Our prime objective is growth. In my view, there is no longer any ambiguity about this. It is toward growth that our programs and their conditionality are aimed. It is with a view toward growth that we carry out our special responsibility of helping to correct balance of payments disequilibria and, more generally, to eliminate obstructive macro-economic imbalances.
When I refer to growth, I mean high-quality growth, no pseudo-growth. . . . There have been many instances of the latter over the past 20 years, which helps to explain how the world is now, that is, not only very insufficiently developed, but also wrongly developed. Allow me to explain what I mean by pseudo-growth.
• There is “flash-in-the-pan” growth, fueled by inflation and financed through excessive borrowing or—even more harmfully—by the accumulation of arrears, which amounts to willful destruction of countries’ external creditworthiness.
• There is growth for the privileged few, leaving the poor with nothing but empty promises.
• Finally—and my list is far from comprehensive—there is forced quantitative expansion, pursued through the disorderly exploitation of natural resources and the ravaging of the environment.
In contrast, the growth objectives found in our programs . . . are . . . concrete and meaningful, and our every action is aimed at orienting the efforts of all parties—the countries concerned, their friends, their creditors and ourselves—toward high-quality growth.
What does this mean? At least part of the answer lies beyond the boundaries of economics. For economic growth, in its broadest sense, is too rich in meaning, too complex, and too essential to mankind’s future to be left only to economists.
High-quality growth means, first of all, growth that is sustainable in that it does not crumble in the face of the slightest external shock. It means growth with domestic and external financial stability. It means growth that is dynamic and that creates the conditions for future expansion by enhancing investment—in human capital in particular. High-quality growth is concerned with the poor, the weak, and the vulnerable. Finally, it is growth that does not wreak havoc with the atmosphere, with the rivers, forests, or oceans, or with any part of mankind’s common heritage. In a word, high-quality growth entails working together to achieve a complex set of economic and social goals: neglecting any one would ultimately endanger the others.
This said, the means by which this high-quality growth is achieved—be they economic, social, or political—are perhaps as important as the ends. The downturns experienced in many developing countries that had temporarily achieved relatively high growth rates in the 1970s are instructive in this regard. They show that growth founded on inflationary policies and excessive external borrowing and which is not built on broad-based and creative participation of the largest possible part of the population, but on the pre-eminent, if not exclusive, initiative of the State, is deprived of its essential driving force.
One of the opportunities facing us in the 1990s, one of the aspects of this “new deal” which must serve as our point of departure, is that a much broader consensus has emerged with regard to the objective of high-quality growth. This objective, this guiding ideal of growth, is highly ambitious. How can we achieve it? By reflecting on the unconvincing experiments and failures of the past and by drawing lessons from them. The most important lesson is that it is necessary to revitalize simultaneously the two key components of international cooperation: namely, more credible national policies and international support that is equally credible. We cannot but set our sights higher, as regards both policies and the support for them.
More credible national policies
. . . High-quality growth will not be achieved in the absence of “bold reformism.” Severe disequilibria and inappropriate structural adaptation must be addressed promptly and on all fronts, and the public must know the hard facts about the scope of the problems and the policies chosen. Let us not ascribe the virtues of gradualism to foot-dragging policies or to policies aimed at preserving vested interests or flaws in the established order. We must recognize the need for change, as well as set out the principles for it. Postponing change would be worse than the disease itself; it would cause the continued economic deterioration of economies, not their recovery. What can be done to win public support, how would it be possible to gain the support of the creditor or donor community? This is not the time to soft-pedal reform, but rather to support carefully crafted programs which attack the problem at its roots. This is the focus of the programs supported by the Fund. . . .
These programs involve, first and foremost, macroeconomic discipline, beginning with the reduction of fiscal deficits and monetary measures aimed at achieving price stability and realistic exchange rates. Such discipline is essential. It has taken us far too long to shake off two dangerous misconceptions of the 1970s: first, that monetary stability and growth are at odds with one another; and second, that external financing—borrowing—is the best path to growth. The experience of recent years shows clearly that the countries making the greatest strides are those that borrowed prudently and steadfastly resisted inflation. A recent Fund study of 88 net debtor developing countries found that those with high inflation during 1983-89—that is, with inflation in excess of 15 percent—had an average investment ratio that was one third lower than that of low-inflation countries (18 percent versus 27 percent). What is even more striking is that real income per capita stagnated in the high-inflation countries, whereas it grew by more than 4 percent a year, on average, in countries with low inflation. . . .
Macroeconomic discipline goes hand in hand with structural reforms that are designed to promote efficient resource use and to remove the most deep-rooted and stubborn obstacles to growth. Here I refer to reforms that eliminate damaging distortions in tax systems, prices, interest rates, and exchange rates; reforms that provide incentives for competition and private initiative; that improve public enterprise efficiency; that open up foreign trade and foreign investment; that enhance the quality of investment—and not only its quantity; and reforms that cut back to a minimum, administrative intervention and, with it, corruption.
Reforms and the poor
Often, and quite properly, questions are raised about the impact of such policies on the poorest and the most vulnerable. Let me say outright: these policies serve the poor, and we must do our utmost to implement them if we are to be efficient in our fight against poverty and all it entails.
First, we should ask ourselves what happens to the poor without such discipline, without such reforms? How do the poor, who have little or no assets, fare when runaway inflation is set loose by easy money policies? When factories close down because of overvalued exchange rates? When there is no incentive to produce crops because state monopolies pay prices that do not cover the costs of production? The answer is both obvious and tragic. The poor are the first hit, the worst hit, and the least able to protect themselves.
In contrast, the reforms to which I referred can and must improve the lot of the poor. This observation is based not on theory, but on examples from our experience. For example, higher producer prices raise the incomes of poor farmers; more efficient supply arrangements, which reduce costs, have a similar effect; and fiscal reforms which raise revenues and restructure public expenditures by reducing excessive military outlays and all other wasteful spending, and which increase productive investment, enable governments to provide more appropriate social services. . . .
The fact remains that the transition from an economy ridden with imbalances and rigidities to a high-quality growth path is always difficult and can sometimes take longer than we tend to believe. Some policies that are necessary for this transition may hurt some of society’s vulnerable groups in the short run. With the governments concerned, we are making a serious effort to contain and mitigate such ill effects and to introduce appropriate “safety nets.” We are striving to improve the design of our programs to ensure a better blend of adjustment, growth, and equity and, in particular, to ensure that the plight of the poor is properly recognized. During fiscal retrenchment, for example, we encourage governments to avoid raising taxes on the basic staples consumed by the poor; to protect critical social expenditures on health, education, and nutritional programs; and to compensate or support the retraining of workers who are laid off. We also make provisions in programs, whenever the financing is available, for subsidies that target vulnerable groups—free meals for children, income supplements for the elderly and the disabled, and housing subsidies for the homeless, to cite but a few examples. Similarly, we are focusing our thoughts and efforts toward improving the way environmental concerns are addressed within the framework of the programs we support.
Rational economic policies and the defense of the environment have to be mutually reinforcing. Experience has shown overwhelmingly that ineffective policies lead to shortages and the overuse of natural resources, with disastrous environmental consequences, not to mention what is perhaps the most grotesque assault on the environment—the accumulation of military hardware in the poorest countries.
But let us not be mistaken. Social safety nets and ecological safeguards are not added to programs on the cheap. These options have their costs. And these costs cannot be properly covered, even in part, by increasing deficits or by money creation. The ambitious aim of quality cannot be achieved unless we are prepared to finance it. The two best ways to do this are:
• First, through greater national solidarity; in particular, when there are large differences in wealth, could one not increase taxes paid by the richer part of the population?
• Second, through more vigorous savings efforts; the question here is whether there are further unproductive expenditures that can be sacrificed? For example, must Africa really continue to devote more than 5 percent of its GDP to military and national security spending? Obviously not. And it is clear that any country that is not perceived by the international community to have firmly embarked on a strong effort to cut spending to a reasonable level will stand little chance of obtaining sufficient international support, even for its most justified expenditures. In saying this, I would like at the same time to acknowledge how difficult it is in practice to reorient government spending. This requires bold political choices. When these choices are made, they must be supported.