9. Panel Discussion
- Georg Winckler
- Published Date:
- September 1992
I would like to thank the Austrian National Bank and the IMF for organizing this seminar and for the opportunity to make a few remarks on the role of the World Bank in support of the economic transformation in the countries of Central and Eastern Europe.
The overall goal of the World Bank Group in these countries, as in other parts of the world, is to support government efforts to achieve sustainable, market-based, and equitable growth. In pursuit of this goal, World Bank Group programs are focusing on the following priority development areas: enterprise reform, development of new institutions for economic governance, modernization and renovation of infrastructure, development of effective systems of social support, and rehabilitation of the environment. In sum, we are trying to support systemic reform and stimulate a rapid supply response. But the links between systemic transformation and macroeconomic stability require that we also ensure that the macroeconomic and financial policies in these countries will be supportive of programs in these priority areas.
This seminar properly focused on the reform policies undertaken by the countries themselves. It is clear, however, that in the last year external shocks are compounding the difficulty of systemic reform and macroeconomic management. Problems in all these countries have been aggravated by the demise of the Council for Mutual Economic Assistance (CMEA), the uncertain situation in the U.S.S.R., and the temporary oil price shock and, in some cases, the disruption in oil supplies arising from the Middle East crisis.
As a consequence of these developments, financing requirements for the region have increased. Based on assumptions about the future evolution of oil prices and on current expectations about post-CMEA trade arrangements, on private capital flows and the extent of adjustment the countries would undertake, we now estimate financing requirements for the region at $27-28 billion in 1991 and only slightly less in 1992-93.
To address these problems, our efforts have two major dimensions: first, mobilization of external resources through direct lending and cofinancing with others; second, policy advice and technical assistance in support of the reform effort.
Lending to the region goes back many years, but it has increased dramatically in the last two years. In fiscal year 1990, the Bank lent a total of $1.8 billion to Hungary, Poland, and Yugoslavia—up from a little over $500 million two years earlier. In the current fiscal year, which ends in June, the Bank expects to lend about $2.5 billion to these countries, plus Bulgaria, Czechoslovakia, and Romania. Lending for the fiscal year period 1991-93 to these six countries is expected to come close to $9 billion. This is an estimate of what the World Bank may be able prudently to commit in response to adequate progress in policy reform and expansion of domestic absorption capacity. Obviously, it is conditioned on the maintenance of appropriate economic policies in recipient member countries. The focus of the conditionality is on structural and institutional reforms, especially the introduction of market forces in these economies.
Specific investment projects represent the prime vehicle for combining Bank advice, delivering technical assistance, and securing the appropriate financial flows, including through cofinancing. At least 60 percent of our program will be for specific investments in agriculture, industry (including privatization and restructuring), the financial sector, infrastructure, energy, environment, human resources, and technical assistance to strengthen economic management. The remainder, which is up to 40 percent of anticipated commitments, could be in the form of quick-disbursing balance of payments support, through structural and sectoral adjustment loans, or through hybrid loans with quick-disbursing components. In addition, the International Finance Corporation expects to be able to commit $500 million during fiscal years 1991-93 through loan and equity investments in private sector activities.
The dollar amounts of the lending efforts tend to overshadow what, in my mind, may be the even more important technical assistance activities of the Bank. The Bank is focusing its technical assistance on various aspects of institution building and systemic reform. Perhaps most notable among these are our efforts to strengthen the management of key sectors, in particular, energy, the environment, and finance, as well as to facilitate enterprise restructuring and privatization. Policy advice—mainly related to the management of the transition to a market system—is provided in the context of structural adjustment operations either already in place, such as in Poland and Hungary, or in preparation, such as in Czechoslovakia and Bulgaria.
The region’s needs for both financial and technical assistance clearly deserve and have already resulted in significant mobilization of the resources of the international community. The Bank’s intention is not only to collaborate actively with other agencies but also to develop project pipelines even beyond its own financing capacity as a vehicle for collaboration and cofinancing. We are currently working intensively with many bilateral and multilateral donors, including the European Bank for Reconstruction and Development and the European Community, in order to develop a greater number of collaborative efforts in the future. In fiscal year 1991, which ends in June, we are planning to cofinance several projects—with the European Investment Bank and with the Export-Import Bank of Japan—in which the World Bank’s contribution would be about $1 billion, but in which the total financing would be almost double that amount. And, of course, we continue our active and continuous collaboration with our colleagues from the IMF, whose programs help ensure the basic economic stabilization that is a precondition for lasting systemic reform.
Restoring sustained growth and development is a long-term process and one cannot be discouraged by the temporary and often unavoidably large costs of transition. The World Bank is an institution that focuses on the long term. We are now concentrating our efforts in this region to facilitate the transition to a market economy. And when the transition is completed, we expect to continue to support effective development programs for as long as our assistance is needed by our member countries.
John Odling Smee
Official international support can take various forms, the most important being financial assistance, technical assistance (including training), and access to markets. The countries of Central and Eastern Europe are seeking all of these. The focus in what follows is on the International Monetary Fund’s role in providing financial assistance. But two brief remarks might first be made about technical assistance and access to markets.
The Fund is providing technical assistance to the countries of Central and Eastern Europe on a large scale by the standards of its assistance to other countries. The assistance covers all the main areas of the Fund’s expertise, especially central banking and the monetary system, the budgetary system, tax reform, statistics (especially in the monetary and balance of payments areas), and macroeconomic policy analysis. The Fund is also actively involved in training government officials. Finally, the Fund will very shortly have resident representatives in all six member countries in Central and Eastern Europe. Part of their work involves technical assistance.
Access to western markets is very important for Central and Eastern Europe. It is necessary if they are to integrate their economies quickly into the world economy. This integration is an important part of the transition to market economies. Although the Fund is not directly involved in trade issues, it supports greater access and fewer barriers to trade in general.
The Fund’s Financial Assistance
The Fund is prepared to extend $5 billion of financial assistance to the countries of Central and Eastern Europe in 1991. In practice the amount could turn out to be less if oil prices stay at around current levels. This is a large amount by the standards of the Fund’s assistance to other parts of the world. It also acts as a catalyst for other official flows, as explained by Mr. Camdessus.1
Financial assistance from the Fund can be continued for a few years, but not indefinitely. Other international institutions and governments, and in due course the private sector, will have to play a larger part in providing net capital inflows. There is a logical progression, from the first stage in which the public sector bears the risk, to later stages in which the private sector, especially with direct investments, should play the major role. Private inward investment will not, of course, be forthcoming unless the initial stages of the transition are seen to be successful. This increases the importance of moving decisively during the early years to assure private investors that the reform process is on the right track and irreversible. Only the private sector can provide the powerful combination of financial capital, efficient technology, and managerial expertise that is needed over an extended period of time.
The Fund’s financial assistance is linked mainly to macroeconomic stabilization programs. These interact with the fundamental structute and systemic reforms associated with the move from central planning to markets and from public to private ownership. Neither set of policies would work so well, if at all, in the absence of the other.
Macroeconomic Stabilization Programs
Earlier papers have discussed various aspects of macroeconomic stabilization programs.2 Rather than repeat what has been said already, this section briefly discusses the relationship of the programs to the theme of the seminar, namely, the road to growth. More precisely, it asks, at a time when output is still falling, where the growth is going to come from.
The first point to note is that falling output is not generally attributable to macroeconomic stabilization programs per se. All six countries in Central and Eastern Europe experienced a fall in output in 1990, yet there were stabilization programs in only three of them (Hungary, Poland, and Yugoslavia). Moreover, the fall in output was greater in Bulgaria and Romania, which did not have programs, than in Hungary and Yugoslavia, which did. Experience suggests that there will be some short-term output cost of reducing inflation. But this need not be large or long-lived when inflation is merely being contained, as is the case in those programs where the objective is to prevent price jumps from giving rise to permanently higher inflation.
An important determinant of the impact of macroeconomic stabilization policies is the hardness of the budget constraint. The fact that prices rose more than expected in all the 1990 programs, and are tending to rise more rapidly than expected in most countries in 1991, suggests that, among other things, enterprises are managing to avoid financial discipline. Higher prices bump up against the ceilings created by firm macroeconomic policies, squeeze the real economy, and aggravate the output problem.
There are a number of policy implications of the soft budget constraint. First, efforts should be made to harden the budget constraint as early as possible, although this is easier said than done. Second, the credibility of policies and the reputation of the government should be established as early as possible.3 Moreover, governments should not change course as soon as the going gets rough, because this would merely undermine their credibility and set back the day when enterprises treat the budget constraint as being firm. Third, a policy of wage restraint may be necessary to add to the firmness of the budget constraint.4
The fall in aggregate output mainly reflects the fact that existing production is being curtailed (because it has become unprofitable as relative prices have changed, because purchasers have switched to liberalized imported goods, because sales to the U.S.S.R. have collapsed, and for other reasons) before new production can take its place. During the transition period when economies are moving from one type of economy to another, it is inevitable that resources will be unemployed; indeed, some of the capital resources may be permanently unemployed and have to be scrapped. While the initial decline in output may have been partly a demand-side phenomenon, the solution lies in speeding up the response of the supply side. Extra demand in the meantime would not be helpful. Although it might produce some extra output in the short term, it would slow down the adjustment by reprieving enterprises and sectors that should otherwise run down, and, more important, it would jeopardize the whole change in attitudes and the establishment of credibility that are necessary to make the transition successful. In other words, it would store up problems for the future, including social and political tensions, in order to mildly alleviate those tensions in the present.
It is understandable that it is not easy to see where the growth will come from when output is still falling. There is always a tendency in observing economic and financial behavior to assume that trends will continue in the same direction forever. In early 1985, even those economists who had been saying that the dollar could not go on rising forever tended to lose their nerve and sought rationalizations for why it would. This turned out to be a portent of the turnaround in the dollar! Perhaps the gloom among some commentators about declining output in Central and Eastern Europe will similarly act as a portent of better things to come.
It is in the nature of a market economy that exact predictions are not possible, but the main mechanisms bringing about a recovery in output can be identified. In the short term various new opportunities will present themselves. Export markets in the convertible currency area, both traditional and new ones, will be attractive provided the exchange rate is competitive and not undermined by excessive wages (another supply-side issue). The rapid growth of exports in Hungary and Poland in 1990 illustrates this point. Second, opportunities in domestic markets for consumer and investment goods will reappear as uncertainty about the progress of reforms and inflation recedes and expenditure is resumed. Third, new private firms are actively seeking markets at home and abroad, often with new goods and services.
Growth in the longer term depends on the gradual expansion of the productive capacity of the economy. The importance of both human and fiscal capital accumulation is emphasized in other papers (see Borenzstein and Montiel, Chapter 6 above). There is also much scope for making more efficient use of existing resources by improving efficiency. Over the long term the incorporation of best-practice western technology and management techniques will provide a major source of growth. A full integration into the world economy will also, by improving the allocation of resources and allowing countries to take advantage of the gains from trade, add to the growth of real incomes. However, although it is easy to identify the main sources of growth in the long term, tapping these will inevitably take time and persistence.
Most of these comments refer to the economics of macroeconomic stabilization. There is clearly a risk of social and political tensions if the process of reform is long and drawn out, and the results slow to come. Indeed, concern about this is a major factor behind the strong international financial support for Central and Eastern Europe. This risk points to the need for speed in undertaking reforms so that the worst can be passed quickly and light can be observed at the end of the tunnel. Some growth from low levels of output that have been arrived at in a short time may be better than apparently endless small downward steps as in a gradualist reform program. The risk also explains why the pursuit of credible policies, which persuades people that there will be no turning back, is so important. This of course means that there must be no turning back. And it explains why there should be adequate social safety nets for those disadvantaged by the reforms.
Ultimately the process of transition in Central and Eastern Europe is a challenge of political leadership rather than economics. Although the process may be long and may appear to produce nothing but hardship for extended periods of time, political leaders must be able to keep the vision of the eventual goal in front of the population, and move toward it as quickly as possible.
One and a half years have gone by since massive assistance was launched by the West in support of economic reforms in Eastern Europe, but the public debate over this assistance is still centered on the screening of the needs of these countries, the design of support measures, and the enumeration of the initiatives and amounts of finance that are involved. So far, very little assessment has been made of the results of such assistance, and very few lessons have been drawn from this experience for planning new measures or adjusting previous plans. It is on these points that I will focus my remarks in order to help fill this gap.
Last year, the Organization for Economic Cooperation (OECD) Development Center for Cooperation with European Economies in Transition, together with the World Bank, organized a conference at which the theme of international assistance was extensively discussed. That was the year when the old economic and political systems were disrupted, inflation and external deficits were rising rapidly, shortages of essential goods were widespread, and uncertainties on how to progress toward a new socioeconomic system and a new economic management had reached their peak. Emergency aid, financial solidarity, and measures for restoring macroeconomic balance were desperately needed, and the OECD countries, together with the major multilateral institutions, responded swiftly to such demands by supplying Czechoslovakia, Hungary, Poland, and, to a lesser extent, Bulgaria and Romania, with commodity aid, balance of payments financing, and technical assistance.
Today, the economic picture is different because progress has been made in tackling the problems of these economies, although this progress is limited and uneven across countries and areas of imbalance. Programs of macroeconomic stabilization are being pursued in all these countries, and this has entailed a deep curtailment of domestic demand, a reduction of government subsidies to enterprises, loss in real incomes of households, and a struggle for survival for the numerous, uncompetitive enterprises. At the same time, food shortages have by and large disappeared, and the external payments situation has been stabilized, although it is still far from satisfactory. The collapse of domestic demand has been compounded by the fall in exports to the U.S.S.R., resulting in a sharper-than-expected decline in output in the whole area. As to structural reforms, price and external trade liberalization has been to a substantial degree introduced but not yet completed. In other areas of systemic or structural change, progress is still limited.
Against this common backdrop of stabilization and reform, the conditions and needs of each country in this group differ in some crucial respects. Hungary and Poland have been implementing austerity measures for more than a year, and have experienced a deep economic recession without being in a position to claim such successes as control over inflationary pressures or a sustainable balance of payments situation. The current economic hardship is also increasing people’s resistance to the introduction of the necessary systemic transformation. The creation of well-functioning labor and capital markets is far from accomplished. Institutions that are essential for a market-based economy, such as a viable banking system, an efficient social security system, and commercial law, are not yet in place. Governments are under increasing pressure from enterprises to ease monetary and fiscal policies and have given in somewhat, on the assumption that part of the current fall in external demand is transitory and should be offset.
Bulgaria, Czechoslovakia, and Romania are at the early stages of macroeconomic stabilization and, while similar to Hungary and Poland in lacking the basic institutions of a market economy, they have not yet reached the stage of increasing resistance to fundamental change. The Soviet Union is a case of its own in that it has started neither macroeconomic stabilization nor structural transformation. Uncertainty still looms large on how far the U.S.S.R. is willing to advance in embracing private ownership, market competition, privatization, free prices, and free trade.
Overall, for the other five countries it is apparent that the enterprise sector and the new potential entrepreneurs are not responding with sufficient rapidity to the new business opportunities created by economic liberalization. An impediment in this direction is caused by delays in establishing market institutions because of lack of adequate know-how and experience in adopting the appropriate measures. An even bigger obstacle is represented by delays in liquidating, restructuring, commercializing, or privatizing state enterprises. Of course, it is highly unpopular for any government to close loss-making enterprises or to restructure them by shedding redundant labor in a period of economic recession when the new job opportunities are clearly insufficient. But structural changes are also resisted because they cut deeply into the old system of social guarantees and safeguards or erode privileges that hide inefficiencies among enterprises. Social and political resistance makes it particularly difficult for the authorities to move from the phase of stabilization to the stage of self-sustained economic growth.
In such a context, external assistance cannot be seen as a substitute for unpopular but necessary reforms; it is instead an essential underpinning for them and is even more crucial than last year’s emergency assistance in order to revive the momentum of radical transformation. If these countries’ requirements have evolved since the beginning of 1990, the forms of assistance also have to evolve. Unfortunately, the need for parallelism in the evolution of the two is hardly realized by the major parties involved. On the one side, the reforming countries continue to concentrate their requests to the OECD countries and the main international institutions for the provision of larger amounts of official capital. They are disappointed that the OECD countries are not providing more grants or official lending and insist on the establishment of a fund that is comparable in objectives and magnitude to the Marshall Plan that the United States granted to Europe for postwar reconstruction. On the other side, the OECD countries underscore the sizable volume of grants and loans that have been supplied through governmental, private, and international institutions. Actually, the financial pledges of the IMF, the World Bank, and the Group of Twenty-Four donor countries coordinated by the Commission of the European Communities (EC) and the European Bank for Reconstruction and Development (EBRD) add up to an amount that comes close, in relative terms, to the dimensions of the Marshall Plan’s funds.
In discussing and evaluating the assistance of the OECD countries the key word has so far been the “financing gap,” or, specifically, how to cover the current balance of payments deficit. Although the financing gap approach, or “gapology,” has attracted most of the attention of both financing and beneficiary countries, the more the reform process unfolds or should unfold, the less adequate is this approach. The rationale behind this approach is that each of these countries cannot absorb the entire deficit that is expected in its balance of payments for a given year as a result of the economic changes, and should find the means to finance it. The “gapology” aims at identifying an appropriate mix of external adjustment and financing that can allow the country to reach a viable balance of payments position in three to five years. Usually, once an agreement on this mix is achieved, all donor countries are called upon to fill the gap following a burden-sharing scheme that varies to some extent from case to case and that is sometimes the subject of contention among donors. However, in such an exercise, to focus mainly on channeling and assessing assistance seems inappropriate, if not counterproductive, for several reasons.
First, the adjustment strategy is designed on the basis of a changing, and therefore highly uncertain, economic environment. The fact that these countries take a commitment to pursue some predetermined and quantified, intermediate targets does not imply that they harbor enough confidence to enable them to achieve the ultimate targets of a manageable external deficit and lower inflation. This is so because these commitments are taken against a backdrop of economic relationships that are largely unknown and unpredictable owing to the systemic and structural shifts that are taking place at the same time. Hence there is a high probability of undershooting or overshooting. With the former, it is difficult for the country to muster additional financing that would result in bringing to a halt the implementation of the strategy, disrupting external trade and domestic production, and bringing about higher inflation. With overshooting, the country tends to react by easing financial policies prematurely, thus undermining the second stage of its strategy when the stabilization attained should give way to a new period of economic expansion.
The second shortcoming of the “gapology” lies in the fact that it distracts attention from the core of the adjustment problem of a formerly centrally planned economy, namely, that a proper linkage has to be established between the commitment to macroeconomic adjustment and the commitment to fundamental reforms. External balance can be achieved through a variety of ways and means. In the economies of Eastern Europe, where there is a long tradition of direct intervention by the authorities in enterprises’ decisions, macro-economic adjustment can easily be obtained through administrative restrictions that do not tackle the underlying weaknesses and distortions of the economic system. As a result, macroeconomic balance, once achieved, might not be durable, since it does not reflect substantive improvements in the productivity, efficiency, and competitiveness of the economic system. A case in point is the experience of economic policy in Yugoslavia in the 1980s. By not addressing the deep structural and microeconomic imbalances, Yugoslavia’s successes in balancing its external accounts were so short-lived as to require a new stabilization program supported by the IMF almost every two years. In essence, in assisting a country in transition to a new economic system, the “quality” of adjustment matters even more than the “quantity” of adjustment and its corresponding need for financing. Of course, without adequate external financing, not even the best-conceived and the most severe program of adjustment can succeed, because the drastic curtailment of expenditure it entails will depress capital formation and consequently the long-term growth potential of the economy.
Third, a pitfall in focusing on the “financing gap” is the resulting tendency to make countries dependent on foreign assistance over prolonged periods. The experience of most of the developing countries since the onset of the debt crisis in the 1980s shows that, after repeated adjustment programs and gap-filling exercises, dependence on the Bretton Woods institutions for catalyzing nonvoluntary lending by private sources has not disappeared, but strengthened. Eventually, the option of debt relief had become unavoidable for these countries, and this led to a severe contraction of new lending and a tightening of the balance of payments constraint on economic growth.
From the shortcomings of the “gapology” approach and the rapidly evolving economic conditions of Eastern Europe, one draws the conclusion that the main issue is still what type of assistance is needed for the years to come. Corollaries of this issue are (a) What should be the sources of assistance? and (b) Under which conditions?
As regards the nature of assistance, this must encompass a wide spectrum of forms, in addition to official financing and grants, namely, private lending, direct investment, access to western markets, technical assistance, transfers of technologies and know-how, and training. Effectiveness in assistance crucially depends on the emergence of both a balanced combination of all these forms and a tight interconnection between them. Lending—if not accompanied by technical assistance and technology transfers—does not allow the recipient country to make the best use of borrowed resources. Lending—while the OECD area maintains a high level of protection of its markets against the exports of Eastern Europe—makes it more difficult for the borrowing country to gain the resources for servicing external debt. Furthermore, relying mostly on borrowing without a concurrent inflow of direct investment entails a heavy mortgage on the future resources of the country, and can stretch the country’s financial leverage to the point of endangering its creditworthiness.
One of the most urgent problems these countries face at this juncture is how to use the current stabilization phase to lay the foundations for sustained economic expansion in the coming years. So far, the supply response of their economies to the initial liberalization move has been timid and below the authorities’ expectations. The revival of economic activity is hampered by the widespread structural rigidities and the embryonic development of the infrastructure of a market-based system. The complexities of building markets and market institutions, and these countries’ lack of knowledge and experience in this field make it necessary that the countries’ commitment to reform be backed up by the OECD countries through the provision of experts that can help in the implementation of systemic changes. The operation and management of the new system also require enterprises and regulators that know how to interact within the new market framework. To reach this stage, it is necessary for the advanced industrial countries to be involved in supplying Eastern Europe with training for public administration as well as for enterprises. The OECD countries should also ease restrictions on the transfer of advanced technologies. Overall, all these forms of assistance must be related to the main objective of external assistance that is to speed up the political, social, and economic transformation of East European countries, and this implies a profound cultural change that external financing alone cannot bring about. What is needed is a multichannel approach that brings these societies in closer contact with the advanced democracies in three fields: political, social, and economic.
What should be the sources of such assistance? So far the public sector of the OECD countries has been called upon to bear the brunt of this multipronged support. They have supplied capital, know-how, technical assistance, commodity aid, and training. However, their inputs cover only a small fraction of the requirements. In particular, given their persistent and widespread imbalances in public finances, it is not possible for OECD countries to grant a sizable amount of credit over a number of years. They can and should instead act more boldly in opening up their markets to the competition of East European products. The benefits of such an initiative are significant and evident. In 1990, for instance, in spite of the collapse of the Soviet market, Hungary managed to increase its exports by diverting its trade to the EC area where it had received easier access. In turn, Hungary increased its imports from the same area. Trade liberalization by OECD countries can thus represent not only new competition for their enterprises but also a new opportunity for larger exports. Another form of trade-related assistance is the granting of export credits. The reforming countries are complaining that these credits are crowding out the traditional trade flows between former countries of the Council for Mutual Economic Assistance (CMEA). Although there is no evidence yet to substantiate such a claim, this possibility cannot be excluded, because these countries lack export credit systems. Hence, some support, particularly in the form of technical assistance, should be considered for the creation of a viable export credit and guarantee scheme.
If the role of the public sector cannot be overstretched, it is the private sector that should be called on to play a much more important role than has materialized so far. Within the private sector, the nonfinancial enterprises can supply the most diversified basket of inputs for the development of a market system. Their involvement is, however, linked to the presence in the reforming countries of economic conditions and business opportunities that would divert into Eastern Europe capital and skills that could be equally invested in other geographical areas. Unfortunately, such conditions and opportunities are not yet sufficiently present in Eastern Europe, since they are the result of a successful implementation of market-oriented reforms. Actually, these reforming economies are trapped in a vicious circle whereby reforms need the support of the private sector in order to succeed, but the private sector is not keen on engaging itself in these economies before the reforms have succeeded.
One way of breaking this vicious circle could be a new framework of collaboration between OECD countries and reforming countries almost as a contract that implies an exchange of guarantees. On the part of the reforming countries there would be an engagement to introduce institutional changes such as protection of ownership rights, economic and trade liberalization, fair competition, and equality of treatment between public and private firms, and a commitment to apply macroeconomic discipline. On the others’ part, there would be an engagement of governments to promote through incentives and guarantees a direct involvement of their enterprises in the economic development of Eastern Europe. This exchange of guarantees should last until the main market institutions in the reforming countries are properly functioning and economic conditions have settled on positions less unbalanced than today’s. There are, of course, other ways of dealing with this vicious circle. In particular, one wonders why these countries do not advance more boldly in reforming their economies, but it is apparent that the social hardship inherent in such a move could put these fledgling democracies to too hard a test.
What conditions should accompany assistance? Any external input is not without compensation or forms of apparent or hidden conditionality. Conditions can pertain to different areas, such as political liberalization or foreign policy or economic policy. In the economic domain, at the core of the conditionality applied to all reforming countries in Eastern Europe there has so far been the economic strategy agreed with and recommended by the IMF. The agreement with the IMF on the economic measures to be enacted has been the key for catalyzing official financing and other support. However, this agreement has proved to be less effective in prodding foreign, private lenders and investors. The central role that the OECD countries have attributed to IMF conditionality is due to several factors. This conditionality is enforceable without impinging upon national sovereignty and without being at the mercy of the political interests of any particular influential donor country. Conditions respond to the need to restore macroeconomic balance first, are couched in a purely technical framework, are monitored very closely, and in case of noncompliance can prevent these countries from gaining access to their main financial source, namely, official lending.
The IMF policy requirements have unquestionable merits. They have strengthened governments’ determination to apply financial discipline, they have guided the policies of inexperienced authorities in the use of macroeconomic tools, and they have contributed to the establishment of a framework for monitoring the economy and for sound policymaking. The policy recommendations of the IMF assign priority to the control of inflation and the attainment of a sustainable balance of payments position. But is this enough when the main challenge for these economies is to build a new system and to transform structures, and when so little is known about underlying demand and supply functions and the impact of structural change on the macroeconomic balance? After all, the ultimate target for the country is to bring the economy to a high rate of expansion, and macroeconomic stability and the transformation of the system should be seen as strictly instrumental in attaining this goal rather than as autonomous objectives. Large uncertainties, however, loom over the interconnections in progressing along the macroeconomic path and the microeconomic one, while parallelism in advancing along both paths is crucial for reviving economic activity. The margin for potential error or unintended results in the macroeconomic performance criteria agreed with the Fund seems now so wide that strict compliance with them might even be counterproductive or might leave unfilled gaps in the financial strategy of the country.
To cope with these shortcomings the IMF has broadened the focus of its conditionality from the macroeconomic policy to the structural policy. However, while in the former the IMF enjoys a clear leverage by reason of its statutes, in the latter it lacks not only adequate experience but also a well-established means of enforcement. The pragmatism used by the IMF in resorting to midterm reviews of adjustment programs has acted as a safety valve in avoiding undue rigidity in operational targets and in dealing with unforeseen problems. This pragmatism should be praised but does not lessen the urgency of a reconsideration by the Bretton Woods institutions of the guidelines and implementation of their conditionality.
In this respect, two suggestions might be of help. First, conditions that are related to policy management could be limited to the macroeconomic area rather than being extended to the structural one. In the latter, emphasis should be placed on the commitment to liberalize prices and trade, and to establish, by certain deadlines, basic institutions for a market economy, such as property rights, commercial law, a privatization framework, an accounting system, a labor market, and a foreign exchange market. This institutional conditionality should also specify on a case-by-case basis a number of fundamental characteristics that each market institution should bear. Second, the effectiveness of conditionality could be greatly enhanced by expanding the conditions that tie financing to the execution of investment or infrastructural projects. The speed with which the reforming country makes it possible to carry out the specific project would determine the pace and features of external assistance.
Two more considerations on assistance refer to its coherence and coordination. East European countries are drawing support from a multiplicity of bilateral and multilateral sources that operate to a large extent independently. Even on such fundamental issues as the general policy orientation to be recommended to a given country, the major multilateral institutions take independent views, and the room for contradictory advice is ample. Furthermore, a great deal of external financing and technical assistance is supply-driven, that is, it reflects the priorities of the donor rather than the specificity of the demands of policymakers in the beneficiary country. When recommendations from different institutions are in contrast, the receiving country either delays action, at least to clear the confusion, or follows the less costly option, which might also be the less viable one. It is therefore necessary that assisting institutions try to work for the mutual coherence of their autonomous approaches. Coherence must be based, first, on sharing information and developing a common understanding of the economic situation and issues. A second step should be taken to agree on a minimum of policy measures that the beneficiary country should take in order to cope with its most pressing difficulties. This agreement on the critical policy mass should be possible if none of the assisting institutions pretends to be the depository of wisdom, even when its policy enforcement capacity vis-à-vis the beneficiary country is more effective than that of the other institutions.
As regards coordination, the pluralism of independent donors has already given rise to duplication of assistance as well as to unfilled gaps. A certain amount of duplication is inevitable, since any individual donor cannot match the magnitude of the pent-up demand for support. There must also be room for more than one donor in order to expose the reforming country to a full range of alternative or complementary approaches, expertise, and experience in building market institutions or developing market participants. However, given the fact that the magnitude of the demand far exceeds the available supply of assistance, a strong effort should be deployed by donors and beneficiaries to avoid the waste of resources resulting from duplication of activities or low-priority initiatives.
In principle, it is up to the reforming country to coordinate the inputs obtained from various external sources. But since such a capacity has not yet been developed, it is the responsibility of donors to find a solution. Ideally, the coordination task should belong to a superior institution that can assign tasks and divide responsibilities in a rational manner with a view of the overall economic strategy of the country. Unfortunately, such an institution does not exist, and even if it existed it would soon be rejected by the donors in the name of their untouchable sovereignty or autonomy. Therefore, coordination cannot materialize except through a spirit of cooperation among the individual bodies involved. But if this spirit proves difficult to inspire because of the egotism of each donor, then the only solution is to elicit more intense collaboration based on the requirements of the concrete projects demanded by the reforming country. This seems particularly true in satisfying the huge needs that these reforming economies have for technical assistance in policy formulation and training at both government and enterprise levels.