IMF Survey - May 24, 1999
Social issues
In the keynote address opening a session on social issues in development, Lawrence Summersrecently nominated U.S. Secretary of the Treasurydescribed some of the political and economic lessons he had learned since entering government and suggested areas in which further work needed to be done to improve the resolution of economic and financial crises in developing countries. He began by asking how global integration could be recon-ciled with other crucial objectives, noting that the three imperatives in making decisions to resolve economic and financial crises were obtaining the benefits that integra-tion brought (through increased trade and investment), respecting national sovereignty, and pursuing public purpose (to compensate for market failures).
Summers noted that some observers on the political or economic right had little trouble reconciling all three, because they deemphasized the third imperative and advocated minimal government. Global visionaries on the left also found reconciliation easy to achieve, because they were convinced that national sovereignty should not be allowed to stand in the way of increased national and global regulation. Thoughtful people in the middle of the political spectrum, including those charged with developing policies to resolve economic and financial crises in developing countries, had considerably more trouble effecting a resolution. They faced a complex set of trade-offs rather than clear precedents and had to make difficult judgments without either adequate background information or much time for reflection.
He observed that one problem policymakers faced was how to encourage policy regimes in developing countries that would "discourage inappropriate encouragement of short-term capital." Capital controls, such as those that Chile had recently used, were one policy option, but Summers cautioned that in some developing countries, "short-term capital is the only kind you [national authorities and domestically owned firms] can get." Summers suggested that institutional arrangements should be developed to provide developing countries with the longer-term capital flows they needed to emerge from crises and achieve sustainable growth. He also called for sharper thinking by international financial institutions and other aid providers about how the frequently cited objective of providing adequate social safety nets could best be achieved.
Transition economies
In his keynote address on transition economies, [World Bank chief economist] Joseph Stiglitz said that a decade ago many transition countries in Central and Eastern Europe had been regarded as being "on the cusp of success," but their future remains bleak today, with Estonia, Hungary, Poland, and Slovenia being the notable exceptions. Russia had done particu-larly badly; in an apparent contradiction of the laws of economics, it registered simultaneous output declines and increasing inequality of incomes. As a result, the number of Russians living in poverty soared from 2 mil- lion at the start of the transition to 66 million. In stark contrast, China has achieved great success in both eco-nomic development and in making the transition from central planning to a market-oriented economy.
Stiglitz noted that early in the transition, Eastern and Central Europe and the countries of the former Soviet Union had placed excessive reliance on "textbook economics" and too little on the political and economic environments in which transition was to take place.
There had been a strong political imperative for transi-tion economies to move quickly on reform to prevent their slipping back toward communism, and this had led to hasty and poorly conceived privatization and restructuring efforts. He observed that experience had now made it painfully clear that privatization alone could not create a market. Restructuring efforts that threw large numbers of people out of work had failed to generate new manufacturing and service sector investment and thereby to create large numbers of new jobs. Economist Joseph Schumpeter's notion of "creative destruction" did not seem to apply to many tran-sition countries, and creating new enterprises capable of achieving high productivity and sustainability proved to be quite difficult.
Stiglitz said that privatization in the absence of a reliable regulatory environment had led to asset stripping in transition economies, particularly those with open capital markets that facilitated transfers of capital abroad. The need for better corporate governance was particularly acute, since transition's "institutional blitzkrieg" approach had destroyed the old forms of social capital in these countries without creating new ones. In China, by contrast, the stakeholder privatization of state-owned enterprisesdividing them into smaller, yet functional business unitshad worked rather well, and corporate governance had been much less problematic.