Washington - Thank you for the opportunity to discuss the IMF's macroeconomic policy advice in low-income countries (LICs).  To set the context, I would like to begin by discussing our broader views on the role of the IMF in LICs, then take up macroeconomic policies in LICs, which is the principal topic of this seminar, and conclude with a few comments on IMF governance and transparency.

IMF Role in Low-Income Countries 

Today's headlines are replete with discussions about the Fund's role in the global financial crisis and emerging market economies, in particular.  But we should not lose sight of the Fund's important role in the low-income countries.  Macroeconomic stability is a necessary but not sufficient condition for growth and poverty reduction in the LICs and the Fund has a critical role to play, consistent with its mandate, through its policy advice, technical assistance and, when needed, financing.  In the final analysis, achieving sustained growth in low-income countries, which is the best recipe for reducing poverty, will require the collective efforts of the IMF, multilateral development banks, donors, and most critically, good country policies. 

On the whole, I believe that the IMF has given considerable and careful thought to its role in LICs this decade, that the Fund has done a better job though further progress is needed, and that this progress is among the reasons why economic performance in many LICs has strengthened this decade.

First, it bears emphasis that the Fund's role in low-income countries is multi-dimensional.  Its role is not just about lending, even though there has been a tendency in recent decades to over-emphasize the Fund's lending role.  This tendency was seen in the large number of LICs with a continuous series of programs, in which IMF debt was built up and rolled over again and again, while underlying economic conditions registered insufficient gains.

The IMF's workhorse lending facility for LICs, the Poverty Reduction and Growth Facility lends to poor countries without reference to their actual balance of payments need.  Instead, the PRGF is provided on a standard of a "protracted" balance of payments need, which is vague.  Thus, in contrast to a middle income country's relationship with the Fund, poor countries can borrow from the IMF even after macroeconomic stability and external viability have been achieved.  PRGF support is also less concessional than that of the MDBs. Over time, this "prolonged use" of what should have been temporary balance of payments support, not only contributed to the build-up of debt, but may have weakened country ownership of macroeconomic policies and blurred the line between the IMF's balance of payments financing and the longer-term development financing provided by others. 

In recent years the IMF has made progress in overcoming this unhealthy over-reliance on lending.  Economic performance in Heavily Indebted Poor Countries has improved and the HIPC and Multilateral Debt Relief initiatives cleansed the slate for these countries with unsustainable debts, reducing the pressures to continually roll over IMF debt coming due.  These debt relief initiatives are to be welcomed.  But they should be accompanied by changes in the IMF's approach to lending in LICs to avoid a return to serial IMF programs and re-accumulation of poor country debt to the Fund.  Furthermore, debt relief is not a panacea and it is no substitute for the sound policies and new development resources that are needed for sustained growth and poverty reduction.

The IMF has also created new instruments for its LIC work. The Policy Support Instrument provides a path for graduation from serial IMF borrowing programs, while offering the policy advice and signal to donors and markets for which some countries had an ongoing need.  

The Fund recently created an "Exogenous Shocks Facility" (ESF) for LICs, which provides front-loaded financing with a lower standard for adjustment.  Countries do experience shocks that may be exogenous and result in temporary balance of payments financing needs.  But history teaches us that: one cannot anticipate ex ante whether a shock is temporary; shocks often are longer lasting; ultimately adjustment is required; and over-reliance on financing for persisting or recurring shocks can contribute to the build-up of unsustainable debt.  Hence, caution needs to be taken so that implementation of the ESF does not upset the proper and delicate balance between financing and adjustment and result in a renewed cycle in the build-up of unsustainable debt. 

This ESF, however, employs an "actual" balance of payments need test, which is to be welcomed.  Going forward, we would like to see the IMF further target its lending activity in low-income countries and provide financing only intermittently when there is an "actual balance of payments need," as the Fund does in middle-income countries.  

Second, we strongly believe that the IMF should stick to its core competencies of fiscal, monetary, financial sector and exchange rate policies, and structural reforms that are directly relevant to macroeconomic stability.  Longer-term structural issues critical to development, such as civil service reform and improving the investment climate, are important, but they are not within the mandate of the IMF.  The IMF should resist the well-intentioned temptation to expand its activities to fill gaps not in its core competency. 

In summary, the IMF has an important, but limited role to play in LICs, in collaboration with country policies, donors and MDBs.  This role should focus on promoting macroeconomic stability through the IMF's advice and assistance in core areas and through financing to meet actual balance of payments needs on an intermittent basis.  Macroeconomic stability is not the whole picture.  But it is necessary if low-income countries hope to sustain high rates of growth and durable reductions in poverty. 

IMF Macroeconomic Policies in Developing Countries

A central question posed in this seminar is whether the IMF has unduly constrained public spending on health and education in low-income countries.  Having re-read some of the literature ahead of this seminar let me observe that the debate on this topic raises complex issues for which often there are no easy answers.  We are grateful, however, that this debate has benefited from the contributions of talented analysts from many quarters who have offered useful insights and helped define the issues.  Many of the protagonists are here today. The NGO community, through its work in the field, brought many of these issues to public light.  The IMF staff developed new tools for analyzing the issues, including the "spend and absorb" framework.  The IMF's Independent Evaluation Office and a taskforce headed by the Center for Global Development have offered constructive analysis and recommendations.  These contributions have helped lay a foundation for narrowing differences, making significant progress on these issues, shaping U.S. thinking, and most importantly strengthening the Fund's role in LICs.  By virtue of this ongoing collaboration, it is our hope that more progress will be made in the future.    

As the IMF assists countries in navigating through these difficult policy choices, it is important to keep several thoughts in mind:  

·         First, macroeconomic stability matters greatly.  This decade, many countries have strengthened their policy frameworks, contributing to stronger growth, lower inflation, rising investor confidence and reduced poverty.  These hard-won gains must be safeguarded.  There are two implications I would underscore.   Fiscal discipline and debt sustainability are essential.  Countries must live within a sustainable envelope.  Proposals that the IMF implement blanket exemptions of health and education spending from overall fiscal targets are unrealistic.  Also, inflation has real costs for the poor, who have the least ability to hedge against the erosion of their living standards.  One can debate whether economic incentives are significantly undermined by an inflation rate in the low or slightly higher single digits.  But the reality is often more complex. Unfortunately, many low-income countries have a history of poor policy choices, including on monetary policy management, which undermined macroeconomic stability and the potential for high rates of growth.    

·         Second, the composition of spending is important.  Microeconomic absorptive capacity issues and spending composition can be more binding than macroeconomic constraints.  These issues are outside the IMF's mandate and expertise, yet they must necessarily inform macroeconomic policy choices.  The record of public expenditure management in many low-income countries has been poor, but important progress is being made in some.  The IMF has been accused of "assuming the worst" on absorptive capacity, but we are not convinced such a sweeping accusation is fair.  Certainly the Fund should take into account available information – positive and negative -- but in the end these are complex issues with risks on both sides.  Prudence in such circumstances should not be under-rated.

·         Third, ideally aid should be fully spent and absorbed with central banks and finance ministries acting in coordination.  But as we all know, the ideal is not always reality.  Clearly, LICs with relatively stable price levels, low levels of debt, adequate foreign exchange reserves, fiscal space and sound public management – the so-called "mature stabilizers" -- are best positioned to fully spend and absorb aid.  But not all countries are mature stabilizers and not all countries have fiscal space and adequate reserves.   A country that has not created fiscal or foreign exchange shock absorbers, when hit by a shock, can see a rapid erosion of living standards.  Deviations from the full spend and absorb approach, while countries put in place stronger policies for stability, may at times be appropriate. The IMF should support these countries' public financial management capacity through technical assistance and work in setting fiscal standards.

·         Fourth, aid volatility is a reality. This fact has a bearing on the shock absorber question above.  Some argue that IMF projections of aid flows and macroeconomic outcomes have a self-fulfilling pessimistic bias that deters aid, and others suggest that the IMF should do more to catalyze donor aid. We believe that Fund projections for aid inflows should be guided by realism.  We support the IMF working with countries on alternative aid inflow scenarios that are realistic, while recognizing that such work can be staff-intensive and IMF staff resources are finite.

·         Fifth, countries need to own their policy choices.  Ownership is critical.  This is the country's responsibility and not a task the IMF can assume. The process of inter-ministerial budget formulation and execution in low-income countries is often fraught with weaknesses.  While the IMF can help build capacity, it is unrealistic to expect the IMF to fix problems of health ministries which lack capacity or leadership to effectively engage in the inter-ministerial budget process.  Similarly, the IMF should not be blamed if country authorities fail to make their budget priorities reflect their stated policies on health and education. 

In short, we recognize that IMF policy advice and conditions have in some cases constrained public investment with unintended impacts on health and education spending.  The IMF is not perfect.  But in many cases, the need to foster macroeconomic stability may offer a valid reason for overall fiscal constraint, which has implications for public investment spending.  Further, we believe the IMF has generally made efforts in recent years to respond in a reasonable fashion as new evidence and ideas on aid inflows and macroeconomic polices have emerged, by introducing greater flexibility into its advice and conditionality, particularly for "mature stabilizers."

From our perspective on the IMF Board, we have followed these issues closely and change has occurred.

·         IMF policy advice and programs are now explicitly aimed at helping countries spend and absorb aid more fully, with greater attention to coordination of fiscal and monetary policies, which was identified as a weakness. 

·         The IMF has loosened inflation targets when appropriate, especially to accommodate first-round impacts of commodity price increases.

·         The Fund has limited the use of wage bill ceilings to cases where out-of-control wage spending threatens macroeconomic stability.

·         IMF programs employ a more balanced approach to "adjusters" to macro targets, permitting higher domestic spending in response to aid shortfalls.

·         Fund staff is expected to avoid pessimism in their aid projections, including by taking into account that donors often cannot make firm commitments for the out-years.

·         The Fund's on-going work to track pro-poor expenditures, and in some cases target floors for such expenditures, has helped support health and education spending in program countries.

The United States has supported these changes.  We have worked in the Board to see that these policies are translated into action in country cases, where they impact the welfare of citizens in immediate and sustained ways. Our door remains open to NGOs with concerns about IMF policies or country cases, and we encourage the IMF to remain vigilant and respond to new evidence and information, and to criticisms, external and internal.   

Democracy Issues

Finally, I would like to touch on a set of issues, which I categorize under the heading of "democracy" – or how the IMF is organized to be responsive and accountable to its broad membership and external stakeholders.

The IMF is a shareholder-based institution and we believe this system is a source of strength for the Fund, which has helped make it more effective and able to respond quickly to events in the global economy.  Yet, the Fund's structure should ensure that LICs have a strong "voice" in the institution.  Several features are key in this regard. The Fund largely operates on the basis of consensus, and formal votes usually are not taken.  The recent IMF quota reform, agreed in April, provides for a tripling of each country's "basic votes", boosting the voting shares of LICs, and for an additional Alternate Executive Director for the two African constituencies in the IMF Board.  The United States also led the effort to modernize the system of country weights – or "quotas" – so that the IMF's governance structure better reflects the realities of today's global economy.  The quota reform, while not as ambitious as we would have preferred, is a step in the right direction and boosts the shares of dynamic emerging market economies.  The United States also backs reducing the size of the IMF Board from 24 chairs to 20, while protecting the chairs of emerging and developing countries. 

The IMF has made remarkable strides over the last decade toward becoming more transparent.  Whereas in the early mid-1990s very little was published, now most loan documents, policy papers and country surveillance reports are available on the IMF's web site.  The United States was a strong advocate for transparency from the very start.  We support further progress, both in disclosure of basic surveillance documents and in more prompt publication of the Fund Board's minutes.

We also have encouraged the Fund to reach out to ensure that external stakeholders' voices are heard on IMF policy and country issues.  We have taken note of NGO calls for the IMF to make draft policy papers and technical assistance reports public, and to engage in broader consultations with external stakeholders. We have recently supported presumed dissemination of TA reports to donors and IMF Board members.  We also supported public disclosure of TA reports, but getting a majority for that will be a longer-term effort.  On policy issues, the circulation of draft papers has not found support in the Board.  We have, though, strongly advocated that the IMF consult with external stakeholders. Outreach on policy issues by the Fund's Independent Evaluation Office, has also been worthwhile.  On country matters, we support IMF staff consultations with external stakeholders including legislatures and civil society, while recognizing that IMF staff resources are finite and that some country-specific policy consultations must necessarily be confidential. 

Conclusion

I would like to conclude by emphasizing that we will continue to closely follow the debate on macroeconomic policies in LICs.  While we believe that the IMF has made good progress and responded appropriately, we cannot become complacent and we are always ready to consider new information and evidence and to advocate course corrections in IMF program design if they are merited.  We urge all parties in the debate to continue to work together to help the LICs achieve better results and strengthen the Fund's role in the poorest countries.

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