Financial&�� Development
Bahram Nowzad ADVISORS TO THE EDITOR Finance & Development is published quarterly in English, Arabic, EDITOR Chinese, French, German, Portuguese, and Spanish by the International Andrew Crockett Monetary Fund and the International Bank for Reconstruction and Shuja Nawaz Vinod Dubey Development, Washington, DC 20431, USA {DSPS 123-250). Second MANAGING EDITOR Howard Handy class postage is paid at Washington, DC and at additional mailing Gregory Ingram offices. • English edition printed at Lancaster Press, Lancaster, Rachel Weaving PA. • English edition ISSN 0015-1947. • Opinions expressed in arti- ASSISTANT EDITOR Paul Isenman cles and other material are those of the authors; they do not necessarily Arturo Israel Sheila Meehan reflect Fund or Bank policy. • New readers who wish to receive Claudio Loser EDITORIAL OFFICER Finance & Development regularly should apply in writing to Finance & Guy Pfeffermann Development, International Monetary Fund, Washington DC 20431, Richard Stoddard Alexander Shakow USA, specifying the language edition and briefly stating the reasons for ART EDITOR Alan Tait their request. • The contents of Finance & Development are indexed in Business Periodicals Index, Public Affairs Information Service (PAIS), U Tun Wai Joan Wolbier and Bibliographie Internationale des Sciences Sociales. An annual GRAPHICS ARTIST David Williams index of articles and book reviews is carried in the December issue.
International Monetary Fund Published quarterly in March, June, September, and December, Staff the Staff Papers of the International Monetary Fund contains studies on monetary and financial problems affecting the world economy. Articles appearing in the December 1985 issue are: • Fiscal Deficits and Interest Rates in the United Stales: Papers An Empirical Analysis by Vito Tanzi • The Sustainabtlity of Fiscal Deficits by P.R. Masson • Foreign Borrowing and Capital Flight: A Formal Analysis by Mohsin S. Khan and Nadeem Ul Haque • Currency Substitution in Argentina, Mexico, and Uruguay by C.L, Ramirez-Rojas • Trade Data Discrependes and the Incentive to Smuggle: An Empirical Analysis by Donogh C. McDonald • The Speed of Adjustment of the Inflation Rate in Developing Countries: A Cross-Country Study of Inertia by Ajai Chopra Subscriptions for Staff Papers (US$15.00 for a volume, US$4.00 for a single issue, special rates—US$7.50 a volume—to university libraries, faculty, and students) should be sent to: Publications Unit, Box A-861 • International Monetary Fund 700 19th Street, N.W, • Washington, D.C. 20431, U.S.A. Telephone (202) 623-7430
©International Monetary Fund. Not for Redistribution March 1986/Volume 23/Number 1 Finance Development A quarterly publication at the International Monetary Fund and the World Bank
Richard D. Erb 2 Adjustment, growth, and the Fund's role Interview with the Deputy Managing Director of the IMF
Economic aid reconsidered Shahid Javed Burki A fresh look at development aid and Robert Ay res Major findings of a Development Committee task force
Robert Cassen 11 The effectiveness of aid
The record and the lessons
Richard D. Erb 15 Collaboration between aid agencies and the IMF
Ibrahim Shihata and 17 A review of OPEC aid efforts
Naiem Sherbiny Experience of the first 25 years
Edward V.K. Jaycox 21 Africa: Development challenges and the World Bank's response
Effects of Fund programs Morris Goldstein 24 Global effects of Fund-supported programs Are they properly understood and easily measured? Not entirely.
Jacques de Larosiere 28 Economic adjustment and growth . . . from the speeches of the Managing Director
Mohsin Khan and 30 Do Fund-supported adjustment programs retard growth? Malcolm Knight A study of available evidence
Charles A. Sisson 33 Fund-supported programs and income distribution in LDCs Distributional issues in adjustment programs are important but complex
Basil Kavalsky 37 Reviewing public investment programs How the Bank works with countries to assess priorities -"
Robert Solomon 41 The IMF in a period of turbulence A i . , Review article on latest installment of the Fund history V ' ' . ! v
Friedrich Kahnert 44 Re-examining urban poverty and employment r Improved incomes and labor productivity hold the key to better results J
/ V.V. Bhatt 48 Entrepreneurship development: India's experience / ,-•, ~—3-.-\j(.—
Books Wm. C. Hood so International Economic Policy Coordination by Willem H. Buiter and Richard C. Marston (editors) Lyn Squire 51 Taxation for Development by Stephen R. Lewis Jr. Graham Donaldson 51 Agriculture and the Development Process by D.P. Chaudhri and Ajit K. Dasgupta Anthony Lanyi 51 Bank Lending to Developing Countries by C. Fred Bergsten, William R. Cline, and John Williamson; Financial Intermediation Beyond the Debt Crisis by Donald R. Lessard and John Williamson 52 Books in brief 53 Letters
The Editor welcomes views and comments from readers on the contents of the journal. The contents of Finance & Development may be quoted or reproduced without further permission. Due acknowledgement is requested.
©International Monetary Fund. Not for Redistribution Adjustment, growth, and the Fund's role
A conversation with Richard D. Erb, Deputy Managing Director of the Fund
F&D What is realty new about the so-called Baker initiative, and where does the Fund fit in? Erb I see the Baker initiative as an important step in strengthening the debt strategy that has been followed since 1982; indeed that is the way Treasury Secretary Baker himself cast the proposal at the October 1985 Annual Meetings of the Fund and the Bank in Seoul. It is an initiative that builds on the experience to date, yet faces up to the continued efforts that need to be made in the future, and finally identifies and lays out the cooperative roles that the various parties must play in the process. I think we need to look back and recognize the progress that a number of countries have made in dealing with their debt problems. We also need to appreciate that many countries are having a more difficult time than had been anticipated in dealing with their internal and external imbalances, and with their external debt problems. In particular, we need to face up to the additional efforts that are required in a number of major debtor countries. In that connection, under the Baker plan, the Fund would continue to play a central role in dealing with the economic imbalances and the debt problems that countries face, a role that would continue to include the analysis and policy advice that the Fund brings to discussions with member countries. The Fund's role will also be to continue to help countries obtain new external financing from commercial banks as well as from official sources. I would also emphasize the joint role of the Bank and the Fund in the areas of analysis and policy advice as well as in bringing external funds to assist a country.
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©International Monetary Fund. Not for Redistribution F&D Many people speak (and write) as though until the Seoul government has a certain growth objective. We try to help frame the meeting, the key to debt problems was adjustment, and after Seoul, policies in a way that will enable the country to achieve its growth growth. Do you see any conflict between adjustment and growth? objective, while recognizing the constraints that it may face, con- Erb No, I don't see any conflict between adjustment and growth. straints related to the availability of external financing, domestic Indeed, I think they go together. Adjustment got a bad name because savings, and domestic investment. We don't view a particular growth of a misperception, in the early days of the financial crisis, of the rate as an abstract magnitude or target. If better conditions can be initial need for a number of countries to respond to the sudden drying created to foster investment, make more efficient use of resources, up of external financing. They did that by drastically cutting govern- and attract foreign resources, then the growth rate can be very high. ment expenditures—with emphasis on investment expenditures— If these conditions are not there, the growth rate is not going to be and in many cases by adopting exchange controls and by putting as high. This is not because a target was not set, but because of the restrictions on imports. In several cases, the adjustments were more absence of underlying policies. The objective is to achieve as high a severe because governments had delayed making appropriate policy rate of growth in the country as possible; putting in place appropriate responses to deteriorating economic conditions. micro and macro policies will improve the chances of achieving that That is not the desirable path of adjustment in the way we view it growth. at the Fund. When economic conditions begin to deteriorate, adjust- ment from a Fund perspective means an appropriate and timely policy F&D Promoting better micro, as well as macro, policies implies a response to prevent severe imbalances from building up. In cases more activist role for the Fund. Is the Fund ready for such a role? where conditions have deteriorated sharply—for whatever reason— Erb I think the real question is whether the members are ready adjustment involves adopting policies that will lay the basis not only for a more active role for the Fund in growth-oriented policies. There for restoring external creditworthiness and external financial flows is a widespread misperception that growth-oriented policies are easy but also for re-establishing the domestic basis for economic growth to implement. Our experience has been that in many countries those by encouraging more savings and a more efficient use of resources. policies that would have the most immediate, dramatic, and sustained What we call adjustment includes, for example, reducing fiscal impact on growth are often the most difficult ones for countries to deficits when they have been a source of a major imbalance in an implement. Exchange rate adjustments, which would make a country economy. The effort to reduce the fiscal deficit is an effort to provide more competitive, open up export opportunities, and create the more resources for investment and to reduce pressures on monetary potential for import-competing industries, are sometimes very difficult authorities to finance a deficit with inflationary money creation, thus for countries to undertake. Changes in relative prices, which would laying the basis for economic growth. Without investment, economic encourage flows of resources to sectors that can utilize them more growth is not going to be very durable or very sustainable. A high efficiently, are difficult for countries to make. or accelerating rate of inflation is not going to instill much confidence Generally, countries find it easier to cut investment budgets than in the business community to make new investments. Capital will to restrain consumption expenditures, even though it is investment likely flee the country. So it is important to get inflation down. The that lays the basis for economic growth. These are policy areas in Fund also places a great deal of emphasis on achieving an exchange the hands of governments. I can cite numerous examples. For rate that permits the elimination of exchange controls and import instance, shutting down an inefficient state enterprise and using the restrictions, thus encouraging a more efficient use of resources. resources that go into that enterprise in a more productive activity, Where a government has put restrictions on trade, those restrictions where you have positive rates of return, is a growth-oriented policy. must be reduced, in order to allow imports, especially of goods that But it is not easy to shut down an inefficient and deficit-running state will form the basis for productive investment. enterprise. The challenge for many countries and for international institutions is to implement policies that are indeed growth-oriented and that would have a sustained impact on economic growth. Now, F&D Given the greater emphasis on growth, is there a danger that there is, to be sure, a "growth-oriented" strategy that some advocate the growth rate for a country will become a target, to which everything which, in our experience, is not sustainable. This consists simply, at must adjust? a moment in time, of increasing government expenditures and Erb The way to look at various targets—including growth—is by increasing money creation. But unless the external resources increase recognizing that economies are integrated. By that I mean that one to support that sort of general policy it is not going to last very long; can't set a particular target without taking into account all the other its main impact may be on inflation rather than on economic growth. constraints and other targets that a country may have. The relationship That kind of "growth" policy really isn't growth-oriented; it, in fact, between, say, growth and external financing may be positive, but if may be detrimental if it encourages financial flows to sectors that are the external financing is not adequate to support the domestic growth not productive. target, then the only way you are going to achieve it is, first, through more domestic savings (to support more investment and permit a F&D What do you say to those who claim that the Fund applies higher growth rate) and, second, through more efficient use of a the same program package to all countries, in all conditions? country's resources. Erb Our experience has been that we have different combinations As we look at the growth prospects in a country, we don't of policies in different countries depending on their problems and the necessarily set a target for growth, although we recognize that a constraints in their economies. In some countries it is necessary to
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©International Monetary Fund. Not for Redistribution focus on a fiscal deficit that may be very large. In other countries it F&D The Fund is not an aid institution, but its work affects may be necessary to put the emphasis on an exchange rate and economic development in member countries. How can it assist the producer prices that are out of line. As a practical matter we find development efforts of members and multilateral aid agencies? that when a country is faced with economic problems—slow economic Erb The Fund is not an aid agency in the sense that it does not growth and external financing constraints—there is usually more than provide long-term balance of payments financing. But the policy one manifestation of that problem. Often, fiscal deficits are high, analysis, the policy advice, and the short-term financing that the Fund inflation is rising, and the exchange rate is out of line. If our policy provides can be extremely important in helping countries achieve advice appears perhaps too uniform across countries—a notion I their development objectives. The Fund's analysis—in its emphasis would challenge—it may be because the problems that countries face on fiscal, monetary, exchange rate, and pricing policies that will help are very similar. Countries that are in trouble often have the same to reduce imbalances and create better conditions for economic kinds of policy problems. By its nature and mandate, the Fund focuses growth—is very much growth-oriented. When a developing country on broad macroeconomic policy targets, and governments have been is faced with an external financing problem, and the Fund steps in reluctant to allow the Fund to become too deeply involved in the and provides short-term financing, it helps the country adjust. micro structure of their economies. So we are, in a way, constrained The advantage that the Fund has over a development agency or by what we can focus on. But by saying that I would not want to development bank is that we can provide a country with fairly large- imply that these variables are unimportant: they are extremely scale, quick-disbursing, and untied resources in a short period. When important. Credit creation, the fiscal deficit, exchange rate policy, a country is suddenly faced with, say, a shift in its external circum- and producer pricing policies have a major impact on an economy and stances, a decline in the terms of trade, or perhaps an internal they should rightly be the focus of the Fund's work. problem, such as a drought, the Fund is able to help it through the early phases of the adjustment. This should ideally give development F&D Is it fair to say (as some have done) that Fund surveillance institutions time to mobilize more resources so as to provide medium- is essentially asymmetrical, that it is mainly applied to developing and longer-term financing on a sustainable basis. Even in providing countries? temporary resources, the Fund is contributing to the country's Erb I think there is considerable confusion on this matter. For one development efforts, because without the temporary resources the thing there is confusion between conditionality, which the Fund country would need to make even more drastic adjustments. associates with the use of its resources, and surveillance. They are two separate activities of the Fund. When we lend, we do apply F&D Fund-Bank cooperation has been much talked about. How conditionality; we require policy adjustments and have leverage, in practicable is it at the country program level, given the different effect. When we engage in an Article IV surveillance discussion, mandates of the two institutions? however, whether it is with an industrial country or a developing Erb I don't think one should exaggerate the differences in mandate country, we don't have any leverage other than the analysis and between the two institutions. As a practical matter, we both are quality of the policy advice that we bring to the discussion. Indeed, providing analysis and policy advice to countries whose economies if one looks at the surveillance activity in the context of surveillance are, in fact, integrated. You can't artificially carve up an economy discussions alone, to the extent that there is asymmetry, it is because because two institutions may have different mandates. Through the of the relatively greater degree of attention that is focused on the sharing of analysis and views on policy advice, and through the efforts major economies of the world, relative to the economies that have that the two institutions make in providing external resources, both less of an impact on the world economy. This is already embedded institutions should be working closely to help a country. I don't think in our consultation procedures whereby we have regular annual that one can draw fixed lines between macro policies and micro consultations for countries (developing as well as developed) that policies, or the short run and the long run. In many countries a very have a larger impact on the world economy, and less frequent large fiscal deficit is a result of, for example, state enterprises that consultation with those that may have a smaller impact, assuming may be inefficient and inappropriate. The resolution of the fiscal that their economies are working reasonably well. In the World problem, in part, depends on inputs from the World Bank in helping Economic Outlook exercise, which is part of the surveillance process a country better manage its enterprises. To the extent that the in the Fund, a great deal of attention is focused on the United States country is using its public resources for better investments it is and the other major industrial countries, and an effort is being made improving the general macro environment of the country. So the two to develop greater analysis of the interrelationships among the major institutions need to work closely together in the field, while recognizing currency countries. In many ways, therefore, the surveillance process that each brings differences in perspective and expertise that are is focused on the larger industrial countries. important to a country's situation. We shouldn't try to become one There is another way in which people think of the surveillance homogeneous institution, obviously, but build on our separate man- process as being asymmetrical. I think that the perceived asymmetry dates and strengths in the ways that we work with and assist is not a result of the surveillance process but a result of the nature governments. of the exchange regime. Under the current exchange rate system one could argue that there is asymmetry between, for example, those F&D Speaking of low-income countries, can you say something countries that can borrow and are not subject to any external discipline about the problem of payments arrears to the Fund and the difficulties on their policies, and those that have limited ability to borrow and it poses for the institution? are subject to external pressures. It is also suggested at times that Erb It is true that we have some arrears but the number of countries a country may run a large external surplus without being under with arrears problems with the Fund is relatively small. We have pressure to adjust. According to this view, a more symmetrical acted, and will continue to act, to protect the Fund's financial integrity exchange rate regime would be one that might force adjustments in and to take all steps dictated by financial prudence. As regards surplus countries as well as in deficit countries. But that is a different countries in arrears, what we seek to do is to help the country adopt issue from surveillance. Asymmetry under the current system gets economic policies that will strengthen its ability to grow internally as confused with the process of surveillance per se, and it is really a well as increase its exports over time. A country cannot service its function more of the structure of the exchange rate system than of external debt, including that owed to the Fund, if it is following surveillance. policies that are causing the economy to deteriorate and decline. It
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©International Monetary Fund. Not for Redistribution is important for the country to implement, as quickly as possible, I think it is easier to be part of an institution and working to policies that will reverse the deterioration and decline that, in part, strengthen and enhance the work of that institution, recognizing full cause the external arrears problem. In helping countries implement well the important role that the Executive Board plays in representing better policies one of the things we also do is work with external the views of countries in the workings of the institution. In some donors so that external financial assistance will support those policies, ways I find it easier now, although the work is extremely demanding. thus enabling a country to clear up any arrears it may have, not only with the Fund but also with other institutions. F&D What has impressed you most during your period as Deputy Managing Director about the Fund as an institution? F&D Your appointment to this post continues a tradition—of the Erb Something I saw as an Executive Director, and see even more IS Executive Director becoming Deputy Managing Director. Was it a intimately in the position I am in now, is the workload and the difficult adjustment, from being the representative of the largest dedication of the staff. When a country is faced with a problem and member of the Fund to working as a member of its secretariat? a mission must go out to that country, vacations get postponed, Erb I found it a relatively easy adjustment to make. I think any annual leave gets put off, weekends get put aside. That dedication Executive Director would tell you that being an Executive Director in responding to the needs of the member countries, being able to is not an easy job in that you are in between the authorities you cope with very difficult situations, and often doing so regardless of represent, whether it is a single country or a multi-country constit- personal considerations, is what makes the institution a strong one. uency, and the institution that you are helping to guide, through the And of course one must not overlook the quality of the staff. The work of the Executive Board. As an Executive Director you are Fund has made an effort over time to draw the best people from the always seeking to balance the interests and perspectives of your membership at large and I think it has succeeded in doing so. That member countries with the interests and objectives of other countries is the reason why the Fund has been very effective, especially in the that are represented on the Executive Board. You are neither of the difficult circumstances of the past few years, in responding to the institution directly nor really of your own country. In some ways, as problems that have arisen. Most people on the outside give the Fund an Executive Director, you are perhaps viewed in your own country a great deal of credit for having been responsive to the debt problems as part of the institution, while in the institution you are viewed as that arose. I think that that credit goes very much to the staff, to its belonging to your country. In reality you are in between. quality, intelligence, capabilities, and commitment. ED
From the Fund . . . External Debt Management Edited by Hassanali Mehran This volume of papers presented at a seminar of coordinating the management of external organized by the IMF Institute and the Central debt in individual countries with broad Banking Department of the International Mone- macroeconomic policymaking, particularly fis- tary Fund places external debt management in cal policy. the context of broad economic and fiscal man- A special feature of this volume, reflecting a agement. Drawing together contributions by perspective that is not often provided by such commercial bankers, national debt managers, reviews of debt issues, is a section that com- and debt specialists from the Fund and the bines contributions from 22 national debt man- World Bank, it emphasizes the importance agers on their debt management systems.
* * * * Price: US$11.50 (cloth); $17.50 (hard cover) Available from: Publications Unit, Box A-861 International Monetary Fund •» 700 19th Street, N.W. Washington, D.C. 20431, U.S.A. + Telephone: (202) 623-7430
Finance & Development I March 1986
©International Monetary Fund. Not for Redistribution A fresh look at development aid
A review of the major findings of the Development Committee's Task Force on Concessional Flows in the context of the current aid climate
Shahid Javed Burki and Robert L. Ayres
I herhee has been considerable rethinking of development strategies in recent years, prompted in part by the great divergence in Table 1 the performance of developing countries over Changes in distribution of ODA, 1975-83 the last 30 years. Developing countries today (In millions of US dollars) are characterized by considerably more di- 1975 1980 1983 versity than they showed in the mid-1950s, Country group Amount Percent Amount Percent Amount Percent which suggests that universal prescriptions Low-income 6,627.7 41.7 9,773.7 38.3 9,865.8 41.5 are less valid now than they were when the Africa 2,097.0 13.2 4,626.1 17.4 4,326.0 18.2 discipline of development economics was in India 1,708.6 10.7 1,127.1 8.0 1,720.0 7.2 its infancy. The debate over approaches to China 0.0 0.0 66.1 0.2 663.2 2.8 development includes a number of new and Other 2,822.1 17.7 3,954.4 14.9 3,156.6 13.3 Middle-income 9,226.8 15,544.4 58.6 57.7 some perennial issues, such as the respective 58.0 13,715.0 High-income 49.3 0.3 203.5 0.8 169.7 0.7 roles of the public and private sectors, en- Total 15,903.8 100.0 25,521.6 100.0 23,750.5 100.0 couragement of greater export orientation in Source: The data on aid flows are from: OECD, Geographical Distribution of Financial Flows to Developing Countries developing economies, new approaches to (Paris, various issues). The country classifications are derived from the World Bank, Wotid Development Report 1985 (New York, Oxford University Press, 1985). poverty alleviation, and the harmonization of Note: Low-income countries are those with 1983 GNP per capita of $400 or less. Middle-income countries are those with 1983 GNP per capita between $400 and $6,850, excluding three industrial economic stabilization and growth policies. It market economies (Italy, Ireland, and Spain) and one oil exporter (Oman). These exceptions are included in the high- is only natural that the intellectual ferment income group. about alternative development strategies should also include debate about the role of official development assistance (ODA) (also known The aid debate of the early 1980s has had up in the phrase "aid fatigue." A third issue as concessional flows or, more commonly, as several prominent themes. One is the effec- is the volume of aid: how much is required aid). This is because aid has played a central tiveness of aid. A number of donor govern- to meet the developmental needs of recipi- role in the development of many nations— ments as well as academic and journalistic ents? What are those needs? These themes including middle-income countries, such as observers have been taking a harder look at are seen to be interrelated in a number of Colombia and the Republic of Korea, that have how effectively aid has contributed to devel- complex and important ways. For example, "graduated" from concessional assistance, opment. A second theme is the support for a demonstration of aid's effectiveness might and low-income countries, such as those of aid in donor countries. There is a perception serve to increase public support for it and sub-Saharan Africa that still depend heavily in some quarters that such support has de- thereby contribute to increases in its volume. upon it for sizable proportions of their in- clined among both the general public and The early 1980s have also witnessed the vestment resources. political leaders. This situation is often summed increasing politicization of aid and the in
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©International Monetary Fund. Not for Redistribution creased mixing of aid with the foreign policy the Bank and the Fund on the Transfer of investigations in each of these areas, it called and commercial objectives of donors. The Real Resources to Developing Countries): frequent attention to the links between them. bilateral aid programs of a number of donors one studied issues of private direct invest- It gave particular attention to the link between have become increasingly concentrated on ment in developing countries, another the the volume and the effectiveness of aid. This countries of geopolitical interest. One unfor- role of nonconcessional flows. Several years article presents the principal findings of the tunate consequence of this tendency is that ago three members of the Committee—Can- Task Force and its analysis of the conditions poor countries lacking a central place in ada, the Netherlands, and the Nordic con- that govern aid flows and their effectiveness. donors' larger foreign policy concerns receive stituency—urged the creation of a Task Force a disproportionately small amount of aid. (See on Concessional Flows. The Task Force was Effectiveness of aid Tables land 2.) officially established at the May 1982 meeting Moreover, aid volume, after growing at an of the Development Committee in Helsinki The Task Force investigated the subject annual average rate of about 6 percent in real to study and assess the flows of short- and of aid effectiveness by carrying out a system- terms during the 1970s, began to stagnate long-term ODA, their use, and their effec- atic review of four central aspects of conces- after 1980, and even declined in real terms tiveness, with a view to enhancing the quality sional aid: its contributions to (1) economic from 1981 to 1983. At the same time, most and volume of such aid. (Its membership and growth of recipient countries; (2) poverty developing countries were confronting an methods of operation are detailed in the alleviation, particularly in the poorest coun- external environment that had become grim accompanying box.) The Task Force con- tries; (3) improved policies and institutions and inhospitable to development as a conse- cluded its work with the presentation of its through "policy dialogue" and the provision quence of the most severe global recession final report at the Committee's meeting in of technical assistance; and (4) enhanced since the 1930s compounded by increases in Seoul in October 1985. The report contributes market forces and development of the private oil prices, interest rates, and debt-servicing to the current debate about development sector. (For a detailed discussion of aid ef- difficulties. Growth rates slowed in most strategies and the role that aid plays in them. fectiveness, see the article by Robert Cassen countries (and even turned negative in some). The Task Force took a decision at its first in this issue.) These various circumstances persuaded meeting, in October 1982, that influenced all The most important conclusion reached by some governments to begin to seek a new its subsequent work. It decided that the major the Task Force in this area was that aid has political consensus on the relationship be- issues about aid could most fruitfully be been productive and helpful to development; tween developed and developing countries, approached in a systemic manner, that is, in without it, a number of countries would not including the role of aid. This in turn resulted a way that examined the relationships be- have been able to graduate from the ranks of in the creation of several task forces of the tween the effectiveness of aid, political sup- poor to middle-income nations, and the coun- Development Committee (the Joint Minister- port for aid, and the volume of aid flows. tries that remain poor would have been still ial Committee of the Boards of Governors of While the Task Force carried out separate poorer. In some cases, aid has been spec- tacularly successful—for example, the "Green Revolution" in South Asian agriculture was greatly facilitated by aid for agricultural re- Table 2 search, credit, and improvements in infra- Ranking of 25 major recipients of aid, 1973-83 structure. In sub-Saharan Africa, where much By total cumulative By average annual ODA aid has been legitimately criticized for not ODA receipts receipts per capita achieving fully its intended objectives, aid (In millions of US dollars) (In US dollars) nevertheless has contributed significantly to 1 . Egypt 17,750.9 1 . Jordan 209.87 the development of basic infrastructure— 2. India 16,789.6 2. Israel 185.53 roads, dams, ports, and telecommunications 3. Syrian Arab Republic 10,193.9 3. Oman 118.06 facilities. A good example is the development 4. Bangladesh 10,185.1 4. Syrian Arab Republic 97.55 5. Pakistan 8,364.1 5. Mauritania 95.71 of a national road network in Malawi, financed 6. Israel 8,163.4 6. Papua New Guinea 92.28 by aid. Educational development in sub-Sa- 7. Indonesia 8,086.8 7. Lebanon 56.17 haran Africa has also been greatly stimulated 8. Jordan 7,156.7 8. Somalia 54.27 by aid. 9. Sudan 4,972.5 9. Yemen, People's Dem. Rep. 45.38 The Task Force recognized, however, that 10. Tanzania 4,817.4 10. Jamaica 41.86 in some situations aid has been much less 1 1 . Morocco 4,026.4 1 1 . Congo, People's Rep. 41.63 effective. In general it has had a better record 12. Turkey 3,978.7 12. Lesotho 40.98 in Asia than in Africa. For example, despite 13. Viet Nam 3,386.8 13. Egypt 36.43 the commitment of large amounts of aid to 36.24 14. Zaire 3,199.6 14. Senegal African agriculture, food output per capita 15. Papua New Guinea 3,246.7 1 5. Yemen Arab Republic 35.37 declined in 23 out of 33 countries in the region 16. Kenya 2,993.8 16. Nicaragua 33.22 17. Sri Lanka 2,965.0 17. Tunisia 31.45 between 1975 and 1982 (based on most recent 1 8. Yemen Arab Republic 2,918.4 18. Liberia 30.49 data available; there were no data for six 19. Philippines 2,884.6 1 9. Central African Republic 27.64 other countries). This was a major reason for 20. Thailand 2,822.8 20. Zambia 27.36 the stagnation (and even decline in some 21. Somalia 2,686.4 21. Costa Rica 27.19 countries) in overall growth of per capita 22. Senegal 2,392.1 22. Niger 26.13 income. Even though the many reasons for 23. Tunisia 2,318.0 23. Togo 24.94 ! retarded development in sub-Saharan Africa 24. Burma 2,218.9 24. Mali 22.86 i do not include aid as the main factor, aid 25. Korea, Rep. of 2,051.1 25. Burkina Faso 22.76 donors could have done better—in encour- Source: OECD, Geographical Distribution of Financial Flows to Developing Countries (Paris, various issues). aging more appropriate technical packages ! for rainfed agriculture, for example, or in
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©International Monetary Fund. Not for Redistribution as making information about their project and program experiences more available to others and ensuring that the relevant lessons are Operations of the Task Force on Concessional Flows incorporated in new projects. Some agencies have done well, but in many cases improve- Established in May 1982; the Task Force on Concessional Flows comprised governmental representatives from a diverse group of industrial and developing countries. The countries ments are still needed. represented were Belgium, Canada, China, Costa Rica, the Dominican Republic, the Federal Support for aid Republic of Germany, Finland, France, India, Indonesia, Italy,-Japan, Kuwait, the Netherlands, Saudi Arabia, Senegal, Tanzania, the United Kingdom, and the United States. Belgium and The Task Force directly addressed the Italy shared representation, alternating attendance at meetings. Professor John P. Lewis of question of whether the slowdown in the rate tfee WoMjew Wte» SietejQl Finance & Development I March 1986 ©International Monetary Fund. Not for Redistribution of ODA as a proportion of GNP set by the concerned in both developing and developed income countries (if low-income countries are United Nations in 1970. In order to achieve countries to help ODA recipients cope with defined, as they are by the World Bank, as this, the governments have carried out well- increased needs for resources by one or more those with GNP per capita of less than $400 conceived programs to educate the public of the following options: in 1983). Indeed, the share of upper middle- about the importance of aid. The Japanese • Increasing the effectiveness of official income countries in total ODA has lately been Government doubled aid between 1977 and aid; about as high as the share of low-income 1981, and then doubled it again from 1981 to • Changing present country allocations of Africa, and the per capita aid receipts of a 1985. The first decision seemed to run ahead ODA; number of middle-income countries are ex- of public opinion but the Government's com- • Concentrating expected increments in tremely high. Even without substantial in- mitment has since helped to foster a positive ODA on low-income countries; creases in aid volume, reallocation could en- public attitude toward aid. In Italy, too, a • Combining ODA with less concessional sure the greater concentration of ODA on dramatic increase in aid has been achieved in flows, mainly other nonconcessional official countries that need it most. recent years, largely because of the efforts flows in ways that would result in a higher Directing all increases in aid for the rest of of political leaders. overall volume of external resources; and the 1980s to the low-income countries. This Since maintaining and strengthening sup- • Supplementing ODAflow sb y encour- could do much to close the gap between need port for aid can be assisted by more effective aging one or more of the following: increased and supplies. Even if total ODA grows at communication of its role in the development flows of voluntary contributions; contributions only 2 percent a year in real terms, concen- process and the successes that aid has of ODA from new donors; earnings from tration of the increment on low-income coun- achieved, the Task Force stressed the im- trade; and foreign private investment. tries would boost their receipts by about 8 portant role of development education pro- Each of the "coping mechanisms" has some percent a year. grams and nongovernmental organizations in potential for helping recipients as follows: Combining ODA with less concessional flows. donor countries. There is a special need for Improvements in the efficiency of capital This is another possibility, although not for continuing and enhancing the development utilization. This could ensure that a given the poorest and least creditworthy. If the education role of nongovernmental organiza- amount of aid goes further toward promoting legitimate needs for aid of countries such as tions, especially those engaged in develop- development. There is particular scope for China, India, Pakistan, and Sri Lanka (the so- ment work overseas. The Task Force called improvement in the low-income countries of called "Asian blend" countries that have ac- upon both bilateral and multilateral aid agen- sub-Saharan Africa where evidence shows cess to the commercial market, official non- cies to work closely with these organizations declining rates of return on all investments concessional flows, and ODA finances) cannot in providing a better understanding of devel- including aid in recent years. be entirely met from budgetary sources, it is opment problems and the role of aid in Reallocation of ODA. Redirecting aid, par- important that they obtain additional official alleviating them. ticularly from middle- to low-income coun- transfers of a nonconcessional nature and not tries, would be highly desirable on develop- be left to the commercial market alone. To Volume of aid ment grounds and would help to stretch ODA act as a reasonable substitute for ODA, The Task Force addressed the subject of to the latter group. Currently, low-income however, the rates and maturities of such aid volume from two perspectives: need and countries receive only about 40 percent of flows would need to be improved and their supply. It eschewed the conventional method ODA, with the remainder going to middle- volume significantly increased. of estimating aid needs by determining a priori the rate of growth for aid recipients, the resources needed to generate these rates, the proportion that could be met from do- Table 3 mestic sources, and the proportion that had 1 to be obtained from outside (foreign savings). Ranking of 17 largest DAC donors of aid, 1984 This method of treating aid flows as a residual Volume of aid (In millions of US dollars) Share is not satisfactory, since it assumes domestic Amount (Percent) Percent of GNP savings as fixed. Instead of adopting this 1 . United States 8,698 30.4 1. Netherlands 1.02 excessively mechanistic approach, the Task 2. Japan 4,319 15.1 2. Norway 0.99 Force carried out a more qualitative assess- 3. France 3,790 13.2 3. Denmark 0.85 ment. It identified four key areas where 4. Germany 2,782 9.7 4. Sweden 0.80 concessional assistance is urgently needed: 5. Canada 1,625 5.7 5. France 0.77 (1) tackling the fundamental problems of pov- 6. United Kingdom 1,432 5.0 6. Belgium 0.56 erty, particularly in the poorest countries; (2) 7. Netherlands 1,268 4.4 7. Canada 0.50 helping a number of countries complete needed 8. Italy 1,105 3.9 8. Germany 0.45 structural adjustments of their economies; 9. Australia 773 2.7 8. Australia 0.45 (3) sustaining investment and growth in those 10. Sweden 741 2.6 10. Finland 0.36 low-income countries that have pursued ef- 11. Norway 526 1.8 1 1 . Japan 0.35 12. Denmark 12. United Kingdom 0.33 fective policies and have succeeded in estab- 449 1.6 13. Belgium 434 1.5 13. Italy 0.32 lishing development momentum; and (4) re- 14. Switzerland 286 1.0 14. Switzerland 0.30 sponding to emergencies. 15. Austria 181 0.6 15. Austria 0.28 Based on such a qualitative assessment, 16. Finland 178 0.6 1 6. New Zealand 0.27 the Task Force believed that the currently 1 7. New Zealand 59 0.2 17. United States 0.24 projected growth in ODA—estimated by DAC Total 28,647 100.0 at about 2 percent a year in real terms over Source: OECD Press Release (Press/A(85)44), June 18, 1985. 1 1985-90—would be insufficient to meet these Preliminary estimates. needs. Accordingly, the Task Force urged all Finance & Development I March 1986 ©International Monetary Fund. Not for Redistribution Grants from private voluntary organiza- Similarly, reallocation of ODA to low-in- graduated during this period from being aid tions. For overseas development activities in come countries is highly desirable and would receivers to aid givers, it appears that trade 1984 these were estimated at $2.5 billion, make a major contribution to meeting their in the foreseeable future will make a smaller equal to about 9 percent of ODA. The idea needs even if total ODA were not to increase contribution to the growth of developing econ- of increasing the role of nongovernmental and by much. But the scope for such reallocation omies. Most poor countries are commodity private voluntary organizations in transferring appears to be limited for a number of reasons: exporters and, despite recovery in industrial resources for development is very attractive. some donors have already gone quite far in countries, commodity prices have continued In some DAC countries, new tax incentives this direction; a reduction of ODA flows to to decline. might help to raise the receipts of such lower middle-income countries could have These considerations brought the Task organizations. The DAC is currently exploring severe disruptive effects; and some donors' Force to its main conclusion about aid volume: new forms of cofinancing between official aid ODA allocations to middle-income countries that "no single one of the measures consid- agencies and nongovernmental organizations. are based in large measure on political, stra- ered, nor any combination of them, will cope New donors. This term covers some (mostly tegic, historical, or commercial reasons, which adequately with the challenge of development upper middle-income) countries that long ago are not easy to adjust. The possibilities for in the low-income countries. Since there is stopped receiving new disbursements of ODA. reallocation within the group of low-income no escaping the need for predominant reliance They include Argentina, Brazil, Colombia, countries are also limited. Further reductions on traditional, appropriated concessional as- Israel, Korea, Mexico, and Venezuela, as of aid to members of this group—and partic- sistance, donor governments should exert well as (among OECD countries) Greece, ularly to the largest among them, India and redoubled efforts to increase the supply of Ireland, Luxembourg, Portugal, and Spain. It China—could have a negative impact on their ODA as a matter of urgency." The Task is important to establish the principle that fragile creditworthiness. Force found the need for an increase in ODA those who have benefited from aid in the past The Task Force's review of the fcther volume "known and unmistakable" and urged should begin to act as donors themselves, coping mechanisms led to generally similar each donor to adopt the most effective means even in a small way. Eventually, ODA from conclusions. For example, the Task Force at its disposal to increase the volume of aid. such new donors may grow into sizable found limited possibilities among the various Donors that have not yet reached the inter- amounts. schemes for blending highly concessional ODA national ODA target of 0.7 percent of GNP All countries should enhance trading oppor- with nonconcessional flows. How much "ad- were urged to do so or, alternatively, to set tunities for the developing world. In light of ditionality" (in the total flow of resources) their own national targets for increasing aid. the uncertain supply outlook for ODA, in- would result from such schemes was deemed Conclusion creased exports would help close the re- open to considerable question. While private sources gap. Industrial countries need to voluntary organizations now play an important The main contribution made by the Task resist increasing pressures for protectionism; role all over the world in providing develop- Force on Concessional Flows was to under- developing countries need to restructure their ment services, there are inherent limitations score the important links that exist between economies, investing more in those tradable on their financial resources. Opportunities for the effectiveness of aid, political support for goods in which they have a comparative significantly expanding private flows and earn- aid, and the volume of aid flows. While there advantage and taking care to avoid sustained ings from trade seem mainly limited to middle- is no question that revival of growth in poor overvaluation of their currencies. income countries and only a few low-income countries will only become possible if they Direct foreign investment. Both direct and countries at present. Whereas expansion in have access to flows of concessional assist- portfolio investment have the potential to world trade in the 1960s and 1970s was of ance larger than those currently anticipated satisfy a higher proportion of the financial tremendous benefit to the countries that by the DAC and the sum indicated by the needs of developing countries than in the turn of events affecting OPEC, the amounts past. The contribution that direct investment needed will materialize only if the recipients makes to development, however, depends Shahid Javed Burki can continue to demonstrate that they can significantly on the policy framework in which a Pakistani, is Director of use them effectively. Financial stringencies it takes place. Many developing countries the Bank's International in donor countries and economic difficulties have recently undertaken policy reforms that Relations Department and in some of them threaten aid budgets. If aid give more scope for private sector activities. served as Secretary of the levels are to be maintained or increased, the They have also become more receptive to Task Force on public must not only continue to support aid foreign direct investment since lending by Concessional Flows. in the face of tight finances but also .such commercial banks has declined. support needs to grow. The increase in this support will in turn depend on both a con- Limitations vincing demonstration of the aid needs of recipients and on their effective utilization of While these various coping mechanisms Robert L. Ayres aid. have some potential (some more than others) a US citizen, was principal It was for these reasons that the Devel- for helping developing countries face the staff member of the Task opment Committee in its meeting in Seoul prospective shortage of aid, they have a Force Secretariat. A decided to keep the subjects studied by the number of serious limitations as well. For member of the Bank's Task Force on its agenda for some time to example, there are clear limits to the extent International Relations come. Urging that the report and its sugges- to which increased aid effectiveness can sub- Department, he is the tions be taken into account by all governments stitute for increases in volume: gains stem- author of Banking on the concerned, the Committee called upon the ming from the more effective use of aid will Poor: The World Bank World Bank to take the lead in following up be gradual and incremental; they are a nec- and World Poverty (MIT on the Task Force's conclusions and to report Press, 1983). essary, but not sufficient, response to the to future Development Committee meetings needs of developing countries. on progress achieved. ED 10 Finance & Development I March 1986 ©International Monetary Fund. Not for Redistribution The effectiveness of aid The main conclusions of a study undertaken for the Development Committee's Task Force on Concessional Flows Robert Cassen AiLidd is a vast and varied terrain. With flows ment-aid receipts did achieve relatively high and one must therefore look at the effects amounting to $35 billion a year, no one can domestic savings rates. The main conclusion on the poor of a whole range of aid endeavors. pretend to familiarity with more than a fraction from international statistical analysis is that To a large extent, the success of aid in of it. Our study (see box) looked at official one is better off looking at individual countries. reaching the poor is bound up with the success aid, mainly from Western bilateral and mul- The country case studies conducted for of aid for rural development. The record of tilateral sources, in a sample of seven coun- our study proved more interesting. That for aid for rural development, like that of rural tries—Bangladesh, Colombia, India, Kenya, India found that aid receipts, though small in development in general, is much better in the Republic of Korea, Malawi, and Mali— proportion to GNP, had been important in South Asia than in Africa. In Africa only a and reviewed a considerable range of evalu- some periods by supplementing foreign ex- small proportion of aid—much of it rather ation and other materials. It found that the change and the resources from domestic unsuccessful—has gone into small-scale ag- bulk of aid has been effective in attaining its savings. Aid's contributions to transforming riculture or livestock investment, and aid for developmental objectives, though a substan- India's food output had major macroeconomic research on food crops has been relatively tial proportion has not. There is much that effects: before the Green Revolution the neglected, compared with cash crops. aid can take credit for, and much that needs whole Indian economy slowed down when- Even with the progress achieved, donors improvement. ever there was a bad harvest, and large may be criticized on a number of grounds: Much of what needs to be put right can be foreign exchange expenditures were required they usually fail to consider the probable done by individual agencies. But there is a for food imports. In Bangladesh, reconstruc- distribution of benefits in projects that are critical lack of collaboration among agencies, tion assistance after 1971 had important ef- not directly poverty-oriented; they make little either in sharing the lessons of experience or fects on subsequent growth, as is true of use of the opportunities afforded by coordi- in promoting the coordination of aid. While more recent aid to Bangladesh and other nation meetings to take up poverty issues each agency watches over its own activities, countries studied where aid finances a large with recipients; their collective efforts rarely to greater or lesser effect, little attention is share of investment and imports. make a coherent contribution to the relief of given to how they interact with other aid The proportion of people in poverty seemed poverty; and their activities have harmed the efforts, or to the combined results of aid.^ to be declining in several developing countries poor on occasion—through displacing labor And unfortunately—though perhaps not sur- in the 1970s, but progress has probably been with the machinery supplied under some rural prisingly—the record of almost all aid is least halted by the global recession. Direct at- credit and other projects, through some large satisfactory where good performance is most tempts to improve living standards through hydroelectric or irrigation schemes when in- urgently needed: in the poorest countries, aid have had some success. Aid for basic sufficient care is taken to resettle displaced particularly in sub-Saharan Africa. services (health, nutrition, family planning, populations, and in some structural adjust- education, housing) is an area where donors ment programs where retrenchment has fallen Aid, growth, and poverty have acted on the lessons of experience: unnecessarily heavily on the poor. while aid in the past financed metropolitan While donors could do more and better The relationship between aid and economic hospitals used by urban middle classes, or work to address poverty directly, they also growth has most commonly been studied in not-so-low-cost housing that the poor could need to continue with infrastructural and other international cross-section statistical investi- not afford, it is more likely today to be used gations. This literature is inconclusive; the for rural health clinics and paramedical work- results of the individual studies depend on ers, or "sites-and-services" schemes which the countries and periods chosen, and prob- do benefit poor people. Similarly in nutrition, Does Aid Work? Report to an Inter-govern- lems of measurement and interpretation family planning, and education, methods of mental Task Force, by Robert Cassen and abound. Aid receipts were once thought to reaching the poor with effective services are Associates, will be published by Oxford be associated with reduced domestic savings, now known and being put into practice. University Press in Spring 1986. The study was undertaken by a group of independent but some recent research which distinguished Efforts to improve the productivity, in- consultants and financed by contributions aid for consumption from that used for in- come, and assets of poor people are harder from some of the governments represented vestment—as most other studies failed to to assess. Only a fraction of aid goes into on the Task Force. do—found that countries with higher invest- schemes that are directly poverty-oriented, Finance & Development I March 1986 11 ©International Monetary Fund. Not for Redistribution long-term investments whose immediate im- of inflation, unsatisfactory price structures substantial direct effect on poverty, through pact on poverty may be modest. And they (especially for farmers), overburdened public the transfer of productive assets or knowl- have to engage in program lending associated sectors, or inefficient government agencies— edge to the poor. Very little of aid, however, with policy reform. By raising income levels, than to design a strategy that is appropriate has been directed at or had any effect (positive these efforts may ultimately achieve more to each country's capacities and likely to or negative) on the very poorest people, against poverty, per dollar transferred, than succeed in contemporary conditions. though these people appear to have gained directly poverty-oriented aid. There is cause for concern about the lack indirectly from aid projects that reduced their Aid is only a part—often a small part—of of adequate harmonization, in some cases, food costs (grains throughout the developing what is needed to reduce poverty. If aid between adjustment programs and the re- world, potatoes in Andean South America, measures are not to be just a movement quirements for future development; improved and fish in Southeast Asia). A significant against the tide, the recipient must be com- collaboration between the World Bank and finding of the World Bank's evaluators is that mitted to reducing poverty. Policies must be the IMF will be part of the remedy. Current when projects do aim to assist the poor supportive, in both donor and recipient coun- conditions call for sophistication in trade policy directly, their rates of return are comparable tries, as must be the political and social and a carefully designed sequencing of trade with those of other projects: there is no processes in recipient countries. And it is liberalization measures, recognizing that the necessary trade-off between poverty orien- easier to reduce poverty where there is poorest countries in particular may need tation and efficiency. growth and when trends in the world economy donor support for a longer lead time for Between two thirds and three quarters of are favorable. Many aid agencies have the adjustment than others more fortunately placed. aid projects (and somewhat more in the case relief of poverty as a key objective in their In some cases, exchange rate changes need of the World Bank) are judged satisfactory charters. Faith in achieving this objective is to be better supported by measures to ensure by rate-of-retum or other criteria; a small also an important element in public support those changes are effective. Moreover, while percentage (less than 10 percent) failed to for aid. But it would be better for all concerned better prices for farmers may be a necessary produce any of the desired results. It is hard if the scope and limitations of what aid by condition for raising agricultural production, to come up with a standard of comparison for itself can do were more subtly appreciated. efforts will also be needed to supply farmers such findings. There are no broadly repre- A question arising with increasing fre- with a range of essential inputs—credit, fer- sentative data, for example, on the success quency concerns the use of non-governmental tilizer, water, appropriate plant varieties— or failure of private investment even in in- or private voluntary organizations as channels and reliable transport for marketable sur- dustrial countries. When one remembers that for official development assistance. The best pluses. Those planning policy changes must aid agencies are trying to do difficult and of them have considerable advantages in also consider the effects on poor people, who frequently innovative things, often in adverse reaching target groups and encouraging par- are of course particularly vulnerable to in- circumstances, this record may compare rea- ticipatory development. But not all are as creases in food prices, at least in the short sonably well with that of other complex good as the best. Many questions arise about run (in the longer run, as production in- endeavors. their capacity to absorb large additional funds creases, supply curves may shift and food Some agencies evaluate a relatively small without damage to their integrity and inde- availability and employment are likely to proportion of their projects; only one (the pendence. These organizations already chan- improve). World Bank) systematically evaluates all of nel significant amounts of bilateral and mul- The success of policy-based lending de- its projects. There is no reason to suspect tilateral aid, but their work has not been pends to a large extent on the state of that evaluations are in general complacent or evaluated over a wide enough range of activ- institutional development in the recipient self-serving; indeed there is frequently a ities to permit a final judgment on their country. Experience also shows that it is vital negative bias: agencies commonly pick "prob- effectiveness; assessment of the issues sur- for the recipient to be politically committed lem" projects for evaluation, and fault-finding rounding their work will be an important part to the measures embodied in an adjustment is often the main preoccupation of evaluators. of inquiries about aid in future. program. If the recipient does not have ad- When faults are found, they form a fairly Policy dialogue equate negotiating strength and analytical common list: poor design, wrong technology capacity, there is a considerable risk that (often, though by no means always, associated The new wave of policy-based lending in reform programs will be seen as outside with bilateral donors' commercial interests), the 1980s must be seen as a positive and impositions whose effectiveness may lapse failures of institution building, lack of under- promising departure. Such lending will un- when aid flows cease. Technical cooperation standing of the human and social environment, doubtedly contribute to development and en- may be needed before some recipients can and excessive optimism over completion times. hance the effectiveness of aid, given that play their full part in elaborating a program; Not only are the faults common, they also some, at least, of aid's failures can be attrib- "dialogue" should not become "monologue recur, suggesting a considerable need for uted to the policy environment in which aid plus money." attention to the learning process. operates. By the end of 1984, for example, Aid performance Evaluations range from the excellent to the some 15 African countries had acted to raise perfunctory. It is regrettable that certain producer prices for farmers and adopt more Much of the evidence about aid perform- kinds of questions are rarely asked, not least competitive exchange rates under externally ance comes from the evaluation of completed when undue reliance is placed on the economic financed adjustment programs, and by now projects. Eight agencies have surveyed large rate of return as the principal indicator of a the number has risen. samples of recently completed projects and project's worth. Yet there are questions. Experience with reached broadly similar conclusions. Most aid Sustainabitity. A subject requiring much the policy dialogue accompanying this type of projects for which data exist seem, considered more attention than it receives is the life of lending ranges from the reasonably successful in themselves, to have been worthwhile. A projects beyond the time of the donors' to the conspicuously unsuccessful. And it good deal of project aid—in particular, the involvement. That life may depend on the seems that it is easier to identify common "new style" projects designed for the agri- caliber of the institutions managing projects, faulty policies—overvalued currencies and cultural and for the urban marginal sectors on the ability and commitment of recipients damaging trade controls, excessive tolerance during the 1970s—appears to have had a to ensure the payment of domestic costs, on 12 Finance & Development I March 1986 ©International Monetary Fund. Not for Redistribution the novelty and appropriateness of the tech- those of project aid, both as to the proportions development and balance of payments needs, nology introduced, or on social and cultural of success and failure, and as to the reasons as well as their agricultural development, factors. Donors should pay more heed to why things go right or wrong, and thus they supporting national food strategies where such factors during project design if they wish are not described in detail here. they exist. There is a need to plan food aid to be confident that projects will survive after There is, however, a shortcoming in the in programs that cover several years at a they withdraw. Perhaps one question above intellectual underpinnings of institution build- time, and for greater donor coordination of all deserves asking more often about most ing, human development, and associated co- aid to given countries. aid: will this help in the long run to increase operation, compared with the theoretical and Program lending. The success of program the recipient's self-reliance? quantitative tools used to plan physical de- lending is usually identified with that of the Role of women. Most agencies have now velopment. Work has been done on manpower policy dialogue it supports. There are few adopted policies to involve women more ad- planning and the development of individual evaluations of other aspects of program lend- equately in development work—perhaps in institutions. But there is little guidance for ing, and no settled evaluation methodology. recognition of the fact that giving proper planning the institutional requirements of whole Donors have still to elaborate a consistent weight to women's roles is not only a matter sectors, for matching institutional needs with "philosophy" of program lending. In some of equity but often a necessary condition for evolving economic structures, or for system- quarters the current volumes of such lending projects' success. Yet progress in the field is atically denning jntersectoral institutional link- are regarded as temporary—made necessary still limited, and donors are far from fulfilling ages. The basic objective of technical coop- by the severity of the recession, which has the OECD Development Assistance Com- eration—to promote self-reliance—has not limited the scope for new project lending and mittee's agreed guiding principles, which pro- been defined in terms that would aid the made balance of payments support essential. pose taking "full account of the gender com- planning of institutional needs and facilitate Our study, on the contrary, argues for greater position of the population at all stages of the national decisions. This subject warrants a attention to the long-term future of program [aid] programming cycle." major conceptual effort. lending and its complements (compensatory Environmental issues. There is clear evi- Food aid. Food aid has been much criti- financing mechanisms, food aid, debt relief). dence that some aid has had harmful envi- cized: program food aid, for diminishing coun- The absence of a facility for medium- to long- ronmental effects. Donors are increasingly tries' incentives to invest adequately in food term concessional balance of payments sup- aware of this and are taking steps to assure production and for undermining food prices; port has long been noted in writings on that effects on the environment are consid- project food aid, for general inefficiency, and development finance. This and related ques- ered at relevant stages of project preparation for constructing physical assets (when it suc- tions of how to finance local and recurrent and implementation. Yet their policies and ceeds in doing so) that are not of general costs are all in need of a more comprehensive those of recipients toward environmental mat- utility. approach. ters are often not fully agreed and elaborated Program food aid can be, and has been, upon; and in the field insufficient care for the successfully used without deleterious effects. Need for coordination environmental consequences of aid can still Methods for avoiding market disincentives Most evaluations of aid look at individual be observed. are known, though still not always used. In projects or programs, or occasionally, the Learning from experience. Virtually all theory many of the goals of food aid should involvement of a particular aid agency in a agencies have systems to bring the lessons be more easily met by channeling it through given country. More rarely studied are the of past projects to bear on the preparation of projects: there should be less of a "disincen- systemic effects of the operations of a mul- new ones. Yet these work imperfectly. Some- tive" effect for farmers if the food reaches tiplicity of donors working in a particular times the use of feedback mechanisms varies poor people who would not otherwise con- country. Examination of these effects points widely even within a single agency—some sume it; nutritional goals can be pursued by consistently to a need for greater coordination: departments taking them seriously, others directing foods to groups at nutritional risk, • The variety of aid activities may not less so. But in virtually all agencies, what the while physical resources can be developed if make a cohesive contribution to a country's DAC has christened the "fund-chanelling func- food is used as wages. In practice, however, development, but may just be the result of tion"—the need to maintain or raise the complaints about project food aid seem gen- an almost haphazard process of accretion; volume of loans—often conflicts with the erally well founded, even though there are • With too many donor agencies operating quality of lending. numerous instances of success, such as the in a given sector or subsector, project- and One gap is identified as particularly unfor- food-for-work schemes in Bangladesh, after equipment-types proliferate (the study cites tunate: aid agencies' failure to share their years of learning by mistakes. Experience is among examples the 18 makes of pump experience. Only a tiny number of interagency better when project food aid fits into well supplied by aid for Kenya's rural water supply, conferences have been held to review or designed investment programs than when each with different requirements for instal- share each other's knowledge. There is vir- projects are created ad hoc to absorb it. It is lation, maintenance, parts, and training); tually no systematic exchange of information useful to question the cost-effectiveness of • A multiplicity of donors, the complexity among agencies, even about successes, let food aid: in some cases the recipient may be of their separate procedures, and the pro- alone the more sensitive problem of failures. better off receiving the sums expended in cedural and data requirements of project Thus one donor will confess to lack of success transporting and distributing the food, than implementation and monitoring can put in a particular area of lending where others with the delivered food itself. intolerable burdens on the recipient's may be doing well. Interagency collaboration Given that food aid is going to continue administration; is the province particularly of the DAC, but (were it to be discontinued, financial aid would • Most important, the recipient's budget- the World Bank and other large agencies not rise enough to fill the gap), the general ary process may be inadequate to cope with could be far more active in promoting and presumption should be in favor of program, the demands of multiple uncoordinated aid profiting from it. rather than project, food aid. Experience activities for domestic resources to comple- Technical cooperation. Technical cooper- suggests that program food aid should be ment the external ones supplied by donors. ation amounts to more than one fifth of all linked with other aid to given recipients, and These problems abound in what the study aid. Its results are broadly comparable to should relate to recipient countries' level of calls "countries of slender administrative Finance & Development / March 1986 13 ©International Monetary Fund. Not for Redistribution means"—again, particularly in sub-Saharan projects or via on-lending through national activities within sectors. There is much scope Africa. More than half of these countries have development banks. Much of aid creates or for improving the mix of public and private no central administrative unit even for mon- supports infrastructure without which private activities even in areas such as forestry, itoring the inflow of aid, let alone for nego- enterprise could not operate. Procurement resettlement schemes, and family planning tiating it centrally. Yet the average country under public aid projects has often fostered that are normally thought of as in the public receiving aid has some 20-30 official aid the development of private initiative, for domain. There are many opportunities for aid agencies operating within it, and possibly example when aid for roadbuilding requires to strengthen desirable private sector activ- double that number of voluntary agencies, all letting of tenders to private construction ities and to foster the coming into being of negotiating with individual ministries. Under firms. Much of the policy dialogue today is competitive firms and markets where these such circumstances it is no wonder that the concerned with expanding the role of market do not yet exist. But donors should eschew whole of aid may turn out to be smaller than forces, with privatization of public sector "asymmetrical liberalism"—that is, the use the sum of the parts. agencies, and with the conditions for private of the aid process to encourage liberal trade Donors and recipients have resisted co- investment and liberal trade. policies and domestic market forces in recip- ordination for many reasons. On the recipient There have been cases in the past of ient countries, while donors themselves in- side, governments have often preferred to support to governments with policies inimical crease their own trade protection, and employ retain an ability to play one donor off against to the private sector. But this is mostly old aid conditions (especially tied aid and mixed another; they are apprehensive about donors history, and in countries whose attitudes to credits) which distort the competitive process. "ganging up" against them if aid coordination the private sector antedated the donors' pres- Conclusion becomes more effective. On the donor side, ence. The number of instances in which aid bilateral donors are keen to pursue their has pressed for greater use of market mech- While donors and recipients have no cause commercial and political objectives through anisms, and had a response, is far greater. for complacency, they need not be too de- aid, objectives that may not be served by There is a delicate path to be steered between fensive about the record of aid. There is concerting their aid with that of other donors. encouragement of the use of market forces much that can be criticized—particularly where In addition, donors collectively have a concern on efficiency grounds and unwarranted intru- error is repeated—but there is much more that they may be unable to agree with one sion on a country's political values. Some that is laudable: from aid's many contributions another over significant policy issues. But donors have not always observed this to raising food production in South Asia to both donors and recipients are now more and distinction. experimental rural education in Africa; from more ready to appreciate that any gains from Dispute can be avoided with the recognition infrastructure investment to self-help rural the past failure to coordinate are small relative that what is sought is an appropriate balance development schemes; from widespread sup- to the costs of that failure. Both sides are between the private and public sectors—both port for strengthening developing country becoming interested in promoting coordina- in the broad division of investment and in the institutions to population programs in a great tion, with the World Bank taking a more variety of countries; and, not least, the new active role than it has in the past. Improved initiatives to promote policy reform, that, one coordination must start with the recipient, may hope, will enhance the effectiveness of helped if necessary with technical assistance, Robert Cassen all aid and accelerate development itself. but there is also much for donors to do, both British, is a professor at Our study does not pretend within the time at higher levels such as Consultative Groups the Institute of and resources available to have resolved all and at the sectoral level on the ground. Development Studies questions about the effectiveness of aid. The (Sussex). He was on the authors will be satisfied if practitioners of aid The private sector Bank's staff in 1969-72 find it helpful for management purposes, and An old complaint about aid, in some quar- and 1980-81. In August if it provokes a public debate about aid focused ters at least, has been that it has neglected 1986 he will become more on the evidence of what aid has or has Director of Queen or even hindered the operation of market Elizabeth House, Oxford. not done, and less on prejudice, deriving from forces. The current evidence does not sup- what one or another person has observed port such a case. Some aid goes to the private individually or from a particular ideological sector as final user, for example in rural credit persuasion. ED Protectionism is a matter of rising concern, again. Economists, politicians, and public Protecti&msm: officials have pronounced themselves at length, and frequently, about the dangers and drawbacks—and sometimes about the alleged advantages—of protectionist trade a famous measures. The general case against protectionism was put succinctly and elegantly by the French novelist Honor6 de Balzac in Le MMecin de Campagne, published in 1833; novelist's The encouragement of trade does not imply protection. The right policy for a country is one that seeks to free it from paying tribute to foreigners, but without the shameful aid view of customs tariff sand prohibitions. Industry can only be saved" by itself/ competition is its life. Protected, ft will be lulled to sleep; it will die under monopoly as surely as behind the tariff wall. The country that will make all other countries its dependents is the one that proclaims free trade; it will feel strong enough in its manufacturing to keep its products at prices lower than those of its competitors. [Translation from the French by the Editor] 14 Finance & Development I March 1986 ©International Monetary Fund. Not for Redistribution Collaboration between aid agencies and the IMF Richard D. Erb The Deputy Managing Director of the Fund context of a balance of payments that can be lated and financing requirements evaluated. spoke at a High Level Meeting of the Devel- financed over the short and medium term. At the same time, the total magnitude of opment Assistance Committee of the OECD in Economic growth and a sustainable balance financing available from all sources has a December 1985. Here are excerpts from his of payments are not conflicting objectives but significant impact on the policy choices and comments: go hand in hand. The experience of many the short- and medium-term growth pros- countries indicates that economic growth is pects of a country. This is particularly true I have been asked to discuss some of the not durable if domestic and external financial for countries which have been hit by internal practical aspects of coordination of financial imbalances emerge. or external shocks, such as a drought or flows to developing countries in the context This latter point leads to a second justifi- sudden decline in the terms of trade, and are of Fund-supported economic programs .... cation for close collaboration: aid agencies, being supported by IMF balance of payments Over the past five years the Fund's involve- development banks, and the Fund work with assistance. ment with these countries has been particu- individual economies whose components are It is sometimes suggested that greater larly diverse and intense. The three main integrated... As recent experience in many collaboration between the IMF and develop- overlapping areas of activity include Fund countries has demonstrated, a well-prepared ment finance institutions is needed in order financing of economic programs, Article IV and executed project or investment program to provide a better meshing of the perceived consultations, and technical assistance .... may be undermined by a deteriorating eco- short-run perspective of the IMF and the The increase in Fund activity in low-income nomic environment caused by rising inflation perceived long-run perspective of develop- countries, especially Fund lending, reflected and a growing fiscal imbalance, or by price ment agencies. While I believe that different the serious economic imbalances in these and exchange rate rigidities. At the same time horizons shape our respective activities countries arising from adverse external de- time, the achievement Of broad fiscal, mon- and that this is another reason for closer velopments and domestic policy weaknesses. etary and balance of payments targets may collaboration if our institutions are to better Associated with the increase in Fund activity be jeopardized and growth prospects weak- serve low-income countries, the notion that has been greater collaboration with aid agen- ened if resources flow to unproductive in- the Fund is only short-run oriented and de- cies and development finance institutions and, vestments. Through collaboration, a sharing velopment agencies long-term oriented is in particular, the World Bank. . . . of analyses enhances our mutual understand- misleading. . . . I also need not elaborate on the important, ing of the complexities and interrelationships and I would add healthy, differences in the in an economy and improves the prospects Issues for future cooperation mandates, expertise, financial structures, and that policy advice and financial support pro- relationships with countries that characterize vided by our respective agencies will enhance ... I would like to identify some concrete each of our respective institutions, but from economic growth and external stabilization. issues that I think would be useful to address the perspective of the International Monetary A third factor that has indicated closer as we look to the future and strengthen Fund I would like to make some general collaboration stems from the need to better collaboration. observations on why collaboration between coordinate and indeed reinforce the financing (1) Medium-term analysis. In recent years, the Fund, the World Bank, and aid agencies that is provided by each institution. The the Fund has been devoting more effort to is important and growing. First, our respec- macroeconomic assessments of the IMF and providing analysis and policy advice within a tive institutions share common objectives in the sectoral and investment program assess- medium-term context. Normally the staff at- seeking to help countries promote economic ments of the World Bank provide a firmer tempts to put its analysis in a three- to five- growth in the most efficient way and in the base on which aid programs may be formu- year framework. This is done not only in the Finance & Development I March 1986 15 ©International Monetary Fund. Not for Redistribution context of extended Fund facility programs opment assistance programs were curtailed. and social tensions. But it is the build-up of but also one-year stand-bys and Article IV In some cases, investments were cut because economic imbalances and the inability of a consultations. . . . a government's total resources were not country to live within available foreign re- Among the unknowns that often make it adequate and the government had alternative sources that ultimately forces an adjustment difficult to develop a firm medium-term out- priorities. In other cases the development .... In providing support, the Fund itself is look ... are ... first, Fund missions often assistance was cut because the investment able to help alleviate the external financing find that it is difficult to evaluate a country's projects no longer were productive in light of constraint by providing quick-disbursing, un- public investment prospects because aid the changed economic conditions. From this tied balance of payments assistance. Relative agencies and development institutions are not experience I draw a conclusion . . .: while it to aid agencies and development assistance firm with respect to the projects or sectors is important for the Fund to encourage a institutions, the monetary role and character they intend to support over a two- or three- country faced with the need to adjust to of the IMF enables the Fund to play a major year period. Even when projects or sectoral changed economic circumstances to protect financing role in the early years of an adjust- programs may be identified, often the timing investment projects conducive to long-term ment period and thus ease the adjustment of disbursements is uncertain. development and growth, it is also important process for countries. A second factor ... is the uncertainties for aid agencies to reassess periodically whether When expected aid flows, World Bank surrounding the form, magnitude, and timing a project or a development program makes assistance, and Fund assistance are not ad- of external financing flows. Low-income coun- sense in light of changed economic circum- equate to meet a country's immediate financ- tries depend primarily on official sources of stances .... ing needs in the early years of adjustment, finance, but most official sources of finance, Most countries faced with the need to the Fund and the World Bank usually make including those providing debt rescheduling, adjust to domestic imbalances or changed an effort to help a country seek additional do not normally provide financing plans for a economic circumstances must consider struc- assistance in special donor meetings ... If period beyond one year. Indeed, the Fund is tural changes, including not only changes in the additional foreign assistance is disbursed subject to criticism if it goes too far in making exchange rates and prices but also, for ex- irregularly and over a longer period of time, assumptions about official financing and debt ample, the elimination or restructuring of the detrimental impact on an economy's short- rescheduling beyond the immediate short run. state enterprises. Although such adjustments run and long-run development and growth In short, if the Fund is to make further lead to moire efficient use of resources and prospects is severe. Thus, I would draw yet progress in helping countries to develop their have a positive impact on economic growth, another conclusion that I believe is relevant policies in a medium-term framework, aid the experience of the Fund suggests that to our discussion of collaboration: in order to agencies and development institutions will such structural adjustments are often more promote economic growth and development, also need to be more forward looking and difficult for governments to implement than development assistance agencies need also less short term in their orientation. The Fund overall cuts in government expenditures or to consider ways of providing some quick- could assist aid agencies in this regard by monetary restraint. This occurs because disbursing, untied aid in a short-run framework. providing more detail in medium-term pro- sometimes the negative impact of such ad- Over the coming years it will be important jections on the growth and balance of pay- justments is felt by some sectors before the to ensure that external financing is available ments implications of different assumptions positive effects are experienced in other to sustain the adjustment efforts low-income about the volume and timing of foreign sectors .... However, to the extent that countries have been undertaking in recent assistance. aid flows can be quickly redirected toward years. The Fund is willing to continue sup- (2) Adjustment program design . . . the activities or sectors of an economy that have porting these efforts, but Fund financing on Fund has supported a number of economic become more efficient because of a structural a growing and sustained basis would not be adjustment programs implemented by low- adjustment in exchange rates and prices, the consistent with the monetary character of the income developing countries over the past quicker and more dramatic the growth impact. Fund, the already high debt-service burdens five years. In many countries faced with a The availability of raw materials and spare of many of the low-income countries, or with deteriorating current account position—and parts and infrastructure repair in a sector the protracted nature of their problems .... sometimes accompanied by deteriorating ex- favorably affected by an exchange rate change Low-income countries have little access to ternal financial flows—major policy adjust- will accelerate the productive response in that additional commercial bank lending and, in ments were necessary to reduce public sector sector. This leads me to another conclu- any case, substantial bank lending would not demand, to constrain money and credit growth, sion . . .: while it is important for de- be compatible with their debt-carrying capac- and to establish appropriate price incentives velopment assistance agencies to frame ity. Thus, the bulk of external financing for through changes in exchange rates, domestic their assistance within a medium-term low-income countries will need to be provided prices, and interest rates. The magnitude of framework, it is also important to be on concessional terms either directly from those adjustments depended importantly on flexible and responsive to new devel- bilateral aid agencies or through multilateral the magnitude of additional official assistance opment opportunities which may arise development institutions. Of course, there is .... But whatever the magnitude of adjust- because of changing economic condi- some trade-off between an increase in the ment required to live within external re- tions. In this context aid agencies might volume of aid and an increase in aid efficiency. sources, an effort was made by Fund missions consider linking a certain proportion of their However, I believe it will be necessary for to encourage governments to cut budget aid to support improved policies rather than donor countries to try and find ways of deficits to help reduce imbalances between projects in low-income countries. increasing the volume of aid to low-income aggregate demand and supply. Where pos- (3) Financing adjustment programs. Fund- countries to facilitate the difficult adjustment sible, missions encouraged governments to supported adjustment programs are some- measures that are needed and to ensure that cut consumption expenditures or raise rev- times criticized for being too harsh and for such adjustment does not come at the cost enues rather than cut investment expendi- forcing governments to sacrifice economic of a further decline in living standards in the tures .... growth and subject their citizens to austerity. short run and more quickly restores the basis I realize that in the course of such adjust- Unfortunately, the adjustments faced by many for economic growth and a sustainable balance ment some bilateral and multilateral devel- countries are difficult and a cause of political of payments. HD 16 Finance & Development / March 1986 ©International Monetary Fund. Not for Redistribution A review of OPEC aid efforts Twenty-five years of bilateral and multilateral aid from members of the Organization of Petroleum Exporting Countries Ibrahim F.I. Shihata andNaiem A. Sherbiny AiLidd from OPEC countries is about as old median value for OPEC members as a group, as OPEC itself. OPEC was formed in 1960 5 times the median value for the industrially i: Finance & Development I March 1986 17 ©International Monetary Fund. Not for Redistribution Profile of selected OPEC aid institutions (As of end of 1984) Year Capital Cumulative financing 1 Institution Base Established Started Authorized Paid-in Commitments Disbursements (In millions of US dollars) Multilateral Arab Fund for Economic and Social Development Kuwait Dec 1971 Jan 1974 2,800 1,822 2,229 1,078 Arab Bank for Economic Devel- opment in Africa (BADEA) Khartoum Nov 1973 March 1975 988 985 883 527 Islamic Development Bank Jeddah Oct 1975 Oct 1976 2,010 1,281 4,686 3,771 OPEC Fund for International Development Vienna Jan 1976 Aug 1976 3,435 2,513 2,034 1,418 Arab Authority for Agricultural 2 Investment and Development Khartoum Nov 1976 May 1978 540 340 672 50 Subtotal 9,773 6,941 9,899 6,844 Bilateral Kuwait Fund for Arab Economic Development Kuwait Dec 1961 Mar 1962 6,900 2,952 4,508 2,682 Abu Dhabi Fund for Arab Economic Development Abu Dhabi July 1971 Sept 1974 544 581 1,065 865 Iraqi Fund for External Development Baghdad June 1974 Jan 1977 1,009 723 1,484 694 Venezuelan Investment Fund Caracas June 1974 Dec 1974 3,000 3,000 3,046 2,637 Saudi Fund for Development Riyadh Sept 1974 Feb 1975 7,163 5,300 4,510 2,291 Subtotal 18,616 12,556 14,613 9,169 Total 28,389 19,497 24,512 16,013 1 Because of a lack of detailed data, different nature and terms of flows, or both, some OPEC institutions are not shown. Two bilateral institutions are not shown for lack of comprehensive data: the Libyan Arab Foreign Bank, and the Organization for Investment, Economic and Technical Assistance of Iran (Iran Organization). Three multilateral institutions are not shown for lack of comprehensive data: the Arab Fund for Technical Assistance to African and Arab Countries, the Arab Gulf Program for United Nations Development Organizations, and the Islamic Solidarity Fund. For available information on these institutions, three sources may be consulted: The OPEC Fund, OPEC Aid and OPEC Aid Institutions - A Profile, No. 5, Vienna (1985); OECD, Aid from OPEC Countries, Paris 1983; and UNCTAD, Financial Solidarity for Development, 1973-1981 Review, New York, 1984. 2 In addition to AAAID's equity participations, it has guaranteed loans offered to its subsidiary companies in the order of $86 million. Finally, OPEC aid is mostly influenced by sociopolitical and humanitarian considerations rather than by a desire to compensate for the Chart 1 higher oil import bills of the recipient coun- Composition of aid flows from OPEC countries and institutions, 1968-84 tries. With the exception of a few loans, from the Saudi Fund to Brazil (one) and to Taiwan, Province of China (two), the large, semi- Multilateral Bilateral industrial, higher income developing coun- Egypt, Syria, Jordan tries, which account for most of the oil imports govecnment-to-government General support general support assistance of developing countries, hardly receive any $12 billion concessional flows from OPEC sources. OPEC $41 billion countries were not, however, oblivious to the financial hardships caused by higher oil prices. Some OPEC countries participated in financ- ing the IMF oil facility (42 percent); Arab donors established, in 1974, twb oil facilities of their own for the benefit of African and Arab countries, respectively; and Venezuela, in association with Mexicojointly launched in 1981 an oil assistance program to provide low-cost oil to Central American and Carib- bean countries. Such assistance represents, Project assistance however, a small portion of total OPEC flows $7 billion which were channeled mainly to countries Nonproject Project assistance assistance with modest oil import bills and, in some $10 billion $9 billion cases, to other oil exporters. Through 1984, total cumulative disburse- Sources: Authors' estimates based on references in box on OPEC aid institutions. ments, net of repayments, of aid from OPEC 18 Finance & Development / March 1986 ©International Monetary Fund. Not for Redistribution member countries amounted to about $79 second oil price increase facilitated further associated financial flows, whatever the vol- billion. In relation to the timing of the major capital expansion of existing aid institutions ume of funds allocated or committed. To help oil price increases, these net aid flows may to $28.4 billion. Most agencies more than alleviate conditions in developing countries, be estimated as follows: $5 billion through doubled their capital during 1975-79. Arab members of OPEC have increasingly 1973 (before the first major oil price increase); This expansion of capital resources helped resorted to the more rapidly disbursed grants $31 billion during 1974-78 (between the first broaden the scope and activities of existing and long-term loans and deposits under gen- and the second major oil price increases); and aid institutions, both geographically and func- eral support assistance which, until recently, $43 billion during 1979-84 (following the tionally. Geographically, the existing bilateral constituted the major portion of OPEC aid. second major oil price increase). aid institutions (e.g., the Kuwait Fund and By the end of 1984, OPEC aid institutions Thus the aid granted by OPEC members the Abu Dhabi Fund) expanded their lending had carried out more than 1,600 operations, from the time of the first oil price increase totaling nearly $24 billion, geographically dis- to the end of 1984 totaled $74 billion. This tributed among 99 countries on three conti- was equivalent to about 22 percent of aid Chart 2 nents as follows: $10.6 billion to Africa, $10.7 given by all major donors. In relation to GNP, Net ODA disbursements by major donor billion to Asia, and about $3.1 billion to Latin OPEC aid flows averaged about 1.7 percent, groups, 1973-84 American countries (Table 1). Among these, considerably higher than the 0.7 percent Arab countries in Africa and Asia, as a distinct target established by the United Nations • Actual • UN target group, accounted for about $11.1 billion. The (Chart 2). The period after the first oil price sectoral distribution of loan commitments is increase was one when OPEC members shown in Table 2. No comprehensive evalu- generally ran substantial surpluses, giving ation has been made of the effects of these them the resources to share with countries operations on the recipient countries. How- in need. During this period, several individual ever, many of these operations were cofi- OPEC donors, for many years, granted aid nanced by the World Bank, and were subject at ratios well above 4 percent of GNP: for to the scrutiny of the Bank's Operations example, in 1975 the ratio for Kuwait reached Evaluation Department as World Bank projects. 7 percent, for Saudi Arabia 8 percent, for the United Arab Emirates 12 percent, and for Future prospects Qatar 16 percent. In dollar terms, for most Total OPEC aid peaked in 1980, and since of the period since 1975, Saudi Arabia has then has declined markedly; the estimated been the second largest national source of 1984 figure for disbursements was $4.5 bil- concessional aid in the world, while Kuwait lion, about 50 percent of the peak level. Yet consistently ranked among the largest ten in relation to GNP, the ratio in the 1980s for donors, and the United Arab Emirates was its Arab member countries continues to be among the largest ten donors in some years. above 2 percent. The reduced capacity of The geographic distribution of OPEC aid OPEC aid donors has resulted from three is not easily documented, especially since factors: lower oil revenues, higher domestic some bilateral donor countries (e.g., Saudi absorption, and the continuing Iran-Iraq con- Arabia, the leading donor) do not provide flict. The medium-term outlook for OPEC aid detailed information for all their aid flows. indicates a further decline, because of a The data on geographic distribution of bilateral possible fall in oil revenues, and increased flows include general support assistance, proj- demand on those revenues for domestic needs. ect assistance, and nonproject assistance, However, the disbursements from OPEC while those of OPEC aid agency operations aid institutions are unlikely to diminish mark- exclude general support assistance but include edly during the period through 1990. For one some multilateral aid. Available data on bilat- thing, changes in commitments take time eral flows show Asia as the main recipient Source: OPEC Secretariat based on OECD published figures. before they are reflected in changes in dis- (66 percent), followed by Africa (27 percent), bursements, and commitments have not de- and Latin America (7 percent). The figures Council for Mutual Economic Assistance. clined for most Arab aid institutions and OPEC for Africa and Asia include flows to members funds. Further, a number of these institutions of the League of Arab States that account for had invested, in short-term instruments, con- about 70 percent of bilateral OPEC aid. This beyond the region. Moreover, all the post- siderable sums earmarked for later disburse- concentration of aid on countries that have 1973 OPEC aid institutions, except one, had ment. These sums have contributed to im- special cultural, political, or economic rela- from the outset a mandate that covered all proving their cash flows. The liquidity position tions with the donors seems to be quite developing countries. Only the Arab Authority of these institutions is being further improved common in bilateral aid flows worldwide. for Agricultural Investment and Development by repayments of the loans made earlier in Aid agencies (set up in 1976) had an expressly regional the 1970s. The portion of OPEC aid that is orientation from the start, with particular likely to be easily reduced in the immediate The two major oil price increases substan- emphasis on the Sudan. future is the larger category of general sup- tially increased the capital resources of OPEC The change in functional .scope has been port assistance. members and aid agencies. The first dramat- no less dramatic. Until 1973, the activities of ically expanded the capital of aid institutions OPEC aid institutions for the most part con- Broader economic relations from $1.2 billion to $12.1 billion, and enabled centrated on project financing. Despite many While concessional aid has been a major OPEC members to establish within a short advantages, this form of assistance involves element of OPEC's relations with developing period thereafter 11 new aid agencies. The long administrative processes that constrain countries, it is important to recognize that Finance & Development I March 1986 19 ©International Monetary Fund. Not for Redistribution these relations are much broader in scope. tries, $70 billion representing workers' re- sate for the decline in OPEC aid flows. For Total financial flows from OPEC to developing mittances, $14 billion in direct investments, example, during 1980-83 when OPEC oil countries amounted to some $347 billion and $29 billion in commercial credits. To the revenues declined by 36 percent, their im- during 1973-83, including $164 billion in re- extent, therefore, that these types of flows ports from developing countries increased by spect of OPEC imports from developing coun- expand in the years ahead they will compen- 32 percent. As regards workers' remittances, the expatriate work force in the OPEC coun- tries and remittances continued to grow dur- ing 1980-35. In 1983, for example, those Table 1 1 remittances were about two and a half times Geographic distribution of commitments by OPEC aid agencies, at end-1984 Regional distribution Total allocations as much as OPEC aid. Amount To the extent that political risks presented Latin (In millions America of US Percentage No. of No. of disincentives to OPEC's direct investments 2 3 Africa Asia and other dollars) share countries operations in other developing countries, the protection (In percent) against such risks expected to be provided Multilateral by the Multilateral Investment Guarantee Arab Fund 60.0 40.0 — 2,229 9.4 16 163 Agency is likely to encourage a greater flow BADEA 100.0 — — 883 2.7 37 110 Islamic Bank 44.2 55.8 — 4,686 16.9 36 359 of such investments. OPEC countries, it OPEC Fund 46.2 42.7 11.1 2,034 8.5 82 384 should be noted, have shown particular in- terest in this agency during the preparation Bilateral of its convention, which significantly empha- Abu Dhabi Fund 41.2 58.1 0.7 1,065 4.6 40 84 sizes the Agency's mandate to encourage Iraqi Fund 41.5 53.3 5.2 1,484 7.6 31 69 Kuwait Fund 48.0 51.2 0.8 4,508 19.7 62 286 flows of investments among its developing Saudi Fund 45.9 52.0 2.1 4,510 19.7 53 202 country members. Venezuelan This brief review of OPEC aid shows that Investment Fund* — — 100.0 3,046 10.9 n.a. n.a. it has, since the early 1970s, been an impor- tant source of assistance for many developing Regional share of total allocations 43.3 43.9 72.8 700 countries, and that it has several features that are different from aid from other sources. (In millions of US dollars) For the recipient countries, OPEC aid is one Regional total 10,585 10,731 3,129 24,445 100.0 99 1,657 element within a network of economic ties Sources: Coordination Secretariat of Arab National and Regional Development Institutions, Financing Operations, that includes trade, direct investment by December 31, 1984 and Middle East Economic Survey (MEES), May 6,1985; except for the Venezuelan Investment Fund, figures for which are obtained from OPEC,OP£C Aid and OPEC Aid Institutions - A Profile (No. 5) 1985. OPEC institutions and private enterprises, 1 The data do not include the Iran Organization or its allocations due to incomplete data coverage since 1978. For data up to 1978 see UNCTAD, Financial Solidarity for Development, New York 1984, pp. 40-43. and worker remittances. The emergence of 2 Africa includes the following members of the League of Arab States: Algeria, Djibouti, Egypt,Libya, Mauritania, Morocco, Somalia, Sudan, and Tunisia. With the exception of Libya, most African states were recipients of OPEC aid. large surpluses in the 1970s and early 1980s 3 Asia includes the following members of the League of Arab States: Bahrain,Iraq, Jordan, Kuwait, Lebanon, Oman, facilitated OPEC aid. Future aid will depend Qatar, Saudi Arabia, Syria, United Arab Emirates, Yemen Arab Republic, and Peoples Democratic Republic of Yemen. Except for OPEC donors (other than Iraq), the rest of Arab states, among others in Asia, were recipients of OPEC aid. on the level of oil revenues, while the expan- 4 According to the statute of the Venezuelan Investment Fund, the amounts it dedicates to development assistance at any given time cannot exceed 15 percent of its assets. At end-1984, VIF's development assistance was equivalent to sion of economic relations of OPEC countries $3,046 million, as shown above. with other developing countries will result in an increase in nonaid flows. HO Ibrahim F.I. Shihata Table 2 1 was the first Director Sectoral distribution of OPEC aid agency commitments at end-1984 General of the OPEC (In percent) Fund for International Agriculture/ Agro- Development,1976-83. He industries2 Industry Transport Energy Other is Vice President and Multilateral General Counsel of the Arab Fund 16.0 13.3 26.2 19.1 25.4 Bank and Secretary BADEA 21.1 12.1 40.2 12.2 14.4 General of the Islamic Bank 11.1 26.2 27.6 8.2 26.9 International Centre for OPEC Fund 12.5 6.2 15.7 51.0 14.6 Settlement of Investment Disputes. Bilateral Naiem A. Sherbiny Kuwait Fund 20.2 19.3 30.0 25.3 5.2 taught Economics in US Abu Dhabi Fund 13.9 47.9 12.4 23.8 2.0 universities, 1968-76. He Iraqi Fund 12.2 19.0 56.9 2.8 9.1 was an Economist in the Saudi Fund 17.4 7.0 36.4 21.3 17.9 3 Arab Fund for Economic Venezuelan Investment Fund 1 1 .6 1.2 24.6 55.9 6.7 and Social Development before joining the Bank in Percent of total allocations 17.1 14.7 30.8 23.4 14.0 1978. He is a Senior Sources: Same as Table 1. Economist in the Energy 1 The data do not include the Iran Organization or its allocations, due to incomplete data coverage since 1978. 2 Agriculture includes livestock and rural development: industry includes mining; transport includes communications Department. and storage; and other includes education, health, national development banks, water supply and sewerage. 3 Data on the VIF includes oil sales credits with local counterpart funds for project financing. 20 Finance & Development I March 1986 ©International Monetary Fund. Not for Redistribution Africa: Development challenges and flic World Bank's response Edward V. K. Jaycox Edward V.K. Jaycox, Vice-President, Eastern capita income for all of Africa was marginally generally unfavorable climate and geograph- and Southern Africa Region of the World positive in the 1970s as income growth barely ical factors: tropical soil which is fragile and Bank, spoke on this topk at the Woodrow outpaced population increase. But in the 1980s, deficient in organic materials, and only one Wilson International Center for Scholars, The domestic production has declined every year fourth of which is well watered Fifth, ex- Smithsonian Institution, Washington, DC, in white population has continued to grow rap- tremely rapid population growth.... - August 1985. Here are excerpts from his lecture: idly. The decline in per capita income has . These already vulnerable countries have been so steep that it is now below its 1970 been particularly hard-nit, by a series,of ex- The tragedy unfolding in Africa has riveted level: we now face the prospect that Africa ternal shocks in rapid succession: the oil world attention on the region's plight. Since will experience a generation of declining per shocks of J973 and 1979, wSii increased 1980, some 34 countries have been afflicted capita income. imported energy costs.and devalued com- by drought. Millions of people have died and Agriculture, the backbone of African econ- modity exports accordingly; the major reces- many more are threatened by famine and omies and the key to the development of the sion in industrialized countries which trans- malnutrition. Emergency assistance, though continent (since it is overwhelmingly rural mitted itself to Africa-as a decline in demand much needed, will not suffice. This tragedy and agrarian) has been a lagging sector. for commodity exports and declines in their is not of recent origin. Its causes have deep Agriculture output per capita has been de- prices to levels Hot seen since the Great roots and are structural. The drought, though, clining steadily over the last two decades and Depression; worldwide inflation which en- has revealed the vulnerability of Africa's eco- food imports have increased sixfold in the last couraged countries to finance their develop- system, its structure of production, and its 20 years.... ment through debt and then disinflation which low level of development. The appropriate left them with Mgh debt at high real interest response must therefore involve tackling all Unfortunately, the decline in production rates. At the same titne access to new credit of these problems in a comprehensive manner. was not confined to agriculture. Mining output and private equity investment has all but dried It must, however, be realized at the outset in 1982 was 68 percent of its 1970 level. up and concessional aid has declined, partly that sub-Saharan Africa suffers from deformed Much of industrial capacity lies idle because in response to budget stringency in the donor production structures inherited from the co- of falling domestic demand, poor investment countries and partly as a result of growing lonial era. Much of the region's exports choices and inadequate foreign exchange for dissatisfaction with the results that aid has consists of a vulnerable and narrow spectrum materials and spare parts.... achieved—so-called "aid fatigue." Moreover, of primary commodities, while manufactured Looking at the basic constraints to devel- as recovery began to get underway in indus- goods and capital equipment form a small opment, we find: first, a weak human resource trialized countries, the benefits have eluded proportion of domestic output. Trade forms base, lack of technical, managerial, and en- most African countries. Demand for their a high proportion of gross domestic product trepreneurial skills due to neglect of education products has not picked up significantly, prices and is highly concentrated with respect to during colonial times. Second, political fragility remain low, interest rates remain high and trading partners. resulting from newness of independence and aid continues to stagnate.... Over the past two decades, the fragility of diverse cultures and languages and a lack of ...In the face of these external shocks, by Africa's economies began to unfold. The eco- national integration. Third, a heritage of un- and large African governments have failed to nomic situation began to deteriorate in the even, dualistic development, weak infrastruc- adjust their economies, and have therefore 1970s and continues to do so. Growth of per ture, and subsistence agriculture. Fourth, been overwhelmed by difficulties and decline. Finance & Development I March 1986 21 ©International Monetary Fund. Not for Redistribution It must be noted that this is not because vironmental protection and conservation, family ticipate. So far, approximately US$1.3 billion African leaders don't care or because they planning, and institutional development. has been contributed to this Special Facility, don't know any better. Political instability and This third front—to institutionalize the ca- which will be concentrated on supporting institutional fragility have to a large extent pacity to manage the development process, policy reform programs. The Facility is being tied their hands and led to overpoliticization the capacity to implement policy reforms and financed by donations from 21 donor countries of the decision-making process.... sound investment programs, lies at the heart plus an allocation from the profits of the World The Bank's response of the development process and is lagging Bank itself. It became effective July 1 [1985] woefully in sub-Saharan Africa. Here again and [began] disbursing to the first recipients The Bank has outlined a Joint Program of we are working with other donors and the [in August]. We are working on further ex- Action for sub-Saharan Africa. This program UNDP to examine the effectiveness of tech- pansion of the Facility and hope eventually to calls for a collaborative effort by African nical assistance, and our past efforts at insti- see the United States join our ranks. governments and the international commu- tution building, and to develop with each There are a few other aspects of our nity, the essence of which is, by now, widely country strategies for human resource response to the economic situation of Africa, shared. development.... which I'd just like to mention: This Joint Program has as its objective The World Bank has been asked by the • We have also created a Special Project nothing less than getting sub-Saharan Africa donor community to take the lead in laying Preparation Facility which will finance on a back on the growth path. There are three out with each African country robust recovery grant basis project preparation and policy main elements of our approach. First, to and development strategies which can be studies that would form the basis for projects implement policy reforms which will provide supported externally. African governments and programs financed by the Bank or by a framework for sound economic growth. have asked the World Bank to form increasing other donors; Second, to improve dramatically the quality numbers of Consultative Groups—groups of • We have established a budget to finance of public and private investment and expend- donors and financial supporters, to promote African agriculture research of a regional iture in these countries. And third, to increase more, better coordinated, and more effective nature on a grant basis; as rapidly as possible the domestic capacity external assistance. After all, most of the • We have increased the number of field to manage national economies through human new investment in Africa over the past two missions in sub-Saharan Africa and strength- resources and institutional development. Our decades has taken place with the participation ened each of the existing field offices with strategy necessarily involves a focus on ag- of the donor community.... the addition of professional economists and riculture—because of the central importance Now let me turn to the question of the agricultural staff; of this sector, economically and socially as financial resources available to help Africa • We have generally redirected staff and well as because of the imminent dangers to back to the growth path. Even though in the budget resources internally in the Bank to- the fragile environment inherent in the com- past Africa has received the highest per capita ward sub-Saharan Africa operations.... bination of traditional agriculture and increas- allocations of external assistance on conces- But while we need to do more, we also ing population density. sional terms, we have seen these flows need to do things differently. We need to On the policy reform front, we are sup- stagnate and decline in recent years. Sec- look at Africa's problems comprehensively. porting analytically and financially the imple- ondly, the burden of debt and debt service We need to utilize existing aid more efficiently mentation of macroeconomic and sector policy has generated a very substantial reflow of and we need to be willing to try new ap- frameworks which stress efficiency of in- capital to the developed world. We now proaches. Furthermore, to put the African vestment, greater reliance on market forces, estimate that on a net basis the capital flows countries on the growth path, it is important and reductions in bureaucratic controls which to Africa in the period 1985-89 will be less that African governments, bilateral donors, have stifled development and had regressive than one half the net flows to Africa during and multilateral agencies recognize: the ov- impact on social equity. In this respect, we the period 1980-84. We do not foresee any erriding importance of the development of are working both with the countries and the dramatic improvement in terms of trade or indigenous managerial, executive, research, other donors (including the IMF) to find ways export possibilities that can offset this reduc- and innovative capability; creation of an hon- to implement these difficult reform and ad- tion in net capital flows. If Africa is to return est, dedicated, and loyal body of managers justment programs in the least painful and to the growth path, if Africa is to successfully and entrepreneurs; development of appro- most efficient ways—keeping the develop- survive the traumas of necessary structural priate technology, appropriate prices, and ment objectives firmly in mind. Alongside our adjustment, the net flows of capital to Africa adequate control over public enterprises; the traditional project loans/credits, we are mak- will have to be substantially increased—through need for the economies to be flexible and to ing so-called structural adjustment and sec- increased gross flows and/or some forms of shift resources from one activity to another; toral adjustment loans/credits which provide debt relief—at least for those African coun- and the need for a conducive political envi- general or wide-ranging import support to tries willing and able to take painful measures ronment for economic activities. We need to countries implementing important policy re- to adjust their domestic economies. avoid proposing prescriptive policy packages form programs. While the World Bank Group has a very which are not politically feasible. We must On the matter of quality of investment and positive net flow of resources to sub-Saharan take into account real political fears and carry other expenditure we are working not only Africa, we are forced to do less than what out detailed analyses of implementation prob- on our own portfolio of investments, but on we could and should do because of the short- lems to avoid undesirable income distribution the total expenditure programs in these coun- age of IDA resources. The last replenishment and power distribution effects. We must pro- tries.... This means emphasis in most cases of IDA—of which Africa now receives more pose step by step implementation sequences on rehabilitation and maintenance, in infra- than 35 percent—was only $9 billion over a with buttressing and buffering measures to structure, services and enterprises to in- three-year period, compared to the $16 billion make them less painful or dangerous. crease output and capacity utilization quickly we felt was required. In order to help com- There are no magic solutions, no panaceas. at least cost. We need these quick returns, pensate for this shortfall in IDA we have But the World Bank is prepared to make but we cannot ignore the very high but slower organized a Special Facility for Sub-Saharan every effort to respond to the development returns to education, training, research, en- Africa, in which donors were invited to par- challenge which Africa presents. ED 22 Finance & Development I March 1986 ©International Monetary Fund. Not for Redistribution THE EFFECTS OF FUND-SUPPORTED ADJUSTMENT PROGRAMS Adjustment is frequently necessary but seldom painless. Any program of adjustment, in essence, involves an attempt to establish a better balance between the availability and use of resources, between supply and demand, between income and expenditure. The impact of Fund-supported programs has been a subject of debate for almost as long as the Fund has been involved in assisting its members with their balance of payments difficulties. The debate has intensified in recent years in light of the particularly severe balance of payments difficulties that member countries have faced, requiring commensurate adjustment efforts. Finance & Development has carried several articles in past issues dealing with different aspects of Fund- supported programs. In this issue we publish a set of three articles based on recent staff studies that analyzed, in considerable depth, three particular facets of this question, namely the global effects of programs, the impact of programs on economic growth, and the consequences of programs for income distribution. The original studies are being published by the Fund in its Occasional Paper series. The Managing Director of the Fund, Jacques de Larosiere, has frequently had occasion to address the question of adjustment and growth in his public statements. A selection of his remarks is also included in this section. Finance & Development I March 1986 23 ©International Monetary Fund. Not for Redistribution Global effects of Fund-supported programs Main findings of a study examining the principal aspects of this subject Morris Goldstein JLnterest in and concern about the global Second, that the consistency of Fund pre- countries. The scope of the study did not effects of Fund-supported adjustment pro- scriptions across countries was questiona- allow an appraisal of individual Fund programs. grams (hereafter referred to as Fund pro- ble—that, for example, prescriptions for ap- Definition and measurement grams) has increased considerably in the propriate monetary and fiscal policies in 1980s. To some extent, this is a natural industrial countries might imply a lower de- Before assessing the global effects of Fund reflection of the number of member countries mand for imports than the export objectives programs, it is important to have a clear idea undertaking Fund programs. In 1980-83, for of Fund programs in non-oil developing coun- of how program effects should be defined and example, in the face of severe external pay- tries. Third, that because one program coun- measured. Five separate standards for the ments deficits, an average of 23 countries a try's imports are another's exports, trade evaluation of Fund programs were examined. year had a Fund program. If countries bor- links among program countries may frustrate They were: rowing under the compensatory financing the trade objectives of individual countries. • Factual standard: the difference between facility are also included, the number of pro- Finally, that simultaneous exchange rate de- macroeconomic performance under the Fund gram countries rises to 31 a year. The valuation by many program countries, some program and performance prior to the pro- corresponding figure for 1971-73 was only of which export mainly primary commodities, gram—the before-after approach; eight countries a year. (Program periods do would result mostly in a lower world price • Normative measure: the difference be- not coincide exactly with calendar years; a for their exports, with little beneficial effect tween performance under the program and country was assigned to the program group on their export earnings. The common thread the performance specified in its targets—the in any year in which it had a Fund program of these positions is that what might be actual-versus-target approach; for at least seven months.) feasible and desirable for a single program • Conjectural standard—/: the difference The misgivings about the global effects of country acting alone will not be so for many between performance under the program and Fund programs may be classified into four program countries acting simultaneously. performance had no program been imple- areas. First, that simultaneous demand re- The study on which this article is based mented—theactual-versus-in-the-absence-of straint policies in many program countries examined the strengths and weaknesses of approach; could impart a pro-cyclical deflationary bias alternative ways of defining and measuring • Conjectural standard—II: the difference to the world economy, with adverse conse- the effects of programs; identified the chan- between performance under the program and quences for real output and employment in nels by which policies in program countries the "optimal" performance—the actual-ver- non-program and program countries alike. might be expected to affect both non-program sus-optimal-policy approach; and and other program countries; reviewed the • Conjectural standard—HI: the differ- empirical evidence on the likely size of such ence between hypothetical performance un- "aggregation" or "interdependence" effects der Fund program-type policies and hypo- This article is based on a much longer study of the of Fund programs; and considered the ways thetical performance under some other same title published by the Fund as Occasional in which the Fund takes global effects into policies—the comparison-of-polities approach. Paper 42. account, both in the design of programs and, The main conclusion, simply put, was that more broadly, in the advice it gives to member not only the size but also the direction of 24 Finance & Development I March 1986 ©International Monetary Fund. Not for Redistribution program effects is likely to be quite sensitive demand for imports in developing countries. expect that, other things being equal, the to alternative definitions and estimating meth- These factors suggest that as a result of Fund larger these four parameters or disturbances, odologies. The review of five possible inter- programs the decline in import volume was the greater would be the transmission of pretations of program effects showed that the smaller than it would otherwise have been; program effects to the rest of the world or measured effects of the same programs can Fund programs can then be viewed as having to other program countries, that is, the larger vary substantially, depending, inter alia, on had an expansionary effect on global economic would be the global effects of programs. (1) whether changes in non-program factors activity. In addition, based on preliminary A detailed examination of the trade data between the pre-program and program pe- trade data for 1984, the same group of 1983 for program countries showed that, first and riods are accounted for; (2) whether program program countries exhibited an average in- most important, even though the combined targets make allowance for unexpected de- crease of 10 percent in their import volumes share of these countries in world trade has velopments in the global environment; (3) in 1984—which supports the proposition that risen steadily over the past decade, it is still whether program countries differ systemati- the medium-term effects of programs are quite modest, accounting in 1983 for about cally from non-program countries prior to the probably quite different from their initial impact. 7-8 percent of global trade and roughly 40 program period in ways that matter for sub- Yet a third, more mixed, verdict might well percent of the trade of all non-oil developing sequent performance; (4) whether non-pro- emerge from the actual-versus-target or ac- countries. To place these figures in perspec- gram countries are themselves affected by tual-versus-optimal-policy approaches. If, for tive, in 1983 the seven largest industrial Fund programs; (5) whether the medium- example, import volumes fell more than tar- countries took 49 percent, and the United and long-run as well as the initial effects of geted, the verdict might be that the external States alone accounted for over 15 percent, programs are considered; (6) whether, be- adjustment achieved under 1983 programs of world imports. Thus, even with nearly 40 cause of confidence and credibility factors, was both unavoidable and better managed countries implementing Fund programs in the implementation of a given policy has than it would have been without programs, 1984, the potential for shifts in import demand different effects within the context of a Fund but still that the compression of imports went in these countries to affect economic activity program than it has without it; and, perhaps further than would be optimal or desirable in the rest of the world would seem to be most important, (7) whether the most rele- from the perspective of longer-term growth. quite limited, especially compared with the vant comparison for the actual effect of a Under these methods, the decline of imports potential leverage of the industrial countries. Fund program is what would have happened could be attributed to overachievements of (The fact that program countries as a group without it, or what could have happened under fiscal targets, or to greater than anticipated typically have rather a modest share of world some hypothetical and optimal set of policies. adjustment pressures linked to higher than imports does not mean, though, either that A good way of illustrating how the alter- expected world real interest rates, or even individual countries or even industries could native definitions of program effects can color to the application of restrictive trade controls not be seriously affected by changes in the the evaluation of programs is to use the by program countries that ran counter to import behavior of program countries, or that different methods to assess the much dis- program intentions. In any case, the conclu- these induced effects on exports would be cussed recent import compression experi- sion from this perspective could be that the roughly similar across countries and industries.) enced by countries that had Fund programs effect of programs on imports was expan- A second point that emerged is that the in 1983. On a weighted average basis, the sionary but not as expansionary as would be share of world trade attributable to program volume of imports by program countries fell desirable or optimal given the operating countries varies considerably over time with by almost 8 percent in 1983. What role should environment. changes in the numbers and types of program be assigned to Fund programs in this decline? The effects of programs can, therefore, countries. The program countries' share of Because the before-after approach cannot mean different things to different people. This world imports for 1983, for example, was ten distinguish program from non-program de- is not all bad because none of the separate times larger than their average share in 1973- terminants of outcomes, all changes are at- definitions of program effects is free of short- 75, and more than four times larger than their tributed to the program, and the interpreta- comings. Still, unless these different defini- share in 1982. The main reason for the tion would be that Fund programs "caused" tions or interpretations of program effects increase in their share of world imports in the fall in import volumes. Since a lower are explicitly recognized, the danger exists 1983 is that several large trading countries demand for imports by program countries that different views of the global effects of (Argentina, Brazil, Chile, Hungary, Korea, implies, ceteris paribus, lower exports for the Fund programs will be due in large part to Mexico, and Turkey) were added to the rest of the world, this would imply, in turn, the application of different yardsticks to the program country group in that year. (Like- that Fund programs had a deflationary effect same evidence. wise, the program country share of world on global economic activity, depending of trade hit a peak of over 12 percent of world course on their weight in the world economy. Program countries imports in 1977 because the United Kingdom The actual-versus-in-the-absence-of ap- and Italy had programs then.) Perhaps the proach means comparing the actual decline in It is clear that the global impact of Fund main implication of this temporal instability in imports with the change that would have programs will be strongly influenced by the shares of world trade is that one should not occurred without Fund programs. In this structural and behavioral characteristics of expect any transmission effects from program connection, three points are relevant. First, the program countries themselves. In the countries to be stable from year to year. This the Fund's lending in 1983 exceeded SDR 12 study, four of these characteristics were of course complicates the estimation of the billion and helped to secure over SDR 20 examined: (1) the share of program countries global effects of programs. in world trade; (2) the degree of trade inter- billion in new bank lending to non-oil devel- Trade interdependence oping countries. Second, without the direct dependence among them; (3) the share of and "catalytic" effects of Fund lending, the program countries in international capital flows; The greater the trade interdependence flow of financing to 1983 program countries and (4) the typical size of changes in import among program countries, the higher, ceteris would have been much smaller. Finally, based volumes, export prices, and real exchange paribus, would be the risk that any program- on past empirical work, foreign exchange rates in program countries that could have induced changes in the demand for imports receipts are the main determinant of the significant transmission effects. One might would be mutually reinforcing—perhaps with Finance & Development I March 1986 25 ©International Monetary Fund. Not for Redistribution larger multiplier effects on aggregate demand countries over the past decade; and third, and borrowers in international capital markets than desired or anticipated. financial institutions, primarily commercial took too narrow a view of their own self- An analysis of the data on interdependence banks, have been at the forefront of this interest. suggested two conclusions. First, the average "privatization" of lending to the developing degree of trade interdependence among pro- world, increasing their share in long-term Effects of import changes gram countries is rather low. For the 37 debt from 15 percent in 1973 to 36 percent The broad characteristics of program coun- program countries examined, the (un- in 1983. tries that were reviewed earlier are helpful weighted) average share of imports from and The share of program countries in the as an indicator of their potential to influence exports to other program countries was 9 external liabilities of the non-oil developing macroeconomic developments in the rest of percent and 8 percent, respectively. This countries is now much more important than the world. To gain a more precise view of rather low average level of trade interde- it used to be. The piecemeal data available the global effects of Fund programs, these pendence among program countries reflects on foreign direct investment suggest: (1) that effects were studied within the more formal the more general fact that most program program countries accounted for roughly 55 framework of econometric global trade models. countries are non-oil developing countries and percent of the total foreign direct investment (Such models have certain advantages over that these countries trade mostly with indus- in non-oil developing countries in 1983; (2) rough calculations of trade shares: they can trial countries. (In 1983, for example, indus- that only three countries of the program provide a better estimate of induced, "later trial countries accounted for 59 percent of country group (Brazil, Mexico, and South round" effects; they are better at estimating the total imports of non-oil developing coun- Africa) accounted for about 70 percent of the the timing of effects; and they can better tries and for 57 percent of their exports.) total in 1983; and (3) that in earlier years, calculate marginal, as against average, trade Trade among non-oil developing countries program countries seem to have had only a propensities, and these are more relevant for represented 20 percent of their total imports small share (less than 10 percent) of total assessing the effects of Fund programs.) The and 24 percent of their total exports in 1983. foreign direct investment in non-oil developing three models used for the simulations were Second, although average interdependence countries. the OECD Interlink model, the IMF World is low, there clearly are some program coun- The same pattern seems to have prevailed Trade Model, and the LINK model. tries where intra-program country trade is with external debt. Until 1983, program coun- The simulation experiments conducted within significant. Out of the 37 program countries tries had only a modest share of total debt of the framework of these models showed that examined, 11 have more than 10 percent of all non-oil developing countries, ranging from changes in imports by program countries do their trade with other program countries; for about 8 percent in 1982 to roughly 23 percent affect economic activity in the rest of the four of them that average was above 25 in 1980. However, with the addition in 1983 world, and in the expected direction. But, percent. of 11 major borrowing developing countries just as important, they strongly suggest that For the majority of program countries, to the program country group, the situation the size of such global transmission effects is therefore, trade with other program countries changed dramatically: program countries then small. Specifically, even the 7 percent (or accounts for only a small share of total exports accounted for 56 percent of the total out- $10 billion) fall in the value of imports by or imports. Such trade has, however, been standing debt of non-oil developing countries, program countries that occurred in 1983 increasing, and there are some program coun- 79 percent of their short-term debt, and 67 appears to have been associated with only a tries where it is unmistakably important. percent of the long-term debt owed to private 0.1-0.2 percent fall in real GNP in industrial Finally, it appears that trade among program financial institutions. This sudden change re- countries. This is not the stuff of which global countries is more capital intensive than the flects the concentration of bank lending to recessions are made, or ended. trade of program countries with industrial developing countries in a relatively small The same simulation exercises also indi- countries. number of major borrowers, the serious debt- cate: (1) that the lion's share of these trade International capital flows servicing difficulties of these borrowers in and output transmission effects takes place 1982-83 in response to a harsh external within one year of the import change; (2) that Policies in program countries could affect environment and inappropriate past domestic the full or final effect on real GNP in industrial other countries through trade in financial policies, and the implementation of Fund countries, albeit small, is considerably larger assets as well as trade in goods and services. programs by these same countries. Lest the (say, two to three times) than the initial In addition, because the availability and terms figures on the program country share of bank effect; and (3) that even among the seven of financing strongly influence the speed of lending to non-oil developing countries be largest industrial countries, these induced external adjustment, and because current misinterpreted, it is important to recognize effects on output differ because of intercoun- account deficits create a need for financing, that even in the peak year of 1983, program try differences in both the share of total the effects of capital flows on programs can countries probably accounted for only 3-4 exports going to non-oil developing countries often not be divorced from the effects of percent of banks' total (domestic and inter- and the share of exports in GNP. Finally, the trade flows. national) claims. simulation results imply that the effects of As with trade flows, one would expect the Finally, when considering the global effects changes in imports of program countries are global effects of programs to be larger, the of Fund programs that operate via interna- likely to be much greater on their own real larger the weight of program countries in tional capital flows, it is crucial to account for income and growth rates than on those of international capital flows. An evaluation of the distinction between the influence of Fund their partners. the size and structure of the external liabilities programs and that of program countries. In Exchange rate changes of all non-oil developing countries in both recent years a number of important Fund 1973 and 1983 shows that: first, non-oil programs have involved an understanding not No other topic seems to have led to so developing countries have been more attrac- only between the Fund and the program much discussion of aggregation effects as tive to international lenders than to foreign countries, but also between the Fund and simultaneous exchange rate action by primary investors; second, private creditors have be- various private financial institutions—and this producing countries. The World Bank and the come much more important than official cred- precisely out of concern for the global or Fund have been criticized for taking too itors as a source of external lending to these "systemic" effects that might follow if lenders "piecemeal" an approach to exchange rate 26 Finance & Development I March 1986 ©International Monetary Fund. Not for Redistribution policy and it has been suggested that devel- aggregation and interdependence effects in provisions for waivers and modifications in oping countries should collectively devalue both the advice it gives to member countries Fund programs represent a well-established against the currencies of the developed coun- and in the design of Fund programs them- mechanism for dealing with departures from tries. On the other hand, as noted earlier, selves. The latter is important because even performance criteria, including those attrib- some observers have taken precisely the if Fund programs did have strong potential utable to unforeseen aggregation and inter- opposite view—warning that exchange rate- global effects, such effects could in principle dependence effects. induced increases in production and in exports be offset for both in the design of programs In conclusion of primary commodities, if implemented si- and in the advice given by the Fund to non- multaneously by many program countries, program countries. For example, if the pro- As the analysis presented in this article has will merely depress the world price of these cess of achieving greater fiscal responsibility shown, while the concerns regarding the commodities and unfavorably affect the insti- in program countries had significant multiplier global effects of Fund programs cannot be gator's terms of trade—and this for little effects on aggregate demand in non-program dismissed, the situation is neither as straight- benefit since the demand for these goods is countries, and if these spillover effects were forward nor as alarming as some would sug- quite price inelastic. larger than desired and their size and timing gest. First, it must be recognized that alter- In analyzing this aspect of the study, the were known, then an adjustment could be native definitions and measurement standards aggregate or global effects of multilateral made to the design of programs to reduce for program effects can yield markedly dif- exchange rate changes by a group of program such spillovers. Similarly, if the international ferent results. Second, it is important to view countries were examined. The analysis showed adjustment process is working smoothly, any the impact qf Fund programs in their broader that the proposition that simultaneous ex- reduction in spending in countries with balance sense—including, for example, the "catalytic" change rate action by program countries could of payments deficits should be offset by an effect on enhancing the availability of financial have serious aggregate effects on the prices increase in spending in surplus countries, resources—as well as to consider the situa- of program country exports was applicable leaving global aggregate demand little af- tion that would have developed in the absence mainly to primary commodities. Moreover, fected. In other words, trouble arises only if of a Fund program. Third, the global effects the potential for significant aggregate price the global effects of programs are significant of Fund programs on trade and economic consequences depended mainly on the ability and if these effects are ignored in the design activity, during the 1980s, were limited, inter of program countries to affect world supply. of policy in program countries and in the alia, by the small share of program countries While this potential is clearly much higher for Fund's advice to non-program countries. in world trade and by the relatively low degree some commodities (e.g., cocoa, coffee) than By its very nature the Fund must be of trade interdependence among program for others (e.g., wheat, citrus fruits), and in concerned about the global or systemic effects countries. Fourth, the risk of adverse aggre- the long run rather than the short run, the of policies of its individual members. Indeed, gate price effects of simultaneous exchange risks are reduced in practice. This is because the raison d'etre of the Fund and most of its rate depreciations was reduced because, inter primary commodities now represent a signif- activities is precisely the principle that the alia, of the lesser importance of primary icantly smaller share of exports by non-oil effects on other countries of the policies of commodities in the trade of the non-oil de- developing countries than they did two dec- individual members can be significant, and veloping countries, and the relatively low ades ago, and the share of non-oil developing that an institution is needed to ensure that share of these countries in world exports of countries in world exports of primary com- countries with balance of payments problems non-energy primary commodities. However, modities is now considerably smaller than do not take measures that have large and the Fund monitors closely the global effects even a decade ago. Further, not all program unsatisfactory international repercussions. Both of exchange rate changes by program coun- countries change their exchange rates at the the Fund's lending activities and its surveil- tries and must continue to urge industrial same time and those that do usually do not lance functions are largely directed toward countries to improve access of developing export the same products. Still, such inter- meeting that objective. Also, some of the countries to their large markets. Fifth, the dependence and aggregation effects associ- Fund's most visible activities during the past global or systemic effects of policies of indi- ated with multilateral exchange rate action few years have been motivated by such global vidual countries do matter. The Fund, in need to be closely monitored, and it is possible concerns. Two of the best examples are the offering advice to all countries, is concerned to identify the individual non-oil developing Fund's efforts to deal with the debt problems about these effects and has evolved a number countries and primary commodities where of members that had borrowed beyond their of procedures to consider the repercussions "market power" seems to be relatively high. debt-servicing capacity and the Fund's recent of Fund programs on other countries and the A case has also been made for the view that policy advice to the United States concerning world economy as a whole. exchange rate adjustment can be useful to its fiscal policy. The relevant question is not protect the profitability of exporting even for whether the Fund ought to consider the global those non-oil developing countries that face and systemic effects of its advice and pro- fixed external terms of trade. Last but not grams but rather how it can best do so. least, the important role played by industrial The main mechanism within the Fund for Morris Goldstein country policies in influencing the effects of appraising the global effects of country poli- o US citizen, is an Advisor exchange rate action by program countries cies, as well as the consistency of policies in the External Relations must be recognized. across country groups, is the World Economic Department. Educated at Rutgers and New York Aggregation and interdependence Outlook exercise that takes place twice a year. Because of the sequential nature of University, he joined the The discussion thus far is relevant for Fund programs and because of the distribution Fund in 1970. He has published articles on assessing the likely size and direction of any to outgoing missions of information on both international economics global effects of Fund programs. Attention previous Fund programs and foreign demand and labor economics. must, however, also be turned toward an and price developments, it is also possible equally important and closely related subject, for program design to incorporate effects namely, if and how the Fund accounts for from other programs. In a similar vein, the Finance & Development I March 1986 27 ©International Monetary Fund. Not for Redistribution Economic adjustment and growth Jacques de Larosiere The economic (and in particular balance of payments) difficulties facing For the indebted countries....key elements developing countries have focused attention on the need and importance to in an effective adjustment strategy include undertake adjustment, including its modalities, costs, timing, and other the following: aspects. This has sometimes created the erroneous impression that economic — More effective pursuit of greater do- growth had been forgotten in the process—that, indeed, a choice has to be mestic price stability to improve the climate made between adjustment and growth. Orderly adjustment and the reestab- for investment. lishment of financial stability may entail a reduction of growth in the short — Adequate control over budget deficits where they have been contributing to infla- run. However, as the following excerpts from speeches by the Managing tionary pressures or crowding out more Director of the Fund stress, adjustment and growth are complementary and productive resource use in the private sector. closely related. In fact, financial stability is essential for the resumption of — Realistic and flexible domestic prices sustainable growth over the medium term. (including especially the exchange rate, in- terest rates, and major administered prices) so as to improve the allocation of resources and promote growth. — Continuous review of government ex- ...adjustment as perceived by the Interna- penditure, both current and capital, to insure tional Monetary Fund is not synonymous that the resources thus absorbed are pro- with lower growth or economic retrogres- ductively employed. sion. Many persons in the media, sometimes even individuals who should know better, These are the policies that are recom- insist upon identifying the Fund as an insti- mended by the Fund. It would be hard to tution that advocates economic retrogres- exaggerate their importance. Only such sion. This description is fallacious and at policies can rebuild confidence, serve to odds with the facts.... The objective of Fund bring back flight capital, and attract new [supported adjustment] programs...is to flows of direct foreign investment. Without achieve a better balance of payments equi- such policies the present imbalances and librium in the medium term and a more external payments difficulties cannot be sur- efficient use of resources—which by defi- mounted and a return to satisfactory growth nition are limited—by introducing a number will simply not be possible. They are not of incentives and measures to generate short-sighted or anti-growth policies as is more domestic savings, more investment, sometimes contended. Far from it: they are and more exports. These are not programs consistent with growth and, indeed, indis- aimed at recession, but rather at a more pensable to it. It is in that context that the rational combination of economic policies in collaboration between the Fund and the order to achieve a better balance of pay- World Bank is so important. Indeed, the ments equilibrium and thus open the way Fund works very closely with the World for more vigorous and lasting growth. Bank to ensure that the requirements of balance of payments adjustment are cast in United Nations Administrative Committee the light of balanced and sustainable devel- on Coordination, London, opment over the longer term; this collabo- April 16, 1984 ration is being intensified. 28 Finance & Development I March 1986 ©International Monetary Fund. Not for Redistribution We can already see that many of those Central to the task of increasing the mo- ...The Fund and the Bank have and must countries that have been most successful in mentum of development are effective policies retain distinct mandates. But they share a implementing adjustment programs and in in the indebted countries....The necessary common purpose and there is an important restoring external viability are also those policies must.. .be based on certain common degree of complementarity in many of their where domestic growth is recovering most elements: the encouragement of productive activities. In view of...the importance of vigorously. Though the road of economic investment; the mobilization and retention growth-oriented structural actions, it will adjustment will continue to be bumpy, the of savings; an appropriate structure of rel- come as no surprise when I say that I have adjustment programs that many developing ative prices; and a restoration of confidence never been more convinced of the need for countries are implementing, if adhered to, and domestic financial stability.... Where such close collaboration between our two promise significant further benefits to eco- policies have been followed, the results in institutions. nomic performance over the medium term. terms of growth and development have been impressive....The policies I have been de- Annual Meetings of the IMF scribing are at the heart of the programs Annual Meetings of the IMF and the World Bank, Washington, DC the Fund has been supporting. They are and the World Bank, Seoul September 24, 1984 not anti-growth as is sometimes contended. October 8-11, 1985 Far from it. They are the pillars of sustain- able growth. There are no alternatives. An economy beset with price distortions, ramp- ant inflation, import restrictions, and capital The actions of the Fund, following the flight simply cannot grow. We believe that the movement of adjustment outbreak of the debt problems, decisively ...A satisfactory growth of export earn- must be geared with more firmness to the helped to alleviate the financial squeeze on ings is at the heart of a strategy aimed at resolution of structural problems and to the indebted countries, to contain the crisis, combining vigorous growth and improved alleviating obstacles to growth....! do not and to support trade and activity lev- creditworthiness. However, an enhanced think [a country] can grow without adjusting els.... The actions of the Fund were geared flow of capital is also needed....! have been when it has imbalances that are an obstacle not only toward restoring financial viability particularly struck by the emphasis placed to growth....the adjustment process is to in problem countries but also at facilitating [by Governors at the Meetings] on the make sustainable growth possible....A a resumption of sustainable growth. This interconnnections among financing, growth, country that has very high inflation, a very point is sometimes missed. And there has and adjustment. Appropriate policy efforts large fiscal deficit, a very large inefficient been a misconception on the part of some can be frustrated if they are not supported public sector, with public enterprises making observers that Fund-supported adjustment by adequate flows of finance. Such flows losses, a distorted exchange rate, and in- programs are rooted in austerity, that they enable the domestic capital stock to grow sufficiently attractive interest rates to mo- involve import compression, and that they more rapidly and thus strengthen export bilize domestic savings...is not going to are anti-growth. In fact, if we look at the capacity. In this way, they not only permit attract foreign investment to enhance its programs in effect with the Fund, it is clear an acceleration of domestic growth, they investment programs, and is going to crowd that they are doing quite the opposite, they underpin the long-term capacity of an econ- out domestic resources in a way that will are facilitating a resumption of growth and omy to service its existing debt. hurt growth. I look at adjustment not as an helping to rebuild import capacity consistent ...The Fund will continue to work with obstacle to growth, but as a condition for with external viability. its members to attain the optimal blend of growth. adjustment and finance within the context Creditanstalt, Vienna, of programs aimed at strengthening sus- Press conference, Seoul May 22, 1985 tainable growth.... October 11, 1985 Finance & Development I March 1986 29 ©International Monetary Fund. Not for Redistribution Do Fund-supported adjustment programs retard growth? Mohsin S. Khan and Malcolm D. Knight A recent study (see box below) reviewed avail- Objectives as to achieve a viable balance of payments able empirical evidence to see if such programs In analyzing the effects of Fund-supported position within a reasonable period of time. are intrinsically biased against economic growth. adjustment programs on the level or rate of A viable balance of payments has two aspects. Selected passages from this study are repro- growth of output, it is crucial first to consider First, it implies that the balance of payments duced below. the circumstances in which such programs problems will not merely be suppressed but are introduced. Typically the need for a eradicated, and second, that the improvement The Fund's Articles of Agreement make it stabilization program, whether supported by in the country's external position will be clear (Article I) that promoting the growth of the Fund or otherwise, arises when a country durable. output and trade is a primary objective of experiences an imbalance between aggregate The Fund's task is, in the first instance, to economic policy and that eliminating payments domestic demand (absorption) and aggregate ensure that foreign financing attains a level disequilibria should be sought in accordance supply, which is reflected in a worsening of consistent with the country's present and with this objective. Fund-supported adjust- its external payments position. While it is future debt-servicing capacity. This may in- ment programs consequently have to be de- true that such external factors as an exoge- volve setting limits on foreign borrowing or, signed to achieve a viable balance of payments nous deterioration of the terms of trade or as has been more evident in recent years, within the context of improved long-term an increase in foreign interest rates can be ensuring that the requisite inflow of foreign growth performance and price stability. responsible for the basic demand-supply im- capital is in fact forthcoming to fill the financing Nevertheless, Fund policies and programs balances, often these imbalances can be traced gap. (For example, during 1983 lending by have come under mounting criticism in recent to inappropriate domestic policies that expand the Fund exceeded $12 billion and the Fund years in the press, as well as in certain aggregate domestic demand too rapidly rel- helped to secure over $21 billion in additional academic circles, for failing to encourage ative to the productive potential of the econ- bank lending to countries with programs.) economic growth. Indeed, it has been fre- omy and seriously distort relative prices. If The permissible rate of foreign borrowing quently argued that rather than fostering the foreign financing is available, the relative defines the necessary degree of adjustment growth of output, Fund programs tend to expansion of domestic demand can persist for of the imbalances in the economy. To achieve cause a slowdown in economic activity, in- extended periods—albeit at the cost of a the required adjustment, the Fund designs a creased unemployment, and a general wors- widening current account deficit, a loss of stabilization program that includes measures ening of living standards. . . . international competitiveness owing to rapid to restore a sustainable balance between domestic inflation, an inefficient allocation of aggregate demand and supply and simulta- resources because of the distortions in rela- neously to expand the production of tradables, tive prices, and a heavier foreign debt burden. thereby easing the balance of payments Clearly, this disequilibrium cannot continue constraint. Fund-Supported Adjustment Programs and indefinitely, as the country steadily loses Policy content Economic Growth by Mohsin S. Khan and international competitiveness and eventually Malcolm D. Knight, Occasional Paper No. creditworthiness. In the absence of appro- Description of Fund programs. Although 41, International Monetary Fund, Washing- priate policy action, a cessation of foreign stand-by arrangements with the Fund are ton, DC, 1985. financing would impose adjustment on the often viewed as synonymous with devaluation Price: US $7.50 (US $4.50 to university and domestic credit restraint, Fund programs libraries, faculty members, and students). country, and this forced adjustment is likely Available from: Publications Unit, Box A- to be very disruptive. The basic objective of are in fact complex packages of policy mea- 861, International Monetary Fund, 70019th the Fund in these circumstances is to provide sures geared to the particular circumstances Street, NW, Washington, DC 20431 USA. for a more orderly adjustment of the imbalance of the country. More important, the choice between absorption and aggregate supply so of policies and the nature of the policy mix in 30 Finance & Development I March 1986 ©International Monetary Fund. Not for Redistribution programs result from extensive negotiations change rate, it will affect both real domestic to reduce the level of aggregate domestic between the country authorities and the Fund. absorption and the incentive to produce trad- demand and simultaneously to cause a shift Aside from monetary and exchange rate pol- able goods. in its composition away from current con- icies, a typical Fund program calls for fiscal In summary, it would be misleading to sumption and toward fixed capital formation. measures, such as reductions in government suggest that Fund programs rely exclusively Notwithstanding the difficulties of imple- expenditures and increases in taxation, in- on one or two policy instruments directed menting supply-side policies as part of an creases in domestic interest rates and pro- solely at restraining domestic demand. As the adjustment program, the Fund has stressed ducer prices to realistic levels, policies to above discussion has indicated, much more their importance in improving efficiency and raise investment and improve its efficiency, is involved in the design of Fund programs the long-term rate of growth. The first diffi- trade liberalization, and wage restraint. Con- than a mechanical application of the simple culty is that many types of supply-side meas- siderable overlap among these various policies monetary approach to the balance of pay- ures improve output only after a significant does not preclude the convenience of grouping ments, supplemented perhaps by an exchange delay.... them into the following three categories: rate change. From this standpoint, it may be A second constraint on the use of certain demand-side policies, supply-side policies, noted that many alternative policies proposed supply-side measures is the possibility that and policies to improve international by critics, particularly those relating to the they may affect the political and social objec- competitiveness. supply side, already form an integral part of tives of governments. Many government pol- Demand-side policies are measures that Fund programs.... The basic difference, if any, icies that create distortions (that is, deviations influence the aggregate level or rate of growth arises from some critics' proposal to use of prices from marginal costs) are designed of domestic demand and absorption. Such controls as a policy to correct balance of to achieve objectives other than economic policies include the whole range of fiscal, payments problems. Fund policy leans heavily efficiency and may have been implemented monetary, and domestic credit measures as- in the direction of eliminating controls and with full knowledge of their likely adverse sociated with traditional macroeconomic pol- restrictions on trade and payments; never- effect on resource allocation. Such policies icy. Although these policies also affect pro- theless, the Fund has on occasion accepted may include food subsidies, employment pro- duction and supply, it is useful at this level the temporary use of import controls and grams, restrictions on imports of certain of abstraction to label policies that primarily export subsidies and, as an interim arrange- categories of goods and services, and capital affect aggregate absorption as "demand-ori- ment, the continuation of dual exchange mar- controls. Changes in such policies often have ented" policies. kets. What the Fund has consistently opposed a strong impact on equity as well as economic Supply-side policies are intended to increase is the introduction of new restrictions, as well efficiency, and the Fund is enjoined to respect the volume of goods and services supplied by as the intensification on a permanent basis of the views of sovereign governments in these the domestic economy at any given level of existing restrictions and other distortions in matters, although it can, and frequently does, domestic demand. Such supply-oriented pol- the trade and payments system. (The use of render advice on the budgetary costs of such icies can be divided broadly into two groups. controls on trade and payments also is incon- policies. First, there are policies designed to increase sistent with the objectives of the Fund as set Even if these difficulties with supply-side current output by improving the efficiency forth in the Articles of Agreement.) Although policies are somehow overcome, this does with which factors of production, such as a theoretical case can be made for controls not imply that demand-side policies can be capital and labor, are utilized and allocated and restrictions in the short run, in practice dispensed with. Supply-side policies by them- among competing uses. This category in- it has proved difficult to manage such systems selves do not guarantee an improvement in cludes measures to reduce distortions caused efficiently and effectively over time. Further- the balance of payments because, other things by price rigidities, monopolies, taxes, subsi- more, such policies, by introducing rigidities being equal, aggregate demand can rise be- dies, and trade restrictions. The second group in the economy and creating incentives for yond sustainable levels even with increasing encompasses policies designed to raise the the inefficient use of resources and forms of aggregate supply, unless it is restrained from long-run rate of growth of capacity output. production, can turn out to be counterprod- doing so. Consequently, stabilization pro- Under this heading are incentives for domestic uctive in the long run and damaging to the grams have to use both sets of policies, and saving and investment. Also important are growth potential of the economy. the decision on the relative emphasis that is policies designed to increase the inflow of Choice of policy instruments. A crucial to be placed on demand and supply measures foreign savings, whether in the form of private concern that arises in the design of adjustment in Fund programs is based on a number of lending, foreign direct investment, or in- programs is how much emphasis should be criteria. These include: creased development assistance. These two placed on supply-side policies relative to de- (i) The nature, magnitude, and likely du- groups of supply-side policies are obviously mand-side policies. As the need for a stabi- ration of the external payments imbalance. interrelated, since policies that increase cur- lization program typically reflects excess de- For example, if a deterioration in the country's rent output may, by themselves, lead to a mand, all programs must involve some degree external terms of trade causes the balance of larger flow of saving and investment and a of restraint of aggregate domestic demand. payments deficit, the appropriate response higher rate of growth of capacity output. This does not mean, however, that adjust- would include supply-side measures designed Policies to improve international competi- ment should be based exclusively on reducing to change the basic structure of production tiveness contain elements of both demand- absorption—the imbalance could in principle in the economy. In other words, an adverse side and supply-side policies, since they are also be eliminated through expanding domes- external development may alter the mix be- based on combinations of measures (such as tic supply. In fact, demand-side and supply- tween demand and supply measures. By devaluation cum wage restraint) intended to side policies are closely interrelated. Policies contrast, if the initial disequilibrium is the affect the program country's real exchange designed to achieve a higher growth rate in result of excess aggregate domestic demand, rate. Improving competitiveness is why con- the medium term generally require an in- owing perhaps to excessively expansionary siderable importance often attaches to the crease in the rate of productive investment, fiscal and domestic credit policies, then the role of exchange rate policies in stabilization while demand-management policies require a response would normally rely more heavily programs. In general, to the extent that a reduction in the savings-investment gap. The on demand restraint than on supply-side combination of policies alters the real ex- policy package, therefore, must be designed measures. Finance & Development I March 1986 31 ©International Monetary Fund. Not for Redistribution (ii) The initial level of the country's external programs that balance of payments recovery duction of primary goods. The effect of var- indebtedness and the amount of additional does not conflict with economic growth when iations in real interest rates on savings is, financing that can be expected. These con- the time-horizon of both objectives is properly however, quite small, implying that it would ditions determine the length of time over specified to be the medium term. take fairly sizable increases in nominal interest which the adjustment process can take place. This view is based on a number of consid- rates to change the savings rate. Fourth, a (iii) The nature and importance of the erations. First, even if a reduction in absorp- number of studies find a close relationship constraints facing the government in pursuing tion impairs growth over the short run, to between the growth rate and capital forma- policies that have important social and political the extent that a Fund program succeeds in tion. Therefore, policies directed at increasing implications. avoiding the drastic cut in absorption that investment and improving its efficiency will Issues relating to growth accompanies a complete loss of creditor sup- tend to have a beneficial effect on long-run port, the program can be said to protect the development. Finally, such empirical evidence ...a distinction needs to be drawn between growth of the economy currently and in the as is currently available is consistent with the the short-term issues and the longer-term future. Second, the supply-side, or structural, view that devaluation would, on balance, exert issues relating to the effects of Fund programs policies in adjustment programs are intended an expansionary rather than contractionary on growth. to enhance the productive potential of the effect on domestic output, even in the short Short-term issues. If the initial problem is economy by improving the allocation of re- run. This result clearly has an important excess aggregate domestic demand, then, in sources and stimulating domestic savings and bearing on the use of exchange rate policy in order to achieve the objectives of the adjust- investment. If such policies are successful, developing countries. ment program, absorption must be reduced they diminish any inescapable impact upon One explanation of the view that Fund in the short run. Although this reduction in growth of measures that focus on reducing programs systematically reduce growth is absorption can be perceived as representing absorption. Furthermore, by raising the ca- perhaps the misconception that programs are a decline in living standards, it should not be pacity of the country to service debt in the designed solely to reduce aggregate demand regarded as a "cost" of the program, since future, these structural policies allow for a through the use of contractionary monetary absorption is merely being brought back into higher level of sustainable capital inflows, and and fiscal policies. Since some empirical evi- line with availability of resources. The real thus a higher rate of economic growth in the dence indicates that such policies slow growth issue is how the reduction in absorption— long run. Lastly, financial stability resulting temporarily, it is concluded that Fund pro- whether brought about by appropriate de- from a successful stabilization program can grams must therefore be deflationary. As mand-side policies or by exchange rate ac- have a beneficial effect on the state of con- discussed in this survey, this interpretation tion—will influence the level and rate of fidence in the economy. This confidence can of the policy content of Fund programs is far growth of output or real income.... In practice encourage both domestically financed and too narrow, and account has to be taken of ... the reduction in absorption necessary to foreign-financed investment, leading to gains the other growth-inducing measures con- achieve the objectives will generally be ac- in employment, productivity, and output. tained in Fund programs. This aspect is companied by some fall in the growth of brought out clearly in the results of cross- output, particularly if inflation has become country studies measuring the effects of Fund ingrained in the system. This decline in the packages that combined the whole range of growth rate is a necessary part of the ad- Conclusions demand-management and supply-side poli- justment to eliminate underlying imbalances ...The main patterns to emerge from the cies. These studies found that the rate of in the economy. In other words, the adjust- present survey can be briefly summarized. growth declined in a number of countries ment aims at leading the economy onto a First, the studies reviewed generally indi- during the course of a program, but this result more stable and sustainable growth path from cated that, while the size of the effect varied, was matched by a number of cases where a higher but unsustainable path that generally tighter monetary and credit policies would the growth rate in fact rose. Once the influ- accompanies the supply-demand imbalances. result in a fall in the growth rate in the first ence of all relevant policies on the growth The critical question, of course, concerns the year after they were implemented. Further- rate is recognized, there is no clear pre- size and duration of the short-run effects of more, if monetary and credit restraint took sumption that Fund-supported adjustment policies designed to reduce absorption. the form of a reduction in the flow of credit programs adversely affect growth. ...Fund programs are not intended to to the private sector, the empirical evidence In conclusion, this paper has shown the reduce a country's absorption of goods and showed that private capital formation and serious limitations of existing empirical anal- services below the level that can be financed possibly the long-run rate of growth would ysis of Fund-supported adjustment programs (out of current savings and capital inflows) on be adversely affected. Second, no studies and economic growth. To'evaluate the criti- a sustainable basis. Any reductions in ab- showed any clear empirical relation between cism that Fund programs are unnecessarily sorption and growth that go beyond the levels growth and fiscal policy. There are close deflationary would require more systematic necessary to achieve the objectives of the institutional links between monetary and fiscal empirical studies. Such studies would have program can be fairly viewed as the true policies in developing countries and thus, once to be in the nature of a case-by-case approach, "costs" of a program. Since the "necessary" monetary policy variables are taken into ac- taking the whole range of Fund policies into reduction in absorption and the consequent count, the various studies have found it consideration rather than focusing on individ- decline in growth, however, are not meas- difficult to measure the independent role of ual elements of programs. They would also urable precisely, such a notion of costs is fiscal policy. Third, there is some evidence have to be supplemented by some type of difficult to quantify.... that supply-side policies, particularly policies modeling and simulation analysis so as to Long-term issues. ...Even if it was deter- to increase producer prices and the domestic handle the issues that arise in comparing the mined that stabilization programs reduce out- interest rates, have favorable effects on pro- set of policies included in a Fund program put in the short run, this deficiency could be duction and savings. For example, price elas- with a hypothetical alternative package of outweighed by the long-term benefits result- ticities of supply of agricultural commodities measures or in comparing the effects of a ing from the adoption of suitable adjustment tend to be higher than normally assumed, so Fund program with the outcome that would policies. Indeed, it is a basic premise of Fund that increases in prices encourage the pro- occur in the absence of a program.... ED 32 Finance & Development I March 1986 ©International Monetary Fund. Not for Redistribution Fund-supported programs and income distribution in LDCs The major findings of a Fund staff study on this difficult but important issue Charles A. Sisson M he Fund has long recognized the signifi- tional issues without compromising the pur- holds, urban-rural distinctions, factors of pro- cance of distributional issues in adjustment suit of other objectives. duction, type of employment, among others— programs. Adjustment policies are framed in The first two approaches provide a more and no one classification is fully adequate to light of the size of the imbalance confronting comprehensive view of the choices available encompass distributional comparisons for all the economy and how much adjustment is to the authorities, but they also greatly com- purposes. realistically possible and can be maintained plicate the analysis. Ideally, Fund programs Second, the existing income distribution of beyond the program period, so that distri- would have to be compared to the alternative a country seeking balance of payments sup- butional issues have always been an inherent, program that a country would have pursued port from the Fund is a result of past policies if unspecified, element in programs. How- without Fund support, and the period for this and may be unsustainable. Furthermore, the ever, in the absence of any satisfactory means comparison would have to be sufficiently long indices commonly used in making comparisons of addressing this matter, the Fund has to allow the economy to achieve a new of income distribution do not normally provide generally maintained that distributional issues equilibrium. Clearly, economic analysis has clear results about distributional changes. are primarily an internal political concern. not progressed to the point where such an Moreover, price movements during the course This stance has led some observers to sug- analysis can be successfully undertaken. Fur- of a Fund program will change the consump- gest that Fund-supported adjustment pro- ther, most countries do not identify an ade- tion opportunities available to individuals, grams (hereafter referred to as Fund pro- quate adjustment program before approaching leading to further difficulties in making com- grams) favor vested interests and are inimical the Fund so that an alternative approach is parisons. Therefore any simple comparison to the needs of the poor. not available for comparison. It is ultimately of pre-program and post-program income This paper examines the methodological for the authorities to determine what policies distribution would result in misleading con- difficulties of analyzing the distributional ef- are politically feasible to achieve the stated clusions about the distributional effects of fects of Fund programs and then presents, objectives of a program. Changes in income Fund-supported programs. The more appro- in summary form, the analytical approach and distribution as such are not a performance priate comparison would be a "with-and- conclusions of a recent Fund staff study. criterion in adjustment programs (and, given without" comparison, i.e., a comparison with (This study, Fund-Supported Programs, Fis- the difficulties described in this paper, it is the income distribution that would have evolved cal Policy, and the Distribution of Income, is hard to see how it could be); and the author- in the absence of a program or under a to be published in the Fund's Occasional ities have discretion in seeking to achieve any different program or an alternative set of Papers series. Mr. Sisson was one of the politically acceptable distribution of income. policies. Unfortunately, economic analysis has principal authors of this study—Ed.) The last two approaches may be more not progressed to the point where such an manageable, mainly in that they avoid the approach is feasible. Methodological problems trade-off between growth and equity which Third, to the extent that growth is an The question of the relationship between is central to the other two, and indeed to any objective of Fund programs—and a primary Fund programs and issues relating to income attempt to discover an "optimal" set of poli- objective of the Fund is to promote growth distribution can be addressed in several ways, cies. It has long been recognized that there within the context of a sustainable balance of each emphasizing slightly different aspects is some element of trade-off between the rate payments position—it implies that programs of, and concerns about, the effect of economic of growth which an economy can achieve and focus on resource allocation rather than in- policies. Perhaps the most encompassing ap- the degree to which a particular income come distribution per se, although resource proach would be to try to determine whether redistribution lowers the returns that factors reallocation obviously affects income distri- Fund programs support a more desirable can command in the marketplace. In other bution as incentives are adjusted. However, distribution of income. Second, one could try words, over time the size of the economic the effect of corrective policies takes longer to determine whether there typically is an "pie" measured by output can become more than any simple income transfer (just as the alternative set of policies that would more important than how it is initially divided. adverse effects of price distortions are often adequately address social objectives. A third Even using these more limited approaches, evident only after a protracted period). Thus, approach would be to determine if, generally however, leaves some difficult, if not insur- the period of most Fund-supported programs speaking, Fund-supported programs have mountable, methodological issues and data is too limited to allow a full study of their worsened income distribution. Fourth, Fund problems. First, there are a number of ways distributional implications. programs could be analyzed to determine in which the distribution of income can be A further consideration is the need for which policies would best address distribu- classified—such as by individuals, house- extensive information on individual income Finance & Development I March 1986 33 ©International Monetary Fund. Not for Redistribution groups (.including detailed information on con- cent containing measures to restrain govern- ciaries of even the initial redistributive effects, sumption and personal income levels) as well ment expenditure, and 96 percent measures as they may not be involved in export-oriented as information on government transfers and to increase revenues. Among specific ex- industries (indeed, often they are involved in services received, public sector, nonmone- penditure control measures, about three fifths importing activities), or they may have a tary and irregular sources of income, and the of all programs sought to limit the wage bill; relatively small share of their wealth held composition of investment portfolios; and all a similar number limited purchases of goods abroad. Moreover, in many countries, small of this for both before and after the program and services, and also subsidies. Revenue farmers are helped by more profitable exports period. Such information is not necessarily measures focused on the personal income tax and less competition from (undervalued) im- available in countries with highly developed in 46 percent of the programs, corporate ports; and the wage share of manufactured statistical services and is certainly unavailable taxes in 34 percent, taxes on domestic goods exports has been shown to be higher than in most countries that have Fund-supported and services in 73 percent, import duties in that of (usually protected) import substitution. programs. 57 percent, and export duties in 24 percent. Over the longer term, the effects of these While the study concerned the distribu- measures are not clear-cut; the macroeco- Analysis tional effect of fiscal policies in Fund-sup- nomic measures should promote growth and In view of the considerable difficulties as- ported programs, it recognized that these employment throughout the economy, leading sociated with analyzing the impact of Fund policies are normally framed in the context to a higher standard of living for all, including programs on income distribution outlined above, of monetary and external sector policies that the poor, so that the ultimate effect of the the Fund staff recently conducted a more have far-reaching implications for income; policies will not necessarily be to increase limited inquiry reviewing the measures con- hence it attempted to provide a general inequality. tained in 94 Fund-supported adjustment pro- overview of these effects on income distri- There is a relationship between fiscal pol- grams in the 64 countries which had under- bution, even though a detailed analysis was icies and exchange rate and monetary devel- taken such programs in 1980-84, and assessed beyond its scope. Exchange rate, monetary, opments, and these links are an important their likely distributional effects on various and credit policies are commonly acknowl- aspect of the adjustment process. On the socioeconomic groups. edged to be important for adjustment, but revenue side of the budget, the most signif- The programs surveyed contained a variety their full effect on income distribution is icant tax sources surveyed were income of approaches to the adjustment problem and obscured because their impact is indirect, taxes, taxes on domestic goods and services, consequently encompassed a wide range of through changes in resource allocation. The and trade duties. Measures designed to re- policy measures (see accompanying table), initial effects of measures to increase the form individual and corporate taxation were while also containing some common elements. price of foreign exchange favor factors of seen to have had little effect on income Virtually all programs used limits on monetary production in export industries and those who distribution because of the limited reliance on or credit expansion, while 55 percent included hold capital abroad, while policies to make these taxes and their inherent limitations as measures to liberalize and reform external capital more expensive reward those who a potential source of revenue in developing trade. Most programs linked the external own capital. This is not to suggest, however, countries. While the impact of income taxes imbalance to fiscal performance, with 91 per- that the wealthy will be the primary benefi- has been limited, the overall effect has been to improve the distribution of income. Taxes on goods and services have, in keeping with their relative importance in the revenue sys- Economic policies employed In 94 Fund-supported programs, 1980-84 tems of developing countries, been more Number Percent important sources of revenue. The evidence of of total Policies' programs programs indicates that these taxes affect the distri- bution between different sectors of the econ- Liberalization and reform of exchange rate arrangement 52 55 Limit on credit expansion 92 98 omy (e.g., rural versus urban) and between Measures to mobilize domestic savings 51 54 individuals with different consumption habits Measures affecting wages and prices 83 88 (e.g., between smokers and non-smokers), Structural adjustment measures 70 74 rather than redistribute income across income classes. Improve or reform of tax administration 52 55 Taxes on trade are an equally, if not more, Restructuring of personal income tax 43 46 important tax source for developing countries, Measures affecting corporate tax 32 34 and generally their impact has been supportive Domestic tax on goods and services 69 73 of distributional concerns. Taxes on imports, Import duties 54 57 under adjustment programs, have three im- Export duties 23 24 portant characteristics that help improve in- Restrictions on central government functional expenditure come distribution. Individuals in higher in- outlays 4 4 come classes tend to consume more imports Restraint of central government current expenditure 86 91 than those with lower incomes, so that they Restraint of wages and salaries 59 63 tend to pay more import taxes. Second, goods Restraint on capital outlays and net lending 56 60 that are generally identified to represent Improved expenditure administration 40 43 luxury consumption by the wealthy tend to Capping or reduction in subsidies 39 41 2 have higher tax rates. Finally, to the extent Curtailment of current transfers to NPEs 26 28 that tariffs replace quantitative restrictions on External debt policies 86 91 imports, the economic rent that importers Source: International Monetary Fund. 1 gain when imports are administratively limited 2 Classifications are not necessarily mutually exclusive. Nontinancial public enterprises. is reduced or taken away from importers, who tend to be in higher income classes. 34 Finance & Development I March 1986 ©International Monetary Fund. Not for Redistribution Who do subsidies affect? Empirical information concerning the direct effect of price and subsidy In a second member country for which data were available, food policy on income distribution is scarce and of questionable quality. In subsidies have been allocated through ration shops that distribute foodgrains addition,, existing studies do sofr.cover a 'aaj^iiat ranfe df ajSatfifei to ' at Ws^|p^«Mp»t^fc^, Rural people, who«a The effects of policies concerning export important and controversial aspects of Fund- particularly adverse effect on both the urban duties in these programs on income distri- supported programs. and rural poor, some programs have at- bution are less important, but also less sup- About 63 percent of Fund programs con- tempted to target subsidies more accurately portive. The final incidence of export taxes tained measures to restrain the wage bill. By to those who most need them. In devising depends on the relative elasticities of supply trying to limit the growth of wage bills by policies with respect to subsidies on the and demand for a country's exports, but such measures as wage freezes, limits on consumption of petroleum, for example, there generally developing countries are price-tak- employment, and reduced fringe benefits, has been an attempt to redistribute resources ers in international markets and their pro- wage and salary policies in Fund-supported away from factors employed in inefficient ducers must bear any increase in an export programs have tended to redistribute income industries and, by removing subsidies to the tax. Since these producers often tend to be away from the urban middle class. To the use of private vehicles, to promote the de- agricultural small-holders or other low-income extent that the poor are predominantly in velopment of mass-transit systems which are producers, increased export duties may not rural areas, these efforts tend to equalize the typically used by lower income groups. Thus, have desirable redistributional effects. How- income structure, although they may ad- ironically, one of the most controversial as- ever, if export duties do not discourage versely affect the efficiency of government pects of Fund-supported programs—the re- growers from growing their crops, but merely operations. Three fifths of all Fund-supported duction of subsidies—has been the one that from exporting them, it is consumers who programs have also tended to constrain in- has probably had the greatest success in may benefit from lower domestic prices of vestment to available resources, often by improving income distribution. export crops. limiting new projects, or by improving the Government participation in the market Fund-supported programs have not focused efficiency of such investment programs by economy through nonfinancial public enter- on specific functional expenditures: less than focusing on quick-yielding projects. Given the prises is often justified by its presumed fa- 5 percent of programs referred to a specific long gestation periods of these investment vorable impact on income distribution. In functional expenditure, and less than one third programs it is difficult to determine how these practice, however, these enterprises fre- of them made any reference at all to functional measures have affected income distribution. quently become a financial burden on the expenditures. Therefore it may be concluded The issue of subsidies and transfers to economy, so that the favorable effects of that the impact in this area has been minor. public enterprises is a controversial one (see producing goods at controlled prices may be In contrast, efforts to limit excessively ex- box). The reassessment of food subsidies offset by the limited amount of goods pro- pansionary fiscal policies through policies to under Fund-supported programs often fo- duced and the inflation caused by government control economic categories of expenditure— cuses on increasing the price of basic com- reliance on domestic bank borrowing to fi- specifically government wages and salaries, modities to levels nearer world market prices. nance their losses. In some cases, the only investment outlays, food and petroleum sub- This frequently increases domestic agricul- elements in the economy that benefit from sidies, and transfers to cover the losses of tural incomes and, in this way, distribution is these activities are the factors of production public enterprises—are perhaps the most improved. Where the increase would have a used by these industries, and those who can Finance & Development I March 1986 35 ©International Monetary Fund. Not for Redistribution control the sale of these products in parallel icies, and hence are not sustainable under of the type of adjustment measures imple- markets. When these firms are encouraged any set of policies. The resultant demand- mented under Fund-supported programs. to raise prices, the effect is not so much to management policies enacted as part of pru- A final consideration is the broader issue penalize consumers as it is to validate prices dent financial planning are thus one (and it is of what, if any, adjustment policies could be already being charged in unofficial markets. hoped a sound) means of instituting a nec- adopted that would lessen further any adverse Thus, the primary redistributive effect of essary decline in domestic consumption lev- distributional effects of adjustment policies on pricing measures is to transfer income from els. The ensuing income distribution does not the lowest income groups. The Fund staff the unofficial and untaxed sector to the official necessarily become more regressive in that have made recommendations to improve the and taxed sector. higher income groups are affected more than targeting of adjustment measures away from Conclusions lower income groups. The debate over some low-income groups. These include, in partic- Fund-supported adjustment programs may be ular, exchange rate action aimed at providing While the types of policies undertaken in more a reaction to the required adjustment, adequate incentives for an agricultural sector the context of Fund-supported adjustment and reflect the views of vocal and well- dominated by small farmers, improving access programs do, in their role to restore the organized affected groups, than an indictment to credit markets, movement toward taxation framework for sustained economic growth, of global income, establishment of a truly have implications for the distribution of in- broad-based tax on goods and services, re- come, they have not in general been inimical Charles A. Sisson placement of quantitative restrictions on im- to the goal of improving distribution of income. a US national, completed ports by import duties, and focusing on ex- In particular, Fund programs have not been his graduate work at The penditure programs which will yield quick directed against the poor. Indeed, in some American University, results, such as provision of basic skills and cases the policies in these programs have Washington, DC. He is an vocational training. However, the absence of been framed to protect the poor as far as economist in the Fiscal more complete socioeconomic and demo- possible. It has to be recognized, however, Affairs Department of the graphic data—factors particularly lacking in Fund, and has published that the existing income distribution and nom- developing countries—will pose obstacles to mainly on public finance inal income levels in many countries embark- and tax policy. the implementation of the above recommen- ing on adjustment programs with the assist- dations and, more generally, to improvements ance of the Fund are frequently the result of in income distribution within the context of overly expansionary fiscal and monetary pol- adjustment programs. Two Studies on the Impact of IMF Programs Occasional Paper No. 41 Occasional Paper No. 42 Fund-Supported Adjustment Programs and The Global Effects of Fund-Supported Economic Growth Adjustment Programs by Mohsin S. Khan and Malcolm D. Knight by Morris Goldstein A review of the evidence available in the litera- As an increasing number of countries implement ture on the impact of Fund-supported adjustment Fund programs, questions on their aggregate im- programs on economic growth in developing coun- pact become relevant. Will they give a deflationary tries. In the context of why programs are typically bias to the world economy? Are the implications for needed, and what they generally consist of, the trade of individual programs globally compatible? study examines both econometric evidence on the Would simultaneous devaluation by many program effects of individual measures and cross-country countries lower their export prices? After a detailed experience with complete policy packages. Illus- discussion of how the impact of programs can be trative simulations are given to reconcile conflicting measured, this study identifies the ways in which evidence and to examine the different effects of program policies can have global effects and re- demand and supply measures on growth. views the evidence on these. Price: US$7.50 (US$4.50 to university libraries, faculty members, and students) Available from: Publications Unit • Box A-861 International Monetary Fund 700 19th Street, N.W. • Washington, D.C. 20431, U.S.A. Telephone: (202) 623-7430 36 Finance & Development I March 1986 ©International Monetary Fund. Not for Redistribution Reviewing public investment programs Underpressure to cut public expenditures while safeguarding future growth, governments undertaking adjustment programs increasingly seek the Bank's advice on investment priorities Basil Kavalsky jimssistiiig countries in preparing and re- 1983. For Argentina the comparable figures public investment programs has come from vising their public investment programs is not were 24.6 and 20.5 percent. the Fund. The Fund's concern with the via- a new activity for the Bank. Throughout its These lower investment levels were the bility of country adjustment programs over existence borrowers have asked the Bank's outcome of the need to reduce the public the medium term has demanded that it go advice in formulating five year plans and sector deficit in the face of shortages of beyond assessing aggregate levels of public selecting priorities from among competing resources, including those from external bor- expenditure and the resulting budget deficits. project proposals. The Bank's combination of rowing. In response to this pressure, minis- The implications of unproductive investments work at the micro, sectoral, and macro levels tries of finance often lowered expenditure for future fiscal and external payments bal- makes it well placed to assess particular ceilings for other ministries by a uniform ances suggest a need to examine carefully projects in relation to the government's broad percentage across the board. Ministries such the allocation of public investment and the economic objectives. as agriculture or education were then left to process of project selection. For the past few The past five years have seen a dramatic determine the allocations to individual pro- years, therefore, the Fund has been asking increase in the number of reviews of public grams. Since cuts in public employment and for the Bank's view of the country's public investment programs undertaken by the Bank. salaries are generally the most difficult to investment program before making its own During the 1970s many developing countries make politically, the cuts tended to fall dis- decision as to whether to go ahead with a raised the share of investment in GDP by proportionately on nonsalary components of stand-by or extended Fund arrangement. The expanding their public investment programs. recurrent expenditures—for example, teach- Bank has also been in a position to advise on With world recession in the early 1980s and ing materials or hospital supplies—and on whether the ceiling on the government deficit increased debt-service burdens, investment investments. New investments were post- may result in the exclusion of high priority levels in these countries have dropped. In poned and those in progress delayed. With development expenditures. These reviews sub-Saharan Africa, for example, investment the increasing recognition of the high costs have therefore provided a focus for the ex- fell from 18.7 percent of GDP in 1980 to 14.7 of neglected maintenance and delayed con- change of ideas between the two institutions. percent in 1983. Reductions were particularly struction schedules, governments have turned These developments have coincided with severe in the high-debt Latin American coun- to the Bank to assist them in identifying the the evolution of thinking and practice within tries. The ratio of investment to GDP in critical activities on which to spend scarce the Bank. Since the mid-1970s the Bank has Brazil averaged 28 percent from 1973 to 1978 budgetary resources. become increasingly concerned about the and fell to 22.5 percent between 1979 and Another stimulus to the Bank's review of environment in which its investment projects Finance & Development I March 1986 37 ©International Monetary Fund. Not for Redistribution must operate. In part this is a matter of the considering the adequacy of current outlays, exercises derives from the interaction be- policy framework for the economy and the considering new investments only after pro- tween macro and sector economists and be- sector in question. Irrigation projects, for viding for the maintenance of existing assets. tween Bank economists and government example, will not yield their full potential In the larger middle-income countries, on the economists. returns if distorted agricultural prices reduce other hand, tax resources are usually available Analytical methods. A fairly standard ana- farmer incentives. But neither will they yield for those recurrent expenditures needed to lytical approach to these programs has evolved their full potential returns if associated in- maintain existing facilities and services, and over time. This consists of the preparation vestments are not made, say in upgrading ministries of finance and planning are more of a macroeconomic consistency framework farm-to-market roads, or if the institutional concerned that the Bank contribute to the agreed upon by the government and the Bank, support from the research, extension, and process of project selection. combined with a detailed review of the indi- credit agencies is inadequate. In planning its The issue of whether public enterprises vidual components of the investment program. lending operations the Bank thus evaluates should be covered is an especially difficult The macro framework is used to assess the policy framework, the public investment one. The Bank's reviews of public enterprise the consistency of the various sectoral pro- program, and institutional support. performance have consistently stressed the posals with one another and with the govern- The commonality of interest between bor- need for greater autonomy in the management ment's broad economic goals. The framework rowing countries, the Fund, and the Bank of these enterprises—autonomy that extends used is normally the Bank's Revised Minimum has resulted in the Bank conducting about to their investment decisions. Where enter- Standard Model (RMSM), which has the ten missions a year specifically to review prises are using public funds, however, or advantages of incorporating Bank projections public investment programs. In addition per- relying on government guarantees for their of commodity prices and also allowing the haps ten general economic missions a year borrowing, there is a legitimate argument for debt implications of different-sized investment review public investment programs. These comparing the returns to their use of funds programs to be evaluated. latter focus on the program's broad compo- with the returns to other uses. The basic approach used iterates back- sition and macroeconomic impact, and are In principle public enterprises should stand wards and forwards between the macro less detailed in their review of sectors and or fall on their financial viability and the framework, the formulation of sector strat- projects. Most of the Bank's sector missions government as the major shareholder should egies, and the appraisal of individual projects. (for example, to appraise conditions and pros- assess that viability at appropriate times, but Formal planning techniques are of limited pects in agriculture or transport) now include leave to management the decisions involved value in this task. Input-output matrices and in their terms of reference a systematic in the attainment of financial viability. This material balances may have some role in large, review of the sectoral investment program. system works if management and workers in predominantly self-sufficient economies, but In this way public investment programs in an enterprise are subject to financial disci- for the majority of developing countries they virtually all the Bank's major borrowers are pline, but in most cases public sector agencies rarely yield useful information at the economy- reviewed about once every five years. face only a "soft" budget constraint and wide level. They may be a useful adjunct to planning heavy industrial development in Objectives and coverage incentives that encourage solving problems through additional investment rather than countries where this forms a significant part What are the objectives of the Bank in through improved efficiency. In Brazil huge of the public investment program and is mainly reviewing public investment programs? To investments by public enterprises, financed oriented to the domestic market. Macro date these reviews have had two major pur- by borrowing abroad, were a major contrib- models, for their part, rarely incorporate the poses. The first is to make recommendations utory factor in the subsequent debt crisis. amount of detail that is needed to evaluate on how the program can be tailored to fit For these reasons, Bank reviews of public the impact of individual projects on the econ- available resources at the lowest cost to long- investment are likely to continue to cover omy. Cost-benefit analysis is an indispensable run growth. The second is to evaluate the proposals of the public enterprises, but many tool for project preparation and appraisal, but system of investment programming and to of the reviews will be combined with studies it does not form a sufficient basis for assem- identify ways in which it can be improved to of how public enterprises are being managed, bling a public investment program given the provide a basis for better decision making in so as to identify the root causes of problems. difficulties inherent in quantifying benefits and the country. In future, as the constraints ease in dealing with nonecbnomic objectives (such on countries' resources, the focus will shift Modalities as the provision of services to disadvantaged to a more forward-looking view of the poten- In general the Bank carries out its analysis groups or regions). tial for new investments and the selection by of public investment programs by sending a At the micro level, different sectors de- the Bank of new projects for financing. group of five to eight general and sector mand different analytical techniques—for ex- The first questions that arise when the economists to the country for about three ample least-cost studies for power supply or Bank is asked to take on a public investment weeks. Drawing on the Bank's prior analytical intermodal analyses for transport. Sectoral review concern the coverage. Should the work on the country, in particular its sector studies generally require more time to un- entire public expenditure program be re- reports, and project experience, extensive dertake than the mission has at its disposal, viewed or should the scope be limited to briefing discussions usually take place before so that if they are to be incorporated in the investment? Should public enterprises be in- the visit. In many cases (and as the norm for analysis they need to be carried out through cluded or only the government sector? The larger countries) the review is divided into prior sector or project work. answer to the first of these questions depends two field phases, each of about three weeks' Assessing priorities on the circumstances. For example, in low- duration, separated by some months. The income countries, particularly those in sub- first phase emphasizes data gathering and Macro level The Bank's reviews therefore Saharan Africa where recurrent expenditures initiates work within the government while proceed on both the macro and sector levels. have been too low to maintain the capital covering some, but not all, the sectors. The At the macro level, the country economist stock in recent years, it makes little sense second phase analyzes the data, discusses must analyze the macroeconomic situation to exclude these expenditures from the re- preliminary conclusions, and completes the and derive estimates of total resource avail- view's agenda; the analysis must start by sectoral review. Much of the value of these abilities, taking into account the government's 38 Finance & Development I March 1986 ©International Monetary Fund. Not for Redistribution own targets and the views of the Fund. This tor. This consideration of sectoral priorities The key to reviewing public investment analysis raises fundamental questions about is the most arbitrary part of the review programs is the iteration among the sector the level of public expenditure relative to process. In theory it is easy to invent models specialists and between the sectoral and ma- private, and the level of aggregate consump- which will enable one to say that at the margin croeconomists. This permits different options tion relative to investment and savings. a certain amount should be shifted from to be identified and the program to be modified Differences of view about the government's agriculture to transport. In practice, however, accordingly. For example, the industry spe- plans tend to arise most often over the the relationships and data requirements are cialist may calculate that a proposed industrial prospects for external financing, and for com- much too complex. The Bank's analysts project will not yield adequate returns, and modity prices and the revenues associated therefore use information on the historical its exclusion from the program may in turn with them. Differences can also arise where shares of sectors, and their experience of the permit a reduction in the power investment government projections are targets, based on capacity to implement sectoral programs, program. In most cases the linkages are of the assumption that project implementation adjusted in accordance with the government's course far more judgmental and take longer will improve and making inadequate provision stated priorities and by reference to the macro to have effect. For example, the rates at for exogenous events such as the effect of framework. The Bank's RMSM model cal- which different sectors are expected to de- poor weather on harvests. This approach culates historical capital/output ratios by sec- velop may suggest that priority be given to causes a built-in overprogramming of public tor, which can be applied to the new invest- various levels of education over the longer investment, which must be hastily cut when ment mix to see what it implies for output. term, but the available information will almost reality supervenes. Instead, the Bank has This is valuable in raising questions and never permit a precise quantification of this tended to argue for a core investment pro- making the underlying assumptions explicit. relationship. gram supplemented by a reserve shelf of Sectoral programs. It is at the level of The policy framework projects that can be taken up if enough individual sector programs that the Bank is resources become available. on its firmest ground, particularly where the As indicated earlier, a coherent view of The first priority in allocating total re- review has been preceded by in-depth sector public investment programs must encompass sources is to ensure that adequate provision work. During a public investment review the policy and institutional environment. In is made for recurrent expenditures. Unfor- mission much of the emphasis is on clarifying carrying out public investment reviews it is tunately, developing countries' plans are rarely sectoral objectives and strategies in consul- particularly important to evaluate pricing pol- organized so as to make this transparent; tation with the responsible government offi- icies. In the energy sector, for example, most budget documents list recurrent ex- cials, and then on assessing whether the appropriate pricing policies give an impetus penditures in a form that relates to means or project and program proposals are consistent to conservation with consequent reductions instruments, not ends or objectives. For with these objectives. Even when information in the levels of investment needed in energy- example, an allocation for salaries does not is readily available, a program will rarely be using sectors such as power and transport. show whether the salaries are used to carry organized in the form of neatly evaluated The recent review of Mexico's public invest- out the department's own planning and ad- project proposals with rates of return calcu- ment program found that raising petroleum ministrative functions or to maintain irrigation lated for each. In the time available, therefore, prices toward world levels resulted in sub- canals. the Bank staff must use relatively simple stantially less growth in electric power use Projections of investment expenditures criteria to evaluate the projects and programs. and that investment plans in the power sector typically give little attention to the implications Some features of the evaluation are com- could therefore be scaled down. of new investments for recurrent expendi- mon to all sectors. For example, the extent Pricing policies are important not only in ture. Many governments have taken on ob- to which sectoral objectives are likely to be sectors producing physical outputs. When ligations they might have chosen to avoid, achieved is always assessed in relation to the services are offered free or at highly subsi- had they realized what recurrent expenditures total package of expenditure programs, sec- dized prices, the excess demand does not were involved. The approach taken by Peter toral policies, and institutional capacity. In necessarily mean that additional public serv- Heller of the IMF in his article in Finance & every sector the largest investment projects ices should be provided. In the social sectors, Development ("Underfinancing of recurrent are scrutinized to assess their economic vi- governments generally provide substantial development costs," March 1979) is a pos- ability. In addition, specific techniques are subsidies for users. The rationale for subsi- sible path to a suitable proxy for deriving applied to evaluation in some sectors. In dies is that these services are directed at the adequate recurrent expenditure levels. In the power development a level of demand is poor, but jn the Bank's experience this is long run, however, there is no substitute for derived and then a least-cost program is often not the case. Thus university studies, governments undertaking such analysis di- designed to meet that demand. A transport which yield very high private returns in most rectly. Botswana's recently formulated eco- evaluation generally starts by ensuring that developing countries, are often far more nomic Plan is a model in this regard. Aggre- the system as it stands can be maintained. highly subsidized than primary education. gate recurrent expenditure needs were derived New investments are then looked at in co- Similarly it is not uncommon to find medical from historical relationships and compared ordination with the review of the agricultural care systems in which the highest subsidies with detailed projections of the recurrent and industrial proposals, to judge their prior- go to patients in private or semi-private expenditures entailed by new projects, to ity. In the social sectors where capital ex- hospital rooms. Even where subsidies reach make sure they were consistent. This pro- penditure is usually a minor part of the the poor, there is evidence that the poor cedure allows the full costs of an expenditure expansion program, the coverage and quality would be willing to pay more (whether for program to be evaluated. The Bank is sup- objectives (for example, health care at what public or private services) if that meant better porting efforts to move toward a similar level of sophistication, for what parts of the quality, or easier access to services. For approach in Zambia. population?) are looked at and the needs for example, studies carried out by the Bank in Sector vs. sector. When the aggregate re- increased expenditure evaluated against them. some of the Sahelian countries suggest con- source availabilities are denned, the sector Consideration is also given to whether a more siderable willingness and ability to pay for specialists are given guidelines on the re- economical use of existing resources could better education, and the extent to which sources available for investment in each sec- allow a reduction in proposed expenditures. children from quite low-income families in Finance & Development I March 1986 39 ©International Monetary Fund. Not for Redistribution Africa are sent to private schools supports on the framework of in-depth sector work through technical assistance in upgrading the this. Introducing charges that allow public carried out by the Bank and the country, but data base well in advance of mounting public services to recover their operating costs is often judgments must be made only on the investment reviews. Adequate data will be often a critical step toward using these serv- basis of what the specialist can learn during particularly important in following up on the ices more efficiently and providing additional a short stay in the field. The Bank will need implementation of the agreed program. resources for their expansion. to expand and deepen its analysis of sectoral A third issue is that the analytical frame- work does not permit exploration of the Stronger planning, coordination policies and investment programs, and plan the timing of these analyses so as to provide longer-term effects of a package of investment The end-product of the Bank's public in- inputs into its reviews of the overall invest- projects on the availability of government vestment reviews is not a new public invest- ment program. revenues and on the country's foreign ex- ment program, but a process within the A second issue is the quality of information. change earnings and burden. In many of the government concerned. The reviews are in- Though the government is usually requested large Latin American debtors, the projects tended to highlight crucial questions, relating to prepare information on the public invest- financed by foreign inflows were viable, ex to the program's design and financing, for ment program in advance of the mission, it ante, but crises were caused by difficulties in resolution within the government. Even more is surprising how difficult this often proves converting their returns into government rev- than most Bank activities, the reviews are to be. Many governments do not have infor- enues and foreign exchange. Bank reviews conceived as collaborative exercises, being mation on individual projects. And where state need to pay close attention to this problem carried out jointly by Bank staff and the and local governments have considerable au- in future, by explicitly reviewing the operating ministries or departments concerned. The tonomy, as in Brazil for example, it may be and maintenance costs associated with the reviews focus explicitly on institutional issues, difficult for the central government to get investment program, the potential for re- evaluating the country's process for identi- precise information on their activities. Infor- covering costs, and the foreign exchange fying and selecting projects and for integrating mation on public enterprises is almost always implications. them into a macro framework. These missions difficult to obtain. One of the important ben- Public investment reviews will remain an often result in technical assistance to the efits of the Bank's review in many countries important part of the Bank's efforts. They government in those phases of the process is precisely that it provides an impetus to the are of substantial use to the Bank in deciding that need strengthening. gathering of information in one place, so that on its own lending strategy. More important, Public investment reviews are becoming officials in the central ministries can consider the authorities in most of the countries for an increasingly important mechanism for aid the likely impact of the investment proposals. which they have been undertaken have ex- coordination. For donors, a project's inclusion The Bank needs to take the initiative through pressed their satisfaction with the outcome. in a program that has been reviewed provides its continuing economic and sector work and The reviews provide an opportunity to take some assurance that there is agreement on a fresh and objective look at investment its economic priority. For the country, the programs that over time have become mere program provides a line of defense against collections of projects and have lost their donors' tying of aid to projects that seem Basil Kavalsky coherence in relation to the government's mainly designed to benefit equipment sup- is Assistant Director of the own goals. pliers in the aid-giving country. These doc- Country Policy One clear lesson from the experience so uments are increasingly being asked for by Department. A South far is that these reviews are most effective aid group meetings and are being discussed African, he studied at the when they are carried out in collaboration at them. University of Cape Town with the government concerned. Both the and the London School of Bank and the government learn in the process Issues for the future Economics before joining and the resulting recommendations have a the Bank staff in 1966. With all their positive features, there are greater credibility than if they originated with a number of areas where steps could be taken the Bank or the government alone. Future to make the Bank's reviews more effective. reviews are likely to rely increasingly on such The reviews are strongest where they rest collaboration. Finance& Development is available on microfilm"''from University ^Microfilms, P.O. Box 1346f Ann 4$$0r, Ml 481Q6, USA, and on nficroftche (English only) from Microphoto Division, Bell and Howell Company, Old Mansfield Road, Woositer, OH 44691, USA 40 Finance & Development I March 1986 ©International Monetary Fund. Not for Redistribution Review article The IMF in a period of turbulence A review of the latest addition to the Margaret Garritsen de Vries Fund history The International Monetary Fund 1972-1978 Cooperation on Trial Robert Solomon Volumes I and II: Narrative and Analysis; Volume III: Documents. The International Monetary Fund, Washington, DC, 1985, 1809 pp., $60 (set). M he third installment of the International Monetary Fund's official As a result, the narrative and analysis cannot and do not proceed history covers 1972-78, a period of fundamental change in the world in strict chronological order. Instead, the history treats topics seriatim, economy and in the international monetary system: the move to often spanning the same period, as it traces the origins and devel- floating exchange rates, the several effects of the first oil shock, the opment of ideas and situations, and the variety and complexity of onset of stagflation in the industrial countries, and the emergence of issues that the IMF confronted. newly industrializing countries as heavy borrowers from commercial Deja vu banks. The IMF had to amend its constitution (the Articles of Agreement), enlarge and revise its lending facilities and the terms History at its best helps to illuminate the present. The work under on which it made funds available, and adapt its consultation and review does this in numerous ways. It gives us, for example, a surveillance procedures to the new circumstances. perspective on current proposals for international monetary reform. The author, Margaret Garritsen de Vries, has produced a valuable Dissatisfaction with floating exchange rates—particularly with large history of this period. She, and the management of the Fund, are to medium-term swings in currency values—is being widely expressed be congratulated. Mrs. de Vries has been given, and has used, the nowadays, much more than in the period covered by the Fund history. freedom to analyze and to exercise independent judgment as well as Specific proposals for maintaining more stable exchange rates, such to narrate. It is not an exaggeration to say that, had one examined as the establishment of target zones, are being put forward by some this manuscript without knowledge of its source, one would not have officials and by some private parties. Implementation of these pro- identified it as an official history from its style and substance (except, posals would require that monetary policy be aimed more directly at of course, for a few superficial indications such as the acknowledgments stabilizing exchange rates, even in the largest industrial countries (a in the preface and the third volume of documents). number of small and even medium-sized nations already do so to a The two volumes of "narrative and analysis" comprise 1042 pages, significant degree). excluding appendices, a useful chronology, and the index. That comes Yet, as the Fund history brings out again and again, neither the to almost 149 pages a year. The previous installment, covering 1966- German nor the US monetary authorities have been willing to sacrifice 71, devoted about 109 pages to each year, on average, and the first the domestic objectives of monetary policy in order to preserve installment, covering 1945-65, 60 pages to each year. The increasing exchange rate relationships. In 1972, in the course of IMF consul- number of pages a year is an indication of the growing importance of tations with the United States, the US Executive Director "took the Fund in the world economy and the greater complexity of its issue" with the recommendation that US monetary policy be oriented activities. This latest history of the IMF is for all practical purposes to raising interest rates so as to attract funds from abroad and thereby a history of the international economy and of international monetary help preserve the dollar's par value. He argued that it was "essential developments and policies in 1972-78. that US authorities retain a free hand in formulating monetary policy in order to facilitate the expansion needed in the domestic economy" (p. 15). Robert Solomon is a Guest Scholar at the Brookings Institution. He In that same year, Germany imposed a cash reserve requirement was formerly an Adviser to the Board of Governors and Director, Division (Bardepot) on borrowings abroad by residents, who found interest of International Finance, US Federal Reserve System. He has served rates higher at home than on foreign markets (pp. 17-18). as Vice Chairman of the Committee of Twenty, 1972-74. He is the Even earlier, in May 1971, German officials had tried to persuade author of The International Monetary System, 1945-1981 (Harper & Row, 1982) and numerous journal articles on economics and finance. their partners in the European Community to undertake a joint float in order to regain control over their own monetary policy (p. 113). Finance & Development I March 1986 41 ©International Monetary Fund. Not for Redistribution The same motivation led to the decision by the European Community "resented the transformation of the gold-exchange standard into a countries in March 1973 to allow their currencies to float against the dollar standard" (pp. 164-5). dollar (p. 113). Not all of this is unfamiliar today. Although the dollar is far from Is there any more reason today than in the 1970s to expect the weak, the United States is once again in current account deficit and largest economies to devote their monetary policies to the pursuit of the other industrial countries in current account surplus. A large part exchange rate targets? There might be a greater prospect for this if of those current account imbalances is attributable to the appreciation fiscal policies were more flexible. But the experience of the 1980s of the dollar in 1981-84. shows fiscal policy in both the United States and Germany to be Suppose that the system adumbrated in the C-20 Outline of Reform highly inflexible. had been in force in the 1980s. But assume also that the United Mrs. de Vries' judgment that independent monetary policy under States had adopted the same budget and monetary policies that have floating rates has proved to be "illusory" strikes me as not quite prevailed in recent years. With exchange rates pegged at, say, their correct. She derives this conclusion from the observation that pursuit 1980 values, the flow of funds to the United States would have led of independent monetary policy, especially in Germany and the United to decreasing reserves in Europe, Japan, and elsewhere and to States, led to exchange rate movements that had some undesired increasing reserves in the United States. Europe and Japan would effects (p. 834). This is certainly true, but those effects—"distress" have been expected to adopt restrictive monetary policies and, if the for German exporters and some worsening of inflation in the United reserve losses were substantial, to move their exchange rates lower States when the dollar depreciated against the mark in 1977-78—did relative to the dollar. American policies would have been expected not prevent monetary policies from achieving their primary domestic to shift the other way. Thus, exchange rates would have moved in aims. Restrictive monetary policy is bound to distress some elements the same direction as they actually did in the 1980s. But the in the economy; if it had not been German exporters by way of macroeconomic policies dictated by the C-20 principles would have appreciation of the deutsche mark, it would presumably have been been perverse. The United States, which was already growing faster the construction industry or other industries sensitive to interest than other industrial countries, would have been expected to adopt rates. In the same way, the mix of fiscal and monetary policies in still more expansionary policies, since its reserves would have been the United States in 1981-84, instead of crowding out domestic increasing. Europe and Japan would have been expected to pursue investment, distressed US exporters and producers that compete more restrictive policies, despite the sluggishness of their economies. with imports. When exchange rates are flexible, monetary policy The point is that the C-20 Outline of Reform did not anticipate a does not become less effective. On the contrary, it has a wider reach situation such as that which prevailed in 1981-84, when the United across the economy. States had a weak balance of payments on current account but a Committee of Twenty strong currency. Therefore the provisions in the C-20 Outline for overriding the reserve indicators would probably have been invoked. With international monetary reform in the air once again, it is This could also have led to the activation of the provision for floating germane to ask whether the Committee of Twenty (C-20) exercise in "particular situations." And that takes us back to where we are has relevance today. Mrs. de Vries provides a thorough and basically today. fair review of that unsuccessful effort to create a more satisfactory international monetary system. The C-20 began its work in September ...and the situation today 1972, when the exchange rates of industrial countries were pegged Critics of the present system might argue that under the more at the values negotiated in the Smithsonian agreement (except for structured C-20 system the United States would have been induced the pound sterling, which began to float in June 1972). But the dollar to alter its fiscal policy sooner, reducing its budget deficit. That is a was no longer convertible into gold or SDRs for monetary authorities, matter of political judgment. I find it unlikely that the Reagan as it had been up to August 15, 1971. The US balance of payments administration would have changed its budget policy under the had been weak for some time and had not yet shown improvement influence of an international monetary system of the C-20 type. in response to the exchange rate realignment, while many other All in all, we have to conclude that the C-20 system, if it had been industrial countries were in surplus. in effect in the 1980s, could have produced some perverse policies In the circumstances, the main interest of US officials in the C-20 but probably would have led to exchange rate changes in the same negotiations was to establish conditions under which nations in "large direction, and conceivably of the same magnitude, as those that were and persistent" balance of payments surplus were required to adopt actually experienced. It is hard to avoid the judgment that, given the policies aimed at reducing their surpluses. This aim inspired the macroeconomic policies being pursued in the United States and other comprehensive proposal that US officials put on the C-20 agenda. industrial countries in the 1980s, the world was better off with an Changes in countries' reserves would establish a presumption for the appreciating dollar. adoption of balance of payments adjustment measures. Incidentally, The central problem, it is now being recognized, arises less from that proposal did not, contrary to what Mrs. de Vries has concluded, the nature of the exchange rate regime than from the interaction of provide for "virtually automatic" exchange rate adjustments (p. 231). macroeconomic policies of industrial countries and the consequent The proposal explicitly stated that exchange rate changes "are not effect on the world economy. This gives the Fund's consultation and seen as the only, or necessarily as the most desirable, means of surveillance processes a potential role of very great importance. adjustment in all cases" (Economic Report of the President, January The exchange rate agreement negotiated by J. de Larosiere, then 1973). Directeur du Tresor in the French Finance Ministry, and E.H. Yeo, The main interest of officials of European Community countries, then Under-Secretary for Monetary Affairs in the US Treasury, as Mrs. de Vries points out, was in convertibility or asset settlement, recognized that exchange rate stability is dependent on "orderl; since they were "convinced that the US payments deficits were underlying economic and financial conditions." That agreement, a I caused by relatively easy US money policies and the resulting inflation embodied in the Fund's new Article IV, calls on the IMF to exercis I and that the special role of the dollar in international payments "firm surveillance over the exchange rate policies of members" (pij encouraged these deficits since the United States did not need primary 743-9). assets or borrowed credits to finance them...." Europeans were As the Fund's Executive Directors began to take on this respo I unwilling to accumulate inconvertible dollars indefinitely and they sibility, they realized, as Mrs. de Vries puts it, that "in judging I. 42 Finance & Development I March 1986 ©International Monetary Fund. Not for Redistribution exchange rate Fund officials could not concentrate solely on the use exercise, described carefully by Mrs. de Vries, would be an important a member had made of reserves or on its policies of intervention in input to a regular multilateral consultation process in the Fund on exchange markets or even only on its domestic monetary and other macroeconomic aims and policies. macroeconomic policies. The Fund would have to review a member's In its capacity as a lending institution, the Fund was active in 1972- entire economic situation" (p. 840). 78, creating two oil facilities to assist in the recycling of OPEC Today even this formulation appears inadequate, since it contains surpluses, a supplementary financing facility, and enlarged access to no reference to the interaction of policies among nations. Until 1978, its resources. Borrowings ("drawings" in the IMF jargon) were made when the present history ends, the Fund seems to have been too by 76 non-oil developing countries, 2 oil exporters, 11 so-called "more much concerned with "exchange rate policies." From the vantage developed primary producing" members (including Australia, New point of 1985, what is needed is to broaden IMF surveillance to Zealand, Portugal, and Spain), and Italy and the United Kingdom, in encompass the fact that a better performance of the world economy addition to five other industrial countries, including the United States, depends significantly on the economic objectives and economic policies that drew on their reserve tranches. of the larger industrial countries. How to make those objectives and In the early 1980s, under Mr. de Larosiere as Managing Director, policies mutually compatible and at the same time conducive to the Fund became not only a still larger lender but, more generally, noninflationary and vigorous growth of the world economy is a major a manager of the debt problem. That experience will be a major topic challenge. That challenge requires cooperation among nations— for the next installment of the Fund history, which will have to deal sometimes referred to as "coordination" of policies. The IMF, in even more fully with the controversial subject of IMF conditionality. addition to its function as a lending institution and a creator of reserves Whatever one's views on this conditionality, an observation from the (SDKs and reserve tranches), is a forum in which such cooperative present installment is relevant. It may have been forgotten by now policy making could be implemented. that the stand-by arrangements with Italy and the United Kingdom The Fund did make one significant contribution to this process. In in the 1970s involved tough conditions on the economic and financial 1978, under the leadership of its then Managing Director, H. Johannes policies of those countries. As Mrs. de Vries says, these arrangements Witteveen, the Fund proposed a "coordinated economic growth "contradict the criticism sometimes leveled at the Fund that the scenario" (pp. 393-4). These proposals for policy changes in the conditions attached to stand-by arrangements for industrial members larger industrial countries helped to influence the decisions taken at are less stringent than those for developing members" (p. 441). the economic summit meeting in Bonn in June 1978. Those decisions Controversy about Fund conditionality is nevertheless acute. That have been unfairly criticized, but not in this history; their failing is it is so testifies to the crucial role that the IMF has come to play in that they did not do the impossible by anticipating the fall of the Shah the world. Its history merits the splendid treatment given it in these of Iran and the second oil shock. The World Economic Outlook volumes. * Putting People First Sociological Variables in Rural Development Edited by Michael M. Cernea Published for the World Bank by Oxford University Press evaluation of existing limitations in project preparation with guidelines and practical solutions to problems of people involved in rural develop- Describes a culturally sensitive approach to the preparation, planning, ment. and implementation of rural development projects. Places a strong em- phasis on analyzing the social organization of rural populations and their Of special interest to: modes of production in livestock projects ... community forestry ... ir- • Social Anthropologists rigation and water users' associations ... rural roads ... fisheries ... • Sociologists and agricultural settlements. Considers difficulties encountered by rural development projects in the • Project Planners and Administrators past, with examples from World Bank experience. Combines a critical • Agricultural and Engineering Technicians Order your copy of Putting People First by completing this coupon and mailing it today. Order: Stock No. BK 520465 US $24.95, 444 pages, 6V»" x 9VV. Add US $4.50 a copy for air mail outside the United States. Please send me Putting People First. Name. Title. Enclosed is my check for $_ _ (or equivalent currency). Address _ Charge my: fj VISA fj MasterCard City. _ State/Province. .Postal Code - n American Express Q Choice (Credit cards accepted only for orders addressed to Washington D.C.) Country _ - Telephone. Return to: World Bank Publications Orders from outside the United States Number _ . Expiration Date - P.O. Box 37525 will be referred to the local World Bank FDMAK86 ' Signature - Washington, D.C. 20013 distributor for fulfillment. U.S.A. Finance & Development / March 1986 43 ©International Monetary Fund. Not for Redistribution Re-examining urban poverty and employment A fresh look at ways of improving urban incomes and labor productivity Friedrich Kahnert ILIrban poverty is a pervasive problem in many, if not most, developing countries. One fifth to one third of urban households in many middle-income countries earn too little to feed themselves adequately. In lower-income countries (or regions of countries), half or more of the urban population may fall into this category. Urban poverty has probably worsened in the recent recession years with many countries experiencing falling real incomes. In these times of austerity, it is becoming even more urgent to raise urban incomes. Even in low-income countries, urban areas now account for half or more of the nation's measured gross national product. The poten- tial for raising public revenues ultimately depends on raising income, and urban incomes form an increasingly important part of the nation's tax and savings base. Enhancing urban employment and labor productivity thus become key objectives both for alleviating poverty and for improving local resource deremployed urban poor? Would it be better Even where urban growth rates are declining, generation. to try to reduce "excessive" migration pri- unprecedented numbers of people are being When the World Bank first focused its marily by promoting rural development? Many added to urban populations. Growth rates of attention on the relief of urban poverty in the similar questions remained unresolved with large metropolitan areas, particularly in Latin early 1970s, a two-pronged approach was the result that the Bank's operational pursuit America, may have peaked in the 1940s and proposed: (1) improving the access of the of urban job creation remained tentative and 1950s and they will probably decline further. poor to housing and related services, and (2) modest. The population of Sao Paulo, for instance, enhancing employment opportunities for the grew by about 2 million, at an annual rate of poor. Given the Bank's lack of experience Issues in retrospect 6.5 percent in the 1950s; in the 1970s, the with poverty-oriented urban development, A decade of experience permits us to take city's annual growth rate fell to 4.4 percent, both approaches were conceived as experi- a fresh look at the problem of urban poverty but even that meant 4.3 million people were mental, intended to foster "learning-by-doing." and its likely solutions. This evidence sug- added during that decade. Sao Paulo will still It was possible to demonstrate that low- gests that the primary emphasis on creation add the same number over the 1990s, even cost housing and services, adapted to local of urban jobs per se may be misdirected and if its growth declines to 2.6 percent a year. conditions, were in demand by the poor and should be complemented or perhaps replaced Urban jobs will have to grow just as rapidly could be made affordable to them. Sites-and- by an emphasis on labor productivity and and perhaps faster than the urban population, services schemes designed to provide land income generation. A consensus may now be because declines in natural population growth and ancillary facilities for housing (instead of developing on what should be done and how. rates (which are now occurring in many construction of completed houses) and slum- Job generation in urban areas is still im- countries) affect the growth of the labor force upgrading became the main operational tools portant. Urban population in developing coun- only after a lag of about 15 years and because in this effort. tries has grown very rapidly over the last 30 female participation in the labor force is No consensus existed on how to promote years, averaging 4.3 percent a year compared increasing in many countries. Rural-to-urban job creation. Indeed, experts disagreed on with 2.1 percent in developed countries. In migration is undeniably an important contrib- basic questions. For example, was it desirable 1980 the urban areas of developing countries utor to urban growth, but it has been less to increase jobs in urban areas or would this had about 3Yz times more people than in the important than natural population growth for simply accelerate rural-to-urban migration and 1950s, and African urban populations more over 20 years. Moreover, notwithstanding swell the ranks of the unemployed and un- than quadrupled over these three decades. differences in regional experience, the con- 44 Finance & Development I March 1986 ©International Monetary Fund. Not for Redistribution tribution of migration to urban growth is short-time work and correctly quantified as tries, as a group, experienced rapid growth declining almost everywhere, even though the difference between actual hours worked of aggregate output. More recently, per capita the actual number of migrants may still be by those on involuntary short time and the incomes in many developing countries have rising. standard work week in the country con- stagnated and even declined, particularly in The intense concern with urban job creation cerned. Crude underemployment rates of 20- Latin America and Africa. In parallel, the originated from widely held fears that urban 40 percent or more are often cited; in reality, recession of the early 1980s has caused urban areas would be unable to provide income- if all those who want to work more actually unemployment to increase but this is a cyclical earning opportunities for their rising popula- put in a full work week, total hours worked change and is not necessarily part of a secular tions. These fears have proved unfounded. would not rise much. For instance, in Mexico rise in unemployment rates. In any case, In fact, urban areas seem generally to have City and Guadalajara, about 20 percent of the whether or not the past employment trends, done well in productively absorbing additions work force worked less than a 40-hour week analyzed above, continue is a separate ques- to their labor force, even though often at low in early 1979 but only 5.8 percent wanted to tion from that of the light they shed on the income levels. This is prompting the shift work more hours. functioning of labor markets. away from an exclusive emphasis on job creation to improving labor productivity and incomes. Urban labor markets Table 1 Indicators of the economic importance of some Much of the vast literature generated by urban areas in developing countries the concern with job creation saw extensive Population imperfections in urban labor markets that Urban area share Output measure (In percent) impeded the matching of labor supply and Brazil: Greater Sao Paulo (1970) 8.6 36.0 of net domestic product demand, causing large and unjustified wage China: Shanghai (1980) 1 .2 1 2.5 of gross industrial production differentials. Clearly, wages in urban areas Haiti: All urban (1976) 24.2 57.6 of national income differ greatly between high- and low-wage Port-au-Prince (1976) 1 5.0 38.7 of national income sectors and subsectors, large and small firms, India: All urban (1970/71) 1 9.9 38.9 of net domestic product the public and the private sector, and so on. Kenya: All urban (1976) 1 1 .9 30.3 of national income But these differences in themselves do not Nairobi (1976) 5.2 20.0 of national income tell us that the market is not functioning Mexico: All urban (1970) 60.0 79.7 of personal income properly. This must be judged by whether or Federal District (1 970) 14.2 33.6 of personal income Pakistan: Karachi (1974/75) 6.1 16.1 of GDP not: Peru: Lima (1980) 28.0 43.0 of GDP • There is a serious and growing problem Philippines: Metro-Manila (1970) 12.0 25.0ofGNP of urban labor surplus, in the form of open Thailand: Metro-Bangkok (1972) 10.9 37.4 of GDP unemployment or underemployment; Turkey: All urban (1981) 47.0 70.0 Of GNP • Wages for workers with similar charac- Source: World Bank. teristics tend to be equalized across sectors and firms; • Wage differentials respond over time to changes in labor supply and demand. Another frequently expressed view holds The view that high and low wages observed The perception that developing countries that a growing proportion of the labor force side by side in urban areas portray severe were experiencing a growing urban labor is channeled into urban tertiary activities malfunctioning of the labor market is not surplus, in the form of open unemployment, where they form a pool of "surplus" and supported by research. Attempts to verify underemployment, or employment hidden in "unproductive" labor. It is not clear why the existence of segmented high-wage and tertiary (trade and services) activities or in income received from tertiary activities should low-wage sectors have largely failed to doc- the informal sector (including construction, be considered inferior to income from the ument the importance of institutionally in- manufacturing, etc.), was a key reason for primary and secondary sectors; the income duced wage differentials or rigidities. The the growing concern with urban job genera- recipient certainly does not think so. In any major part of wage variance in urban activities, tion. The evidence, while partial and far from event, the evidence, though scanty, does not at least in the private sector, is explained by flawless, consistently challenges this support the hypothesis that the urban tertiary productivity factors. And informal sector perception. sector is absorbing ever larger proportions earnings are not universally lower than those First, there is no evidence that open urban of surplus labor. Instead, there is some in the formal sector; a large portion of informal unemployment rates are generally rising. The evidence that the share of tertiary activities sector incomes are well above what labor available evidence suggests these rates may in urban employment has remained quite with comparable skill levels can earn in the have been falling over the 1970s. Double- stable over lengthy periods in the developing formal sector. No wonder that many informal digit rates of open urban unemployment have countries. In addition, average incomes in sector participants have no intention of leaving become less common in a number of coun- this sector compare well with those elsewhere the sector to take a formal wage job. tries, such as Colombia, the Republic of in the urban economy. The best guess now The urban labor market is best viewed as Korea, the Philippines, and Syria. In others, is that the urban tertiary sector in developing a continuum of employment and income- for example Brazil, Egypt, Mexico, and Thai- countries is growing primarily because there earning opportunities ranging from very low land, unemployment rates were not in the is demand for its output and not because to very high income levels. Many imperfec- double-digit range to start with and they people are being forced into it for lack of tions can be demonstrated, particularly along remained stable or even declined. Similarly, alternative income-earning opportunities. ethnic or sexual lines, by barriers to entry underemployment is nowhere near as large The preceding generalizations pertain to into specific activities of a formal or informal as frequently claimed, if defined as involuntary the 1970s, a period when developing coun- nature, by government and union policies and Finance & Development I March 1986 45 ©International Monetary Fund. Not for Redistribution restrictive practices, or by inadequate infor- these show pronounced pro- or anti-urban services. They must be concerned with not mation flows, but they do not appear to have biases, whether explicit or inadvertent, could only the provision of physical infrastructure an overriding impact on the functioning of the be a prime tool for encouraging efficient urban for primary education, basic health centers, labor market. This conclusion may not fully employment and income generation. How- and vocational training but also what is being apply to public sector wages and salaries and, ever, other more specific actions are just as taught and how. Many of the potential cus- a fortiori, public employment policies, which necessary and do not have to wait for overall tomers for these services, particularly if they may be the source of significant economic policy reform to remove conditions that inhibit are the breadwinners, cannot leave their jobs losses. productivity and income growth. Removing to improve their education or get health Urban poverty is by no means confined to or attenuating these inhibitions will often be advice. Even primary school children have the informal sector but occurs in all sectors beneficial even if labor markets actually func- important functions in their families, such as of urban activity. Moreover, urban poverty tion less well than the preceding discussion helping in the family business, earning occa- is not synonymous with urban unemployment. seems to show. For example, upgrading the sional income, or baby-sitting to allow the Many unemployed are poor but many others quality of labor will pay handsome dividends, mother to work. The costs to the households of family members attending traditionally run educational institutions can thus be prohibitive and delivery systems must be adapted to Table 2 reduce them to acceptable levels—for ex- Proportions of population living in urban areas ample by providing instruction and health care in the evening near the places of residence. Share of total population Similarly, vocational schools often produce 1950 1960 1970 1980 (estimate) skills that are not in demand in the local World 29.0 33.9 37.5 41.3 economy or teach the use of tools not gen- Developed regions 52.5 58.2 64.7 70.2 erally available. This argues for involving the Less developed regions 16.7 21.9 25.8 30.5 business community in deciding on how and Less developed regions without China and India 21.0 26.0 31.3 37.1 what to teach. Finally, health and nutrition education are important complements to Source: United Nations, Patterns of Urban and Rural Population Growth, 1980. physical delivery facilities. For example, the health effects of clean drinking water are lost if the water is later contaminated by unsani- are from families that were able to support even if labor mobility falls short of equalizing tary practices. Such counseling should include their efforts to acquire education. More im- wages for workers with similar characteristics family planning advice, because many poverty portant, many of the poor in the labor force across sectors and firms. studies highlight the importance of family size are not unemployed or on involuntary short- Education and health. The best way to as a cause of urban destitution. time work but put in long hours at low wages, enhance the capacity of workers to earn better Land, infrastructure, and public services. or earn reasonable incomes but must use incomes is to improve their education and The growth of employment and income-earn- them to support large numbers of dependents. health. Towns and cities appear to be much ing opportunities depends on the availability Thus, while more jobs and more working better equipped to do this, in general, than of inputs other than labor. If access to land, hours will help some of the poor, others can rural areas. Yet there are serious gaps within work space, and basic infrastructure is insuf- be helped by increasing their productivity and cities; for example, access to primary edu- ficient or these are available in uneconomic income per hour worked. Those not in the cation in low-income urban neighborhoods can locations, entrepreneurs will be unable to labor force, namely, the too young, the too be very substantially below that of many rural expand businesses or create new ones. The old, and the infirm who are not part of areas. Some extra health risks are also in- same applies to essential inputs like electric- households that have working members, can- trinsic to urban life, such as increased risk of ity, water, waste disposal, and transport. If not be helped by purely economic progress; traffic accidents or the easier spread of com- these are in short supply or are unreliable, their probjems require other solutions. municable disease in high density settlements. the cost of doing business will be higher than The experience of migrants does not con- More generally, the incidence and severity it need be, and both employment and the form to earlier expectations either. They are of nutritional, especially caloric, deficiencies, productivity of labor will be depressed. not nearly as grossly overrepresented among is often higher in low-income urban areas For a variety of reasons, the public sector the unemployed, the underemployed, those than in many rural areas, and access of the in developing countries has assumed a much in the informal sector, and the poor as is urban poor to health services is often limited. wider role in the provision of land, infrastruc- widely believed. Some evidence even shows The impact of education on labor produc- ture, and public services than is common in them to do as well or better than urban tivity and earnings is well studied, clear, and developed countries. An equally wide range natives both in formal employment and in direct; returns are often highest for primary of reasons explains why it is not performing earnings across the board, at all education education. The impact of health is more well in this role. A detailed examination of and age levels. difficult to prove statistically but is not in what is wrong and why would lead us into doubt. It is most obvious through the intimate What can be done? general questions of urban management that connections between health, education, and go well beyond the focus of this article. It is If persistent urban poverty problems can- nutrition, and through the direct impact of clear, however, that inadequate provision of not solely or primarily be blamed on labor debilitating and endemic diseases on the earn- these inputs and services is widespread and market performance, and earnings are indeed ings of casual workers and on the level of holds back employment and productivity largely determined by labor supply and de- sustainable effort when at work. growth. This affects the smaller enterprises mand, one must act on these in order to raise Programs to improve the income-earning more severely than large ones, because they employment, productivity, and incomes. Re- capacity of the urban poor must improve are much less able to compensate for such form of overall national policies wherever access of the poor to education and health deficiencies on their own. The small and the 46 Finance & Development I March 1986 ©International Monetary Fund. Not for Redistribution very small enterprises are also the ones that substantive merit or unenforceable. Many that, wherever appropriate, the voices of the create most new jobs, even in developed rules are also ill-adapted to urban socioeco- small and very small enterprises are heard. countries. This makes remedial measures all nomic conditions and discriminate against Third, numerous interactions exist be- the more important. smaller businesses. For example, zoning reg- tween the actions proposed. For example, To be successful, such remedial measures ulations may prohibit business activity in low- relaxing zoning regulations in low-income res- will have to be tailored specifically to the income residential areas, but very small en- idential neighborhoods will reduce the need needs of individual cities and towns; gener- terprises cannot afford work space away from for workshops separate from people's homes; alizations are not very helpful. From a large home. They will thus be forced to operate lowering building standards will reduce needs number of diagnoses in specific urban areas, illegally or not at all, and both income and for credit; locating low-income housing close it appears, however, that the following should employment growth will suffer. to workplaces will reduce the need for and be part of any program to improve the situ- A variety of actions can be undertaken to cost of public transport; and so on. Because ation (in addition to more efficient manage- mitigate the effects of these constraints on of these interactions, the proposals for action ment, cost recovery, and pricing of public business development. Microenterprise credit must be seen as part of a program. services): schemes have shown very high rates of return This broad program can be implemented • Operation of public entities with a clear and could be more generally promoted. Con- by local authorities. Such authorities usually commercial purpose or promoting private siderable experience is now becoming avail- have substantial responsibilities in land, infra- initiatives in land development, factory and able on what it takes to make such schemes structure, and service delivery and mainte- workshop construction, public markets, and financially viable, such as a motivated financial nance, and they are best able to exploit softn; intermediary, preselection of borrowers by complementarities and to plan and coordinate • Systematic consultation with the busi- grass-roots voluntary organizations, mutual investments in these fields. While they should ness sector on issues such as investment repayment guarantees by borrowers, quick not, themselves, become financial interme- planning for infrastructure and services, the disbursement of loans, frequent and conve- diaries, they can use persuasion, leverage, location of commercial land, etc; and nient collection of repayments, and so on. and funds to encourage lending to small • Helping businesses adapt to service More generally, financial institutions could be businesses by existing financial institutions. deficiencies. helped to resolve biases against small- and They also have a clear role in the direct Direct business support and regulatory medium-sized businesses, and priority could support of business at the local level, and in reform. Flaws in markets for capital and be given to allocating foreign exchange for helping in other ways, such as in dealing with foreign exchange also hold back demand for vital spare parts. Where the need is estab- the bureaucracy (including their own), and in labor. Capital and foreign exchange are often lished, technical and managerial assistance to streamlining the regulatory framework and rationed and allocated by criteria that discrim- entrepreneurs could also be promoted. its enforcement. Many local authorities are inate against medium- and small-sized busi- Special assistance could be provided to help also active in education and health services nesses, even though these businesses could entrepreneurs deal with cumbersome bu- and more are entering these fields. Because hire more people and produce more output reaucratic procedures. More important, in responsibility for the various actions is likely with a given amount of capital or foreign cooperation with the business community, to be diffused among a number of institutions exchange. Similar discrimination arises from the regulatory environment should be re- and agencies, a city-level Economic Devel- overly burdensome loan approval, disburse- viewed and inappropriate regulations weeded opment Office with sufficient authority may ment, and collection procedures of financial out; regulations and procedures streamlined need to be created to implement the program. institutions and from the increasingly unten- to minimize costs and maximize gains for the Many cities in developed countries have been able perception that the small entrepreneur local economy while safeguarding essential active in these areas for some time, yielding cannot service loans on commercial conditions. public interests; and relevant staff should be useful experience for their counterparts in Paradoxically, special support programs to trained to understand the socioeconomic im- the developing world. small business often add to capital market plications of their regulatory activities. Many of the actions proposed have been flaws because of the way they are designed. Broad approach tried and much experience with them has Many of them provide subsidized credit, accumulated. They have not, however, been which keeps them small in relation to need Some common directions run through the tried in a coherent and cohesive package, and encourages their clients to move pre- various actions proposed above. First, their organized around the major objective of urban maturely into capital-intensive activities and target is the business sector and its labor employment and income promotion. This should technologies. Also, they often do not provide force as a whole. But many of them are likely now be done. It could produce significant working capital, because they are slow to to have their greatest value for the small and progress in meeting the challenge of poverty. recognize that working capital is often more the very small enterprises, because these important than investment finance for the are, on balance, the least able to compensate regular operation and growth of small enter- for the imperfections and constraints they prises. Similarly, they frequently fail to rec- face. Second, the ideas presented argue for Friedrich Kahnert ognize the importance of construction, trade, greater involvement of the business sector a German, directed the and services in urban employment, income, in such diverse areas as investment program- OECD Development and growth, and they restrict their lending ming and coordination, financing of land de- Centre's research before to manufacturing activities. This excludes velopment, factory and workshop construc- joining the Bank in 1977. financial support from businesses that typi- tion, provision of some public services, the Now a Senior Economist cally employ two thirds to three quarters of establishment of vocational training curricula in the Europe, Middle the labor force active in microenterprises. and teaching methods, reform of regulations, East and North Africa Region, he was Urban The regulatory environment also constrains and so on. Many of these activities are Employment Adviser until the growth and development of urban busi- designed to improve the public response to mid-1985. nesses, particularly the small ones. It is often the wide-ranging needs of the business sec- characterized by regulations that are without tor. Particular care must be taken to ensure Finance & Development I March 1986 47 ©International Monetary Fund. Not for Redistribution Entrepreneurship development: V. V. Bhatt Historically, wherever development has been in response to this need that Gujarat's financial ticipate in the program at their own cost. initiated and sustained, the agents of change institutions evolved a practical, result-ori- While each program is adapted to local have been entrepreneurs. It is they who ented program to develop such entrepreneurs. needs, the basic aspects of EDP are the same innovate—creating new products or proc- EDP was initiated in 1970 under the spon- and are summarized here. esses, finding new materials and markets, sorship of a state financial cum promotional Selection. Selection of trainees is the initial and designing new and more effective forms institution, the Gujarat Industrial and Invest- step in the entrepreneurial development pro- of organization. In many developing coun- ment Corporation. The program was run by gram. The identification process is supervised tries—particularly in backward areas within the GIIC, and its basic elements and char- by the program's trainer-motivators, whose these countries—the socioeconomic environ- acteristics were crystallized through repeated tools and techniques vary with the environ- ment has not been conducive to the emerg- experiments until 1978, when Gujarat's fi- ment in which they operate. In a rural area, ence of entrepreneurial talents. Latent ability, nancial institutions and industrial promotion for example, trainer-motivators work in a however, appears to exist in classes and agencies jointly sponsored a separate Center very personal manner. By contacting social areas without an entrepreneurial tradition. for Entrepreneurship Development to admin- workers, teachers, bankers, and other so- Based on the belief that potential entrepre- ister the program. (For a detailed account of cially respected but nonpolitical persons, they neurs can be identified and trained, financial the evolution of EDP and the initial problems develop a list of suitable candidates. Appli- institutions in Gujarat, India, have established it encountered, please see the publications cations are distributed personally and individ- the Entrepreneurship Development Program cited in the box.) The Center's success in ual interviews are conducted. In urban areas (EDP) to promote small enterprises by tap- turn convinced India's national financial insti- newspapers advertisements or posted notices ping this latent talent. The program's unique- tutions that the program was relevant for might be used to attract applicants and forms ness lies in its integrated approach, which other states and a national agency would be are often distributed through the mail. provides instruction and counseling from se- needed. The Entrepreneurship Development Applications elicit basic information about lection through to the actual operation of Institute of India (EDI-I) was set up in 1983 the background and experience of the can- enterprises. This article sketches the pro- to conduct research, offer consultancy and didate. At successive stages, applicants are gram's evolution, and briefly reviews its training, and assist state-level agencies in evaluated, on the basis of behavioral science methods, results, and possible applications in carrying out their programs. techniques, to determine the extent of their other regions. Throughout the program's evolution its entrepreneurial capacity. Testing is meant to In India in the 1960s a great deal of approach has remained grounded in the belief measure, among other things, candidates' discussion centered upon whether growth that effective psychological-behavioral testing motivation to achieve, their capacity to take could resolve income and regional disparities can identify potential entrepreneurs and that risks and resolve problems, the extent of and whether the fruits of development were careful guidance in the selection of suitable their positive self-image, and their interest in being concentrated in a few areas and classes. enterprises and appropriate practical training setting up businesses by trying something India's development strategy was altered in can develop successful entrepreneurs. The new or unconventional. Personal interviews 1969, as a result of that debate, to give program has been designed to strengthen conclude the selection process, permitting a particular emphasis to industrial promotion in potential entrepreneurs' confidence in their committee that includes trainers and business relatively backward states and districts. It own ability; to impart necessary skills and and academic experts to make a final assess- was soon clear, however, that fiscal and knowledge about financial, technical, and man- ment of entrepreneurial aptitude and a de- financial incentives by themselves would be agerial aspects of business; to provide infor- termination of what will be needed in training. insufficient. Technical assistance would also mation and assistance in identifying, formu- Training. EDP emphasizes practical, hands- be required if nontraditional sources of en- lating, and implementing projects; to help on experience. It is designed to motivate trepreneurial talent were to be tapped. It was secure the required financial and technical participants, guide them in the selection of assistance; and finally to offer follow-up serv- appropriate opportunities, and develop their ices to assist them with the teething problems management skills. The program uses be- that accompany the operation of a new havioral and psychological techniques to in- enterprise. tensify the desire to achieve, to develop the EDP is characterized by an emphasis on ability to define goals realistically and to fulfill For detailed information, see: operational rather than academic training, them, and to increase self-awareness and V.y. Bhatt, Financial Institutions and flexible design of training programs to meet confidence. In helping trainees find the ap- Technical Consultancy Services: The Indian the specific needs of participants, and active propriate enterprise, EDP counsels trainees Experiment in Small Enterprise Promotion, involvement of the financial and business on available opportunities and helps them EDI Seminar Paper 24, World Bank, 1981. communities. The program directly ties its match their interests with projects that may V.G. Patel, Entrepreneurship Develop- training to the setting up of enterprises and already have been identified by technical ment Programme in India and Its Relevance tailors its techniques and strategies to the consultancy agencies or are known to be for Developing Countries, forthcoming EDI socioeconomic and cultural contexts in which candidates for start-up funding. Participating Seminar Paper, World Bank. it operates. Costs are kept down, and training experts from management schools and entre- Copies are available, free of cost, from preneurs are on hand to explain to trainees EDI, World Bank, Washington, DC 20433, kept practical, through the participation of USA. established entrepreneurs, businessmen, and what will be required to manage a small others with in-the-field experience, who par- business. 48 Finance & Development ! March 1986 ©International Monetary Fund. Not for Redistribution Experience in remote areas of Sikkim and India's experience in the Andaman and Nicobar Islands has demonstrated the effectiveness of the pro- gram in areas with little indigenous entrepre- neurship, while its performance in Kerala, where literacy rates are high but most grad- The training process is centered around a EDI-I to select trainer-motivators. Candi- uates seek "employee" positions, indicates project exercise, which involves participants dates are screened for (1) aptitude for de- that sociocultural preferences can be influ- in the conduct of market surveys and the velopment work; (2) faith in people's capacity enced and a new breed of entrepreneurs can preparation of project plans. Trainees are to change; (3) a flair for public relations and be developed. exposed to the thought processes and field field work; (4) an interest in understanding Equally important has been the program's experience necessary to make a rational choice people and getting along with them; (5) knowl- effectiveness in drawing entrepreneurs from of business, product line, market mix, and edge about the area and its people; (6) diverse sources. The conventional domination related aspects of the project. The exercise dedication, initiative, patience, resourceful- of traders and owners of industries has been culminates with the completion of a project ness, and a proper sense of discrimination; significantly reduced. New entrepreneurs have report. Ideally commercial banks and other and (7) a capacity to work under stress. emerged from employees (45 percent), trad- supporting institutions are brought into this Experience has indicated that candidates with ers (20 percent), young engineers and edu- process at an early stage. Finance can thus high academic qualifications or long industrial cated unemployed (25 percent); and farmers be raised for the project, and a link thereby experience but without the requisite behav- and others (10 percent). Though these per- established between the completion of train- ioral and personality traits have not made centages vary among groups depending upon ing and the support of financial institutions effective trainer-motivators. local conditions, the program has demon- for the implementation of the project. Follow-up. The responsibilities of the pro- strated an ability to reach new groups and Training normally entails a 150-hour pro- gram, particularly those of the trainer-moti- develop new sources of entrepreneurship. gram, which is flexible and arranged to meet vator, extend beyond the completion of the EDP's success, particularly in areas with- the needs of participants. Its structure varies project. Once businesses have begun oper- out a history of indigenous entrepreneurial from six-week full-day programs for recent ations, trainers generally visit the new entre- activity, has attracted the World Bank's at- graduates and other unemployed participants preneurs to identify operational problems and tention. The program's integrated approach to three-month evening programs for a mixed assist them in obtaining what help might be and its adaptability to local needs appears to group of working and nonworking individuals. needed from a network of experienced en- hold promise for other regions, such as Africa, The cost of training may vary also, from trepreneurs and supporting institutions that where a scarcity of indigenous entrepreneurs approximately Rs 3,000 to Rs 4,000 ($280- has been established by the program. has constrained development efforts. 380) per trainee, depending on the nature, Organization. Currently 50 different agen- To share the results of India's program and timing, and duration of training. A token fee cies in 20 states are conducting Entrepre- to explore the possibility of adapting it in of Rs 100 to Rs 150 ($10-15) is charged to neurial Development Programs in India. The other countries, the Economic Development trainees to ensure their commitment to the other states, however, have still not evolved Institute of the World Bank sponsored a program. The remaining costs are met by an institution like the CED, which has enabled workshop for participants from eight African the supporting agencies, particularly state Gujarat to accumulate experience and learn countries in January 1985. The workshop, governments, industrial promotion agencies, from mistakes and experiments. held in Ahmedabad, Gujarat, in collaboration and financial institutions. The CED in Gujarat conducts 90 programs with EDI-I and the Industrial Development Faculty. Usually the program uses no full- each year, while EDI-I assists agencies in Bank of India, encouraged participants to time faculty, other than a trainer-motivator the other states in conducting 30 programs develop action plans for their respective coun- supported by an expert in project formulation. each year. Those trained in the EDI-I style tries. As a result of the workshop, pilot Most aspects of the actual training are pro- numbered about 70 in 1983; the EDI-I trains programs in EDP are already being formulated vided by managers or executives; experts 30 trainers every year and along with them in Kenya and Ghana. from state industrial promotion agencies, fi- conducts demonstration programs for poten- The World Bank's EDI sponsored a second nancial institutions, and technical consultancy tial entrepreneurs in various states of India. workshop for top-level officials from Anglo- organizations; and small-scale entrepreneurs. Results. Between 1970 and 1984, 312 pro- phone Africa in Ahmedabad in January 1986. Experts are mobilized by the trainer-moti- grams in entrepreneurship development were A similar workshop for Francophone African vators, who also arrange field trips and in- conducted at 130 locations in Gujarat, with a officials is likely to be held in Abidjan, in plant training in relevant enterprises. In- total of 7,710 participants. The program's collaboration with African Development Bank house core teams are formed from the group effectiveness has varied with region and cir- and the EDI-I in May 1986. Each of these of trainers or experts when resources from cumstance, but on average 60 percent of sessions is conducted by senior staff of the industry or trade are not locally available. The those trained went on to set up their own EDI-I under the sponsorship of the Bank's full-time trainer-motivators provide the back- businesses and some 75 percent of these EDI. The objective is to find out how India's bone of the program. They organize and enterprises have been profitable. Simple sta- EDP experience can be adapted to specific administer programs and oversee the entire tistics, however, may not convey the nature conditions in African countries. It should be training process. Their multidimensional work of the program's impact. Many of those emphasized, however, that for a program of includes aspects of an administrator, liaison trained—unemployed graduates, tribals, this nature to succeed, it is essential that it officer, training manager, trainer, counselor, women, poor artisans, skilled but frustrated be sponsored by the financial institutions and and technical advisor. employees—created new opportunities not industrial promotion agencies; without their Because of the importance of the position, only for themselves but for others. Their active support an integrated program of en- and the critical impact of individual person- success, in addition, had a significant dem- trepreneurial development is not feasible. alities, special tests have been developed by onstration effect on potential entrepreneurs. Finance & Development I March 1986 49 ©International Monetary Fund. Not for Redistribution Book Willem H. Buiter and Richard C. Marston (editors) scale macro model. ends relationships make macroeconomic International Economic Policy Gillis Oudiz and Jeffrey Sachs in their policy coordination impossible." Coordination paper give particular attention to the no- Ralph C. Bryant addresses the relation- Cambridge University Press, New York, 1985, xvi + tions that governments have a rather short ship of uncertainty to cooperation rather 386 pp., $44.50. horizon and in any event are constrained differently. "In the research discussed at This volume offers the collected papers by their presumed inability to bind their this conference, the players know how and comments presented at a conference successors. economic forces are transmitted from one on policy coordination organized jointly by Two papers address the effects of US nation to another...and each player has the the Centre for Economic Policy Research policy, especially fiscal policy, on the world same model in mind. The practical situation and the National Bureau of Economic Re- economy. Jacob A. Frenkel and Assaf confronting policy makers in national gov- search. With five of the eight main papers Razin in their theoretical paper evolve a ernments is of course entirely differ- using game theory as an integral part of rational expectations model that features ent. . .could we try to see how our inferences their analyses and only one eschewing the intertemporal solvency constraint upon about strategic behavior and the potential formal mathematics, the book is of neces- government behavior and the prominent gains from cooperation may be altered if sity technical and aimed at specialists. This role of wealth or permanent income in we allow explicitly for uncertainty about remark is not intended to condemn the determining private spending. Their anal- what the true model is?" book but to warn those who might be ysis opens up the possibility that the effects International economic policy coordina- attracted by the title, of what is in store for of an increase in fiscal spending in the tion is of course of great interest to the them. United States upon spending in other coun- International Monetary Fund, one of whose Consider first the group of papers that tries could be negative because of the most important responsibilities is to pro- invoke game theory. Max Gordon's open- higher world interest rates that would be mote such coordination. The Fund may ing paper is concerned more with exposi- induced. promote coordination in several ways. It tion of concepts than with drawing appli- Patrick Minford sketches an elaborate may contribute to the formulation of the cable policy conclusions. He develops a theoretical model that yields a broadly rules of the game, as for example when two-country model in which real wages, similar possible result of US fiscal policy. nations are prepared to negotiate what is prices, employment, and terms of trade At one stage he uses his model to consider acceptable, responsible, behavior with re- are key variables and draws on game the effects of a rise for one year in the US spect to exchange markets. It may contrib- theory to introduce ideas of strategy in budget deficit, financed without an increase ute by refining and circulating relevant macroeconomic policy making. He dis- in the money supply, and he concludes information and analyses. It may also help cusses the scope for coordination first in that "output abroad falls instead of rising by monitoring performance and reporting the static context and later makes allow- as conventional theories would indicate." upon the degree to which countries may ance for certain intertemporal effects. Finally, as one who has been involved be judged to be operating within the rules Barry Eichengreen gives an interesting in the practice of cooperation at the national of the game. Finally it may, to some extent, thumbnail sketch of issues of coordination level and in the European Economic Com- provide the services of a mediator seeking that arose in the interwar period in con- mission, Tommaso Padoa Schioppa gives to convince countries to alter their strate- nection with the operation of the gold a very readable account of the EMS gies so as to raise the probabilities that standard, the Genoa Conference of 1922, experience. cooperative solutions to international eco- and the tripartite monetary agreement of The panelists' comments contain several nomic policy "games" will be achieved. 1936. He was moved to bring static game nuggets of wisdom. Matthew B. Canzoneri Contributors occasionally mention the theory to his analysis because "the very suggests "that the first order of business role of rules of the game; some acknowl- concept of conflicting objectives, much less in policy coordination research is to achieve edge the importance of information. Con- strategies such as leadership and coop- some sort of consensus on the sign and spicuously lacking, however, is attention eration, are wholly incompatible with fa- symmetry of policy spillover effects...the to the role of a referee, or a party, that by miliar attempts to model the gold standard's assumptions made in this regard are far common consent undertakes surveillance. operation." more important than distinctions between Equally, there is no discussion of the role A highly formal piece by Marcus Miller utility functions and game theoretic solution of the mediator in the policy conflicts that and Mark Salmon serves as a handy intro- concepts that dominate much of our pres- feature in the game situation. A study, duction to a variety of key concepts in ent discussion." Richard N. Cooper makes theoretical and empirical, of the role of the dynamic game theory. The paper by David a similar point: "Economists these days mediator—of surveillance—in the interna- Currie and Paul Levine has much the same sometimes cannot agree even on the sign tional monetary system would be of interest structure in that a quite formal analysis of the effect of a particular policy instrument and could be of benefit. using control and game theory is followed on target variables, much less the magni- by illustrations based on a rather small- tude. These sharp disagreements on means- Wm. C. Hood 50 Finance & Development / March 1986 ©International Monetary Fund. Not for Redistribution Stephen R. Lewis, Jr. tax policy in developing countries. Its out- the effects of, say, personal tax on labor Taxation for Development— standing characteristics are simplicity and supply and saving are based on the implicit Principles and Applications relevance. Nothing more than an acquaint- assumption that the entire burden falls on ance with introductory economics is re- labor. And second, when presenting his Oxford University Press, New York, 1985, xix + 306 preferred policy package for tariffs, Lewis pp., $29.95. quired. The issues tackled, however, are real and the environment in which the recommends a uniform import tariff. Since Should allowances for dependents be de- analysis is conducted is clearly that of a such a policy causes a shift in the exchange ducted from taxable income or from tax developing country. Much of the analysis, rate that discriminates against exporters, liability? Should capital allowances be for example, assumes a small, open econ- Lewis supplements his proposal with a granted when an asset is purchased, omy with a relatively weak tax administra- recommendation for a general export sub- throughout the life of the asset, or when tion and with a large number of unrecorded sidy close to the level of the import tariff. the asset is fully depreciated? Is a single- and even noncash transactions. The book's While this may indeed eliminate the dis- stage sales tax preferable to a multistage three major sections deal with taxes on incentive to exporters, it also reduces rev- one? At what stage—manufacturer's, income, wealth, and commodities. Readers enue from the taxation of foreign trade to wholesale, or retail—should one impose a are encouraged to test their understanding zero or thereabouts. single-stage sales tax? These and similar by tackling the more than 50 problems These blemishes reflect a tendency to questions of practical tax policy are Pro- spaced throughout the volume. ignore or downplay some of the insights fessor Lewis' subject. His answers draw By and large, Lewis' analysis and rec- from more explicitly general-equilibrium on his experience as an advisor in several ommendations are sensible and pragmatic. approaches. This notwithstanding, Lewis' developing countries and derive from a There are, however, two important excep- volume is well worth reading by all those consistent application of standard supply- tions. First, in contrast to his treatment of concerned with tax policy in developing and-demand theory. wealth and commodity taxes, Lewis does countries. The book is designed to provide practical not explore the ultimate incidence of in- guidance to those charged with formulating come taxation. As a result, his analysis of Lyn Squire D.P. Chaudhri and Ajit K. Dasgupta imperfections, are discussed extensively). standards." This development has de- The study's examination of income distri- monstrably improved incomes, and the Agriculture and the bution and poverty reveals a "dent on distribution of incomes, even though the Development Process poverty" achieved through the Green Rev- proportion of households wholly dependent Croom Helm, Dover, NH, 1985, 216 pp., $34.50 olution, and indicates that both poverty and on income from wage labor has more than (cloth). inequality have decreased, at least in the doubled (from 7.7 percent in 1950-51 to Belying its title, this scholarly and inform- latter half of the period. This is a very 15.8 percent in 1975). There is also clear ative little book deals exclusively with the important, though carefully qualified, evidence of benefits for the rest of the Punjab, providing an empirical review of conclusion. economy, state and national, through its its agricultural development from 1950 to The book closes on a more forward- strong backward and forward linkages. For 1980. Since many of the consequences of looking note, examining emerging patterns those who would gainsay the benefits of the Green Revolution are stifl disputed in in growth and structure, reviewing capitalist the Green Revolution, this is powerful some quarters, the achievements of the tendencies in Punjab's development, and counter-evidence. Indian Punjab bear witness to one of the examining the evolving sectoral structure Graham Donaldson outstanding rural development success of output and employment in agriculture stories of the postwar period (one that and manufacturing. An analysis of the vitally affected India's ability to feed its Punjab's contribution to national develop- ment provides the final chapter. growing population, making it virtually self- C. Fred Bergsten, William R. Cline, and John sufficient in basic foodstuffs by the late Given the book's empirical approach Williamson 1970s). (based on the constructs of input-output Bank Lending to Developing An introduction provides historical con- analysis and a central planning perspec- Countries text, contrasting the performance of East tive), it is unfortunate that so little is re- and West Punjab in the first and second vealed about the role of economic man- The Policy Alternatives halves of the twentieth century, but the agement in the development process. For Policy Analyses in International Economics No. 10, book is principally concerned with the past instance, the irregular spurts of growth in Institute for International Economics, Washington, DC, 1985, 221 pp., $12. 30 years in India's Punjab. Its systematic agricultural output are noted without expla- analysis of the growth of agricultural inputs nation, although an analysis of changes in Donald R. Lessard and John Williamson and outputs, using time series of available prices and of farmer incentives over the Financial Intermediation data, shows inter alia that the output of "all 30-year period might prove very revealing. Beyond the Debt Crisis crops" increased about 300 percent during In fact, the word "price" appears only once Policy Analyses in International Economics No. 12, this period. in the text, and that in relation to food Institute for International Economics, Washington, The book broadly surveys public sector consumption patterns. But of course this DC, 1985, 120pp., $12. investment, demographic trends and tran- reflects the author's Marxian perspective. sitions, and product and factor markets The book's merits, however, include con- The international debt crisis has stimulated (although only one page is devoted to the vincing documentation "that agricultural numerous new (and some not-so-new) quite remarkable product markets, while development in the Punjab has been truly proposals for improving the organization factor proportions and labor and capital remarkable not only by comparison with of the international capital market. These markets, as well as their fragmentation and the period before independence but by any two monographs perform the extremely Finance & Development I March 1986 51 ©International Monetary Fund. Not for Redistribution useful service of categorizing and analyz- disbursements, extension of cofinancing, spreads and fees, multiyear rescheduling, ing these proposals. The Lessard and and approval of the Multilateral Investment lengthening maturities, currency conver- Williamson study reviews the medium-term Guarantee Agency. Also endorsed are the sion of existing debts, private and official financing needs of debtor countries and creation of new types of bonds and mutual insurance schemes, World Bank cofinanc- analyzes the entire range of financial in- funds for investment in developing coun- ing, establishment of a secondary market struments available, while the study by tries, relaxation of developing country re- in syndicated loans, and exemption of trade Bergsten, Cline, and Williamson concen- straints on foreign direct investment and finance from rescheduling. The authors trates on ways to manage both outstanding equity purchases, resumption by industrial consider more problematical a number of external debt owed to commercial banks countries of official export credits after a proposals for payments smoothing and and future lending. There is some overlap country initiates adequate adjustment interest capitalization, although some of between the two studies. measures, and encouragement in the in- these may be required in the contexts of Lessard and Williamson build their dis- dustrial countries of the expansion of for- especially difficult restructuring cases or a cussion of alternative financial instruments eign investments of domestic nonbank in- new debt crisis. Options dealing with pay- around four criteria: cash-flow matching, stitutions (e.g., pension funds). ments according to capacity and debt relief incentives to borrower performance, im- Bergsten, Cline, and Williamson discuss are considered less likely to be acceptable pact on local financial markets, and con- 24 options related to the modalities of to lenders. tract enforceability. The detailed discussion commercial bank lending in terms of four These works are useful both as analyses of alternative forms of equity financing is criteria: impact on debtors, impact on banks, of complicated issues and as reference especially useful. Concluding recommen- implications for accounting outcomes and works. Their value in the latter respect dations include, inter alia, a number related bank regulation, and systemic effects. Op- would, however, have been enhanced by to World Bank operations: a general capital tions classified in "recent changes and subject indexes. increase for the Bank and the International extensions," and considered generally fa- Anthony Lanyi Finance Corporation, acceleration of Bank vorable in their impact, include reducing Arnold Pacey and Philip Payne (editors) on the question of resources, although he men- Henry Butt and Bob Palmer Agricultural Development and tions, with obvious approval, other approaches Value for Money in the Public Nutrition that would entail a much greater commitment Sector of financial resources. The categorization of Westview Press, Boulder, CO, USA, 1985, 255 pp.,$25. The Decision-maker's Guide balance of payments problems may be useful, This excellent collection fills an important need and for some almost every problem is either Basil Blackwell, New York, 1985, 187 pp., $45 (cloth), $19.95 for a review of the major issues relating to both "structural" or exogenous. But the crucial point (paper). agriculture and nutrition. The book examines is that, with or without the Fund, reality must be This interesting little book by British members food systems; the interaction of health, work, faced and hard choices made: sooner or later of the Price Waterhouse international account- and family structures; and indicators and meas- countries must learn to live within their means. ancy firm gives a short account—with many urements of malnutrition. It also reviews the The author concentrates on the role of the Fund examples—of how the United Kingdom and causes of malnutrition and presents a framework as lender; the continuing policy dialogue with some other industrial countries are trying to for interventions. The broader agricultural is- members, the considerable technical assist- promote cost reduction in the public sector. Much sues, such as agrarian change and poverty, ance, and the coordinating and catalytic role of of the value-for-money approach is good com- markets, and research, are also discussed. The the Fund in debt problems should also be mon sense, as some examples in the book editors have managed to integrate the contri- mentioned. The author refers to the "pinpoint show. Some of its applications, however, are butions into chapters that read as if written by targetry" underlying the Fund's policy approach thinly disguised political choices about the size a single author (indeed, one of the editors (p. 116). Really? and composition of public expenditure, which coauthored many of the chapters). In sum, a the authors' enthusiasm brushes aside. The book suitable for economists wishing to under- relation between value-for-money and wider stand the nutritional issues related to agricultural Jacques Nusbaumer economic efficiency is also not really discussed. development and for nutritionists interested in Les Services A useful quick guide, albeit written on the stand- acquiring a broader, more policy-oriented per- ard management-consultancy assumption (which Nouvelle Donne de L'economie spective of their field. may well be correct) that most "decision makers" Economica, Paris, 1984, 142 pp., F 75 (paper). have short attention spans and rather simple Wilfred L. David This is a thoughtful and original attempt to minds. The IMF Policy Paradigm examine sen/ices, their present and future rel- evance in advanced and developing economies, Michael Connolly and John Me Dermott (editors) The Macroeconomics of Stabilization, and the problems they pose in economic anal- The Economics of the Caribbean Structural Adjustment, and Economic ysis and policy making. The author starts with Development Basin a deceptively simple question: how can we Praeger, New York, 1985, xiii + 140 pp., $34.95. define a sen/ice? He proceeds to look at the Praeger, New York, 1985, xv + 355 pages, $41.95. This slim volume is a well-written, though uneven valuation of services, the future of service so- A misleading title for a volume that lacks focus and at times critical, exposition of the intellectual cieties, and the consequences—from the stand- and suffers from great variations in the quality framework of Fund-supported programs. Whether point of economic policy—of the growth in the and readability of its articles. Many of the 15 or not a "paradigm" underlies Fund-supported share of services in advanced economies. The papers, from two separate conferences, deal programs, and how it affects policy recommen- book's concluding chapter offers quantitative with theory and are country related only in the dations, is debatable. In most situations, be- evidence on the production of, and international sense of using data to illustrate or test theory. cause there is neither an array of choices nor trade in, services. As a primer on services, this Most are state-of-the-art treatments of monetary ample financial resources, Fund officials have small book should appeal to a large audience. and exchange issues primarily of concern to to be pragmatic within the confines of the nature It is clearly written and its analysis is careful. central banks in open economies: currency sub- and gravity of the problem, and the availability Translation into other languages would make stitution, dual exchange rates, and interest rates. of resources. The author is conspicuously silent the book available to a broader audience. The themes of small ness and openness ara 52 Finance & Development I March 1986 ©International Monetary Fund. Not for Redistribution admirably treated by A. Harberger and A. Krue- ger—tax policy and trade policy under such Export advice conditions, respectively. The former reads like a lecture; the latter like a good textbook. Both Anil Sood and Harinder Kohli's excellent should be required reading for policy makers in article, "Industrial restructuring in developing I14IH&] small countries. The papers on debt are undis- countries" (December 1985), failed to draw tinguished; the one on Mexico suffers from the one conclusion that jumped out at me. After Credit and Investment Insurers, I have seen author's (G. Ortiz) being far too close to what noting the pressure on developing countries how such programs have helped the OECD happened. A paper by M. Blejer and M. Khan to increase their manufactured goods exports countries. We should now try to encourage demonstrates that in the Caribbean public in- and the fact that it is critical to develop others to reap their benefits. vestment has been helpful where it provided infrastructure but detrimental where it competed efficient financial institutions to help dissem- with the private sector. A real gem, however, is inate technology, management, and market- Delio E. Gianturco I Mats Lundhal's penetrating analysis of the de- ing know-how, the authors do not mention Arlington, VA, USA velopment of the "kleptocracy" in Haiti over the the vital role that export credit, guarantee, past century. This one paper makes the book and insurance institutions can play in this truly worthwhile. process. Harinder 5. Kohli and AnU Sood reply: Some units of the World Bank and IFC are We agree with Mr. Delia Gianturco that in aware of this potentially enormous stimulus many circumstances efforts to promote exports Other books received to a balanced and dynamic industrial devel- of manufactured goods need to be supported by Listed below are some of the books we received opment effort, as reflected in new loan ap- the development of effective export credit and in 1985 but were unable to review for lack of provals, but this awareness does not seem insurance institutions. Such institutions can space. to be widespread. A key part of industrial provide vital services needed by private export- and financial restructuring should be to en- ers. In the increasingly competitive, interna- Volker Bronschier and Christopher Chase-Dunn, courage improvements in export finance in- tional markets, the availability of appropriate Transnational Corporations and Under- stitutions which will "level the playing field" credit terms is an important factor in the development, Praeger, New York, 1985, xii + I79 pp., $29.95 (cloth). for borrowing countries and permit them to purchasing decisions of importers. In addition, Ragaei El Mallakh, Qatar Energy and Devel- maximize their industries' comparative ad- insurance institutions can help exporters to opment, Croom Helm Ltd., Dover, NH, USA, vantages in international trade. It is no co- manage better the risks associated with exports. 1985, 184pp., $31 (cloth). incidence that the newly industrializing coun- At the same time, however, experience in- Peter Enderwick, Multinational Business and tries with the most impressive export growth dicates that such institutions cannot increase Labor, St. Martin's Press, New York, 1985, have all established export credit agencies manufactured exports by themselves; the policy 234 pp., $27.50. with a full array of financial programs. and incentives framework must make exports Bart S. Fisher and Kathleen M. Harte, Barter The World Bank can play a key advisory profitable and attractive to individual produc- Praeger, New York, in the World Economy, role to developing countries with regard to ers, compared to sales in domestic markets. 1985, 293 pp., $39.95 (Cloth). Considering the magnitude of economic dis- Jean-Claude Garcia-Zamor, Public Participa- export credit, guarantee, and insurance pro- tion in Development Planning and Man- grams, and should consider assistance to tortions in most developing countries, which agement—Cases from Africa and Asia, these types of institutions as part of its made exports relatively unattractive in the past, Westview Press, Boulder, CO, 1985, xi + restructuring efforts. As a former Vice Chair- such policy reforms must precede or accompany 264 pp., $22. man of the US Export-Import Bank and Vice the development of specialized institutions, as Stephen Guisinger and Associates, Investment President of the International Union of Export we emphasized in the article. Incentives and Performance Require- ments—Patterns of Trade, Production, and Investment, Praeger, New York, 1985, xi + Statement of Ownership, Management, and Circulation required by 39 USC 3685. 325 pp., $35.95. la. Title: Finance & Development. 1b. Publication No. 123-250. 2. Date of filing: 9/13/85. 3. Frequency: James J. Hughes and Richard Perlman, The Quarterly. 4. Complete mailing address of known office of publication: Finance & Development, International Economics of Unemployment—A Compar- Monetary Fund, Washington, DC 20431. ative Analysis of Britain and the United 6. Complete mailing address of the headquarters of general business offices of the Publisher: International States, Cambridge University Press, New Monetary Fund and the International Bank for Reconstruction and Development, Washington, DC 20431. 6. Full names and complete mailing address of Publisher, Editor and Managing Editor: Publisher: International York, 1984, 258 pp., $39.50 (cloth), $12.95 Monetary Fund and International Bank for Reconstruction and Development, Washington, DC 20431. Editor: (paper). Bahrain Nowzad, same address; Managing Editor: Shuja Nawaz, same address. Charles Lipson, Standing Guard—Protecting 7. Owner: International Monetary Fund and the International Bank for Reconstruction and Development, Foreign Capital in the Nineteenth and Washington, DC 20431. 8. Known bondholders, mortgagees, and other security holders owning Or holding 1 percent or more of the Twentieth Centuries, University of California total amount of bonds, mortgages or other securities: None. Press, Berkeley, CA, 1985, xvii + 330pp., 10. Extent and Average No. of copies each Actual No. of copies of single issue $34,95. nature of circulation issue in preceding 12 months published nearest to filing date Hubert Schmitz, Technology and Employment Practices in the Developing Countries, A. Total No. of copies 56,420 54,540 B. Paid and/or requested circulation None None Croom Helm Ltd., Dover, NH, USA, 1985, C. Total paid and/or requested circulation None None 254 pp., $32.50 (cloth). D. Free distribution by mail, carrier UN Economic Commission for Western Asia, or other means International Migration in the Arab World, Samples, complimentary and other free copies 54,586 53,576 Volumes I and II, 1982, x + 649 pp. and E. Total distribution (sum of C and D) 54,586 53,576 iii +*536 pp. F. Copies not distributed 834 964 Miguel S. Wionczek, Politics and Economics G. Total (sum of E,F) 55,420 54,540 of External Debt Crisis—The Latin Ameri- I certify that the statements made by me above are correct and complete. can Experience, Westview Press, Boulder, Shuja Nawaz, Managing Editor CO, 1985, xiii + 481 pp., $37.50. Finance & Development I March 1986 53 ©International Monetary Fund. 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