Report of the Group of Independent Persons Appointed to Conduct an Evaluation

of Certain Aspects of the Enhanced Structural Adjustment Facility

Members of the Evaluation Team

Kwesi Botchwey (Convenor)Paul Collier

Jan Willem GunningKoichi Hamada

Part 2

Glossary of Abbreviations 14

Preface 15

Executive Summary 17

I Introduction 23

II General Themes 26

Social Impact 26Determinants of Ownership 35External Viability 37Country-Specific Analysis 42

III General Recommendations 53

Social Impact 53External Viability 53Ownership and Governance Issues 54Conclusion 58

IV Country Profiles 59

Bangladesh 59Bolivia 62Côte d’Ivoire 64Malawi 73Uganda 82Vietnam 92Zambia 95Zimbabwe 102

Appendix

Statistical Tables and Figures 111

Bibliography 126

Contents

13

BCEAO Banque Central des Etats de l’Afrique de l’Ouest (Central Bankof West African States)

DAC Development Assistance Committee (of the OECD)DDI deep deepening indexESAF Enhanced Structural Adjustment FacilityFDI foreign direct investmentHIPC heavily indebted poor countriesIDRC International Development Research CentreILO International Labour OrganisationNGO nongovernmental organizationNPV net present valueNRM National Resistance MovementPAPSCA Program to Alleviate Poverty and the Social Costs of AdjustmentPDR Policy Development and Review Department (of the IMF)PFP Policy Framework PaperREDB real external debt burdenRENAMO National Resistance Movement of MozambiqueSAC Structural Adjustment CreditSAF Structural Adjustment FacilitySAL Structural Adjustment LoanUEA Uganda Exporters Association UEMOA West African Economic and Monetary UnionUDI Unilateral Declaration of IndependenceUMA Uganda Manufacturers’AssociationUNCCI Uganda National Chamber of Commerce and IndustryUNDP United Nations Development ProgramZCCM Zambia Consolidated Copper Mines

Glossary of Abbreviations

14

W e were appointed by a decision of the Executive Board of the IMF in October1996, to conduct the first-ever independent external evaluation of the Enhanced

Structural Adjustment Facility (ESAF). The evaluation group was originally made up ofDr. Kwesi Botchwey, Harvard Institute for International Development (Coordinator andConvenor); Professor Paul Collier, Centre for the Study of African Economies, OxfordUniversity; Professor Jan Willem Gunning, The Free University of Amsterdam; andProfessor Yusuke Onitsuka, University of Tokyo. Following the unfortunate and un-timely death of Professor Onitsuka, Professor Koichi Hamada of the Economic GrowthCenter, Yale University, was appointed as the new fourth member of the group.

Our evaluation was intended to complement an extensive internal review of experi-ence under ESAF-supported arrangements by the Fund’s Policy Development and Re-view Department (PDR), which was expected to be concluded in the spring of 1997.

We held our first meeting in Washington in April 1997 to discuss administrativearrangements, to conduct preliminary discussions with Fund staff and with membersof an Evaluation Group of IMF Executive Directors charged with the general over-sight of the successful conclusion of our work, and to make all necessary arrange-ments for the release to us of all relevant information in possession of the Fund.

We met again in July 1997 to finalize the administrative arrangements, reach finalagreement among ourselves on country sampling and other procedural matters, andconduct further in-depth meetings with staff of the PDR and other departments work-ing on the countries in our sample. Most important, at this time we attended and par-ticipated in the meeting of the Executive Board devoted to a discussion of the full re-port on the PDR review of experience under ESAF-supported programs.

From about August through much of September and early October 1997, we under-took a program of country visits, which we interrupted in the latter part of Septemberto attend the World Bank/IMF Annual Meetings in Hong Kong, where we conductedfurther interviews with governors and senior officials from a large number of coun-tries, including some countries outside our sample. We also met with a number ofIMF Executive Directors and senior officials from the Bank.

We resumed and concluded our program of country visits after the Annual Meet-ings and finally congregated at the Centre for the Study of African Economies at Ox-ford to review our findings from the field trips, debate outstanding issues, and agreeon the form and content of our final report, which we present here.

We would like to express our gratitude and appreciation to all those who assisted us invarious ways. In particular, we would like to thank the members of the EvaluationGroup of Executive Directors; the Executive Directors of our sample countries; the Di-rector and staff of the Office of Internal Audit and Inspection, especially Elena Frolia,Melanie Brown, and Cathy Song; the Directors and staffs of the Policy Developmentand Review Department and the African Department; and the Fund and World Bank rep-resentatives in the various countries we visited. We also wish to acknowledge the invalu-able support provided by a number of research assistants—Michael Fabricius, ElizabethSu-Dale (who also assembled the first draft), Yasuhisa Ojime, Mototsugu Shintani, andAlex Maynard. Above all, we would like to thank the ministers, government officials,private sector and trade union representatives, nongovernmental organizations (NGOs);and all others who gave us so much of their time during our country visits.

Preface

15

T he terms of reference for this evaluation studydistinguished three components: social impact,

external viability, and ownership.

Social Impact

Although ESAF programs are often criticized forthe uniformity of their design and policy focus, theirsocial impact is highly diverse. There are instancesof generalized initial losses in incomes and of gener-alized initial gains, of prolonged reductions in socialexpenditures and of sustained increases. The samesocial group may suffer severely in some ESAF pro-grams and benefit in others: for example, ESAF rad-ically lowered civil service real wages in Côted’Ivoire while raising them in Uganda. Thus, the av-erage experience across all ESAF programs concealsas much as it reveals, while a case study of an indi-vidual country is liable to be highly particular. Ourapproach has been to apply a simple analytic taxon-omy, distinguishing a few important mechanismswhereby the poor might be affected.

We distinguish between two main channels bywhich ESAF programs can affect the poor: via pri-vate incomes and via social expenditures.

Private Incomes

Private incomes are inevitably affected by ESAFprograms; indeed, the ultimate purpose of such pro-grams is that incomes should be increased on a sus-tainable basis. However, any policy change thatseeks to raise incomes in the aggregate is likely toinflict some income losses. A useful distinction inanalyzing these losses is between those that arise asa result of a fall in the aggregate income of societyand those that arise as a result of redistributionswithin society. In a well-designed program, any ag-gregate losses will be temporary: policy reform is in-tended to raise aggregate income in the medium andlong term. In some societies, a temporary decline inaggregate income is unavoidable, the main instanceof this being the transition economies. Theseeconomies have a large high-cost sector, which re-

duces the potential for other sectors to expand andwhich must therefore itself contract, while lackingthe organizations of private enterprise so that growthelsewhere is initially slow. Because the temporarylosses in transition economies are widespread, thetargeting of safety net responses may not be diffi-cult; rather, it is the sheer scale of need that maypose the challenge. National food-for-work types ofintervention may be both simple and sufficientlyself-targeting. The transition economies are, how-ever, not the main focus of this study.

Most ESAF countries are not transition economies,although a few of them have one or other of the tran-sition economy–type features. Hence, in most ESAFprograms unavoidable income losses arise mainly orexclusively from redistributions between socioeco-nomic groups. Whereas the aggregate income lossesin transition economies are inherently temporary in awell-designed program, the losses arising from re-distributions are likely to be long lasting becausethey are caused by relative price changes that are in-trinsic to policy reform. Such income losses are thusboth more particular, hitting pockets of people in themidst of more generalized improvements, and longerlasting.

Safety net interventions are thus likely to needmore targeting, and to last for longer periods. How-ever, by no means do all losing groups warrantsafety net intervention. The central issue is whetherthe losers are concentrated among the initially poor.Overall, we concur with the main academic study onthis question, which concludes that reform will“generally have positive effects on growth and in-come distribution” (Sahn, 1996, p. 22). That is, onthe whole, the groups that lose from reform are con-centrated among the initially better-off rather thanamong the poor. However, this does not mean thatthere is no overlap between the poor and those wholose from the reforms. In some contexts, income re-distributions work against important subgroups ofthe poor: we found this for maize growers in the re-mote regions of Zambia, estate workers in Malawi,and urban informal sector workers in Côte d’Ivoire.

The very particularity of these groups indicatesthat it is not possible to devise, a priori, safety net in-

Executive Summary

17

EXECUTIVE SUMMARY

terventions that will work across ESAF programs.There is no substitute for detailed country-levelwork using socioeconomic survey data. Usually,however, there is sufficient information availableprior to ESAF programs for safety nets to be builtinto the program design. To date this has not beendone. We recommend that the Fund draw formallyupon the household poverty expertise of the WorldBank, integrating projections of social impact intoprogram design and monitoring the outcomes.

In some nontransition ESAF economies therehave been large, temporary contractions in aggregateincome, Zambia and Zimbabwe being the maincases in our sample. While there were complicatingcircumstances due to drought, we conclude that asignificant part of the decline in income was avoid-able, being due to errors in the sequencing of the re-form program. In both countries financial liberaliza-tion was, in our view, premature, in that it precededfiscal stabilization and considerably delayed its at-tainment. We are also concerned about the sequenc-ing of some structural reforms. Some reforms thatwould have enhanced the ability of the poor to bene-fit from the ESAF program should have been givenearlier priority. We recommend that sequencing is-sues be explicitly analyzed at the stage of programdesign.

The main scope for poverty reduction through ris-ing incomes occurs in the poststabilization phase ofESAF programs. Whereas in the stabilization phaseit is usually appropriate and indeed essential that fis-cal and external deficits be reduced, in the poststabi-lization stage the most important objective may be toincrease the investment rate so as to achieve sustain-able rapid growth. In low-income ESAF countriesboth the scope for, and the desirability of, financingincreased investment through domestic savings islimited. A successful poststabilization ESAF econ-omy is likely to have a phase in which deficits tem-porarily increase again as investment is financed byincreased aid and private foreign capital. Since itnow appears that aid effectiveness requires that aidbe targeted to countries with good macroeconomicpolicy environments, there is potentially a seriousconflict between the common Fund practice of plan-ning for a rapid tapering off of total aid in poststabi-lization situations and the donor objective of in-creased aid effectiveness. We recommend that ESAFhave a continuing role in stabilized low-incomecountries, but that a sharper distinction be drawn be-tween the phase in which policy is oriented towardstabilization and the phase in which it is oriented to-ward growth. In the latter, it may be appropriate forthe investment rate to become a monitorable pro-gram objective. The original purpose of ESAF asstated by the IMF’s Executive Board on December15, 1987, was “to promote in a balanced manner”

the objectives of payments viability and growth.This balance should, in our view, be achievedthrough a changing emphasis over the duration ofprograms.

Partly as a result of the success of ESAF, there arenow several low-income African economies thathave recently achieved a satisfactory policy environ-ment. These countries (Uganda in our sample) arecurrently growing rapidly. However, their invest-ment rates remain low: current high growth is thetemporary pay off to policy reform. This conjunctionof high growth and low investment is not sustain-able: either investment must rise or growth will de-celerate. The increase in investment cannot be fi-nanced predominantly from domestic savingsbecause incomes are so low: both enhanced privateand public capital inflows will be needed until in-comes have risen.

Private investment is currently deterred becausethese environments are rated as highly risky. Therisk ratings for the newly reformed economies areimproving, but from a very low base, and it will takeanother decade before the ratings reach the level ofthe current newly industrializing countries, at whichmajor investment inflows become likely. Recent re-search has shown that in the reformed policy envi-ronments, aid acts as a catalyst for private invest-ment: each dollar of aid induces almost two dollarsof investment. Hence, investment inflows can be in-creased both by increased aid inflows and by a re-duction in the perceived risks. In both of these, theFund has a key role.

The Fund can reduce perceived risks by signalingthat a country has reached the phase in which themacroeconomic policy environment is satisfactoryfor private investment. In this phase, the key role ofthe Fund is the surveillance of policy maintenancethrough the monitoring of a few key variables, ratherthan the negotiation of further promises of policychange. However, surveillance in itself may not besufficient to achieve credible certification. To befully credible, the Fund should put its own resourcesat stake and so have a program. However, it is essen-tial that such a program be clearly distinguishedfrom those that are designed to cope with crisis re-covery. Countries would be seen to graduate out of acrisis period into a second phase of rising invest-ment, before they graduated completely out of Fundprograms. The graduation into this second phasewould constitute a powerful signal to the investmentcommunity. It would also constitute a signal to thedonor community. There is now compelling evi-dence that aid is effective in, and only in, satisfac-tory macroeconomic policy environments. The Fundhas a key role in certifying that such an environmenthas been attained. Clearly, maintained Fund financ-ing in these environments adds credibility to the

18

Social Impact

message that donor funds should appropriately in-crease. The Fund itself is not a development financeinstitution and should not become one. Rather, itsnew role for this group of graduated, but investment-scarce, countries is temporary, in the initial phase ofa reformed environment. The recent wave of reformsand temporary high growth in Africa has thus cre-ated a window of opportunity. The Fund is instru-mental in whether this opportunity is seized.

Social Provision

The provision of social services can be affected byan ESAF program in four distinct ways. First, ifESAF raises or lowers GDP, then, if all other ratiosstay unaltered, real per capita social service provisionwill change accordingly. Second, ESAF may changethe share of government expenditure in GDP. Third,ESAF may change the composition of public expen-diture. Finally, relative price changes may change theamount of service provision that a given value of pub-lic expenditure will purchase. Each of these fourroutes for change has been important in one or otherof the countries in our sample, and for each of theroutes there are examples both of improvements anddeteriorations in social provision. We are, however,concerned that there has been excessive focus on oneof the channels, namely, the composition of public ex-penditure. In our sample, the most important changesin social provision often arose from changes in its rel-ative price, yet this appears to have gone unnoticed.We recommend that the Fund present data on the pro-vision of social services in a standardized format thatdecomposes changes into the four components set outabove, so that governments can more readily see whatis happening and why.

A further factor affecting social provision is thevolatility imposed on certain components of publicexpenditure by the operation of the cash budget.There is no easy solution to this problem. However,in some countries there is a clear trade-off betweenthe procedures that have proved effective in control-ling expenditure in aggregate and the efficiency ofpublic expenditure. A mechanism such as the cashbudget, which substantially reduces the efficiency ofexpenditure, should be regarded as a temporary stop-gap rather than as constituting a solution. Betterforecasting of the intrayear pattern of revenues and amore appropriate pattern of expenditure smoothingwill be necessary as countries graduate from the cir-cumstances of fiscal crisis.

While in our view there is no systematic tendencyof the poor to lose disproportionately from ESAF pro-grams, there are important subgroups of the poor thatare so weakly integrated into the economy that theyare left behind during growth. In Uganda, growth hasbeen predominantly urban based, and subsistence

farmers have not been in a position to benefit. In themedium term, reintegration of these groups into themarket economy will raise their incomes. In somecountries, there is a conflict between this medium-term objective and the short-run objective of revenuemaximization. In Uganda, both the current high levelof petroleum taxes and the previous windfall coffeetax work to slow integration of rural households intothe market. There are again no easy solutions to suchproblems, but government choices should be made inthe context of a more informed appreciation of thecosts of taxation. In the short term, the best way ofimproving the living standards of these economicallydetached households is through increased provision ofbasic social services. In the context of rapid growth,rising rural social provision is likely to be affordableand could reasonably have been included as moni-torable program objectives.

Our recommendations on social impact are asfollows.

• First, in our view the Fund should not invest inbuilding up expertise in poverty analysis. Rather,we recommend that at the stage of program de-sign the Fund formally ask the World Bank toidentify ex ante which groups among the poorare likely to lose from the proposed reforms. TheBank would then provide the Fund with pro-jected time paths of the real incomes of the maingroups of the poor and also with projected out-puts of social services. The output projectionsfor social services would take into account therelative price changes that we have identified asso substantial that they can radically change theconclusion from social indicators. The projectedtime paths would be incorporated in programdocuments, along with the traditional fiscal andmonetary monitoring variables. Whether a pro-gram would be considered in need of revisionwould be decided in part on the basis of a com-parison of outcomes with these projections.Clearly, the time lag for income data is muchgreater than that for financial targets. However,the use of income data in assessing whether theoutcome of a program was consistent with theinitial projections would be salutary since majordeviations would require explanation.

• Second, in program design, trade-offs betweenthe short and the long run should be explicitly an-alyzed. This analysis would address sequencingissues, the efficiency costs of revenue measures,the need for front-loading of slowly maturingstructural reforms, and the appropriateness ofcash budgets.

• Third, in the area of fiscal policy, where themacroeconomic concerns of the Fund and themicroeconomic concerns of the Bank currently

19

EXECUTIVE SUMMARY

overlap, collaboration between the Bank and theFund should be increased. Specifically, bound-aries need to be more clearly delineated and,where overlaps are accepted, a more formalizedrequirement for joint analysis and decisionshould be negotiated so that country-level staffmembers are clear about their respective powersand duties.

• Finally, in already stabilized economies the Fundshould shift from ex ante negotiation of short-term targets and policies to an ex post evaluationover a longer period. This would help reforminggovernments to build their reputations andwould enable the Fund to play a useful role inpotential ESAF countries that now reject the in-strument. In postcrisis economies the Fundwould focus on encouraging and managing in-creased external inflows, public and private. Ex-cept in the transition economies, ESAF fundswould taper in with adjustment rather than taperout. Conversely, the Fund would be more cir-cumspect in providing support in stabilizationcontexts where the commitment of the govern-ment is in serious doubt.

External ViabilityESAF as an instrument is unusual in that it is not

used as budget support (except in the CFA franczone). It thereby directly affects only private in-comes and not social expenditures. Its impact on pri-vate incomes is through the exchange rate. Inadver-tently, this has the effect of implicitly taxing exports.While this is an inevitable feature of all public trans-fers, it is usually offset by the beneficial effects ofincreased public service delivery. We recommendthat ESAF funding be provided as budget support, asindeed already applies in the CFA franc zone.

Since an ESAF program mainly consists of theprovision of a concessional loan, it should be ana-lyzed from an intertemporal perspective. The currentaccount of the balance of payments is the differencebetween savings and investment, as well as the dif-ference between exports and imports. It can also beregarded as the difference between savings and in-vestment, which is an intertemporal concept. AsYusuke Onitsuka demonstrated, a typical nation goesthrough a dynamic pattern that starts from a debtorposition and then approaches a creditor stage in itsprocess of economic development. In this dynamicpath of growth, or in the optimal growth path, suchindicators as the debt-service ratio and the debt-GDPratio do not necessarily stay constant. According tomodern macroeconomics, a current account surplusemerges for a nation that expects a decline in the fu-ture (permanent) income.

There are many indicators of the external viabilityof a nation. As the numerators, we take debt service(a flow variable) at one time, and debt outstanding,or the net present value, at another. For the denomi-nator, we use exports and GDP. The combination ofthese creates the debt-service ratio, for example,which is equal to the debt service divided by exports.All the combinations are static in nature, except theconcept of net present value, which is the discountedsum of all future obligations.

In this report, we propose the use of more dynamicconcepts: the real external debt burden (REDB) de-veloped by Obstfeld and Rogoff (1996), and the debtdeepening index (DDI). REDB indicates the rate ofthe change in the debt-GDP ratio in the absence ofthe current account deficit (or surplus), and DDI indi-cates the rate of change in the debt-GDP ratio underthe actual current account balance.

In particular, we consider that the ratios with re-spect to exports are overemphasized in the practicesof the ESAF program and the HIPC (Heavily In-debted Poor Countries) Initiative. For example, thedebt-service ratio (i.e., the ratio of debt service to ex-ports) and the ratio of debt service to GDP couldproduce quite a different ranking in the viability ofnations because of the difference in the degree ofopenness of nations. We suggest that at least equalweight be given to the indicators related to GDP,compared with those related to exports.

Our recommendations on the issue of external via-bility are as follows.

• One should rely more on ratios of debt service toGDP and debt to GDP as indicators of externalviability of a nation since they are less affectedarbitrarily by the degree of openness of a nationthan are ratios of debt service to exports and debtto exports, because the latter ratios are overlysensitive to the openness of the economy.

• To supplement the static nature of the above ra-tios, one should also refer to the REDB and tothe DDI. The net present value of debt is indeeda dynamic concept, but it should be matched notonly with the current GDP, which is a static con-cept, but also with the net present value of thenational income of a nation or the net presentvalue of the savings-investment balance.

Ownership and Governance Issues

The one common theme that runs through percep-tions of ESAF at the country level is a feeling of aloss of control over the policy content and the paceof implementation of reform programs. On the onehand, there is broad agreement that ownership is anecessary condition of successful policy reform and

20

Ownership and Governance Issues

program implementation. This much is acknowl-edged in official declarations of both donor and re-cipient governments, and by most multilateral insti-tutions, including the IMF, the World Bank, and theregional development banks. Academic writers onthe subject also find, predictably in our view, thathigh conditionality programs do not generally dowell, and the recent review by the Fund’s Policy De-velopment and Review Department implicitly con-firms this view in its finding that a substantial pro-portion of program interruptions are attributable topolicy disagreements between governments and theFund staff.

Our review of country experiences also shows acorrelation between the degree of ownership and suc-cessful program implementation. Vietnam, especiallybefore the ESAF program, Uganda, Ghana, and to alesser extent, Côte d’Ivoire and Bangladesh before theinstability of the Ershad period, are good examples.

On the other hand, in spite of the apparent consen-sus on the importance of ownership, it has not beenpossible to move matters beyond mere theory. Onthe donor side, development cooperation ministriesand offices point to the need to explain to taxpayershow their money is used abroad. This is a realenough political problem, although it must be notedthat it is in practice often aggravated by public mis-conceptions about the size of aid in relation to na-tional budgets, the role of aid in domestic economiccrises, and the extent of true charity in aid flows. Onthe part of the multilateral institutions, there is thesheer weight and convenience of established prac-tice and the commanding authority that comes withcontrolling the purse, to say nothing of the genuinedifficulties that complicate attempts at giving opera-tional meaning to the concept of ownership.

The challenge therefore is how to foster strongcountry ownership and at the same time provide ade-quate assurances to both multilateral and bilateralsources of financial assistance that their resourceswill not be wasted. The solution, in our view, lies notin reducing ownership to simply persuading the coun-try to adopt what others want, but in finding a middleground that enables the country to express its will andbuild consensus behind a program capable of achiev-ing sustainable growth. This requires actions both atthe country level to improve the decision-making andconsensus-building processes, and by the Fund tomake the negotiation process and conditionalityregime more supportive of country ownership.

Accordingly, we make recommendations forcountry initiatives, as well as for modifications inthe Fund’s operating procedures. Without prejudiceto our general and country-specific analysis onownership and to the suggestions we make by nec-essary implication, we propose the following spe-cific recommendations.

Initiatives at the Country Level

The country itself should, first and foremost, takesteps to define its medium- to long-term vision andthe policy agenda that goes with it before it beginsformal negotiations with the Fund, the Bank, andother agencies. For this purpose, the country shouldavail itself of all possible sources of technical assis-tance, including those of its nationals abroad andtechnical assistance from the Fund, which manycountries acknowledge is particularly helpful in suchcircumstances. The country then should take steps tobuild a body of national consensus behind such a na-tional program.

It is obviously for each country to decide how na-tional consensus can be built most effectively, and noironclad laws can be laid down in these circum-stances. Moreover, the idea is not to make this yet an-other conditionality, as it is tending to become withparticular regard to donor demands for civil societyparticipation. However, based on the experiences ofcountries that have managed to create space for sus-tained policy reform through national dialogue, werecommend, for the consideration of the countriesthemselves, the creation of economic managementteams made up of the economic and key sector min-istries and political leaders to oversee the reformprocess so that it does not become the exclusive busi-ness (and burden!) of the minister of finance, and theholding of national conferences where alternativesand trade-offs can be openly debated.

Initiatives by the Fund

Side by side with what we propose should be doneby the country to develop ownership, we recommendthat the following steps be taken by the Fund to en-hance national ownership in negotiating agreements.

First, we recommend that, at the earliest opportu-nity and at a sufficiently high management level, theFund engage in intensive and informal policy dia-logue with the country’s political leadership to un-derstand the country’s political constraints and pos-sibilities and, in this way, be able to form the rightpolitical judgment for determining the mandate forformal negotiation with the country.

Second, we recommend that the timing and dura-tion of IMF missions be so arranged as to allow ade-quate time for country preparation in advance of ne-gotiation and consensus building during thenegotiation process itself.

Third, and perhaps most important, we recommendthat steps be taken to relieve widespread concernsabout the Fund’s perceived inflexibility in negotia-tions through the introduction of an element of choicein the negotiation and conditionality regime. We ac-cordingly recommend that some flexibility be builtinto the mandate for negotiations in the currently es-

21

EXECUTIVE SUMMARY

sentially ex ante negotiation and conditionalityregime. One of the ways (but by no means the onlyone) this could be done is to formulate alternative pro-gram paths through the negotiation process, leaving itto the country to decide, with the advice of the staff,what best (or better) suits its particular circumstances.We recognize and discuss some of the operationalproblems and risks associated with such a flexibleregime more fully in the text of our report. At the veryminimum, each alternative program path would needto satisfy a minimum condition of viability, in ordernot to saddle the Fund with unacceptable risks of pro-gram failure and, more important, to guarantee thecountry sustainable growth.

Next, we recommend that the Fund develop amore systematic mechanism for providing ex postsupport for country-initiated, or home-grown, pro-grams. We believe that this will enable the Fund toplay an important role in countries that have balanceof payments need but where agreement is thwartedor delayed even though the areas of convergence be-tween the Fund and government are substantial; thismay happen, for instance, where a government feelsunable to accede to formal agreement with the Fund,mainly for political reasons. We believe that an es-sential element of such a mechanism of ex post sup-port for homegrown programs would be the provi-sion of technical assistance to the countries wishingto develop such programs, as this will improve pro-gram quality and, commensurately, the occasion forexiting by the Fund for reasons of program failure.While such a system will need to have entry and exitpoints to make it workable the point should be tostrive to reduce the prospect of such programsbreaking down and, therefore, to minimize the riskof exits, which can be disruptive and costly to thecountry in the end. The entry point could be trig-gered, for instance, by a major reform initiative bythe government, such as a strong budget or a majoradjustment to an overvalued exchange rate.

We also recommend that ways be found to bothhumanize and demystify the Fund’s image, so as toassuage the political hazard that countries perceive tobe associated with dealing with the Fund. Here, wehave in mind not so much the dramatic new initiativeby the Bank to send staff members on familiarizationmissions to villages, but simpler ways in which Fundstaff can have more systematic and interactive con-tact with a broad cross section of stakeholders in thecountries. In our view, the policy framework processcould provide a more convenient forum for thesebroad-based contacts than the Article IV consultativemechanism because of its forward-looking policyfocus.

In the area of Fund/Bank cooperation, we note thatagainst the background of increasing overlap in thework of the Fund and the Bank—with the Fund be-coming more “structural” in focus, while the Bank be-comes more “macro”—it is particularly important thatBank/Fund relations be better coordinated, becausethey have an obvious bearing on country ownership.Policy choice by the country is not helped when theFund and the Bank (and donors) pull the country indifferent directions. We therefore recommend that ur-gent steps be taken to develop more effective and op-erational instruments of coordination through closeconsultation between the two institutions.

Finally, to reinforce these strategies aimed at fos-tering country ownership, we strongly recommendthat resident missions be established in all ESAFcountries. We recommend further that the missions bestrengthened by a delegation of more authority tothem, especially in matters that are dependent onknowledge of the concrete domestic situation, andalso through the selection of high-flying, technicallystrong, and politically mature staff members to headthem. We believe that a strengthened resident missionis a more effective way to address concerns aboutprogram interruptions than is intensified monitoringand frequent visits by headquarters-based staff.

22

A fter over a decade of ESAF and, before it, SAFprograms in low-income countries in Africa,

Asia, and Latin America, with uneven outcomes, it isunderstandable that there should be so much debatein development circles about such programs’ effec-tiveness as instruments for bringing about sustain-able poverty-alleviating growth. In the light of thiscontinuing debate, and as part of its own program ofinternal evaluation, the Fund has conducted twomajor reviews of experience under the ESAF. Thefirst one, discussed by the Executive Board in March1993, covered the performance of 19 countriesthrough mid-1992.1 The second one, discussed bythe Board in July 1997, covered countries that beganESAF-supported programs before December 31,1994, numbering 36.2 But the debate on country per-formance under the ESAF has continued, with a par-ticular focus on its effectiveness in bringing aboutpoverty-alleviating growth. In the circumstances, theExecutive Board decided that the second internal re-view done by PDR should be complemented by anexternal evaluation, also to be completed in 1997,using mainly a case study approach.

Our terms of reference requested us to conduct anevaluation based on this approach, and to presentunified conclusions for the design and implementa-tion of ESAF-supported programs and the ESAF in-strument focusing on three key topics, namely:

• development in countries’ external positions dur-ing ESAF-supported programs;

• social policies and the composition of govern-ment spending during ESAF-supported pro-grams; and

• the determinants and influence of differing de-grees of national ownership of ESAF-supportedprograms.

Our terms of reference also required us to select asampling of countries, numbering between four and

seven, that was geographically diverse and includedboth strong and weak performers for each of the threetopics, allowing for as much overlap as possible.

Accordingly, we agreed to evaluate Côte d’Ivoire,Malawi, Uganda, and Zimbabwe on all three ques-tions, and to cover the external viability and owner-ship issues for Bangladesh and Vietnam, the owner-ship issues only for Bolivia, and the social issuesonly for Zambia. Our method of evaluation wasbased both on surveys in the field, in which wespoke to a very wide cross section of stakeholders ineach country, and on a thorough reading of internalFund documents as well as other available literature.Although the three topics we were asked to focus onare not exhaustive of all the concerns that have beenexpressed in the continuing debate, we believe thatthey are among the major ones.

In the area of external viability, savings perfor-mance has been disappointing in relation to rising,even if modest, growth and improved macroeco-nomic policies in ESAF countries. Current accountdeficits have therefore seen little reduction on aver-age over the decade of ESAF-supported reforms,while the stock of debt of ESAF users has aboutdoubled over the period 1985 to 1995.

The issue, therefore, is how these problems can beaddressed, and what trail a search for solutionsshould follow. We note first that the current accountof the balance of payments reflects a process of theintertemporal choices of a nation. The main compo-nent of the current account is a trade balance, whichis essentially exports minus imports. Through na-tional income identity, exports minus imports equalssavings minus investment. The latter is a dynamicconcept and can be interpreted as a result of intertem-poral optimization, a factor that has been relativelyneglected in the discussion of external viability.

As is already shown by Onitsuka (1974), the nor-mal and optimal process of capital accumulation of agrowing economy is not proportional to its growth.First, external borrowing increases, domestic capitalaccumulation follows, repayment of borrowing starts,and finally the country converges to a steady bor-rower or a steady lender state where the debt and GDPgrow more or less proportionally. Whether the coun-

I Introduction

23

1Schadler and others, 1993. The conclusions of the ExecutiveBoard discussion of this evaluation are published in the IMF’s1993 Annual Report, pp. 61–64.

2IMF, 1997.

I INTRODUCTION

try ends up with a borrower position or a lender posi-tion depends upon whether its people are more patientor less patient than the average people of the world.

From this perspective, we have to reexamine vari-ous concepts of external viability. The ratio of ex-ceptional finance is a good measure because itshows the degree to which a country should rely onnonmarket forces. Any ratios to export, like the ratioof debt service to exports or the debt-export ratio,are under suspicion because they are too sensitive tothe openness of the economy. The ratio of debt ser-vice to GDP has better characteristics, but it is a sta-tic concept because it does not take into account thegrowth capacity of a country. We propose the use ofREDB prepared by Obstfeld and Rogoff (1996), andthe DDI, which built on the REDB. REDB is thechange in the debt-GDP ratio if the current accountis balanced, or the equivalently current account sur-plus as a fraction of GDP that is needed to keep thedebt-GDP ratio constant. DDI is the change in thedebt-GDP ratio that develops from the asset dynam-ics, and the ongoing current account, or equivalentlythe current account that is short of the current ac-count corresponding to REDB.

The net present value is a dynamic concept. If onematches it with static concepts like exports and im-ports, the comparison is between two different di-mensions—stock and flow.

The social impact of ESAF programs has also beencontroversial. Critics of the programs have claimedthat they have accentuated poverty, whereas support-ers have claimed the opposite. There are two broadmechanisms by which the poor can be affected by ad-justment programs: through changes in their incomesand through changes in social expenditures. The1997 internal review (IMF, 1997) did not give prior-ity to analyzing the social costs, leaving this explic-itly as an area for the external review, although it didinvestigate the effect on social expenditures andfound that they were, on average, protected.

Policy changes can reduce or increase incomes,either of society as a whole or of particular groups.The transition economies are the most extreme ex-ample of society as a whole bearing short-termcosts for long-term benefits. Since there is no doubtabout the need for radical change in theseeconomies, the policy issue is the extent to whichsocial safety nets can be put in place. In the moreusual ESAF cases, the main social effects arise notbecause of temporary, society-wide losses but be-cause of long-lasting redistributions resulting fromrelative price changes. Here, one controversialissue is whether the groups that lose consist of poorpeople, since the compensation of better-off losinggroups need not be a priority. A second controversyhas been whether ESAF programs have, as a resultof either suboptimal sequencing or public expendi-

ture reductions, imposed avoidable temporary con-traction on the economy.

Policy changes can also reduce or increase the de-livery of basic social services. The most controversialissue has been whether ESAF programs have unnec-essarily squeezed social expenditures, either as a sideeffect of generalized reductions in public expendi-tures, or because of an adverse change in the compo-sition of expenditures. This is the issue on which theadjustment literature has focused. However, there areother ways in which social provision can be affectedthrough ESAF programs, notably through relativeprice changes. The provision of social services maychange substantially during adjustment, not becauseof a change in budget allocations but as a result of in-duced changes in the cost of provision.

In the area of ownership, in spite of near unanim-ity among all concerned—governments in both re-cipient and donor countries, the international and re-gional financial institutions, the DevelopmentAssistance Committee of the OECD, and the over-whelming weight of public opinion in developed anddeveloping countries alike, that reform programsshould be “owned” by the reforming countries—thedebate on the subject has continued unabated. On theone hand, the Development Assistance Committeeand its members, and their supporting financial insti-tutions, have continued to profess their good inten-tions while recipient countries have, for their part,continued to protest in frustration.

The problem has been to define the concept ofownership for operational purposes. While it is in-deed possible, as a number of academic writers andpractitioners have demonstrated,3 to define owner-ship with a reasonable degree of intellectual rigor, ithas been difficult, for reasons of domestic politicalconsiderations and the deadweight of tradition andhabit in development cooperation offices and in theFund and Bank alike, to reconcile the declared inten-tions with practice.

Donors tend to see ownership as an acceptance bythe recipient country of donor-driven priorities andprograms, and the same sentiment often lurks behindaffirmations of the need for country ownership byIMF and Bank staff. For the external agents then, it isas if the whole struggle is about getting the countriesto “volunteer to adopt” donor-driven programs.4

Thus, a number of issues still need to be addressedin order to move the matter beyond the domain ofpolitical correctness to actualization. These includethe following.

• What does ownership mean? What are its dis-tinguishing determinants, and what are their

24

3See, for instance, Helleiner (forthcoming) and Botchwey(1996).

4Helleiner (forthcoming), p. 7.

Introduction

relative weights and influences on programsustainability?

• How can ownership so defined be reconciledwith a regime of conditionality that triggers ac-cess to resources, not only from the Fund and theBank, but also from all other official develop-ment assistance sources?

• To the extent that a negotiated program is alwaysa product of a largely lopsided compromise, es-pecially for countries that have no alternativesources of financing, under what circumstancescan it still be “owned,” if at all, by the country?

• Given the legitimate need to ration scarce re-sources in support of “correct” or “appropriate”policies that have a reasonably good chance ofsuccess, and in a situation where there are no ar-biters nor appellate bodies, what sort of condi-

tionality regime can both achieve efficiency inthe use of external resources and address theconcerns about national ownership?

In this review, we have attempted to test, throughthe case studies, a number of hypotheses, includinga definition of ownership based on the “rooting” or“anchoring” of the reform program in country sup-port, and determinants of such ownership that re-late to program authorship or origination, the scopeof societal support, the level of government com-mitment, the role of specific initiatives by govern-ment and by the Fund in promoting ownership, andthe role of the Fund’s operating methods in foster-ing or inhibiting country ownership. We then makesome recommendations for developing countryownership on the basis of common themes derivedfrom the country experiences and lessons that theyoffer.

25

Social Impact

ESAF as an Instrument

ESAF lending is a conditional transfer of re-sources. Both the conditions and the transfer are dis-tinctive compared with other adjustment lending.

The conditionality is far ranging and high level. Itcovers both medium-term policy changes across theeconomy, and short-term monetary and fiscal man-agement. Its high power comes from cross-condi-tionality, with bilateral donor and other internationalfunding institutions programs. Since this cross-conditionality is nonreciprocal, Fund conditions arethus at the top of the hierarchy of donor conditional-ity. The unique authority of the Fund derives fromthis hierarchy rather than from the amount of re-sources that the Fund transfers, which is typicallyrelatively small in the context of overall transfers.The existence of a hierarchy reflects the donors’need for coordination: some agent must take the leadrole in judging country performance. The fact thatthe IMF occupies this role reflects the primacy ofshort-run macroeconomic policy, given the contextof a long history of macroeconomic mismanagementin most low-income countries.

ESAF as a transfer mechansim is distinctive be-cause, with an important exception, funds accrue tothe central bank rather than to the government bud-get. ESAF does not generate any counterpart funds.The foreign exchange is used either to increase thelevel of reserves or to finance a higher level of im-ports. The part of ESAF funds that is used for re-serves provides an income for the central bank sincethe interest rate earned on its deposits exceeds theinterest rate charged by the IMF. Potentially, thegovernment might capture this income, although therelationship between increased central bank sur-pluses and transfers to the government need not be aclose one. This income transfer is, however, inciden-tal to the purpose of ESAF funds used for reserve ac-cumulation, since the rationale is the increased levelof confidence that higher levels of reserves provide.Research by the Fund has established that investorrisk ratings are strongly positively influenced by the

level of reserves, and in turn the risk ratings appearto be important in determining investment flows(Haque, Nelson, and Mathieson, forthcoming).

That part of ESAF funds that is used to increaseimports also indirectly benefits the budget. ESAF re-cipients have a high fiscal dependence upon importtaxation, and the higher tariffs are, the larger is theproportion of ESAF funds that supports the budget.As with the support of the budget via increased cen-tral bank surpluses, this is an unintended effect. Themajor effect of ESAF import financing is, however,on relative prices. By augmenting central bank salesof foreign exchange, ESAF programs appreciate theexchange rate. This benefits net purchasers of for-eign exchange, and adversely affects net sellers.

In this respect, ESAF is like Dutch disease. Sincethe export sector is a net seller of foreign exchange,the consequence is that ESAF operates like a tax onthe export sector. While this may appear to be a gen-eral effect of all donor transfers, in fact all non-ESAF transfers potentially have an offsetting effect.ESAF is unique in that it does not accrue to the gov-ernment budget (except through the two inadvertentchannels identified above). Non-ESAF transfers, byaugmenting public expenditure, are able to offset thenegative Dutch disease effect on the export sector bypro-export public services. For example, donor sup-port for a road program can reasonably be presumedto lower the transport costs faced by the export sec-tor by more than it implicitly taxes the sectorthrough an appreciation in the exchange rate.

The exception to the above is the operation ofESAF in the CFA franc zone. In the CFA franc zone,ESAF of course does not affect the exchange rate.However, the Fund does allow it to be used in its en-tirety as direct budget support since providing bal-ance of payments support is unnecessary in the con-text of French support. Hence, in the franc zoneESAF is likely to benefit the export sector, whereaselsewhere it is likely to be detrimental.

The model that the Fund adopts in the franc zoneappears to have advantages that could be extended toother ESAF recipients. It is an unfortunate side ef-fect of present ESAF design that budget support ac-crues mainly to the extent that a government has

II General Themes

26

Social Impact

high trade taxes. It is also unfortunate that ESAF isthe only transfer that operates as an unmitigated im-plicit tax on the export sector. Since there is evi-dently no issue of principle in whether ESAF ac-crues to the budget, it might be desirable to unify thetreatment of ESAF recipients by providing it as bud-get support in all instances.

Crisis Response:The Poverty Impact

To date, ESAF programs have generally com-menced in the context of macroeconomic crisis, al-though the form of the crisis has usually been an un-sustainable fiscal deficit or a severe decline in realincomes, rather than a run on the currency. As a re-sult, the poverty impact of the policy package hasnot been foremost among the considerations of Fundstaff. In recent years, there has been a noticeable in-crease in the attention paid to social impact in Funddocuments. However, even in recent work, the dis-cussion in effect relies upon government declara-tions about the efficacy of social programs. TheIMF’s Executive Board may need to restate the pur-pose of ESAF arrangements to include the socialconcerns that it has articulated in the terms of refer-ence for this study as an explicit requirement. IMFwork on the social impact of programs could be bothmore analytic and more empirically based.5

In analyzing the social costs of adjustment, it isuseful to distinguish between the two main routes bywhich living standards are affected by policy:changes in private incomes and in public social ex-penditures. A further distinction is between adjust-ments in which policy reform imposes substantialtemporary costs in aggregate, and those in whichlosses for some groups arise predominantly becauseof redistributions to other groups.

Adjustment and Private Incomes

We first focus upon adjustment and private in-comes. The case of temporary aggregate adjustmentcosts, where the entire economy initially contractsprior to sustainable growth, is exemplified by thetransition economies of Eastern Europe and thecountries of the former Soviet Union. Transitioneconomies are characterised by two features that, inconjunction, produce this U-shaped response to re-form. First, a large sector of the economy, typicallyindustry, produces high-cost inputs that handicap theexpansion of potentially viable sectors, and so mustcontract before such sectors can expand. Second,

there is a lack of entrepreneurship, so that the paceof expansion of the newly viable sectors is slow.Thus, the aggregate economy contracts as the de-cline of the large, unviable sectors initially domi-nates the expansion of the newly viable sectors.

Some of the transition economies are also charac-terized by a lack of safety nets. Typically, there is nopublic system of welfare payments for the unem-ployed; there is no easy-entry job sector to whichformer workers of the declining sector could turn;and there is generally a less strong tradition of sup-port through extended families than in Africa.

A few ESAF countries have all of these featuresof transition economies (although these were notincluded in our sample). Some other ESAF coun-tries have one but not other features of transitioneconomies. For example, Zimbabwe has a large in-dustrial sector supplying capital goods and inter-mediates, much of which had to contract to makeother activities viable on world markets. However,the social costs of this contraction were muchlower than in the pure transition economies be-cause there were already entrepreneurs able to takeup new opportunities, and because there was aready safety net through a large informal sector anda tradition of support through the extended family.In Zambia, there was less need for early contrac-tion (since the industrial sector was largely produc-ing final goods) but, owing to the long period ofstate ownership, there were few entrepreneurs totake advantage of new opportunities. In Malawi,previous repression of the urban informal sectorlimited the main safety net for displaced urbanworkers.

More commonly, ESAF countries do not share anyof the characteristics of the transition economies. Inthis major group, the social costs of adjustment arisethrough redistributions within the society rather thanthrough aggregate losses. For example, in Ugandaand Ghana even the early stages of reform weregrowth enhancing so that, in aggregate, there wereimmediate social benefits. However, whereas aggre-gate losses from transition are temporary, losses aris-ing from redistributions are likely to be long lasting,since the losses are usually due to relative pricechanges that are intrinsic to the policy changes.

Some of those who lose are likely to be poor.However, this is not equivalent to saying that thepoor lose from adjustment. Usually, distributionalchanges arising from policy reform tend to favor thepoor, but it is important to recognize that the poorare not a homogeneous socioeconomic group, so thatamong the poor there will often be identifiablelosers. Because many of the losers from reform arenot poor, the important question to ask is not “wholoses from reform?” but rather, “who, among thepoor, loses from reform?”

27

5We focus here on the feasibility of ex ante analysis of thepoverty impact of Fund programs. Whether such an extension ofthe work of the Fund staff is desirable is a question we will ad-dress later in this report.

II GENERAL THEMES

In most ESAF countries, socioeconomic surveydata were available at the start of the reforms so thatthis process of identification was feasible. However,in our sample, this analysis was typically not done.A notable exception is the recognition in Malawithat the rural poor were net purchasers of maize andhence would suffer from the increases in food pricesenvisaged under the program. More commonly, pre-dictable negative effects for poor groups weremissed. For example, again in Malawi, it could beestablished from survey work that households de-pendent upon wage income from agricultural estateswere among the poor. Wages on the estates were setthrough a national-level government-regulated mini-mum wage. In the first two years of the ESAF pro-gram the nominal value of this minimum wage wasnot altered. As a result, owing to very high inflation,the real value halved. Two years into the programthe nominal wage was raised, but this delay inflicteda severe decline in real income upon a group ill-pre-pared to cope with it. These temporary losses of theestate workers were a transfer to estate owners, andin no way a necessary cost of adjustment. Had avail-able information been better used, it would havebeen easy to protect this substantial group by adjust-ing estate wages for inflation.

While improved analysis of adversely affectedpoor groups is both necessary and feasible, we willsuggest below that this is not an appropriate task forthe Fund.

Adjustment and Social Expenditures

Social expenditures can get squeezed during ad-justment for four reasons. First, the entire economymight contract (the transition economies case), sothat the protection of per capita expenditures wouldrequire a rising share of social expenditures in GDP.An example is Côte d’Ivoire prior to 1995. If aggre-gate income is falling, it is unlikely to be optimal forsocial expenditures to be maintained constant in ab-solute terms, but it may be desirable for them to fallless rapidly than aggregate income. Second, the ad-justment might involve a decline in the share of pub-lic expenditure in GDP. An example is post-1991Zambia. This is quite likely to be the case since ad-justments often start from unsustainable fiscaldeficits; however, it is far from universal. Attentionhas usually focused on whether deficits should beclosed by higher taxation instead of reduced expendi-ture. In our sample, such a criticism would not usu-ally have been reasonable. A more sustainable criti-cism would be that, through premature financialliberalization, governments have faced sharply in-creased interest expenditures, which have necessi-tated otherwise avoidable reductions in social expen-ditures: Zimbabwe and Zambia are examples. If GDP

is not declining, there is a good case for maintainingsocial expenditures by increasing their share of pub-lic expenditure. Third, social expenditures might getsqueezed because other public expenditures are givengreater priority. An example is Uganda, where thegovernment determined that infrastructure was likelyto be more productive. Fourth, social expendituresmight get squeezed because the cost of providingthem rises relative to other prices. Examples of thisare Uganda and Zambia.

Of these four, donors have paid most attention tothe third: the share of social expenditures in the bud-get. However, in our sample the most important ef-fects have come through the fourth: the change inthe relative cost of providing social services. In Zim-babwe, Malawi, and Côte d’Ivoire, the relative costof social services declined substantially, often con-verting declines in the real value of spending into in-creases in the volume of service delivery. In Zambiaand Uganda, relative price changes worked in theopposite direction. Although the relative price effectwas large in each of the countries in our sample, wehave found no mention of it in Fund documents.Sometimes social expenditures are reported as ashare of GDP, and sometimes they are reported in“real” terms when deflated by the GDP deflator; ineach case an implicit assumption is that the deflatorfor social services is the same as for GDP. Generally,the large relative price effects arise from civil ser-vice wage policies and from exchange rate changes.For example, in Zimbabwe and Côte d’Ivoire civilservice real wages have been sharply reduced,whereas in Uganda they have been increased. Sincethese changes in costs are part of the program, theyshould be integrated into the analysis of social provi-sion. In some ESAF countries sectoral cost and pricedata are not available, but in the five countries in oursample data were not a constraint.

Forecasting and Monitoring Social Costs

While it would be feasible to reduce the socialcosts of adjustment by better attention to socioeco-nomic data, the IMF is not the appropriate institutionfor this expertise. The World Bank already under-takes considerable analysis of poverty. The Bank hasa comparative advantage in this field given its mi-croeconomic focus and its history of household datacollection. However, at present this information isused predominantly for longer-term questions ofpoverty-alleviating development strategies. The ap-propriate way to harness this expertise into the betterdesign of short-term stabilization programs is for theFund to formally request the Bank to identify whichgroups among the poor are likely to lose from spe-cific aspects of the program. As part of its response,the Bank should be asked to provide likely paths of

28

Social Impact

the incomes of the main poverty groups and of themonitorable outputs of social services. One advan-tage of this is that such forecasts would then getmonitored. As a result there would be a better warn-ing system when the poor are badly affected. Weshould make it clear that we do not intend that theincome projections for poverty groups be criteria bywhich a program can be declared “off-track” in thesame way as rapidly available financial targets aremonitored. The delay in income data precludes suchan approach. However, there is an important role forthe review of program performance on poverty crite-ria. If program design has envisaged decliningpoverty whereas it is rapidly increasing, the pre-sumption must be that either the program design wasflawed or there have been unanticipated circum-stances. In either event, it would be appropriate toreconsider program design. Poverty monitoringwould thereby provide some mechanism for qualitycontrol of the program in an important dimension. Itis possible that the present lack of formal Fund-Bankprojections and monitoring of poverty outcomes in-creases the fear of policy change.

The Fund staff itself could monitor social expen-ditures more clearly than is currently done in staffreports. At present, the social expenditure data usu-ally reported is the share of social expenditure in thebudget. More important numbers are real per capitahealth and education expenditures. When these fallduring an adjustment program it is useful for Fundstaff to diagnose the cause, whether it is a decline inGDP, a decline in public expenditure relative toGDP, a decline in social expenditure relative to otherpublic expenditure, or a rise in the relative cost ofproviding social services. The above is feasiblebased on data currently available to the Fund andwith current Fund expertise. A much more ambitiousstep would be to attend also to the efficiency of pub-lic expenditure. While this is of obvious importance,the skills required make this more appropriate forthe Bank and other agencies and we do not recom-mend Fund involvement.

Protecting the Poor

The poor are not, in general, disadvantaged by sta-bilization and adjustment, in that they do not usuallysystematically lose more than other groups. In tran-sition economies, temporary hardship may be verywidespread among social groups. In such circum-stances food-for-work projects may provide a safetynet into which the poorest self-select. In low-incomecountries the losing group is likely to be smaller butmore particular. The best and most comprehensiveacademic study of the impact of policy reform on thepoor in Africa, by David Sahn, concludes that re-form will “generally have positive effects on growth

and income distribution,” and that “concern for thewelfare of the poor is a weak excuse for inaction andthe perpetuation of failed policies” (Sahn, 1996, p. 22). Nevertheless, diverse subgroups of the poormay suffer temporary or long-term losses. We havealready noted the example of estate workers inMalawi. In Zambia, those maize farmers who wereremote from markets suffered by the ending of pan-territorial pricing and subsidized maize meal. InCôte d’Ivoire, workers in the informal sector ofAbidjan faced large losses as devaluation squeezedthe expenditures of higher income groups. InUganda, demobilized disabled soldiers lost whatwere in effect welfare payments. In such cases, na-tional food-for-work programs are less effective andcase-specific solutions are required.

To date, safety net programs have tended to havethree weaknesses. First, they have tended to beaimed at high-profile groups that lose, such as re-dundant civil servants, rather than those among theinitially poor who lose. Second, their execution hastended to be slow, and more appropriately paced forthe general problem of poverty alleviation than forthe specific protection of those poor who lose fromreform. Third, the budgets have tended to be smallrelative to the scale of the problem.

Sharing the Benefits

While the poor may not disproportionately sufferfrom stabilization and adjustment policies, largegroups among the poor, such as subsistence farmers,may be slow to benefit from rising aggregate in-comes. Thus, in Uganda, the benefits of incomegrowth have to date largely missed the part of therural population that derives its income predomi-nantly from subsistence. In these circumstances, in-creased delivery of public services is a means bywhich the benefits of growth can swiftly be spread toa majority of the population. This may give rise to ashort-run trade-off between growth maximizationthrough spending on infrastructure and poverty alle-viation through spending on social services. Facedwith such a trade-off there is no obviously right an-swer, but governments should at least be appraisedof the facts. There might at least be a presumptionthat in a growing economy the absolute per capitasupply of basic social services would continuouslyincrease. As discussed above, because of the largerelative price changes that affect social service deliv-ery, this is not automatically achieved by increasedbudgetary provision as a share of GDP. There mayalso be a conflict between the effective delivery ofsocial services and the operation of the cash budget.Although there is no easy answer to these problems,the present lack of clarity in the presentation of dataon social provision and its relationship to GDP

29

II GENERAL THEMES

growth and budgetary decisions in effect biases deci-sions against prompt corrective action to maintainsocial provision on track.

Trade-Offs Between the Short and the Long Run

Fund programs describe both short- and long-termpolicies and objectives, but in practice tend to givepriority to the former. Performance criteria are typi-cally defined in terms of fiscal and monetary vari-ables, measured at high frequencies. The programswe have described in the case studies invariably alsoincluded structural reforms and growth targets butthese play a lesser role in the Fund’s high-level con-ditionality.

This is, of course, entirely appropriate when theprime objective is to stabilize the economy. How-ever, with ESAF lending, the Fund became con-cerned with the issue of long-run growth. While sta-bilization is justifiably seen as a prerequisite forgrowth, this introduced trade-offs between short-runand long-run considerations. These trade-offs are notsystematically analyzed in the programs. We con-sider five areas in which this lack of analysis can beproblematic.

Revenue Concerns

First, the Fund often appears to encourage revenueraising measures without considering explicitly thecost and incidence of taxation. A possible conse-quence of this is the continuing heavy reliance ofmany ESAF countries (well documented in the inter-nal review) on import taxation. Clearly, revenueconsiderations must be balanced here against thelong-run welfare costs of delayed trade liberaliza-tion. In Côte d’Ivoire, the Fund argued in favor ofthe adoption of a high external (UEMOA) tariff, ap-parently without consideration of the long-run costs.In Uganda, there was also little reduction in the re-liance on trade taxes. There was a shift from exportto import taxation but we found no evidence in IMFdocuments that (by Lerner equivalence) import tar-iffs were seen as taxing exporters. The rural econ-omy had retreated into subsistence in the prereformperiod, when exports were heavily taxed explicitly.The reversal of this retreat in the reform period washindered by the implicit taxation of exports. In thissense, trade policy failed to benefit the rural poor.

Another consequence of the Fund’s revenue pre-occupation arises in privatization programs. TheFund is primarily concerned with the effect of theselling of state enterprises on the budget and lesswith the efficiency implications of various alterna-tive forms of privatization. This stance may encour-age governments to adopt socially costly forms of

privatization. An example is the privatization of thepublic telephone company in Côte d’Ivoire. Not onlywas the company sold as a monopoly, but prior tothe privatization a regulatory framework was set upthat ensured high profitability. While this obviouslywas fiscally advantageous (increasing the amountthe government could raise from the sale), it im-posed long-run costs on the economy. In this casethe Fund abstained from taking a position on the mi-croeconomics of the proposed form of the privatiza-tion, other than insisting on transparency in the bid-ding process.

In Fund documents we have found no analysis ofthe trade-off between short-run fiscal benefits andlong-run social costs in such cases. As ESAF opera-tions will increasingly involve the IMF in areaswhere such trade-offs are important, we recommendthat they be explicitly analyzed, rather than beingleft implicitly to the Bank.

Sequencing Problems

Second, where ESAF programs involved both sta-bilization measures and structural reforms, sequenc-ing issues have been given insufficient attention inour sample countries. A common problem has beenthat early financial and exchange rate liberalizationhas made stabilization unnecessarily difficult. Zim-babwe offers a striking example. The removal of fi-nancial repression when the budget deficit was stillquite large led to a very large increase in the govern-ment interest bill (recall that this amounted to 5 per-cent of GDP). This made the planned, highly ambi-tious reduction in noninterest expenditure politicallyunsustainable and hence ultimately infeasible. Thesequencing adopted in the Zimbabwe program washighly unfortunate. Not only did it contribute to theloss of fiscal control, making stabilization elusive,but it also led to a period of very high real interestrates, deterring investment. Errors in sequencing cantherefore undermine both stabilization and (to theextent investment is reduced) structural reform.Clearly, this is not an argument for maintaining fi-nancial repression but rather for postponing finan-cial liberalization until the budget has been broughtunder control.

Similarly, in Zambia domestic financial liberaliza-tion and liberalization of the foreign exchange mar-ket led to a large step-increase in the price level. Thestabilization effort itself became inflationary andwould have failed but for the introduction of the dra-conian measure of the cash budget. In Zambia thesequencing of the reforms in fact created an incen-tive for capital flight.

An important corollary is that such sequencingproblems make it very difficult to protect desirablepublic expenditure. Recall that in Zambia the share

30

Social Impact

of public expenditure in GDP halved in a two-yearperiod. In such a context, a careful consideration ofthe costs and benefits of public expenditure isclearly impossible. In Zimbabwe, sequencing prob-lems contributed to avoidable reductions in percapita spending on health and education.

Errors of sequencing can also have grave implica-tions for the poor. In Zambia, they led to a creditcrunch in the private sector that delayed the emer-gence of rural food markets when the governmentwithdrew from marketing.

Postponement of Structural Reform

Third, in some ESAF programs structural reformshave come too late rather than too early. Both inZambia and Malawi growth required radical struc-tural reforms in agriculture, with long lead times, asin the case of the rehabilitation of rural roads.

We have noted that Zambian farmers were effec-tively stuck in a “corner solution,” specializing inmaize production. The withdrawal of the governmentfrom agricultural marketing operations should havebeen complemented with early reforms to improverural transport, extension and storage. Similarly, re-form in the export sector required the privatization ofZambia Consolidated Copper Mines (ZCCM) but asyet this has still not been achieved.

In Malawi, the first ESAF did not even involvesubstantial structural adjustment and while the pro-gram for the second ESAF did involve structural re-forms, the transformation of the smallholder sectorhas begun only quite recently. In Uganda, after adecade of SAF programs there are still elementaryinfrastructure deficiencies, most notably in electric-ity and telecommunications.

Such problems require very early action on struc-tural measures, to be initiated when the economy isstill in the stabilization phase. The failure to front-load structural reforms with long gestation lags maywell be the most serious defect of structural adjust-ment as currently designed. Without such early ini-tiatives, there may be a long period of little growth,undermining the political support for the program.

Cash Budgets

Fourth, several countries (notably Zambia andUganda, both in our sample) have been very suc-cessful in rapidly bringing down inflation by switch-ing to a cash budget. However, a cash budget makesit impossible for the government to optimally allo-cate its expenditure intertemporally. Investment caneasily be affected, even in cases where capital costsare fully borne by donors: when the cash budget pre-vents the government from making complementaryrecurrent expenditures, investments can be delayed.

There is at present some concern among donors thatthe operation of a cash budget may have such ad-verse effects on the efficiency of expenditure that, inpoststabilization economies, the instrument mayhave to be modified.6

Clearly, there is no simple answer to the questionof when the costs imposed on the economy by in-tertemporal misallocation start to outweigh the bene-fits of the cash budget in terms of fiscal control andcredibility. The Fund staff recognizes that cash bud-gets are only a short-term solution and we encouragefurther work on the question of the evolution of cashbudgets to more sustainable systems of fiscal con-trol. In this area, the Fund could in our view play anextremely important advisory role.

Budget Deficits in Poststabilization Economies

Fifth, probably the most damaging form of con-flict between short- and long-run concerns arises ineconomies that have been successful in achievingstabilization. In such countries, such as Uganda inour sample, the traditional Fund concern with fiscaldeficits needs modification. While the Fund is cor-rect to emphasize that domestic deficit financingshould always be avoided, the attempt to reduce cur-rent account and aid-exclusive fiscal deficits further(or indeed to run a surplus) has no bearing upon thecontrol of inflation, while it is damaging for growth.The original Executive Board statement of the pur-pose of ESAF was as follows: “to promote in a bal-anced manner, both balance of payments viabilityand growth, through mobilization of domestic andexternal resources . . . .” (December 15, 1987). Ahelpful approximation of this purpose is to think of itas two objectives with two instruments: “to promotebalance of payments viability through the mobiliza-tion of domestic resources,” and “to promote growththrough the mobilization of external resources.”Since the intention was to promote each of these “ina balanced manner,” we might think of the two ob-jectives as on average being given equal weight. Inprestabilization environments, priority clearly mustbe given to external viability. Conversely, in poststa-bilization environments, where the budget deficit iscovered by grants and the grant-equivalent of con-cessional lending, the priority for the Fund shouldshift to the “promotion of growth through the mobi-lization of external resources.” At present, the Fundgives the impression that it wishes to see aid taperedout over a quite short period in poststabilization en-vironments. While, as the Fund notes, there must becontingency plans for a decline in the willingness ofdonors to provide aid (just as there must be contin-

31

6We consider the role of the Fund in such economies in thenext subsection.

II GENERAL THEMES

gency plans for a deterioration in the terms of trade),the Fund should, to be consistent with the statementof its Board, encourage both more public and moreprivate capital to flow into those policy environ-ments that it deems to be satisfactory, and provideplanning scenarios that show the growth path thatsuch inflows would permit. A clear statement fromthe Board that the decline of aid in poststabilizationlow-income countries is undesirable would be help-ful and timely.

There are three disadvantages of the Fund’s cur-rent approach to budget deficits in such countries.First, at least a subset of the countries that haveachieved stabilization have also achieved a policyenvironment conducive to growth. As donors be-come more aware of the evidence that aid is effec-tive in such—and only in such—economies, aidflows to these countries are likely to increase. TheFund’s tendency to plan for a rapid decline in aid de-pendency seems inappropriate in such cases: an in-crease in aid (and hence in the budget deficit) is bothlikely and desirable. If donor support indeed materi-alizes while the Fund insists on reducing the totalbudget deficit (measured before grants), then aid canonly be used to reduce government debt (a restric-tion that will almost inevitably reduce the incentivefor donors to provide aid in the medium term).

Second, if targets are set in terms of the current(rather than the total) budget, aid can be used notonly for retiring government debt but also for publicinvestment. However, even in this case the approachcan be detrimental to growth since recurrent expen-diture (e.g., on road maintenance or on teaching ma-terials for schools) may well be growth enhancing.The implicit bias in favor of investment expenditurehas become a matter of concern with several of thedonors in ESAF countries.

Third, budget deficit targets are based on moneydemand estimates that treat GDP growth as exoge-nous. This is of course entirely appropriate for theshort-run stabilization issues for which the Fund’sprogramming approach was developed. However, itis no longer appropriate in a context in which donorsare willing to finance growth-enhancing expendi-tures (whether investment or recurrent expenditure).

There may be important interactions between thefive types of trade-offs we have distinguished.Uganda is a case in point. As noted, Uganda is inthe poststabilization phase and the public invest-ment program needs to be expanded. Not only isthe Fund’s concern to reduce the budget deficit ex-cluding grants and IDA funds here counterproduc-tive, it also encourages increased reliance on tradeand petroleum taxes (the two main revenuesources) rather than on aid. These taxes have highcosts in terms of growth, which can be avoided byaid financing.

Improving the analysis of the trade-offs betweenshort-run and long-run effects is clearly essential forthe success of ESAF programs. It is also importantfor improving the Fund’s signaling function. One ofthe IMF’s most valuable functions is the signal ofcredibility that it provides to private investors by ap-proving a program. This signal becomes noisy as itsrecipients become aware that the design of approvedprograms may be faulty and that program interrup-tions are indeed common.

The Role of the Fund in Postcrisis Management

The Fund’s traditional role is in crisis manage-ment. To date, this has also been the context inwhich ESAF programs have been introduced. How-ever, in a few ESAF countries the Fund is now at adecision point since stabilization has been fullyachieved and the major macroeconomic reformshave been implemented. Either the Fund maintainsits exclusive focus on crisis management and its af-termath, and so withdraws from these countries, or itmaintains its relationship with the countries and ex-tends its remit. In our sample, the clearest case isUganda, which has had a satisfactory inflationrecord for over five years, during which time it hasadopted full convertibility of its currency. The goodpolicy environment in Uganda and the rapidly im-proving risk ratings make it likely that both publicand private capital inflows will increase.

The case for Fund withdrawal in such situations isthat the Fund’s work is done. The case for continuedinvolvement is, first, that both investors and donorsregard the environment as high risk and need reas-surance such as can be provided by IMF involve-ment; second, that ESAF governments need the con-tinued expertise of the Fund; and third, that ESAFresources are most productive in an already re-formed policy environment. Overall, we regard thecase for continued involvement as the stronger.However, each of the three arguments in favor ofcontinued involvement requires qualification.

Investor Reassurance

The Fund’s role in investor reassurance is poten-tially important, but to date it has not been an un-qualified success. A recent econometric study (Ro-drik, 1995) found that the presence of a Fund ESAFprogram had no significant effect on private capitalflows. This is presumably not helped by the fact thatthree-fourths of ESAF programs collapse or are in-terrupted. For the Fund to play a more positive rolein raising the confidence of investors, its relationswith governments need to be made more effectivefor signaling, and it needs to reconsider what wouldconstitute success.

32

Social Impact

For the Fund to have a more favorable signalingrole in a poststabilization economy, it may help forthe change of role from that in the stabilization phaseto be clearly identified by the Fund. One option thatthe Fund may consider is for already stabilizedeconomies with a good record to be evaluated over alonger period, with more emphasis upon ex post as-sessment of performance and less on ex ante negotia-tion of promises and short-term monetary targets.That is, a government would graduate from a crisismanagement phase of ex ante negotiation, to a stabi-lization-with-growth phase of ex post evaluation.Such a change would enable a government to demon-strate its own choices more clearly, so that a goodgovernment could build reputation more rapidly.Such an innovation might also enable the Fund to be-come involved in low-income countries that have nothad a macroeconomic crisis and where the govern-ment consequently does not see the present style ofESAF programs as appropriate (examples being Er-itrea and India). Greater reliance upon ex post evalu-ation would not remove the need for continuousmonitoring. As the Fund staff notes, “without such aprovision, the Fund and other donors would risksquandering their resources on an unsustainable pol-icy regime.” However, it would change the content ofthe monitoring. The major result on aid effectivenessidentified by Burnside and Dollar (1997) is that it isthe level of policy rather than its change that is im-portant. Hence, the continuous monitoring role of theFund in poststabilization environments would focusupon the maintenance of a few key features ofmacroeconomic policy, rather than upon the furtherimprovement of other policies. In addition to thislimited continuous monitoring, major reviews of per-formance would be conducted ex post every threeyears as with the present ESAF cycle. Specificarrangements would be needed for new governments.Newly elected governments lack both a track recordand responsibility for past errors and so constitute anintermediate category. When they face a prestabiliza-tion situation, as in Zambia in 1991, the Fund’s ap-proach would need to remain largely ex ante, whilewhen they face a poststabilization situation, theycould reasonably be presumed to inherit the perfor-mance rating of the previous government.

A successful IMF role in a poststabilization econ-omy is one in which the growth rate is enhanced byincreased investment. An environment of low andstable inflation is likely to be conducive to this objec-tive but it should not be the limit of the Fund’s ambi-tion. In particular, a successful ESAF economy willbe integrating into world financial markets and at-tracting an increasing inflow of capital relative toGDP, which finances a rising private investment rate.

The recent evidence on aid effectiveness estab-lishes that aid is only effective in raising growth in

good policy environments (Burnside and Dollar,1997). An implication (which we have already notedearlier) is that aid should, and perhaps will, becomeincreasingly targeted on the successful ESAFeconomies. Hence, an ideal poststabilization ESAFcountry would go through a phase of rising externaldeficits, resulting from both private and public in-flows, financing rising private and public investment.An important role of the Fund in this environment isto set these rising inflows in the context of a medium-term macroeconomic framework. Clearly, large ex-ternal deficits can be either highly undesirable orhighly desirable, depending upon the policy context,the growth rate, and the initial level and terms of in-debtedness. By making this distinction, the Fund hasan important role in reassuring both donors and pri-vate investors that, in some contexts, large deficitsare appropriate. This requires a very different view ofexternal deficits from the Fund’s customary work asa stabilizer, when deficits are necessarily undesirablebecause they are a sign of unsustainable levels ofconsumption. A somewhat analogous argument ap-plies to the fiscal deficit. In the context of a success-ful ESAF economy with a satisfactory policy envi-ronment, the more grant aid that can be attracted andused, the better. It is dysfunctional to attempt to tapersuch aid out of the budget. The fiscal balance shouldbe calculated to be inclusive not only of pure grants,such as European Union money, but also of the grantelement in other aid. For example, around 70 percentof IDA money should be classified as grant aid,whereas it is presently treated by the Fund as if itwere fully commercial borrowing. As a result, at pre-sent the Fund seriously exaggerates the size of thefiscal deficit. Since private investors generally do lit-tle research on ESAF countries, they are in no posi-tion to correct the impression conveyed by this mis-information, and so this bias can be presumed to bediscouraging private investment, the opposite of theeffect that the Fund should be setting as its objectivein these economies.

Partly as a result of the success of ESAF, there arenow several low-income African economies thathave recently achieved a satisfactory policy environ-ment. These countries (Uganda in our sample) arecurrently growing rapidly. However, their invest-ment rates remain low: current high growth is thetemporary pay-off to policy reform. This conjunc-tion of high growth and low investment is not sus-tainable: either investment must rise or growth willdecelerate. The increase in investment cannot be fi-nanced predominantly from domestic savings be-cause incomes are so low: both enhanced private andpublic capital inflows will be needed until incomeshave risen.

Private investment is currently deterred becausethese environments are rated as highly risky. The

33

II GENERAL THEMES

risk ratings for the newly reformed economies areimproving, but from a very low base, and it willtake another decade before the ratings reach thelevel of the current newly industrializing countries,at which major investment inflows become likely.Recent Fund research has shown that the commer-cial risk ratings, although largely explicable interms of fundamentals, are biased against Africa:African risk ratings are worse than is justified bythe fundamentals. Further, recent World Bank re-search has shown that in the reformed policy envi-ronments, aid acts as a catalyst for private invest-ment: each dollar of aid induces almost two dollarsof investment. Hence, investment inflows can beincreased both by increased aid inflows and by areduction in the perceived risks. In both of these,the Fund has a key role.

The Fund can reduce perceived risks by signalingthat a country has reached the phase in which themacroeconomic policy environment is satisfactoryfor private investment. In this phase, the key role ofthe Fund is the surveillance of policy maintenancethrough the monitoring of a few key variables,rather than the negotiation of further promises ofpolicy change. As we discuss further in the Deter-minants of Ownership section below, the credibilityof a policy environment is enhanced if it is manifestthat the government has willingly chosen the policyregime. This is what we mean by “ex post evalua-tion.” However, surveillance in itself may not besufficient to achieve credible certification. To befully credible, the Fund should put its own re-sources at stake and so have a program. However, itis essential that such a program be clearly distin-guished from those that are designed to cope withcrisis recovery. Countries would be seen to graduateout of a crisis period into a second phase of risinginvestment, before they graduated completely out ofFund programs. The graduation into this secondphase would constitute a powerful signal to the in-vestment community. It would also constitute a sig-nal to the donor community. As discussed earlier,there is now compelling evidence that aid is effec-tive in, and only in, satisfactory macroeconomicpolicy environments. The Fund has a key role incertifying that such an environment has been at-tained. Clearly, maintained Fund financing in theseenvironments adds credibility to the message thatdonor funds should appropriately increase. TheFund itself is not a development finance institutionand should not become one. Rather, its new role forthis group of graduated, but investment-scarcecountries is temporary, in the initial phase of a re-formed environment. The recent wave of reformsand temporary high growth in Africa has thus cre-ated a window of opportunity. The Fund is instru-mental in whether this opportunity is seized.

Fund Expertise

Fund expertise has customarily had a dual role inESAF countries: as the primary source of advice onmacroeconomic policy, and as the highest level ofconditionality on the entire process of policy reform.There is an obvious potential tension between thesetwo roles, which becomes much more acute as re-form proceeds from the core macroeconomic poli-cies of exchange rate liberalization and the reductionof the inflation tax to the myriad of microeconomicchoices facing governments. The Fund has special-ized expertise in the core macroeconomic choicesand correspondingly lacks expertise (as the staff rec-ognizes) in the microeconomic sphere. At present, inpoststabilization environments, the Fund is tendingto broaden its agenda, maintaining the same negoti-ating style of short-term targeting as in crisis man-agement, while changing the content of the negotia-tions from exchange rate policy to the details ofsectoral policy. With the growing concern over thesocial impact of reform, the most natural evolutionof this style would be for the inclusion of social sec-tor policies in IMF conditionality.

A corollary of this extension of the sphere of policyover which the Fund might become concerned is thatthe Fund and the Bank would be performing essen-tially the same role, and the rationale for their contin-ued distinct existence would not be obvious. In a fewESAF economies this is now the situation. In princi-ple, there is close Fund-Bank cooperation and liaisonin policy advice. In practice, the situation on theground is highly variable, but the norm is for liaisonto be seriously deficient. The building of genuine de-tailed liaison would require major institutionalchange, which we do not regard as realistic except ina small number of areas (most notably fiscal policyand trade policy) where Fund-Bank overlap is un-avoidable. However, were the Fund to go in this di-rection, what would be required is not expressions ofgoodwill, but rather formalized procedures for cross-institutional teamwork and decision rules.

The alternative is for the Fund to remain focused onmacroeconomic policy, leaving microeconomic andsectoral policies to the Bank. This would imply that ina poststabilization environment the Fund would havea diminishing role, refocused upon managing in-creased external inflows in an orderly fashion. Thehigh-level conditionality role would fade out in sucheconomies as Fund assessment became ex post. (SeeCollier and others, 1997.) We find this latter model forthe Fund in poststabilization situations more appropri-ate than attempting to convert it into a full-fledged de-velopment bank or to integrate its day-to-day workmuch more closely with that of the Bank.

That is, we propose that the Fund focus moreupon its core business of macroeconomics. This

34

The Determinants of Ownership

would still leave an important area of overlap withthe Bank with respect to fiscal policy. Revenue andexpenditure decisions have both microeconomic andmacroeconomic consequences and their reconcilia-tion is one of the most difficult policy decisions fac-ing governments. It is unfortunate that this decisiontrade-off straddles the institutional divide betweenthe Fund and the Bank. Here, it is a very high prior-ity that the two institutions cooperate much more ef-fectively in advising on the trade-off. For collabora-tion to be effective, given the history of previousfailure, requires not exhortation but institutionalchange, centered on the power of decision.

Aid Effectiveness

The new evidence on aid effectiveness shows thatto date aid transfers have been ineffective both inpromoting growth, except in good policy environ-ments, and in inducing policy reform (see Burnsideand Dollar, 1997). ESAF is a form of concessionallending and, like other donors, the Fund needs todraw lessons from these very disturbing results. Twolessons are particularly important.

First, the attempt to induce policy reform by offer-ing incentives has not, on average, been successful.The econometric evidence suggests that, on average,where reforms have taken place they were not in-duced by aid but reflected the intentions of the gov-ernment. The appearance of tough negotiations(“macho bargaining”) and enforced government pol-icy change, while often true at the minute-by-minutelevel of the negotiating table, is largely a facade inthe longer context of policy change. There is a dan-ger that a culture of toughness prevails over a cultureof analysis.

Second, the transfer of resources in poor policy en-vironments is a waste, whereas in good policy envi-ronments it is productive. This implies that in theearly stabilization phase the most important Fundproduct is expertise, not financing. The Fund shouldbe more circumspect in advancing money to govern-ments that are not committed to programs. Withoutsuch commitment, the Fund and other donors risksquandering their resources on unsustainable policyregimes. Announcements such as “It’s the IMF’s pro-gram, we had to go along with it” (Statement by In-formation Minister of Zimbabwe made on December17, 1996, as quoted in newspaper) are prima facie ev-idence of overconfidence in past lending. Con-versely, in the poststabilization phase, the most im-portant product is finance rather than advice. Exceptin the transition economies, where there are gen-uinely large aggregate costs of adjustment, ESAFfunds should taper in as reform proceeds, rather thantaper out. Like other donors, the Fund needs to un-bundle its advisory and financing roles, fitting the

product to the problem. Doing so would not onlymake ESAF funds more effective, but would also im-prove signaling to private investors. The tapering inof ESAF funds would come to be regarded as the sig-nal that stabilization had been completed and that apro-growth policy environment had been achieved.

The Determinants of Ownership

Country Perceptions

We will now discuss what the country studies tell usabout ownership, make recommendations on what canbe done to strengthen country ownership, and finallyexplore the implications of these recommendations.

A number of themes stand out clearly in the countryperceptions. They relate first to the Fund’s image, sec-ond to the Fund’s operating style and methods, andthird, to the impact of Fund programs. Since the thirdis dealt with elsewhere in our report, we confine our-selves here to the first and second themes.

The Fund’s Image

To a very large extent, attitudes to the Fund differaccording to which constituency one speaks to. Forinstance, businessmen in Malawi and Uganda whohad lost protection and civil servants who had lostprivilege tended to be anti-Fund, while smallholderswhose cash incomes had improved in the wake of re-forms tended to look on the reforms favorably. Nev-ertheless, we found the Fund’s image to be rathernegative at the general popular level, and even in rel-atively more informed circles, and this often unde-servedly. In contrast, the Bank’s image in mostcountries was much more favorable although theBank was often more intrusive in the very sectorsabout which people complained the most. As wepoint out in our country profiles chapter, the Fundoften gets blamed for the iniquities of other institu-tions, including those of the Bank’s and even the In-ternational Labour Organisation (Malawi). This isno doubt attributable to some confusion about theFund’s separate identity and partly also to a generalimpression that the Fund has a preeminent or over-arching role and therefore somehow influences whatall other international financial institutions do.

The Fund’s Operating Style and Methods

There is a widely held view that Fund operationsand dealings with government are clothed in undue se-crecy. This sentiment is understandable, given that theFund mostly deals with ministries of finance and cen-tral banks and with sensitive macroeconomic issuesthat obviously cannot be made matters of public dis-

35

II GENERAL THEMES

cussion. What is interesting, though, is that the Fundcontinues to be berated for its secrecy although Fundmissions have, as the country studies show, for sometime now been dealing with a broader cross section ofgovernment officials and departments. When asked toexplain this apparent paradox, many interviewees ar-gued that meetings with people outside the core min-istries and allied agencies were seldom truly consulta-tive since only the mission leader spoke—and even heusually did no more than seek viewpoints—whileother mission members simply took notes.

We also heard criticism that the range of Fundcontacts was still unduly restrictive. Even in min-istries of finance and central banks, many com-plained that only a few assigned officials partici-pated in discussions with the Fund. Although thiswas no doubt a government decision, it was interest-ing to note that many saw the Fund as partly respon-sible for their exclusion.

In some countries, program implementation hasbeen slowed down by legislative processes becauselegislators felt excluded from government-Fundcontacts, even though in some cases, Fund missionshad made efforts to dialogue with them. In many ofthese cases, we found that the problem was the dis-continuity in the membership of these bodies.

A number of ministers and senior officials wespoke to also felt that the effectiveness of Fund mis-sions depended much too much on the personality ofthe mission leader, and how experienced and confi-dent he felt about the support of various departmentsat headquarters. Many felt that the mission leader’sflexibility in negotiations depended too much onthese factors, and that the negotiation process wouldbe greatly facilitated if some institutional safeguardswere found for reducing the role of these factors.

Almost without exception, technical personnel inministries and political leaders in the various coun-tries who deal regularly with the Fund complainedabout what they saw as the Fund’s inflexible attitudein its dealings with government. They complainedthat the Fund often came to negotiations with fixedpositions so that agreement was usually only possi-ble through compromises in which the country nego-tiating teams moved to the Fund’s positions.

Even in countries that had a reasonably goodrecord of performance under ESAF arrangements,many interviewees felt that the Fund too often sim-ply imposed its will, was generally insensitive togenuine constraints on policymaking and the pace ofimplementation, and was too quick to dismiss policyoptions favored by government.

As regards the policy framework paper (PFP)process, the predominant view—and many ministersand senior officials echoed it with some disappoint-ment—is that although initially the PFP process hadheld great promise as an instrument of a genuine

three-way dialogue between the government, theFund, and the Bank, it has become a rather routineprocess whereby the Fund brings uniform drafts(with spaces to be filled in) from Washington, inwhich even matters of language and form are cast incolorless stone. Many senior officials expressed theview that the PFP has become so uniform that it isdifficult to distinguish one from the other. Many in-terviewees, especially those outside ministries of fi-nance and in the larger government machinery, whobefore had largely been excluded from the economicpolicymaking apparatus, found this atrophying ofthe PFP process particularly regrettable.

The general yearning therefore was for the real-ization of a potential that never was—a truly coun-try-specific PFP, agreed to on the basis of a govern-ment-led consultation process. When asked whatchoice the staff had if they found government ill-prepared for or simply unable to produce a coherentdraft, the recurrent response was that the staff simplyhad a bias against government drafts, although someofficials acknowledged that Fund technical assis-tance could be helpful in such circumstances.

In contrast with the generally negative perceptionsabout Fund-supported reform programs, we foundwidespread approbation of IMF technical assistanceprograms, even among senior officials in economicministries who were critical of Fund negotiatingstrategies and programs. There is a general view thatFund technical assistance is usually unobtrusive andmuch more effective than bilateral programs. Manyfound the secondment of Fund staff of national ori-gin a particularly helpful form of technical assis-tance, both for the preparation for negotiations withthe Fund and for the development of home grownprograms. Because of its effectiveness and generalacceptability, Fund technical assistance, in our view,has a particular significance in the development ofnational ownership.

Ownership, the Negotiation Process, andConditionality

There is one common theme that runs through allthe foregoing country perceptions. At the root of allthe concerns they reflect is a feeling of a loss of con-trol over the setting of the policy agenda in reformprograms, as well as the pace of implementation ofthese policies. They therefore go to the very heart ofthe ownership problem.

All the available evidence suggests that condition-ality-intensive programs seldom succeed in achievingtheir objectives. Moreover, all the parties in the devel-opment debate agree that ownership is the key to suc-cessful program implementation. This is true for theDevelopment Assistance Committee (DAC) of theOECD. It is true of the Bank, the Fund, and all major

36

External Viability

regional financial institutions. Members of the DACmeeting in May 1995 at the level of development co-operation ministers and heads of aid agencies, for in-stance, endorsed a number of strategic orientationsthat included a recognition that “developing countriesthemselves are ultimately responsible for their owndevelopment . . . . For development to succeed, thepeople of the countries concerned must be the ownersof their policies and programs” (OECD, 1996,Annex). In the same way, the final report of the DACad hoc working group on participatory developmentand good governance agreed on key conditions thatincluded a recognition that “in development coopera-tion, legitimate ownership by the country partner is aprimary objective” (OECD, 1997, p. 7).

In the Fund itself, there is a strong and genuinequest for stronger ownership of country programs.The Fund’s guidelines on the PFP state that to ensureownership of the PFP, “the authorities should be en-couraged to initiate the drafting of the PFP or to pro-vide input on selected issues,” and also that the PFPpreparation should involve “a close collaborationwith the authorities, the Bank, Fund staff, keydonors, and other relevant institutions.”

The World Bank, for its part, also states “typically,assistance programs that the recipient countries per-ceive as being imposed end in failure or have only asmall development impact; government and benefi-ciaries do not feel they have a stake when they havenot contributed to the development of a program”(World Bank, 1995c, p. 6).

The second PDR review report notes that “abouttwo-thirds of the interruptions [in ESAF programs]were strongly affected by serious slippages in pastpolicies that either weakened the government’scredibility, or produced protracted disagreementsbetween the staff and the government on remedialmeasures.” Our country visits also provided evi-dence of a strong correlation between the degree ofownership and successful program implementation.This is borne out by the experiences of Uganda andBangladesh before the instability of the post-Ershadperiod set in, and Vietnam under its go-it-alone pol-icy—that is, before the ESAF program began. In thesame vein, Uganda and Zimbabwe provide contrast-ing examples. Uganda tried a state-directed closedeconomy and failed, and turned to an IMF-supported program after a thorough process of na-tional debate: the program has had a reasonablemeasure of success and has been sustained over along period. Zimbabwe, on the other hand, alsostarted with a closed economy in the immediatewake of its independence, ran into some difficultyand started reforms on the basis of a policy frame-work that it developed with the help of outside con-sultants and Bank advice, and then entered into theFund-supported program. The first phase of the re-

form benefited from a substantial degree of owner-ship but the ESAF program ran into difficulties,partly because of weaker ownership and a less-than-spectacular program outcome.

So, what can be done to foster strong countryownership and leadership of the reform process and,at the same time, provide assurances to multilateraland bilateral sources of external funding that theirassistance will not be wasted?

At present, there is an inherent tension betweennational ownership and the need to provide these as-surances to external agencies of support; it is not ir-reconcilable, but it is there. A forthcoming article byProfessor Helleiner, based on a study of Tanzania’srelationship with donors, illustrates this tensionrather dramatically. It reports that when asked howthey understood ownership, a number of donor rep-resentatives reportedly said they saw ownership asthe acceptance by the recipient country of whatdonors want. Some of the more forthright responsesincluded: “Ownership exists when they do what wewant them to do but they do it voluntarily”; “Wewant them to take ownership. Of course they mustdo what we want. If not, they should get their moneyelsewhere”; and, “We have to pressure the local gov-ernment to take ownership”!

Clearly, therefore, the political problems that be-devil attempts at giving the idea of ownership an oper-ational meaning are very real indeed. The solution,though, lies not in reducing ownership to simply get-ting the country to “volunteer” to do what others want,but in finding a real middle ground that balances the competing concerns through a review of the coun-try’s own decision-making and consensus-buildingprocesses, on the one hand, and the IMF’s negotiationprocess and its conditionality regime on the other.

External Viability

An ESAF program influences the macroeconomicsavings-investment process of a recipient country andaffects its current account path because the current ac-count balance is nothing but the savings-investmentbalance. Private agents are generally supposed tosmooth the consumption paths, given macroeconomicpolicies by the government. Accordingly, the result ofthe agents’ intertemporal choices is the recipientcountry’s external current account path.

More precisely, a nation’s savings-investmentpath is the result of its aggregate savings and invest-ment, that is, of the decisions of the economicagents in the private as well as the public sector. Pri-vate agents are supposed to optimize7 their objec-

37

7“Optimize” may be too strong a word; as A.H. Simon argued,“satisfice” may be more proper.

II GENERAL THEMES

tives under the intertemporal budget constraints.Economic agents optimize under certain technologi-cal production constraints, given terms of trade (if acountry is not too large), given intertemporal termsof trade (conditions for external borrowing), andgiven bureaucratic as well as political constraints.8

Those constraints on economic behavior are cer-tainly affected by a concessional loan like the ESAFloan. Moreover, foreign donors are influenced by theexistence of an ESAF loan in determining the condi-tions for extending loans. (Modern information eco-nomics offers a partial explanation of this kind ofmechanism by appealing to the abbreviation of in-formation asymmetry.) On the other hand, the gov-ernment budget will be additionally constrainedowing to the conditionalities of the ESAF program.Technological production constraints may be differ-ent because of technological progress that could befacilitated by the ESAF loan. The X-efficiency, thatis, the inefficiency below the technological frontier,may be eased by the ESAF program.

The above points can be illustrated by the IrvingFisher Diagram (Figure 1). Consider the world con-sisting of two periods—present and future.9 The pre-sent consumption and production are depicted by thehorizontal axis; the future consumption and produc-tion are depicted by the vertical axis. Let TS be theproduction frontier of the recipient country. Giventhe real rate of interest r, P0 and C0 indicate respec-tively the combination of consumption and produc-tion in the first period and in the second period be-fore the ESAF program depicted by the vertical axis.

When the ESAF program provides the possibilitythat the recipient country receives a concessionalloan with an interest rate lower than the market rater, then the production possibility locus of the recipi-ent country expands like P1EL1. P indicates the pro-duction combination in the present and in the futureand C indicates the combination of present and fu-ture consumption after the ESAF.10

L0 and L1 designate the limits of non-ESAF credit.Before ESAF, the amount of credit is restricted toP0L0. After ESAF it changes to EL1. If the country is

credit rationed, it utilizes the available credit limit sothat C0 coincides with L0. Also, the ESAF encour-ages other private lenders to lend more to the coun-try, and P0L0 will be lengthened to C0. If the econ-omy is still credit rationed, EL1will coincide with L1.

In this framework, one can ask the followingquestions:

• Does a nation’s consumption path satisfy thenon-Ponzi game conditions? Does P0L0 or P1EL1indicate the consumption possibility in this two-period case? In other words, does the consump-tion path satisfy the intertemporal budget con-straints? If this condition is violated, a nationtakes a path that accrues an infinite amount ofdebt in the future. This condition rules out the na-tional consumption behavior of continuing toborrow to consume and to repay the previousdebt. Nonstationary behavior of the borrowing isone of the symptoms. In our sample countries, wedid not find a likely case for the violation of thenon-Ponzi condition.

• What is the time horizon of nations in the sam-ple? Because of the limitation of data, so far oneexample is studied, namely, the case ofBangladesh. In Bangladesh, the result of a timeseries analysis did not respect the hypothesis

38

8In some situations, nations may be at their minimum subsis-tence level or severely credit constrained so that the corner solu-tion with no savings may emerge. Or, they may be too poor toplan for the future and are compelled to focus on the present.Time horizon and “patterning of time” (Doob, 1960) are differentfrom nation to nation. These varieties are included here in abroader category of “satisficing” behavior under constraints.

9Of course, the world does not end in two periods. There aremultiple periods. However, since the multiple (or infinite) periodanalysis requires some complicated algebra, we will remain inthis simple world with a simple diagram.

10If the recipient country borrows at the rate of the conces-sional loan, and if it re-lends at the market rate of r to the worldmarket, the point above E to G is attainable. We neglect such pos-sibilities because they will hardly be realized in practice.

Figure 1. Irving Fisher Diagram

Notes: TS= production frontier; P0, P1= production before and after ESAF;C0,C1= consumption before and after ESAF; L0, L1= limits for outside loansbefore and after ESAF; X0= X – (In) efficiency point; L0, L1= credit limit;r = (real) market rate of interest; and P01= production at present before ESAF.

Futureconsumptionandproduction

Present consumptionand production

●

●

T

0

X0

P1

G

ESAF

1~1+0.005

P0C0

E

C1

L0

L1

1+ r

S

External Viability

that the people’s time perspective in terms of therate of time preference was invariant with re-spect to before and after the initiation of theESAF program. The results in the Appendix,however, do not support the hypothesis thatafter the ESAF program the time horizon or therate of time preference was positively affected.

• Are nations constrained like points L0 and L1?

• Does an ESAF program help consumptionsmoothing over time?

• Does an ESAF program increase the availabilityof credit to the nation?

Finally, one can ask the most difficult question:

• Does an ESAF program resolve the problem ofX-efficiency? That is, can an ESAF programbring the economic situation from X0 to P1?

Even from this simple theory, one can find the fol-lowing. If both present and future consumption isnormal, C1 will locate on the right of C0. Thus, ac-cording to the conventional theory, a recipient coun-try is expected to react to the concessional loan byincreasing the deficit of the current account.11

A critique of the intertemporal approach may saythat the government does not behave as a maximizer.However, this does not warrant a reversion to thetraditional macroeconomics taught a quarter centuryago. Government behavior can be analyzed as a su-perimposition on private optimizing behavior. In thisrespect the PDR internal review does not refer at allto the intertemporal aspect of the balance of pay-ments. This aspect is the crux of such modern dy-namic textbooks as Blanchard and Fischer (1989), orObstfeld and Rogoff (1996).

To assess the role of the government deficit, wehave to investigate to what extent neo-Ricardianequivalence applies to recipient countries. If equiva-lence holds, the government deficit will not be a se-rious matter. If equivalence does not hold, the deficitwill be something to worry about. The conclusionsof an IMF study (Schadler, 1997) are mixed, andwill be discussed further.

An ESAF program certainly expands the con-sumption possibility locus of a recipient country.Funds are transferred to the country’s foreign re-serves account. In the accounting sense, this is dis-tinct from a change in the budget balance, but the ag-gregate budget constraint of a nation is affectedfavorably. Quantitatively, this expansion effect is notvery large relative to other private and official capi-tal inflows, but it is large enough to offer incentivesfor a nation to seek the ESAF funds. This effect is

reinforced by the fact that an ESAF program is oftena precondition for loans by other donors.

Indicators of External Viability

What are the proper indicators of external viabil-ity or vulnerability of a nation? This question is al-ways faced by national governments and interna-tional organizations, and has also been posedspecifically to us. To measure the viability of a na-tion, one conventionally uses a variety of indicatorssuch as debt-service ratios (i.e., the ratio of debt ser-vice to the exports of a nation); the ratio of debt ser-vice to GDP; the ratio of the outstanding stock offoreign debt to exports; the ratio of the outstandingstock of foreign debt to GDP; the ratio of net presentvalue of foreign debt to exports; the ratio of the netpresent value of foreign debt to GDP; and the pro-portion of exceptional financing in the total debt.

Our main task is to find the proper indicators ofexternal viability. Indicators that grasp the dynamicoptimization process are hard to find, and in practicewe have to rely on those indicators that can be evalu-ated by observable data present at the time of deci-sion. In discussing the meaning of various indicatorsand their effectiveness for assessing viability, wewould emphasize the distinctions between static anddynamic indicators, and the distinctions between ex-port-related indicators and GDP-related indicators.Our point is that when using the export-related mea-sure, one assumes that all the export proceeds can beused for repayment by halting imports altogether.This is an extremely strong assumption.

Though it may go against conventional wisdom,we argue that those ratios mentioned above, with re-spect to exports, have such a strong bias that the via-bility is exaggerated in an open economy with a highpropensity to export. Also, we would like to arguethat almost all the indicators are static and should besupplemented, if not replaced, by more dynamicconcepts. Though we recognize the difficulty of pro-viding a universal measure of external viability, wepropose two measures that take account of the dy-namic or growth aspects of the economy: the REDBand the DDI.

The external position of a country can be regardedas vulnerable when it does not appear to satisfy in-tertemporal constraints, that is, the non-Ponzi con-straint. The ratio of indebtedness to GDP and theratio of debt service to GDP are reasonable measuresof vulnerability. The ratios of debt and debt serviceto exports, which are more frequently used, are hardto justify on theoretical grounds. Compare two coun-tries that have the same debt service to GDP ratios,but with different export-GDP ratios. The debt-ex-port performance would be judged to be favorablefor the country with a large export-GDP ratio. How-

39

11For the econometric analysis of current account dynamics,see, for example, Ghosh (1995).

II GENERAL THEMES

ever, the country with a higher export-GDP ratio isnot necessarily healthy. At the very least, indicatorsrelative to GDP should be taken as seriously as indi-cators relative to exports.

According to modern macroeconomic theory, thenormal and often desirable pattern of indebtednessis as follows for modern expositions. We call a de-velopment path “normal” when the path is to be re-alized by the competitive interest rate mechanism,and call it “desirable” when the path is the result ofoptimizing national agent. They coincide with eachother when the international capital market is com-petitive and there is no externality.12 First, when alow-income country with scarce capital opens up itseconomy, the country incurs substantial interna-tional debt. The ratio of indebtedness to incomemay grow at first during a transition stage. In themeantime, the country begins capital accumulation.After a while it starts to gradually repay its debt. Ifthe rate of time preference of the country is higherthan the average rate of time preference of theworld, then the country will remain as a debtor, butthe ratio of debt to national income will becomemore or less constant. If the rate of time preferenceof the country is lower than the average rate of timepreference of the world, the country will eventuallyrepay its external debt and then become a creditorcountry in the world.

In other words, a nation less patient than the aver-age nation will become a debtor nation in the longrun; a nation more patient than the average nationwill become a creditor nation. According to a sto-chastic version of the above theory, a nation that ex-pects growing permanent income becomes a bor-rowing nation and a nation that expects decliningpermanent income becomes a lending nation. Thisprocess is characterized by the relationship of theamount of external debt (or credit) to national in-come and by no means by the relationship of theamount of external debt (or credit) to exports.13

In our opinion, the ratio of debt service to exportshas less importance than conventionally considered.The debt-service ratio with respect to the incomevariable, that is, the ratio of debt service to GDP, hasmore meaning since it indicates the magnitude ofdebt burden relative to the scale of national eco-nomic activities. It does not need to be constantthrough time, however, because according to the

above theory this ratio is supposed to increase whena country opens its door to the international capitalmarket and then decrease during the process of de-veloping a balanced growth path.

The ratio of debt service to exports can be mis-leading under certain circumstances. Suppose thereare two countries, country A and country B, of iden-tical size. The magnitude of debt service is also iden-tical for the two economies, say at 10 percent ofGNP. Suppose the propensity to export of country Ais 40 percent, and that of country B is 20 percent.(Also, assume that the propensity to import of A is30 percent and that of B is 10 percent.) The ratio ofdebt service to exports in A is 25 percent, but that inB is 50 percent. Can you say country A is muchmore externally viable than country B? According tothe above analysis, the two countries are similarlyvulnerable. The proponents of the ratio of debt ser-vice to exports seem to assume that, in an emer-gency, a nation can suspend total imports and use thetotal exports to repay the debt. However, in a veryopen country like A, it is highly likely that exportsneed a certain amount of imports, so that importscannot be suspended overnight.14 A strong emphasison the ratio of debt service to exports rather than toGDP should be reexamined to restore a balance be-tween a very open economy and a relatively closedeconomy.15

In fact, the choice of denominator between ex-ports and GDP can make a drastic difference. As willbe seen, the order of eligibility for a HIPC countrywill change from Uganda to Côte d’Ivoire depend-ing on whether one uses exports or GDP.

The IMF relies on the government revenue-basedand export-based indices. The former depends on the

40

12See, for instance, Onitsuka (1974) and Hamada (1966). Seealso Obstfeld and Rogoff (1996); Blanchard and Fischer (1989);and Barro and Sala-i-Martin (1995).

13If one can approximate the optimal process of borrowing andgrowth of a nation by its market process, then the market-financed indebtedness by foreign direct investment and commer-cial lending will be seen as normal and optimal. Therefore, theratio of exceptional financing to the total debt or to GDP may be agood indicator of the seriousness of the debt situation.

14One might argue that, theoretically, the most useful conceptto match indebtedness is the capacity to pay, that is, the potentialsavings-investment balance (S–I). S–I is likely to be related toGDP rather than to exports. At least, there is no theoreticalground that S–I is related to exports more than to GDP. Modelsthat exclusively consider export sectors important imply a similarresult. That is, the degree of indebtedness is more directly relatedto the rate of time preference rather than to the openness of theeconomy. See Baxter (1992), and Svensson and Razin (1983).

15Milesi-Ferretti and Razin (1996) suggest that the debt-serviceratio is the primary index to be complemented by other measures.We would rather recommend the use of the ratio of debt service toGDP in general, possibly to be adjusted by other measures rela-tive to export. Milesi-Ferretti and Razin argue that empiricallyexport is related to capacity to repay from historical experiences.We instead cast doubt on the logical connection from exports tothe capacity to repay. IMF publications indicate that specialistsrecognize the existence and analytical implication of those in-dexes. We also seldom observe, however, cases where the GDP-related indexes are viewed to be as important as export-related in-dices like the debt-service ratio in actual assessments of debtsituations in recipient countries. We also seldom observe cases inwhich the static factors are supplemented by the dynamic factors,that is, the factor due to asset dynamics and the factor due to thebalance of payments current account.

External Viability

assumption that government can stop spending ongovernment expenditures, and the latter, on the as-sumption that imports can be stopped to pay the debtin an emergency. Such assumptions seem to reflectthe ideas that the IMF can easily manage the govern-ment and that the government’s policy will steer theeconomy to a sufficient degree.

In a broader perspective, we must note that bothdebt-service ratios are static concepts. Take the bet-ter one, the debt service to GDP concept, for exam-ple. Suppose two countries share the same debt-service ratio, say 5 percent, but country A is grow-ing at 7 percent and country B is growing at 2 per-cent. If neither country repays its interest obligationor retires or incurs any debt, the ratio of debt serviceto GDP of country B will be increasing at the rate of3 percent, but that of country A will be decreasingby 2 percent. For both countries the debt in the nu-merator of the debt-service ratio will be growing at5 percent, while GDP in the denominator will begrowing at 7 percent in country A and 3 percent inB. Thus, if the rate of interest on external debt issmaller than the rate of economic growth, the ratioof debt service to GDP will be declining. It is, ac-cordingly, crucial for the viability of the interna-tional debt position to know whether or not theeconomy is growing.16

Obstfeld and Rogoff propose on these grounds anew measure called the real external debt burden(REDB). This is expressed as

(r – g)D/Y,

where D is the outstanding foreign debt of the econ-omy, Y is the GDP, r is the real interest rate paid on thedebt, and g is the real growth rate of the economy. Thismeasure shows the trade balance (surplus to a positivevalue) as a fraction of GDP necessary to maintain aconstant debt-GDP ratio. The higher this ratio is, thehigher is the likelihood that the debt is unsustainable.

We would like to propose another indicator, to becalled the debt deepening index (DDI), which is de-fined as

(r – g)D/Y – T/Y,

where T is the current account balance excluding thedebt service payment. This measure—DDI—is thepercentage of GDP that the economy has to improve inthe current account of balance of payments from thepresent value in order to keep the constant debt-GDPratio. It is easy to see (subscript t signifies time) that

d d__ = rDt – Tt , __ Yt = gYt ,dt dt

so that

d Dt Dt Tt__ ~___! = (r – g) __ – __ .dt Yt Yt Yt

As shown in this equation, REDB (the first term inthe right-hand side of the equation) indicates theasset dynamics, namely, which of D and Y is grow-ing faster, and the second term in the right-handside indicates the contribution of current accountdeficit to the D/Y ratio. In other words, the aboveequation indicates the interaction of asset dynamicsand the influence of flow variables to the debt in-come ratio. DDI in the left-hand side of the equa-tion encompasses both the asset effect (REDB) andthe flow effect.17

Finally, the net present value (NPV) is certainly adynamic concept that takes account of the future pay-ment stream of debt. Unfortunately, it is usually com-pared to the static flow concept such as export and in-come. (The inappropriateness of exports as thedenominator is as in the case of debt-service ratio.)The comparison of the NPV of national debt and pre-sent national income is a comparison of concepts ofdifferent dimensions—stock and flow. Suppose twocountries, A and B, have identical NPVs of foreigndebt and identical current GDPs, but A is growing at3 percent and B at 7 percent. The future resources forB to repay the debt in the future must be much higherfor country A. The problem remains as to how onecan be sure of the course of future economic growth.(Similar problems exist in estimating the rate of in-terest to discount the future payment stream to calcu-late the NPV.) In any case, one must be aware thatcalculating the NPV of the national debt is only a halfstep to the dynamic treatment of the debt problem.Given the above theoretical discussions, let us exam-ine the performance of external balances of the coun-tries we study. The movements of indexes and thecomparison of indexes tell us about various aspectsof these economies.

We preface our analysis with some general ob-servations. A number of views and propositionsthat are widely held in popular and even profes-sional circles are often highly debatable. They in-clude the following.

Reduction in the budget deficit will improve the currentaccount of the balance of payments by the same amount.

Fund research shows that there is a negative rela-tionship between public savings and private savings

41

16One may say the long-term forecasts in the PFP are the long-term components of the ESAF, but we cannot help but feel thatfilling the forecasts becomes more like a ritual the longer the timehorizon is. Forecasting is being done in an economy where thepresent statistics are not so accurate. There is no penalty for mak-ing a wrong forecast.

17In fact, DDI is a simplified form of the viability index pro-posed by Cohen. See Cohen, 1996 and 1985.

II GENERAL THEMES

in many of the countries that have arrangementsunder the stand-by and extended arrangements. Onaverage, private savings fell 1 percent, while publicsavings increased 1.7 percent. This means that a 1percent decrease in the budget deficit is partially off-set by about a 0.6 percent decrease in private savings.The regression coefficient of the private savings onthe public savings is about 0.7 and roughly coincideswith the latter figure (Savastano, 1995).

Naturally, full neo-Ricardian equivalence impliesa 100 percent negative offset. Therefore, the privatesector responds to the decline of government deficitsby taking partial account of future liabilities, and nota full account of them. This means that undue em-phasis on the budget deficit may be misleading forthe economy as a whole.

The more “private” lending, or the more foreign directinvestment , the greater will be the probability of insolvency ofthe borrowing country.

Since the IMF is one of the country’s creditors,this is also true. From the standpoint of the borrow-ing country, however, it is dubious. New conces-sional loans and grants may disappear if the benevo-lence of donors disappears. On the other hand, theprivate flow of funds such as FDIs and commercialloans may indicate that other economic agents con-sider it profitable to lend to that country or to investin its future. The existence of private capital inflowsimplies the normal function of the price mechanism.It may also imply that the borrowing country is situ-ated near the optimal path of development in theworld market.

Country-Specific Analysis

In this section, movements of indicators developedabove will be illustrated by country experiences. The

calculation of indicators is made using Fund statistics.We took the proxy for real debt—the U.S. dollar valueof debt. In accordance with this, we took the U.S. dol-lar values of GNP as real GNP. Also, note that thedebt-service ratio is calculated here as the percentageof annual exports, rather than monthly.

Bangladesh

Compared with the preadjustment period (1973/74–85/86), the Bangladesh economy recovered its macro-economic stability during the post-ESAF period(86/87–94/95: SAF 86/87, ESAF 89/90–92/93), asshown in Table 1.

During the post-ESAF period, there was no signof any acceleration in real GDP growth. The growthrates remained arrested at about 4 percent, on aver-age lower than those that prevailed in the 1970s andearly 1980s.

Meanwhile, Bangladesh has accomplished a slightimprovement in its investment-GDP ratio. It also re-duced its level of inflation to about 6 percent, itsgovernment deficit-GDP ratio to 6.7 percent, and itscurrent account deficit-GDP ratio to –1.1 percent. Inthe fiscal area, Bangladesh increased tax collectionby the introduction of the VAT and by the improve-ment of the efficiency of tax collection.

Moreover, the export-GDP ratio increased. This ex-port surge was mainly sustained by nontraditional ex-ports such as ready-made garments, leather, leatherproducts, fish, and shrimp. The share of nontraditionalexports (gross values) has risen from 31 percent in1989 to 87 percent in 1995, while the share of tradi-tional exports, that is, jute-based exports, has declinedand stands at 13 percent in 1995.

Thus, ESAF successfully brought to Bangladeshprice stability, which is an important benefit. It is notclear, however, whether or not ESAF broughtgrowth to the economy. ESAF merely sustainedgrowth. Bangladesh may, thus, be said to be a typical

42

Table 1. Bangladesh: Comparison of Pre-Adjustment and Mid- and Post-Adjustment by MacroKey Indicators

Pre-Adjustment Mid- and Post-Adjustment________________________________ ________________________________Mean Standard Mean Standard

Sample (in percent) Deviation Sample (in percent) Deviation

Real GDP growth rate 11 4.5 0.03 9 4.0 0.01Current account/GDP 11 –4.1 0.018 9 –1.1 0.022Investment/GDP 11 11.7 0.019 9 15.2 0.023Exports/GDP 11 5.7 0.007 9 9.6 0.023Inflation (CPI) 11 10.1 0.043 9 6.4 0.033Government deficit/GDP 6 –8.9 — 9 –6.7 —

Note: All the above figures are calculated based upon the data from the IMF’s International Financial Statistics.

case of an ESAF program that emphasized civiliza-tion but no growth.

In Bangladesh, people are concerned with theneed for regional coordination of trade policies,which between India and Bangladesh are often em-phasized. According to public view, trade liberaliza-tion without considering the relationship with neigh-boring countries would create current accountproblems. Since Bangladesh strove toward liberal-ization without India’s move toward liberalization,the trade imbalance vis-à-vis India has increased.While exports from Bangladesh to India tended to

decline, imports from India tended to increase. Mostof the trade deficits were financed by the continuousgrowth in overseas remittances, but the external debtstock has been growing gradually (Table 2).

As Figure 2 shows, the debt-service ratio in-creased on average, but other indicators show a de-clining tendency. The ratio of debt service to GDPis almost constant throughout time after the adop-tion of ESAF. The debt-GDP ratio is increasingslightly. However, the dynamic indicators are dif-ferent. The REDB is gradually improving, and theDDI has decreased since 1990 except for the last

Table 2. Bangladesh: Key Indicators from Balance of Payments

Trade Current External DebtMillions of Taka Balance Remittance Account (millions of dollars)

1988–89 –67,773 26,860 –23,390 11,1191989–90 –74,329 26,312 –26,798 12,7571990–91 –61,499 30,169 –5,323 13,4701991–92 –56,918 37,237 –8,107 13,8981992–93 –69,325 36,985 1,499 14,6191993–94 –65,848 43,549 11,193 16,2231994–95 –97,428 48,140 –5,974 16,3701995–96 –126,554 49,795 –3,885 . . .

Sources: Bangladesh Bank; Bangladesh Bureau of Statistics; and World Bank, Global Development Finance (World Debt Table).Notes: Trade balance includes freight, insurance, and net amount of other goods and services. For up to 1991–92, the amount of remittance is substi-

tuted by “Transfer by Bangladesh nationals.” External debt is defined as the sum of public and publicly guaranteed long-term debt, the use of IMF credit,and short-term debt.

Country-Specific Analysis

43

Figure 2. Bangladesh: Several Indicators for External Debt

Percent Percent

Debt-GDP ratio (left scale)Debt-service ratio (left scale)Ratio of debt service to GDP (left scale)Real external debt burden (right scale)Debt deepening index (right scale)

0

10

20

30

40

50

60

70

80

95/9694/9593/9492/9391/9290/9189/9088/8987/8886/8785/8684/8583/8482/8381/8280/811979/80–0.05

–0.04

–0.03

–0.02

–0.01

0

0.01

0.02

0.03

0.04

0.05

0.06Pre-ESAF Post-ESAF

II GENERAL THEMES

observation. In sum, both the debt-service ratio andDDI indicate the improvement in external balance.Though static indicators do not show significantchanges, dynamic indicators reflect the improve-ment in growth.

Côte d’Ivoire

Côte d’Ivoire’s external sector performance hasbeen characterized by a period of high growth underimproving terms of trade in the mid-1980s, a stag-nant period of price stability under the fixed ex-change rate mechanism of the CFA franc zone until1994, and a period of rebounding growth after thecritical devaluation in 1994.

During the first period, economic activities weregreatly influenced by a generally optimistic out-look on the economy, which in turn laid the foun-dation for the accumulation of later debt. In thesecond period, the Côte d’Ivoire economy wasconstrained by the CFA franc zone mechanism. In-deed, the price level was stable; consumer pricesdecreased substantially during 1993, but GDPgrowth was extremely stagnant. After the devalua-tion, the economy rebounded. Recent data ongrowth are sparse, but the rebound seems to becontinuing.

Côte d’Ivoire’s balance of payments is distin-guished by the fact that, unlike many developingAfrican economies, the trade balance was in surplusthroughout the 1980s. It is the burden of servicing

the large outstanding debt that turns the current ac-count into deficit (or, in 1994, barely balanced).

Now, let us apply the concepts of various indica-tors that we have introduced above. The paths of theratio of debt service to exports, the ratio of debt ser-vice to GDP, the debt-GDP ratio, REDB, and DDI,in a way, measure the health of a country’s externalposition.

As shown in Figure 3, Côte d’Ivoire is noted forits high value of international debt. All of the threeratios—debt-service, debt service to GDP, and debt-GDP—are high. The debt-service ratio is decreasingbecause of the openness of the economy. On theother hand, the debt-GDP ratio is growing reflectingthe slow GDP growth until the devaluation.

In contrast, two measures, REDB and DDI, thatare related to the change in the debt-GDP ratio fellsubstantially in 1993, but grew rapidly in 1994 and1995. This implies that if we count both debt dy-namics and current account, the debt-generatingmechanism is still working substantially in Côted’Ivoire. These figures confirm that Côte d’Ivoireis a country heavily in debt. Because Côte d’Ivoireis a very open economy, the value of the debt ser-vice–exports ratio and the ratio of outstanding debtto exports understate the difficulty of the debtproblem. From the movement of these indicatorsbefore and after the ESAF program, whose initia-tion year is depicted by the solid vertical line, theexternal viability of Côte d’ Ivoire does not seemto be favorably affected by the ESAF program.

44

Figure 3. Côte d’ Ivoire: Several Indicators for External Debt

Percent Percent

Debt-GDP ratio (left scale)Debt-service ratio (left scale)Ratio of debt service to GDP (left scale)Real external debt burden (right scale)Debt deepening index (right scale)

0

50

100

150

200

250

959493929190898887868584838281801979–70

–60

–50

–40

–30

–20

–10

0

10

20

30Pre-ESAF Post-ESAF

Country-Specific Analysis

Only the debt-service ratio shows some promisingchange.

Under the fixed exchange rate mechanism of theCFA system, a country can hardly conduct an inde-pendent monetary policy. After 1994 when the de-valuation took place, Côte d’Ivoire was able to ini-tiate a de facto inflationary policy, and theeconomy started to grow. Because of our use of theU.S. dollar term for calculating a proxy for the realdollar value of GDP, the improvement of the dy-namic indicators, REDB and DDI, are exaggeratedin 1993. This example casts some doubt on theview, sometimes shared by the Fund, that price sta-bility is always good. In certain circumstances, asin Côte d’ Ivoire in the early 1990s, an inflationarypolicy is useful. By allowing or encouraging thedevaluation, the IMF in fact supported such a refla-tionary policy.

Malawi

We begin by reviewing Malawi’s external viabilityindicators. The trade account was in a small surplusuntil 1992, but it turned to a deficit after that, and thecurrent account was in deficit. The debt-service bur-den was reduced from 60 percent of exports in 1986to 22.5 percent in 1995. The debt-service situationseems to be improving. In 1995, the outstanding debtwas $2,148 million and the NPV was $1,135 million,representing 509.1 percent and 289.2 percent of ex-ports, respectively.

All the indicators of external viability showedsteady movements (see Figure 4) until 1993. In1993, the economic growth rate fell so REDB andDDI increased sharply. In spite of the improvementin the level of debt service, the relative magnitude ofMalawi’s debt to GDP grew fast, owing to Malawi’sslow GDP growth and the current account deficit. Ingeneral, Malawi’s external position appears to havebeen managed rather well.

However, there is a contrast between the declin-ing debt-service ratio and other rising indicators.Among the dynamic indicators, the most compre-hensive—DDI—shows a sharp rise. This castsdoubt as to whether or not the ESAF helped the ex-ternal viability of Malawi. It also offers another ex-planation as to why relying solely on the debt-ser-vice ratio could be misleading. If the Fundoveremphasizes the static indicator such as thedebt-service ratio or the ratio of debt service toGDP, the dynamics of debt in a growth process willbe neglected.

Uganda

Uganda has emerged from a difficult and pro-tracted period of internal conflict. The economy hasbeen stabilized since 1989, thanks to the adoption ofa cash budget. The economy started real growth aftera trough in 1986 and was able to sustain its pace.The level of real GDP per capita is now approachingthe level of its prewar peak.

45

Percent Percent

1

334

667

1,000

959493929190898887868584838281801979–20

0

20

40

60

80

100

Debt-GDP ratio (left scale)Debt-service ratio (left scale)Ratio of debt service to GDP (left scale)Real external debt burden (right scale)Debt deepening index (right scale)

Mid-& Post-ESAF

Figure 4. Malawi: Several Indicators for External Debt(Mid-and Post-ESAF)

II GENERAL THEMES

Uganda’s economy is quite self-sufficient. Export-GDP ratios are less than 10 percent. Also, Uganda isgrowing relatively quickly compared with otherAfrican countries. These characteristics imply twothings. First, not only export-related indicators butalso GDP-related indicators should be considered.All the export-related measures, such as the debt-service ratio and the debt-exports ratio, are relativelyhigh, while the GDP measures, such as the ratio ofdebt service to GDP and the debt-GDP ratio, indicatea rather healthy situation. The use of export-relatedmeasures presents Uganda as a country more vulner-able than it actually is.18

From the viability indicators (Appendix Table A1),it is hard to tell if the ESAF functioned well after1988. Debt-service ratios increased until 1991 butthey have been decreasing since then. The dynamicindicators REDB and DDI have been fallingsharply—that is, improving—since 1992 and 1990respectively (see Figure 5). Thus, the ESAF does notnecessarily improve the viability situation at first.However, after 1993, the economy has been on theright track. This shows the burden of debt was al-ready winding down even before Uganda was se-lected as the number one HIPC Initiative country.

Since the Ugandan economy is relatively closedbecause of the relatively self-sufficient productionstructure, the export-GDP ratio is smaller in Ugandathan in many other African countries consideredhere. The debt-service ratio is large and, accordingly,Uganda is treated relatively favorably in its designa-tion as a HIPC although its indebtedness is subsiding.

Vietnam

Since the announcement of the Doi Moi policy inDecember 1986, Vietnam has been trying to trans-form a centrally planned economy into a market-oriented economy. Although the conceptual mean-ing of Doi Moi used in the Congress’s decision atthat time has little to do with the abandonment ofsocialism in favor of capitalism, the new policy hashad drastic effects on the economic system (see Ta-bles 3 and 4). The principal driving forces in capitalaccumulation and in resource allocation haveshifted from the government-prepared, command-style economic planning to something midway onthe road to the free interplay of market forces. Thischange has been reinforced by the obligation tomeet the conditionalities for financial support setout by the World Bank and the IMF.

In Vietnam, we see steady growth in the export-GDP ratio (see Table 5: from 30.5 percent to 35.2percent) and worsening of trade balance deficits as aresult of extraordinary import growth (see Table 6:from 30.4 percent to 44.4 percent). The export surge

46

18Of course, we do recognize the merit of self-centered devel-opment. Development of domestic markets that sustain growthare something to be encouraged, if possible; in a fast-growingcountry such as Uganda, reference to dynamic indicators that re-flect growth is essential.

0

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Figure 5. Uganda: Several Indicators for External Debt

Country-Specific Analysis

was almost entirely sustained by primary goods suchas crude oil, rice, fish and shrimp. The sharp in-crease in import was accelerated significantly bytrade liberalization, such as the reduction in tariffsand elimination of import shipment licenses. An-other factor that strengthened this import growthwas the increase in FDI. FDI stimulated the importof intermediate goods and capital goods, and the im-port of consumer goods increased as well. So long asflows of FDI are driven by market forces, the financ-ing of the current account by FDI hardly presentsany problems.19

The current account deficit also grew (see Table 5:from 4.3 percent to 8.5 percent), paralleling the ex-pansion of trade balance deficit. Most parts of thecurrent account deficit have been financed by FDIand official development assistance. To reduce thisimbalance, the Vietnamese government has at-tempted to impose restrictions on imports by limit-ing the issuance of letters of credit.

Another feature related to the external sector is the enormous outstanding external debt (see Fig-

ure 6), although the proper statistical treatment ofruble-denominated debt leaves room for discus-sions. The ratio of debt to GDP improved (seeTable 5: from 296.8 percent to 148.1 percent). It re-mains to be seen whether this improvement is goodenough.

Zimbabwe

Historically, Zimbabwe was a country that acumu-lated wealth and a sound infrastructure. It has nothad its external debt rescheduled. However, two re-cent droughts (in 1992 and 1995) made steering theeconomy difficult, and the above-mentioned intrin-sic dilemma of fiscal incompatibility created diffi-culties in the balance of payments as well.

Statistics are not well prepared in Zimbabwe andIMF’s International Financial Statistics has manyblanks for Zimbabwe. The macroeconomic picture isnot very encouraging. Real growth is severely dis-rupted by droughts, though the tentative 1996 fig-ures seem promising. Inflation has been running atmore than 20 percent in most recent years.

The current account balance was affected nega-tively in the drought years, but that is accounted forby the consumption-smoothing motives. Outsiders,including the IMF, should show understanding whenadverse shocks hit a country, although, of course, itis true that fiscal rigidities can exacerbate the diffi-culty created by such external conditions.

Most of Zimbabwe’s external viability indicatorswere worsening when the ESAF program wasadopted. (See Figure 7.) Subsequently, some indica-tors showed improvement, but their levels in 1995were not very encouraging. The lack of growth inthe present causes a problem in REDB and DDI. Thelack of the future prospect for growth gives a pes-simistic picture for the future. Incidentally, sincesmoothing consumption is a natural concern, theFund could be relatively tolerant about the develop-ment in the balance of payments current account dueto droughts.

47

Table 3.Vietnam: Comparison of Pre-Adjustment and Mid-Adjustment by Macro Key Indicators

Pre-Adjustment (1987–93) Mid-Adjustment (1994–95)__________________________ __________________________Mean Mean

Sample (in percent) Sample (in percent)

Real GDP growth rate 1989–93 7.3 1994–95 9.2Investment/GDP 1990–93 18.2 1994–95 26.3Inflation (CPI) 1987–93 117.5 1994–95 13.4Government deficit/GDP 1989–93 –6.4 1994–95 –1.9

Note: All the above figures are calculated based upon the data from the IMF’s International Financial Statistics.

Table 4.Vietnam:Trends in Nominal GNPPer Capita

1992 1993 1994 1995

GNP per capita(U.S. dollars) 142 181 214 275

Growth rate (percent) — 27.1 18.5 28.5

Note: The above figures are calculated based upon the datafrom the IMF’s International Financial Statistics and the WorldBank’s Global Development Finance (1997c).

19Another question remains as to whether the composition ofFDI is desirable or not. We hear the concern, for example, thatFDI in automobile factories is excessive.

II GENERAL THEMES

Summing Up International Comparisons

In short, the basic difficulty in presenting a viabil-ity measure is that our observations are limited to thepast and present, while we would like to compare thepresent value of future liabilities with the presentvalue of capacity to pay in the future. Indicators suchas the ratio of debt service to REDB or DDI are mea-sures of (instantaneous) flow variables. They con-sider rate of growth, but only the instantaneous rateof growth. NPV of debt considers the future coursesof debt payments, but one has difficulty matching itwith the present value of potentially capable pay-ments. Finally, Figures 8–13 illustrate the effect ofindicators for six countries and present examples ofhow those indicators offer different views of the debtproblem.

In the pre-ESAF period, most indicators roughlymove together. In terms of debt-service ratios, Viet-

nam and Malawi are ranked as the two best (lowest),and Uganda is ranked as the worst (highest) in themid-post-ESAF period. In terms of the ratio of debtservice to GDP, on the other hand, Bangladesh andVietnam are the two best-off countries and Zim-babwe and Côte d’Ivoire are the two worst off. Ac-cording to the debt-GDP ratio, Bangladesh and Zim-babwe are the two lowest and Côte d’Ivoire is thehighest.

In terms of REDB, which captures the debt dy-namics in growth, Vietnam and Côte d’Ivoire are thebest, and Malawi, Zimbabwe, and Bangladesh arethe worst. This reflects the stagnant nature of theMalawian economy. Finally, according to the mostcomprehensive index here (DDI), Côte d’Ivoire andVietnam are the best (lowest), and Malawi is theworst (highest). This comparison shows that judgingfrom a single index such as the debt-service ratio canbe quite misleading.

48

Table 6.Vietnam:Trends in the Balance of Payments(In millions of U.S. dollars)

Current Account/Trade Current GDP Ratio Foreign

Exports Imports Balance Balance (in percent) Reserves

1988 733 1,412 –679 –747 . . . . . .1989 1,320 1,670 –350 –584 –9.2 . . .1990 1,731 1,772 –41 –259 –4.1 . . .1991 2,042 2,105 –63 –133 –2.3 271992 2,475 2,535 –60 –8 –0.1 4651993 2,985 3,532 –547 –765 –6.0 4041994 4,054 5,244 –1,190 –1,197 –7.7 8761995 5,198 7,543 –2,345 –1,868 –9.3 1,376

Source: International Monetary Fund.Notes: Current account includes official transfers. Foreign reserves include gold.

Table 5.Vietnam: External Sector Developments

Pre-Adjustment (1987–93) Mid-Adjustment (1994–95)__________________________ __________________________Mean Mean

Sample (in percent) Sample (in percent)

Exports/GDP 1991–93 30.5 1994–95 35.2Imports/GDP 1991–93 30.4 1994–95 44.4Current account/GDP 1989–93 –4.3 1994–95 –8.5External debt stock/GDP 1989–93 296.8 1994–95 148.1

Notes: All the figures are calculated based on the data from the IMF’s International Financial Statistics and the World Bank’s Global Development Finance.Current account includes official transfers. External debt stock is defined as the sum of public and publicly guaranteed long-term debt, private nonguar-anteed long-term debt, the use of IMF credit, and short-term debt.

Country-Specific Analysis

49

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Figure 6. Vietnam: Several Indicators for External Debt

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Figure 7. Zimbabwe: Several Indicators for External Debt

II GENERAL THEMES

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Figure 8. Debt-Service Ratio Versus Ratio of Debt Service to GDP

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Figure 9. Debt-Service Ratio Versus Real External Debt Burden(Pre-ESAF)

Country-Specific Analysis

51

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Figure 10. Debt-Service Ratio Versus Debt Deepening Index(Pre-ESAF)

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Figure 11. Debt-Service Ratio Versus Ratio of Debt Service to GDP(Mid- and Post-ESAF)

II GENERAL THEMES

52

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Figure 13. Debt-Service Ratio Versus Debt Deepening Index(Mid- and Post-ESAF)

W ithout prejudice to the generality of the fore-going analysis, and to various suggestions

that we make by necessary implication, we proposethe following specific recommendations.

Social Impact

First, in our view, the Fund should not invest inbuilding up expertise in poverty analysis. Rather,we recommend that at the stage of program designthe Fund formally ask the Bank to identify ex antewhich groups among the poor are likely to lose fromthe proposed reforms. The Bank would then providethe Fund with projected time paths of the real in-comes of the main groups of the poor as well aswith projected outputs of social services. The outputprojections for social services would take into ac-count the relative price changes that we have identi-fied as so substantial that they can radically changethe conclusion from social indicators. The projectedtime paths would be incorporated into program doc-uments, along with the traditional fiscal and mone-tary monitoring variables. Whether a programwould need revision would be decided partly on thebasis of a comparison of outcomes with these pro-jections. Clearly, the time lag for income data ismuch longer than for financial targets. However, itsuse in assessing whether the outcome of a programwas consistent with the initial projections would besalutary since major deviations would require ex-planation.

Second, in program design, trade-offs between theshort and the long run should be explicitly analyzed.This analysis would address sequencing issues, theefficiency costs of revenue measures, the need forfront-loading of slowly-maturing structural reforms,and the appropriateness of cash budgets.

Third, in the area of fiscal policy, where themacroeconomic concerns of the Fund and the micro-economic concerns of the Bank currently overlap,collaboration between the Bank and the Fund shouldbe increased. Specifically, boundaries need to bemore clearly delineated, and where overlaps are ac-cepted, a more formalized requirement for joint

analysis and decision should be negotiated so thatcountry-level staff are clear about their respectivepowers and duties.

Finally, in already stabilized economies, the Fundshould shift from ex ante negotiation of short-termtargets and policies to an ex post evaluation over alonger period. This would help reforming govern-ments in building reputations and would enable theFund to play a useful role in potential ESAF coun-tries that now reject the instrument. In postcrisiseconomies, the Fund would focus on encouragingand managing increased external inflows, public andprivate. Except in the transition economies, ESAFfunds would taper in with adjustment rather thantaper out. Conversely, the Fund would be more cir-cumspect in providing support in stabilization con-texts where the commitment of the government is inserious doubt.

External Viability

First, we recommend that the operation of ESAFas an inadvertent tax on exports be mitigated by al-lowing ESAF funds to accrue as budget support, asalready happens in the case of franc-zone ESAFcountries.

Second, as indicators of external viability of a na-tion, one should rely more on debt-service–GDP anddebt-GDP ratios since these ratios are less affectedarbitrarily by the degree of openness of a nation thanratios of debt service to exports. To supplement thestatic nature of the above ratios, one should alsorefer to the REDB as well as to the DDI. NPV ofdebt is indeed a dynamic concept, but it should bematched not only with the current GDP, which is astatic concept, but also with the net present value ofthe national income of a nation or the net presentvalue of the savings-investment balance.

As discussed above, debt service to exports ra-tios and debt-exports ratios are less reliable indica-tors than the ratio of debt service GDP and thedebt-exports ratio, because the latter ratios to ex-ports are overly sensitive to the openness of theeconomy.

III General Recommendations

53

III GENERAL RECOMMENDATIONS

Ownership and Governance Issues

Responsibilities of the Country

The Fund often gets cast in the role of the villainwhen, in fact, the problem lies with the country itself.Corrupt and autocratic regimes, some of them proppedup by vested interests abroad, are often the first toplead ownership and then bemoan the lack of it whenthey feel the pressure of donors and the multilateralsystem to rectify things. The role of the multilateralsystem (and also of bilateral donors) in such situationsis to reinforce the leverage of national democraticforces by requiring a restoration of the integrity of thesystem of public resource mobilization and expendi-ture and its oversight institutions (Auditors’ and Ac-countant-Generals’ Offices) as a minimum conditionof assistance. The Fund’s policy in this regard is, in ourview, entirely appropriate. The real solutions mustbegin at the country level. Here, the government’sspace for maneuver will obviously depend on the cred-ibility it enjoys in the eyes of the governed, especiallyorganized constituencies, and this credibility in turndepends, among other things, on the openness and ac-countability of political and fiscal institutions.

Defining a Vision and Setting the Agenda

National ownership requires, first and foremost,that the country itself define its medium- to long-termvision along with a supporting policy agenda and thatit mobilize a sufficient body of national consensus be-hind it before it begins negotiations with the Fund andother external agencies. Where the capacity does notexist in the country or with its nationals abroad toelaborate a national program, it is for the country to“acquire” it by whatever means are available—free-standing technical assistance, hired consultancies, etcetera. Our discussions in the various countries showthat Fund technical assistance provided independentlyor collaboratively with the UNDP and/or bilateralscan be particularly useful in these situations.

The Fund’s technical assistance program in Viet-nam is an outstanding example that needs to be stud-ied and replicated in this regard. A number of coun-try experiences (Ghana, Côte d’Ivoire) also suggestthe secondment of Fund-based staff of national ori-gin—nationals of the country working at the Fund—can be similarly useful for this and other purposes.

Broadening and Sustaining the National Consensus

At the country level, there are a number of ways inwhich government can deepen ownership and buildconsensus. One of these is the formation of economicmanagement teams with a technocratic and political

composition. The experience of a number of countriessuggests that the formation of such economic manage-ment teams drawn from the technical and economicministries, along with political leaders, especially theprime minister or head of government, and some se-nior members of cabinet, can be an effective way ofbuilding consensus and managing programs. Suchmanagement teams will usually take charge of theoverall policy reform package and the coordination ofthe roles of different ministries and government agen-cies and departments in the implementation of the pro-gram. This is particularly important since, in practice,it is difficult for the ministry of finance by itself toachieve this coordination and monitoring of the differ-ent roles of these other ministries and agencies. Theone caveat, however, is that these management teamscan be counterproductive and may, in fact, deepen therivalry between the minister of finance and his col-leagues unless proper liaison is established betweenthe management team and the cabinet as a whole. Thetendency is for cabinet members to feel resentful ifpolicymaking suddenly shifts to a management teamthat includes just a few of their number, and if majorpolicy decisions are taken by this group without refer-ence to them. It is important, therefore, that there beregular communication between the economic man-agement team and the full cabinet through regularbriefings to the cabinet by the minister of finance or,preferably, by the prime minister or whoever chairsthe management team. In some countries, these man-agement teams are headed by the president himself,and this is often even more effective in getting all min-isters to cooperate in the reform effort.

Moreover, in the consensus-building process, it isimportant that opposing views within government areallowed to be expressed freely and openly, and wherethey appear to be predominant, they should not bebrowbeaten into silence. On the contrary, such pre-dominant opposing views and positions should be dis-cussed fully and, if need be, put to the test even if atthe cost of further economic deterioration, as this isoften the only way to create space for change. InGhana and Uganda, for instance, alternative policiesto Fund-supported programs were tried before thesereform programs began. For purposes of wider na-tional consensus building, national conferences havealso proved, in many countries, to be an effective wayof building consensus, especially where they have ahigh degree of inclusivity and openness. The role ofpolitical leadership, at the level of the presidency it-self, is often decisive in these matters.

Initiatives by the Fund

Side by side with what we recommend must bedone at the country level, we also recommend thatsteps be taken by the Fund to make the negotiation

54

Ownership and Governance Issues

and con-ditionality regime more ownership-friendly,so to speak.

Prenegotiation Contacts

We recommend that, before formal negotiationswith the country begin, the Fund, at a sufficiently se-nior management level and with the active participa-tion of the country’s Executive Director, engage in in-tensive and informal political dialogue with thecountry’s political leadership (and other key con-stituencies) in a bid to understand the country’s politi-cal constraints and possibilities. In appropriate cir-cumstances, the Fund may consider, for this purpose,the use of emissaries or third parties who may enjoy aspecial relationship of trust and friendship with thecountry’s political leadership. The idea is for manage-ment in this way to form the necessary political judg-ment that should then inform both the choice of themission leader and the formulation of the mission’smandate. We are aware that the Fund does some ofthis already. Visits by Fund management to the coun-tries are everywhere appreciated. Our proposal is tomake these informal contacts a systematic and regularfeature of Fund-country relations.

Timing of Missions

The timing and duration of country missions cameup frequently in our interviews with government offi-cials. Although both of these matters are always dis-cussed and agreed upon with government representa-tives (usually ministers of finance), there are concernsthat the timing and duration of missions do not alwaysallow sufficient time for the government to fully con-sult and build consensus, especially during the negoti-ation process itself as compromises are made. Thiswas a major complaint in Vietnam, for instance. In aslightly different variant of this problem, governmentsare sometimes ready to conclude negotiations but areunable to do so because missions are not mandated toreach agreement; indeed, some missions set out withthe explicit anticipation that a program would be con-cluded by a follow-up mission.

A related aspect of the timing problem is that gov-ernments’ preparation for negotiations is often com-promised by undue concentration of governmentstaff time on collating statistical and other informa-tion required by missions in the framework of Arti-cle IV consultations.

Now, quite obviously, the timing and duration ofstaff missions cannot be made exclusively dependenton the country’s or government’s needs; they also de-pend on the Fund’s administrative and staff con-straints. Our proposal is for a proper balance to bestruck between these competing considerations, whichallows the country time to prepare the ground ade-

quately for the appropriate policy choices to be made.In particular, new governments, especially those madeup of people with little or no experience in govern-ment, need even more time to consolidate power andbuild consensus. While a rush by the Fund to the sup-port of a new government may be entirely warrantedand necessary to provide early support and thus tostrengthen the position of key reformers, it must becoordinated carefully with other donor missions so asnot to put the consensus-building process under unduestrain and leave the reformers too far ahead of the restof the cabinet and government. Programs arranged inthese circumstances often make swift progress butleave a trail of recrimination in their wake that mayprove costly to the reformers themselves (Malawi),whereas those that are agreed in less hurried circum-stances usually prevail (Uganda, Ghana).

The Element of Choice

The most common complaints from which weheard but few dissenting voices concerned theFund’s perceived “inflexibility” in negotiation andits “insensitivity” to domestic political constraints.Many finance ministers and senior officials withlong experience with Fund negotiations complainedabout what they perceived as “imposition” and theabsence of choice in the way Fund programs are ne-gotiated. Understandably, the complaints were loud-est among, but by no means limited to, countries ex-periencing difficulties in negotiations with the Fund(Ethiopia, Bangladesh, and to some extent, Viet-nam). In our view, this is the greatest source of ten-sion in Fund-country relations, and the main reasonwhy the Fund is often cast in such a villainous role.

To be sure, as we have already noted, the Fund isoften a victim of circumstances of the country’s owncreation. Many ESAF countries come to the Fundwhen they are in a deep macroeconomic crisis re-quiring dire measures to bring much needed stabi-lization. In such cases, the country’s objective situa-tion itself imposes limits on policy options forcorrective action.

But we believe that there is more than a grain oftruth in these widespread complaints. We heardcomplaints about Fund “inflexibility,” even fromBank sources. The persistent concerns about the lossof national ownership come from the feeling thatgovernments are left no choices in negotiations, thatthe staff come with fixed positions and preferencesfor instruments that are considered “safe” and “reli-able,” and that alternatives are often dismissed muchtoo summarily and without objective appraisal. Forexample, a petroleum tax was cited as a frequentlyinvoked “safe” instrument.

We do not, of course, state these views here to saythat they reflect every negotiating experience, nor do

55

III GENERAL RECOMMENDATIONS

we intend to suggest that the complaints are neces-sarily valid in each case. The point we wish to makeis that they reflect a fairly widespread feeling thatthe negotiation process tends to be one-sided andproduces agreement mostly through a convergencearound Fund staff positions. Agreements that areconcluded in these circumstances and the condition-alities that regulate them can obviously not be saidto be compatible with true ownership.

To put the matter in the right perspective, it is nec-essary to clarify the nature of the concern we arehere addressing. There is nothing inherently contra-dictory between conditionality and ownership, and anegotiated program that is “owned” does not ceaseto be so merely because it is tied to conditionalities.The complaints, rather, are about conditionalitiestying financial support to the implementation of aprogram that is not owned, one that a government indistress and with no alternative source of fundingfeels compelled to accept.

We accordingly recommend that some flexibilitybe built into the mandate for negotiations in the cur-rent essentially ex ante negotiation and conditionalityregime. One of the ways, but by no means the onlyone, this could be done is to formulate alternative pro-gram paths through the negotiation process, leaving itto the country to decide, with the advice of the staff,what best (or better) suits its particular circumstances.What we have in mind is not a glorified lottery inwhich the country makes its choice, more or less inthe blind, leaving the Fund to bear the risk of default,nor is this the product of sheer brilliant intuition. Onthe contrary, we believe that the element of choicewill not only help relieve the perception of one-sided-ness and inflexibility in the existing negotiationregime, but it may also help to achieve an agreementin many of the cases where negotiations break downover narrow areas of divergence. It may also help ad-dress the large element of interruptions that the inter-nal review of the ESAF reported “were strongly af-fected by serious slippages in past policies that eitherweakened the government’s credibility, or producedprotracted disagreements between the staff and thegovernment on remedial measures.”

To provide this element of choice without jeopar-dizing basic discipline, alternative programs musteach satisfy a minimum condition of viability—theymust each be capable of bringing about sustainablegrowth.

We recognize that it cannot be a choice between a“strong” and “weak” program in the ordinary sense,for typically a “weak” program—one with a weaker-than-desired fiscal adjustment—will have a larger fi-nancing gap and therefore require more external, in-cluding Fund, resources. However, a country may inpractice decide that it needs time to build consensusand strengthen support for reform, and would there-

fore prefer to undertake the needed fiscal adjustmentsin, say, the second or third year, instead of the firstyear, of an ESAF program. In such situations, whatthe Fund typically does in the existing regime is tobackload its funding (along with other external fund-ing) and in this way complicates the implementationof the program in the first year or perhaps even con-demns it to failure. Our proposal would mean that inthese circumstances the Fund would grant the coun-try its choice and be willing to frontload its fundingto enable the government to demonstrate success andthereby strengthen its credibility. Fund assistancecould, in such situations, be made contingent onstrong signals by the country in the form of some up-front major structural reform along with measuresdesigned to prepare the ground for credible revenueand expenditure measures in the succeeding years.

Such a posture would enable the Fund to demon-strate its flexibility as well as its support for the re-formers, and at the same time would enable the coun-try to exercise some choice in determining theconfiguration of the program. The high-level politicalcontacts that we recommend elsewhere should alsoenable the Fund to form a judgment as to the depth ofthe country’s commitment to sustained reform.

Second, we recommend that the Fund develop amore systematic mechanism for supporting home-grown programs ex post. The objective of such amechanism would not be to condemn countries witha poor track record but, with new governments com-mitted to reform (Ghana 1983, Uganda 1987,Malawi 1994), to wait till they have established atrack record and allow them to bear the cost of ad-justment on their own while they are at it, beforethey can receive Fund support. For precisely thesereasons, homegrown programs would be entirely un-suitable for countries needing immediate balance ofpayments assistance.

A systematic mechanism for supporting home-grown programs ex post would enable the Fund to en-gage itself in countries that do not have critical bal-ance of payments crises but need Fund certificationfor access to private capital markets or in low-incomecountries with some balance of payments need butwhich decide that, for reasons of political principle,they would rather create their own programs.

A system or mechanism for providing ex post sup-port for homegrown programs should aim to provideample technical assistance for the development ofsuch programs. It should obviously also have entryand exit points although the purpose of active Fundtechnical assistance support in such cases would beprecisely to minimize the risk of program default(and therefore of exit in the first place). The entrypoint could usefully be made to be triggered bysome signal by the government in the form of amajor reform initiative.

56

Ownership and Governance Issues

The Fund’s Image: Explaining the Fund’s Role and Method

We have already observed that the Fund’s image inmost of the countries we visited was rather negative.In our view, this is a matter that needs to be addressedin its own right. It has implications for the Fund’s ef-fectiveness as an institution on whom the entiredonor community and private sector agents havethrust a leading role in macroeconomic policy man-agement. It also has implications for the credibilityand sustainability of the government’s role in the re-form process. Already, some countries, notably thosethat have a history of protracted revolutionary strug-gle (Ethiopia and Eritrea) and therefore have agreater capacity for political mobilization and a moreresolute and militant vision of the national develop-ment path, have begun to balk at Fund-supportedarrangements, preferring to pursue macroeconomicand structural reforms on their own.

We believe it is important that ways be found toboth humanize and demystify the Fund’s image to re-lieve the political hazard that countries sometimes per-ceive to be associated with dealing with the Fund. Inthis regard, the Fund might consider following the ex-ample of the Bank, not so much in its rather quixoticrecent decision to send staff members to the villages togive them a taste of poverty, but perhaps from theBank’s country strategy and implementation reviewmeetings in countries where heads of sector ministriesand their staff and key political leaders meet withBank staff to review program performance and discussfuture strategies. In our view, the PFP preparationprocess provides a perfectly suitable forum for Fundstaff interaction with a broad cross section of politicalleaders and technical staff, instead of the bilateral sec-tor meetings that the PFP process usually entails. Wealso endorse wholeheartedly the recommendationsmade in a 1993 internal Fund document forBangladesh: it proposed, among other things, that theresident representative “play a leading role through thedevelopment of a wide range of contacts and by directparticipation in the national debate.” It also recom-mended the publication of IMF Occasional Papers onBangladesh to focus discussion in high-level seminars,as well as Fund participation in meetings with oppo-nents of reform, both in and outside the government.

An improvement in the image of the Fund wouldnot only, in our view, be good for the Fund from thepoint of view of its effectiveness as an institution,but it would also help country ownership. When theimage of the Fund becomes so negative that coun-tries begin to feel a palpable political risk in associ-ating with it, they deny themselves the technical sup-port and policy advice that they acknowledge theFund does have and that they can avail themselvesof, in formulating and developing their own pro-

grams. Thus, a negative Fund image does not, in theend, promote country ownership.

The Role of the Resident Representative

We acknowledge that we did not visit a largeenough sampling of resident missions, and that there-fore the assessment we make in this regard cannot betoo categorical. In what follows, we make judgmentsthat are, to some extent, intuitive but which we be-lieve are reliable on account of the frankness and con-fidentiality that characterized our interaction and discussions with resident representatives and govern-ment officials, as well as donor representatives whohave had regular contacts with resident missions.

First, the resident missions tend to be very smallmissions, with a solitary resident representative work-ing with a skeletal administrative staff. In some cases,we sensed that, beneath the veneer of loyalty to the in-stitution, the resident representatives felt some frus-tration at their isolation from headquarters. Some ofthem also expressed concern about the career ad-vancement possibilities following their postings.

Our general impression is that the role of the resi-dent representative is perhaps not being maximizedenough, although it holds great potential not only forimproving the Fund’s image in the countries but alsofor facilitating the conduct of its relations and nego-tiations with them.

In our view, the role of the resident representativeis critical as a point of continuing contact with acountry and government and, therefore, for programimplementation. For this reason, we strongly recom-mend that there be resident missions in all ESAFcountries. The matter is important enough to warrantthat resources be found to make it possible to havethese missions established.

The full-fledged Fund mission that we recommendfor all ESAF countries should preferably be headedby a high-flying and relatively senior staff memberand an assurance given to them of their reintegrationinto headquarters once their mission abroad is over.We found the absence of this assurance to be a sourceof concern with some resident representatives.

In the framework of such a strengthened mission,greater authority should devolve to resident repre-sentatives, especially in areas or matters that dependcrucially on knowledge of concrete country circum-stances, such as the fulfillment of tranche conditionsor the impact of unexpected shocks or developmentsthat require minor variations of program targets.

In the light of the foregoing recommendations, webelieve that more country visits and intensified pro-gram monitoring by Washington-based staff wouldbe largely superfluous. Not only would they be a cu-rious affirmation of the Fund’s professed belief inthe primacy of country ownership, but they are also

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III GENERAL RECOMMENDATIONS

unlikely to prove as effective a way of aiding suc-cessful implementation of country programs as com-petently manned and strengthened resident missions.

The Fund’s Cooperation with the Bank

In the area of Fund/Bank cooperation, while agreat deal has been done to better define and clarifythe areas of the core competencies of the two institu-tions and to provide guidelines for the managementof areas of unavoidable overlap, a bit of confusionstill reigns. Behind the facade of the closeFund/Bank cooperation that Fund missions cite instaff reports, there is much frustration on both sides.

Among the Fund staff, there is some impatiencewith what is perceived as indecision on the part of theBank on key issues within its core competence (espe-cially expenditure analysis) and undue tardiness in de-livering inputs for joint documents and programs.

On the Bank’s side, the sources of frustration aremany. First, while the particular weaknesses com-plained of by Fund staff are acknowledged, there is ageneral feeling (and some resentment) that the Bankplays second fiddle to the Fund, and that once anESAF has been negotiated, the Fund expects a Struc-tural Adjustment Credit to follow. Second, there arecomplaints that Fund staff are often cast in an inflex-ible mold by their briefing papers and mandates, andare much too quick to plead jurisdiction and turfwhen differences arise. Needless to say, Fund staff,for their part, feel (and this, not without some justifi-cation) that Bank mandates and negotiating stylesare no less inflexible.

The real sources of friction include the sharing ofdraft reports and position papers. Bank staff com-plain that while they share their documents readilywith their counterparts in the Fund, there is too muchhierarchy and rigidity in the Fund’s attitude in thisregard. We heard complaints about the coordinationof policy positions and the sharing of PFP drafts onVietnam and Burkina Faso.20 There is also a wide-spread feeling on the part of the Bank staff that thereis continuing tension between the objectives ofshort-term stabilization and sustainable growth, andthat the Fund “needs to rethink growth.” The Fundstaff, on the other hand, feels that the Bank needs tobetter appreciate the role of macroeconomic stabi-lization in fostering and sustaining growth.

Financing plans of programs constitute anothersource of friction. The Fund staff often complains—and there are many references in staff reports onthis—that the Bank does not always deliver or dis-burse programmed resources on time, while theBank staff complains that the Fund controls itsmoney flow and takes the Bank’s for granted.

The tensions appear to center mostly on struc-tural reforms, especially financial sector reformswhere the specific issues cover the areas of micro-finance, the formulation of policy instruments that are compatible with private sector develop-ment, and the promotion of small- and medium-scale enterprises.

Our sense is that in spite of the progress that hasbeen made in the past few years in forging harmonyin Fund/Bank relations, too much still depends onpersonalities. We are unable, on the basis of the casestudies alone, to formulate any concrete remedialmeasures. We wish to stress, however, that the situa-tion requires urgent resolution, especially with thenew strains that are bound to be caused by the asym-metry in the levels of decision-making authority ofresident missions and country staff of the two insti-tutions, following the Bank’s recent decentralizationprogram, to say nothing of the problem of policy co-hesion and coordination posed by this programwithin the Bank itself. There is a pressing needtherefore to improve Bank/Fund cooperation further,through the development of more effective and oper-ationally reliable instruments of cooperation. Policychoice and ownership are not helped when the coun-try is pulled in different directions by the two institu-tions and perhaps by donors.

Conclusion

We have put a great deal of emphasis on countryleadership as a condition of national ownership. Wetalk of the country developing its own medium- tolong-term vision, of the need for the country to be al-lowed time to build consensus, of the timing and du-ration of missions being arranged to enable consen-sus-building, and of allowing and assisting thecountry to develop its own program if it so desires.We do not intend, by these proposals, an endorse-ment of selectivity in the sense of a withdrawal bythe Fund from engagement with countries until per-fect conditions for ownership have been established.

Accordingly, while we put a premium on countrypreparation and leadership in setting the policyagenda and pace of reform, we recommend also thatthe Fund engage the country at the highest politicallevel and at the earliest opportunity to both listen andoffer advice. We further propose the stationing of res-ident representatives in all ESAF countries and thestrengthening of the Fund’s technical assistance work.We believe that these measures can go a long way insupporting what countries must do at their level topromote national ownership. We therefore urge thatevery effort be made to provide the necessary bud-getary resources to enable the Fund to strengthen itswork in the countries in these two important areas.

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20Interviews, Hong Kong and Vietnam, September/October 1997.