including further decompression of the remuneration structure.

Commitment to Reform

Malawi has made impressive progress in addressing imbalances and structural impediments to sustainable growth, and the authorities remain strongly committed to their policy agenda. They recognize, however, that Malawi’s economic situation remains fragile and are determined to expedite completion of their reform agenda and avoid any slippage in implementing prudent financial policies. But the effectiveness of Malawi’s adjustment efforts and the enhanced prospects for success still depend to a considerable extent on the continued assistance of the donor community and the IMF. The recent IMF approval of the authorities’ request for the second annual arrangement under the ESAF is testimony to the government’s firm commitment to structural adjustment.

IMF African Department

Photo Credits: Denio Zara and Padraic Hughes for the IMF, page 395; Carnegie Endowment for International Peace, page 402.

Economic Reform Crucial for MENA Countries

Following are excerpts from a statement by IMF First Deputy Managing Director Stanley Fischer at the Middle East and North Africa Economic Conference held in Cairo, on November 12–14.

The Cairo conference represents an important step on the path of economic development of the Middle East and North Africa region. It is critical for the future of the people of this region that the economic reform process that is unfolding here continue.

I would like to make three points:

  • The economic climate in the region is improving, although at different rates in different countries.

  • Further reforms are needed in all countries.

  • The IMF is committed to this region and will continue to work to support sound economic policies in all MENA countries.

Recent Progress

For a decade or more, the growth performance of MENA as a whole has been disappointing, as many countries in the region failed to integrate sufficiently into the world economy.

While the region has been beset by a host of exogenous shocks, its poor economic performance can be traced largely to poor economic policies. However, in recent years, several countries have begun major reform programs—among them Algeria, Jordan, Morocco, Tunisia, and Egypt.

These policy changes, together with a more favorable external environment, lie behind the improvement in the region’s economic and financial conditions this year.

What Needs Doing?

There is no great mystery about what needs to be done to improve growth further. The first requirement is the maintenance of macroeconomic stability. The second is the implementation of structural reforms to increase the efficiency of the domestic economy and integrate it into the world economy.

There is now a strong—virtually universal—consensus on what is needed. In pursuit of further consensus, the IMF’s study for this conference presents evidence on growth in MENA countries and focuses on key areas of reform.

Growth in this region will not reach its potential until the rate of investment rises from its average of around 20 percent of GDP toward 25 percent of GDP, closer to the 30-percent-plus common in East Asia. Accordingly, a key challenge is to improve the environment for private sector investment. This is critical for three reasons: foreign investment increases capital accumulation; foreign investment brings in new technology and business methods; and most important, the policies needed to make investment attractive for foreigners are precisely the policies that will make investment attractive for domestic residents.

What does this mean in practice? It means further progress in trade liberalization, in financial sector reforms, and in reform of the regulatory and judicial regimes. It also means reorienting the role of government in the economy through privatization, through reducing the government’s pre-emptive claim on resources, through the promotion of a resilient revenue structure, and through improvements in the quality of expenditure. The issue is not whether the government has an important role to play in the economy. It does—in ensuring the provision of infrastructure; in protecting the poor, especially from the costs of adjustment; and in protecting social spending, in particular spending on health and education. Such spending is not only a matter of social justice, but also, if efficiently implemented, a sound investment in growth. The government should also help the private sector adjust to globalization, by striking the right regulatory balance and providing for appropriate market discipline. It should also ensure the availability of comprehensive and timely economic data to allow the private sector to make well-informed decisions.

These formulas have been repeated so often by the Bretton Woods institutions—the IMF and the World Bank—that they must begin to sound like mantras. They are not that at all. Rather, they are summary descriptions of a set of policy changes that, if implemented, will help increase economic growth—as has been demonstrated all over the world.

The adjustment process benefits from the policy involvement of an informed and forward-looking private sector, as it has in Egypt. It takes statesmanship and vision for businessmen who have thrived in a protected and highly regulated economy to press for liberalization. However, the costs of adjustment facing the business community in the short run are greatly offset by the longer-term benefits, including the ability to compete forcefully in international markets. The sheer size of the international market provides scope for growth and enrichment that goes well beyond anything the local markets could ever offer.

The Role of the IMF

The IMF will continue to support countries in the region in their formulation and implementation of growth-oriented adjustment and reform programs. Countries can count on our support in three main ways:

  • We will continue our in-depth discussions and reviews of economic policy with member countries, particularly in the context of our annual Article IV consultation with each government.

  • We will maintain an intensive program of technical assistance, including for the West Bank and Gaza.

  • Where needed, we will provide financial support to countries undertaking stabilization and reform programs.

Our host country, Egypt, presents a good illustration of the IMF’s role and activities in the region. A month ago, the IMF’s Executive Board approved a two-year stand-by arrangement for Egypt, in support of the government’s program of reform. This program—and it is the program of the Egyptian government—aims to build on Egypt’s progress toward macroeconomic stabilization and to set the country securely on the path of outward-oriented growth and transformation to a full market economy.

Where does this leave us? Throughout much of the MENA region, there is a palpable feeling of change and progress in the air. This change is in large part a result of the important reforms begun during the last two years by several countries in the region. The early results are coming in, and that is why this is a time of economic hope—the hope that the potential in this region that has for too long been unfulfilled will be realized. And economic well-being too promotes the cause of peace.

European Job Growth Hinges on Deeper Labor Market Reform

A substantial reduction in European unemployment—it now stands at between 11 and 12 percent of the workforce—will require deeper labor market reforms across a broader range of complementary policies and institutions than have so far been undertaken. A coherent reform program that emphasizes such complementarities among different policies—while simultaneously addressing distributional concerns more effectively—could help generate a stronger constituency in favor of more broad-based, and potentially more effective, labor market reforms. These are the main conclusions of an IMF Working Paper, Policy Complementarities: The Case for Fundamental Labor Market Reform, by David T. Coe and Dennis J. Snower.

The Current Situation

Since 1970, employment in Europe has grown far more slowly than the labor force: the total labor force increased by 22 percent from 1970 to 1995, while total employment expanded by only 11 percent, with the increase in private sector employment increasing by an even more modest 5 percent. As a consequence, joblessness climbed steadily over this period: from a little more than 2 percent in the early 1970s to 11–12 percent in 1995—ranging from 7.2 percent in the United Kingdom to about 22 percent in Spain. IMF staff estimates of natural rates of unemployment—the rate of unemployment that is compatible with stable inflation—are currently on the order of 8–10 percent for Germany, France, and Italy. Current projections for the year 2000 foresee only modest declines in unemployment in most European countries.

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European Employment Trends

Citation: IMF Survey 0025, 001; 10.5089/9781451937442.023.A024

1Excluding Greece Luxembourg, and Portugal. Real GDP, capital stocks, and rear compensation are calculated using purchasing power parity-based weights.2The increase in employment in 1991 is due largely to the unification of Germany.Data: OECD, Analytical Data Bank, and IMF staff estimates

Current Policies. The twin problems of high unemployment and low job growth are a serious concern for European countries. Total spending on labor market programs has been equivalent to 3.5 percent of European GDP on average in recent years. Only one-third of this outlay has been used for active policies, such as job training, mobility, and placement. The remainder has been used to provide passive income support, such as disability payments or unemployment insurance. Some progress has been made in increasing labor market flexibility over the past decade. This includes provisions for more fixed-term contract workers in Germany, France, and Spain; less stringent rules for shift work in France and Finland; and easing of conditions for layoffs in France. Initiatives are under way to reduce the generous unemployment benefits that have become the norm in Europe since the end of World War II.

These labor market reforms, however, have done little to reduce Europe’s high level of unemployment over the past decade or so. This failure according to the authors, may reflect that only partial and incremental reforms have been implemented and that these reforms have not taken into account complementarities among unemployment policies. The authors also argue that an important group of labor market reform policies are complementary, in the sense that the effect of each policy reform is greater when implemented in conjunction with other reforms than in isolation.

Root Causes. While supply-side shocks and tight macroeconomic policies bear some responsibility for Europe’s high rate of joblessness, the underlying cause derives from labor market rigidities. Such rigidities include job security legislation that makes it difficult to replace workers, barriers limiting the number of people who may qualify for certain professions, and high wages in a number of declining sectors. These and many other practices, maintain Coe and Snower, discourage the unemployed from seeking new positions and make employers equally disinclined to hire them. European labor market institutions insulate incumbent workers from the forces of supply and demand, with the result that the unemployed end up being effectively disenfranchised from the wage bargaining system. All of these tend, in turn, to make wages even less responsive to market forces. In addition to these difficulties, strict seniority rules and other such barriers place formidable obstacles in the way of job creation and prolong unemployment, according to the IMF study.

Coe and Snower cite the following examples where European labor market reforms have been ineffective, or may even have made matters worse because of the absence of reforms linked to complementary policies:

  • In the Netherlands, the statutory minimum wage was reduced or frozen in 1994 to increase employment among lower-skilled workers. This action was largely nullified, however, because the government did not curtail the automatic extension of wage agreements between unions and employers to cover other workers. As a result, real wages of lower-paid employees in the Netherlands continued to increase at about the same pace as the private sector average, even though their unemployment level was roughly twice the overall rate.

  • In 1984, Spain attempted to promote greater wage flexibility by introducing fixed-term labor contracts, including provisions that lowered the costs of laying off workers. Such steps might have helped Spanish firms, which face some of the strictest job security regulations in Europe, adjust more rapidly to changes in market demand—but only if the move to more flexible, fixed-term contracts had been matched by similar efforts to loosen the stringent job security guarantees protecting people with permanent contracts. This did not happen. Failure to undertake both actions simultaneously, say Coe and Snower, had the “perverse effect” of contributing to less wage flexibility and higher rates of unemployment in Spain.

  • In the late 1980s, Sweden initiated a program to accelerate the re-entry of the unemployed into the workforce through a combination of reduced benefits and job counseling and training. These efforts were largely frustrated because the government did not implement parallel regulations preventing people from filing for new unemployment benefits at the expiration of state-supported job training programs. Such institutional barriers help explain why Swedish unemployment grew so rapidly after the adverse shocks of the early 1990s and why it has remained high since then.

Selected IMF Rates

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The SDR interest rate, 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, 13 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. Air 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.

Date: IMF Treasurer’s Department

Throughout Europe, ad hoc, uncoordinated efforts to restructure passive income support or disability programs have yielded only modest results. These programs and other welfare-state benefits often function as alternatives to, or extensions of, unemployment benefits. Thus, reforming one program—such as unemployment insurance—while leaving another intact—such as disability benefits—will do little to encourage job search or reduce long-term dependency, Coe and Snower conclude.

A Comprehensive Approach

In place of these ad hoc, isolated approaches, the IMF study encourages European countries to adopt a more comprehensive strategy to reduce European unemployment—that is, reforms that are simultaneously broad (covering a wide range of complementary policies) and deep (of substantial magnitude).

Distributional Consequences. The authors emphasize that broad-based labor market reforms will be politically feasible only if they incorporate measures to address the equity or income distribution objectives that may have been the initial rationale for many current labor market policies. They argue that a negative income tax, made conditional on employment or job search requirements, is a more efficient means of achieving governments’ equity objectives than the current system of labor market regulations and passive income support. Although there is clearly no one-size-fits-all labor market reform, a hypothetical program relevant to many European countries might consist of the following elements:

  • Replace passive income support measures with a negative income tax that is conditional on employment or job search to achieve distributional objectives—with fewer adverse effects on incentives and employment; such a tax could be coupled with a substantial scaling back of existing measures of passive income support.

  • Cut payroll taxes, particularly for low-wage employees.

  • Liberalize job security laws to encourage the hiring of workers while easing conditions for layoffs.

  • Reduce wage rigidities.

  • Increase incentives for the acquisition and provision of training, including rules that will allow the unemployed to transfer benefits for training vouchers.

  • Lower search costs by increasing job mobility and pension transferability.

Copies of IMF Working Paper 96/93, Policy Complementarities: The Case for Fundamental Labor Market Reform, by David T. Coe and Dennis J. Snower, are available for $7.00 from Publication Services, Box XS600, IMF, Washington, DC 20431 U.S.A. Telephone: (202) 623-7430; fax: (202) 623-7201; Internet: publications@imf.org

Sturc Memorial Lecture Russia Committed to Reform

Following is a summary of remarks delivered in Washington on November 7 by Anders Åslund of the Carnegie Endowment for International Peace, on the occasion of the thirteenth annual Sturc Lecture at the School for Advanced International Studies, The Johns Hopkins University.

From a reform point of view, a great deal has already been accomplished in Russia, said Åslund. It has achieved financial stabilization, with inflation projected at about 20 percent in 1996. An institutional system of checks and balances, anchored by a strong central bank, is firmly in place and stands out as a bastion of stability. More profoundly, Russians have learned the causes of inflation, and they have learned to hate it, Åslund maintained. Populists no longer hold sway, and the leading politicians are committed to financial stability.

Åslund pointed to far-reaching structural changes transforming the Russian economy. Swift privatization, for example, had already transferred more than two-thirds of formerly state-owned assets into private hands. The financial sector was likewise evolving, as one bank after another was forced into bankruptcy without the government bailing it out. The stock market functioned, and Russian enterprises have real owners who can be held publicly accountable for their actions.

Russia’s transformation has not been cost-free, however. The most serious economic issue facing Russia today is rent-seeking behavior that has enabled a small group of people to use the state for their own commercial purposes—at public expense. In Russia, the most destructive form of rent-seeking has been “arbitrage”: buying cheap raw materials—at a cost of as little as 1 percent of the world market price—and selling them abroad. These practices were common in the immediate aftermath of the Soviet Union’s collapse in 1991-92, when individuals became rich overnight through sales of oil, gas, and metals on the private market. Such export rents, said Åslund, have been estimated to be as much as 30 percent of Russia’s 1992 GDP.

Russia’s inequitable and inefficient tax system is another serious problem. In the whole of the former Soviet Union, state revenues have been falling at a rate of 5 percent a year; as early as 1993, average state revenues as a share of GDP had plummeted to 29 percent, and the decline continues. Unfortunately, said Åslund, Russia is currently pursuing a statist approach in attempting to collect taxes. In adopting this approach, the authorities have reinforced the arbitrariness of state power, which is bound to disrupt further economic recovery. The Russian tax system is unjust, said Åslund. For example, while manufacturers are unable to deduct real costs, bank interest remains deductible. The only plausible long-term solution is to reduce tax rates, broaden their base, abolish exemptions, and demand that everyone liable to taxation pay up.

Deregulation and wage arrears also constitute serious economic problems for Russia, said Åslund. The degree of regulation is still overwhelming. Russia requires licensing of virtually all economic activities, and it remains the promised land of inspectors. Clearly, deregulation has to go much further. Persistent wage arrears have become increasingly serious. According to Russian opinion polls, about 60 percent of the labor force reported that they had not been paid on time and in full during the previous month. It is not the absence of money in the budget that constitutes the problem, but the indifference of managers and officials to the needs of the workers. The managers are too strong in relation to their workers, and the legal system is too weak to rein them in, Åslund said.

With each passing year, Russia’s demand for international financial assistance will diminish, Åslund predicted. Lauding the IMF’s support for Russian reform, Åslund nevertheless indicated that the country’s economic future would increasingly depend on trade policy rather than external assistance. For this reason, Åslund urged industrial countries to support Russia’s early accession to the World Trade Organization.

A democracy and a market economy have taken firm root in Russia, Åslund concluded. The economic dilemmas Russia faces are a force in their own right, compelling Russia to move, as many Latin American countries have, from excessive regulation to liberal capitalism.

IMF Announces Organizational and Senior Staff Changes

Michel Camdessus, Managing Director of the IMF, announced a number of organizational changes and senior staff appointments at the IMF. The Central Asia and the Southeast Asia and Pacific Departments will merge on January 1, 1997, to form the Asia and Pacific Department. A Regional Office for Asia and the Pacific will be established at a location in Asia to be made known in the near future.

Hubert Neiss will be the Director of the new Asia and Pacific Department; Kunio Saito will be the Director of the new regional office; Reinhard Munzberg has been appointed Secretary of the IMF; Carol Carson is the new Director of the Statistics Department; and Mohsin S. Khan is now Director of the IMF Institute.

Mr. Camdessus said the organizational changes reflect the very substantial, and still growing, importance of the economies of Asia in the global economy and the parallel rise in the importance of the region’s financial centers. “The creation of a single department to handle our work on Asia will further our ongoing efforts to streamline our organization and is appropriate in view of the interconnectedness of the region’s economies. The establishment of an office in Asia will enable the IMF to develop closer ties with the region and its regional organizations, national policymakers, financial markets, and media, and to monitor developments more effectively. This will allow the IMF to play a more active role than hitherto in the region’s economic development and integration while, through its surveillance and other channels, strengthening the links between the economies of Asia and the rest of the world,” he said.

Mr. Neiss, a national of Austria, becomes Director of the Asia and Pacific Department, effective January 1, 1997. Mr. Neiss, currently Director of the Central Asia Department, joined the IMF as an Economist in the European Department in 1967. He was appointed Chief of the South Pacific Division of the former Asian Department in 1973, served as IMF Resident Representative in Indonesia between 1974 and 1976, and was appointed Assistant Director of the Asian Department in 1979. Mr. Neiss became Deputy Director of the Asian Department in 1980 and was appointed Director of the Central Asia Department when it was formed in 1991.

Mr. Saito, a native of Japan and currently Director of the Southeast Asia and Pacific Department, will become Director of the Regional Office for Asia and Pacific, effective January 1, 1997. He joined the IMF in 1969 as an Economist in the Asian Department and served as an assistant to the IMF Resident Representative in Indonesia between 1970 and 1972; he was appointed Advisor in the former Asian Department in 1978, and became Assistant Director in that Department in 1982. He became Deputy Director of the Asian Department in 1989 and was appointed Director of the Southeast Asia and Pacific Department when it was formed in 1991.

Mr. Munzberg, a national of Germany, has been appointed Secretary of the IMF, effective immediately, succeeding Leo Van Houtven, who has retired from the IMF. Mr. Munzberg was Germany’s Executive Director at the World Bank between 1981 and 1985. He was appointed Assistant General Counsel in the IMF’s Legal Department in 1986, Deputy General Counsel in 1988, and Associate Secretary in May 1996.

Ms. Carson, a national of the United States, has been appointed Director of the Statistics Department, effective immediately, succeeding John B. McLenaghan, who has retired from the IMF. She was appointed Deputy Director of the IMF’s Statistics Department in 1995. Before joining the IMF, she held various positions at, among others, the Bureau of Economic Analysis (BEA) at the U.S. Department of Commerce and served as the BEA’s Director between 1992 and 1995.

Mr. Khan, a national of Pakistan, has been appointed Director of the IMF Institute, effective immediately, succeeding Patrick B. de Fontenay, who has retired from the IMF. Mr. Khan joined the IMF as an Economist in the Research Department in 1972. He became Assistant to the Director in the Research Department in 1981, Assistant Director in 1987, Senior Advisor in 1991, and Deputy Director of the Research Department in 1993. Between 1985 and 1987, he was on assignment to the World Bank as Chief of the Macroeconomics Division of the Development Research Department.

Press Release No. 96/60, December 6

Estimating Potential Output Growth in Chile

The concept of potential output is central to the analysis of cyclical developments and medium-term growth prospects and plays an important role in the assessment of the stance of macroeconomic policies. A recent internal IMF staff study presents estimates of potential output growth for Chile based on a production function approach. A summary of this study, published in “Chile: Recent Economic Developments” (IMF Staff Country Report No. 96/89), provides the methodological basis for an examination of the sources of growth in Chile and a comparison of Chile’s experience with that of other countries.

During the last decade, output growth in Chile averaged 7 percent a year. The main source of growth during 1986–90 was the increase in labor input that reflected a large fall in unemployment, an increase in the participation rate, and an improvement in the quality of human capital (measured by a composite index of school attainments and earnings). In contrast, the rapid growth of output during 1991–95 reflected, in large part, an acceleration in physical capital formation together with an increase in the quality of capital (measured by the share of machinery and equipment in the capital stock). During 1986–95, the average increase in total factor productivity (the residual in the production function) was about 1.2 percent a year. The recent Chilean experience shares some of the features of the East Asian experience, particularly the increase in the labor participation rate and in fixed capital formation.

WTO and IMF Sign Cooperation Agreement

A far-reaching globalization of economic activity has resulted in an ever-growing interdependence among different areas of economic policy. Trade and financial policies and developments are increasingly interlinked within countries and in the way they affect other countries. Therefore, given their responsibilities in these areas, the IMF and the World Trade Organization (WTO) moved today to strengthen their relations when the heads of the two omanizations signed an agreement for future cooperation and collaboration.

Signed by the WTO’s Director-General, Renato Ruggiero, and the IMF’s Managing Director, Michel Camdessus, the agreement focuses on three main elements. First, it lays the basis for carrying forward the WTO’s ministerial mandate to achieve greater coherence in global economic policy by cooperating with the IMF as well as with the World Bank; a cooperation agreement between the WTO and the World Bank was also recently finalized. Second, reflecting the synergies in the work and responsibilities of the IMF and the WTO, the agreement provides channels of communication to ensure that the rights and obligations of members are integral to the thinking of each organization. Third, in keeping with enhanced cooperation, the agreement accords observer status to the IMF and WTO in certain of each other’s decision making bodies. Thus, it grants the WTO observer status to appropriate meetings of the IMF’s Executive Board, when it considers trade issues, and in turn grants observer status to the IMF in most WTO bodies.

The agreement signed in Singapore on the opening day of the WTO’s first Ministerial Conference has other benefits as well, including better access for both organizations to each other’s information and data. Such access is vital to avoid unnecessary duplication. The IMF’s macroeconomic information will be of great use to the WTO Secretariat, especially in their preparation of in-depth and regular trade policy reviews of each WTO member. In turn, the IMF will have access to a wide range of WTO information, including its integrated data base, which contains trade statistics and information on WTO members’ tariff rates; this is expected to help the IMF in its surveillance and lending activities.

While the agreement establishes new mechanisms by which the institutions can address each other, it also reflects and builds on a long-standing successful relationship that has always been friendly and largely informal. Thus, the institutions emphasize the need for their day-to-day dialogue to develop in a natural way, creating a more fruitful, two-way relationship between the organizations. Now that the institutional footing has been put in place by the agreement, it is anticipated that work will start soon to address issues related to achieving better coherence in global economic policymaking, an area where the WTO, the IMF, and the World Bank each has a distinctive role.

Press Release No. 96/61, December 9

IMF staff estimates show a positive gap between actual and potential output in the years in which the central bank tightened monetary policy (1989 and 1992-93). After the slowdown of 1994, the resumption of GDP growth left output slightly above potential both in 1995 and 1996, providing support for the tightening in financial policy that has been pursued since 1995.

For the next five years, potential output is projected to grow at 6.9 percent a year on average. This growth rate was estimated by averaging the results of a high- and a low-growth scenario (6.4 percent and 7.5 percent) based on alternative assumptions regarding physical capital accumulation and on the continuation of recent increases in participation rates and total factor productivity growth. An extrapolation of the trends in factor input and total factor productivity growth over the last five years provides similar results.

Care should be exercised in interpreting these results, the IMF study cautions, and, in particular, in using them as a basis for policy, because the estimates of potential output are quite sensitive to the assumptions about growth of factor inputs and total factor productivity. In the case of Chile, IMF staff projections assume an acceleration of total factor productivity growth, in line with the experience of certain East Asian countries and to reflect the effects of a rapid increase in capital imports by Chile over the past five years. Given the risks involved in designing policy on the basis of an overestimated level of productive capacity, it seems wise to base policies on rates of potential output growth that are at the lower end of the range of plausible estimates. This would reduce the risk of rekindling inflation and confronting the need for a sharp adjustment of policy, with adverse effects on growth.

China Accepts Article VIII

The government of the People’s Republic of China has notified the IMF that it has accepted the obligations of Article VIII, Sections 2, 3, and 4, of the IMF’s Articles of Agreement, with effect from December 1, 1996. IMF members accepting the obligations of Article VIII undertake to refrain from imposing restrictions on the making of payments and transfers for current international transactions or from engaging in discriminatory currency arrangements or multiple currency practices without IMF approval. A total of 134 countries have now assumed Article VIII status.

Two of the purposes of the IMF, as stated in its Articles of Agreement, are to facilitate the expansion and balanced growth of international trade, and thereby to contribute to the promotion and maintenance of high levels of employment and real income; and to assist in the establishment of a multilateral system of payments in respect of current transactions between IMF members. In seeking to achieve these objectives, the IMF exercises firm surveillance over the exchange rate policies of its members, and oversees the elimination of exchange restrictions that hamper the growth of world trade.

By accepting the obligations of Article VIII, China gives confidence to the international community that it will pursue sound economic policies that will obviate the need to use restrictions on the making of payments and transfers for current international transactions, and thereby contribute to a multilateral payments system free of restrictions.

China joined the IMF on December 27, 1945. Its quota is SDR 3.4 billion (about $4.9 billion).

Press Release No. 96/58, December 4

Accountability, Transparency Key to New Zealand Reforms

With sweeping and sustained reforms, New Zealand has recently retooled its economy. A centerpiece of this process has been a bold restructuring of the public sector. How was momentum built and popular support retained? Marco Cangiano, in an IMF Working Paper, Accountability and Transparency in the Public Sector: The New Zealand Experience, reviews these reforms and concludes that commitment to transparency and accountability helped win, and retain, public acceptance. It also enabled policymakers, over time, to shift the focus of fiscal policy from short-term stabilization to a framework that encouraged pursuit of efficiency in expenditure and taxation and responsible longer-term policies.

Background

In the early 1980s, New Zealand’s fiscal woes resembled those of many industrial countries. Government expenditures as a percent of GDP had risen sharply, and the deficit had ballooned. Moreover, compared to other industrial countries, New Zealand’s public enterprise sector played an unusually large role in the economy, accounting for nearly one-third of total employment and managing a substantial range of trading activities. In 1985, when slow growth and chronic and rising deficits prompted the government to take a hard look at the economy, the scope and role of the public sector was a principal focus of concern.

Corporatizing and Privatizing

In 1986, New Zealand took the first step in its reform process. It reorganized its state trading activities around five broad principles:

  • Shed activities more efficiently performed by the private sector.

  • Run state trading organizations like private companies (and shift noncommercial functions elsewhere).

  • Require managers to run their organizations like successful enterprises and hold them fully accountable to performance objectives set by ministers.

  • Operate the enterprises without artificial competitive advantage.

  • Set up enterprises with specific commercial purposes, with new boards of directors from the private sector.

By the end of 1993, New Zealand had created 31 corporatized state-trading organizations and a number of new agencies to assume regulatory functions. In general, corporatization dramatically reduced unit costs, prices, and tariffs, and improved service and profitability. Much of the increased efficiency derived from managers pursuing clearly defined objectives. Competition offered an important incentive. Between 1986 and 1988, remitted profits and dividends doubled. By 1989, New Zealand had ended subsidies to virtually all state-owned enterprises.

Members’ Recent Use of IMF Credit

(million SDRs)

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

But corporatization also had its shortcomings. The effectiveness of incentives and monitoring devices was limited by the absence of tradable shares and the threat of takeover or bankruptcy. Likewise, the perception of an implicit government guarantee for debt remained, as did the presumption of political interference. Penalties for failing to meet agreed-upon targets were not clearly spelled out. And some state-owned enterprises found themselves at a commercial disadvantage because their social responsibilities affected their bottom line.

To address these shortcomings and to meet budgetary needs, the government complemented its corporatization effort with a strong privatization push. Between 1988 and 1994, it sold $NZ 13 billion of government assets (including 21 state-owned enterprises)—equivalent to an annual average of 4 percent of GDP. In pursuing privatization, New Zealand opted to accept foreign ownership, even in strategic sectors, in recognition of the small size of its domestic financial market. It also made certain there was competition before a public sector monopoly was put up for sale.

Responsive, Efficient Government

Next, the authorities turned their attention to the second phase: ensuring that government provided its core services efficiently. In 1987, the New Zealand Treasury recommended that greater attention be paid to the relationship between ministers and the heads of government departments; greater autonomy be granted to department heads; a clear distinction be drawn between the output of services and the desired outcome of a social program; and provision be made for financial accountability.

Practical Lessons from New Zealand’s Reform Efforts

As the New Zealand experience with government reform demonstrates, comprehensive and fundamental change is possible in a relatively short period of time. Careful planning, observes Graham C. Scott in IMF Occasional Paper No. 140, Government Reform in New Zealand, can contain the risks associated with change. Scott served as New Zealand’s Secretary to the Treasury from 1985 to 1992. From this vantage point, his Occasional Paper provides a broad review of the reform process, including 12 lessons for countries seeking to implement similar reforms:

  • Recognize the Problem. For reform to occur, there must be a broad realization that a problem exists, general agreement on a solution, and a strong commitment to pursue this solution despite the inevitable obstacles. Some analysts have argued that only serious crises spawn real change, but New Zealand’s experience suggests that ideas and political and bureaucratic leadership can also effect change.

  • Solve a Sequence of Real Problems. The political reality is that grand designs rarely excite politicians. Keep the end- point in sight and avoid inconsistencies, but emphasize the solution of a sequence of real problems to secure early payoffs and political support.

  • Political Commitment Is Necessary at Key Points. New Zealand’s reforms relied on the leadership of the finance minister and other key authorities. They steered the necessary legislation through the government and parliament, and at other critical junctures conveyed their support to the top management of the civil service. Legislation, although not strictly needed, provided clarity of purpose, a philosophy, and a technical basis to sustain changes over time.

  • Leadership from Heads of Departments Is Essential. Since opportunities to frustrate reforms abound and passive leadership undercuts momentum, the active leadership and commitment of heads of departments and central agencies are crucial.

  • Do Not Relax Central Controls Too Soon. Legislation provided departments a two-year period to make the transition from detailed input controls to outputs and finally to free them from most controls. The government was thus able to deal individually with departments and appraise their readiness to remove input controls.

  • Change Management Requires Particular Skills. New Zealand’s reforms enabled managers at all levels to change the way they manage staff and resources, and to be more responsive to clients. The three phases of change management require different management skills. In the first phase, conceptualization, planning, and strategic skills are essential. The key task of the second phase—the early implementation stage—is motivation. In the third phase, as the system has begun to operate, the emphasis shifts to decentralized activities: technical development, staff training, learning from errors, and identifying best practices. Individual habits and attitudes will lag behind changes in systems. Constant reinforcement of the need to change, and of the rewards for doing so, is necessary.

  • Create Incentives to Change. Department heads welcomed the removal of controls over inputs; it motivated them to implement reforms. When their new duties made them chief finance officer, they responded by bringing in qualified accountants and including departmental finance officers on senior executive teams.

  • Communicate the Objectives of Changes. Reforms often translated into more work for many people. To keep them motivated, they had to understand how the financial management changes would benefit the government as a whole and their operations in particular.

  • Decentralize Technical Accounting Issues. Consistent with their commitment to decentralization, parliament and the treasury avoided dictating detailed accounting practices. Within the bounds of the generally accepted accounting principles, variation across departments was tolerated. Subsequently, inconsistencies that appeared material were rectified.

  • Senior Management Must Allocate Time for the Change. The transition to decentralized management will mean that chief executives have to spend considerable time overseeing the development of new management systems. Until these become routine, their traditional function of providing policy advice may suffer.

  • Manage Traditional Risks Carefully. Opponents of reform will seize upon early problems in implementation. Scott counsels managing these risks with common sense—anticipating problems and intervening quickly to limit damage and correct the problem. Such problems tend to be less important if the overall thrust of the reforms produces early results.

  • Managing Change at the Departmental Level Is Crucial. Management change is critical to the reforms. Departmental chief executives became personally responsible for managing strategy, operations, personnel, and finances. Some managers who had flourished under the previous system were not capable of taking on such personal responsibility. Assuming competent top management is in place, the change process involves:

    • a clear mission for the organization, including corporate values; a commitment to quality; and strategic plans defining priority outputs and the development of the organization;

    • operational plans that translate strategies into detailed agreements assigning responsibilities and that specify information flows internally and externally; and

    • enabling systems to allocate and develop resources, ensure quality, specify results, monitor achievements, and motivate staff performance and innovation.

Copies of IMF Occasional Paper 140, Government Reform in New Zealand, by Graham C. Scott, are available for $15.00 (academic rate: $12.00) from Publication Services, Box XS600, IMF, Washington, DC 20431 U.S.A. Telephone: (202) 623-7430; fax: (202) 623-7201; Internet: publications@imf.org

Legislation in 1988 and 1989 laid the basis for new management relationships and created new methods for ensuring accountability. Department heads became “chief executives” on five-year contracts, accountable for their performance. Government agencies and departments were restructured to rationalize responsibilities and separate policy from operational functions, and funding from the purchase and provision of services. Private providers now competed with public providers.

These operational and organizational changes made the existing appropriation process obsolete. To ensure accountability and managerial efficiency, the new legislation distinguished between outcomes (policy goals) and outputs (the goods and services, including policy advice, needed to achieve these goals). The legislation held chief executives accountable for achieving agreed-upon outputs, while ministers retained responsibility for outcomes.

The quest for improved financial information to support the new asset management led to the adoption of private sector accounting practices in the public sector, including the preparation of annual financial statements on an accrual rather than cash basis. The government also shifted the appropriation system from inputs to outputs and substantially revised its financial procedures to devolve responsibility for managing financial and human resources to the chief executives.

The next step was compiling a balance sheet for the government. This took approximately three years and several phases of legislation, because, notes Cangiano, “no other government had undertaken such an exercise before.” Since 1994, the government has been publishing a full set of financial statements similar to those of a publicly listed company.

Ensuring Fiscal Responsibility

In June 1994, New Zealand moved into the third phase—innovative institutional reform that balanced principles of responsible fiscal management with a degree of policy flexibility. The reform, embodied in the Fiscal Responsibility Act, was deliberately designed to provide a strong medium-and long-term orientation to fiscal policy. The reform rejected quantified fiscal targets and instead adopted five principles that serve as legislative benchmarks:

  • reduce government debt to prudent levels by requiring fiscal operating surpluses until this is achieved;

  • once debt is at a prudent level, ensure that operating expenses do not exceed operating revenues;

  • achieve and maintain a sufficient level of net worth as a cushion against future adverse developments;

  • manage fiscal risks prudently; and

  • pursue a reasonable degree of predictability in the level and stability of future tax rates.

A24ufig04

New Zealand Fiscal Developments1

(In percent of GDP)

Citation: IMF Survey 0025, 001; 10.5089/9781451937442.023.A024

1 Data relate to years ending in June. Starting in 1991/92, financial statements are on an accrual basis and not strictly comparable to the previous cash-based statements From 1992/93 onward, the reporting entity includes alt state-owned enterprises and Crown entities as well as the reserve Bank of New ZealandData: New Zealand Treasury and Statistics New Zealand

Governments may temporarily deviate from these principles with justification and with assurances that they will, within an explicit time frame, return to them. To ensure transparency and accountability, the law also established disclosure requirements for fiscal policy intentions and objectives. To date, fiscal developments have been signaled well in advance, and key ministers have shown awareness of the five crucial fiscal variables: revenues, expenses, accrual operating balance, total debt, and net worth. Transparency and predictability have come to characterize fiscal policymaking, and market analysts and the media have reacted favorably.

Dividends of Reform

New Zealand’s reform efforts have improved its fiscal position dramatically. Surpluses have been recorded since 1994, following two decades of deficits. In 1995/96 the operating surplus was 3.7 percent of GDP; net worth turned positive, reaching 3.7 percent of GDP; and net public debt declined to 31 percent of GDP. State-owned enterprises, and the government itself, abide by the same set of rules and regulations (including taxation), disclosure requirements, and accounting practices that apply to the private sector. And the results, in terms of efficiency gains and the dramatic turnaround in the country’s fiscal position, are impressive.

Copies of IMF Working Paper 96/122, Accountability and Transparency in the Public Sector: The New Zealand Experience, by Marco Cangiano, are available for $7.00 from Publication Services, Box XS600, IMF, Washington, DC 20431 U.S.A. Telephone: (202) 623-7430; fax: (202) 623-7201; Internet: publications@imf.org

The next issue of the IMF Survey will appear on January 13, 1997.

David M. Cheney, Editor

Sara Kane • John Starrels

Senior Editors

Sheila Meehan • Sharon Metzger

Assistant Editor Editorial Assistant

Lijun Li

Staff Assistant

Philip Torsani • In-Ok Yoon

Art Editor Graphic Artist

The IMF Survey (ISSN 0047-083X) is published by the International Monetary Fund 23 times a year, plus an annual Supplement on the IMF, an annual Index, and occasional supplements. Editions are also published in French and Spanish. Opinions and materials in the IMF Survey, including any legal aspects, do not necessarily reflect the official views of the IMF. Address editorial correspondence to Current Publications Division, Room IS9-1300, international Monetary Fund, Washington, DC 20431 U.S.A. Telephone: (202) 623-8585; or e-mail comments to imfsurvey@imf.org. The IMF Survey is mailed first class in Canada, Mexico, and the United States and by airspeed elsewhere. Private firms and individuals are charged an annual rate of US$79.00. Apply for subscriptions to Publication Services, Box XS600, IMF, Washington, DC 20431 U.S.A. Telephone: (202) 623-7430. Cable: Interfund. Fax: (202) 623-7201. Internet: publications@imf.org.

IMF Survey: Volume 25 1996
Author: International Monetary Fund. External Relations Dept.