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8th March 1998

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Good governance for quality growth

Following is an edited excerpt of an address given by IMF Managing Director Michel Camdessus at a meeting of Transparency International, in Paris, on January 21.

Good governance has taken on increasing importance in the IMF's traditional mandate of promoting economic stability and what I call high quality growth.

Today, not only have governance issues moved to the forefront of discussion, but in many cases government reform has moved to the top of the policy agenda. What has changed?

One important change has been in the perception of what constitutes sound economic policy. As more and more evidence has come to light about the adverse consequences of governance problems on economic performance — among them, losses in government revenue, lower quality public investment and public services, reduced private investment, and the loss of public confidence in government — a broader consensus has emerged on the central importance of transparency and good governance in achieving economic success.

Numerous studies have shown that where governance is poor, domestic investment and growth suffer. Moreover, in a world in which private capital has become more mobile, there is mounting evidence that corruption undermines the confidence of the most serious investors and adversely affects private capital inflows— this is the case in all too many countries in Africa.

Even Asia is no exception; we have seen there that governance problems can also undermine the ability of countries to channel private capital inflows into productive, long-term investment.

Moreover, the Asian crisis has demonstrated in a dramatic way how the lack of transparency about underlying economic and financial conditions can feed market uncertainty and trigger large capital outflows that can, in turn, threaten macroeconomic stability. Conversely, progress toward greater transparency can radically alter the very terms of the public debate.

Other factors also come into play. With government budgets under pressure in virtually every country in the world, bilateral aid donors have become more conscious of the need to direct their resources to countries that they believe will use those resources most productively and in which such use can be monitored.

The IMF itself has a responsibility to its members to ensure that the resources they provide to the IMF are put to good use. For all of these reasons, our member countries have come to recognize the vital importance of good governance, and, at our Annual Meetings in September 1996, a Declaration on Partnership for Sustainable Growth was adopted.

It reflects a now-universal consensus on these issues and states that "promoting good governance in all its aspects, including ensuring the rule of law, improving the efficiency and accountability of the public sector, and tackling corruption" is an essential element of an environment in which countries can achieve lasting prosperity.

lt may seem like a catch-all, but its words give legitimacy to our efforts in this area and to the "second generation of reform" that we are now trying to promote.

Subsequently, the IMF's Executive Board met a number of times to develop guidance for our staff in dealing with governance issues. The result was a set of guidelines that have been in effect since last July.

They confirm and strengthen the approach that the IMF has been taking for some time and also stressed the importance of addressing governance issues even handedly in all member countries and, of course, the need to work together on these issues with other multilateral institutions, especially the World Bank, since we are jointly confronted with these problems.

The IMF's Role

How does the IMF go about promoting good governance? Broadly speaking, our approach is to maximize the transparency of government financial operations and create systems that minimize the scope for making decisions on an ad hoc basis and for giving preferential treatment to individuals and organizations.

For example, we are helping members simplify their tax systems and business legislation and strengthen tax and customs administration by eliminating special exemptions that apply to a privileged few; this is the best means of ensuring that adequate revenues are received to finance essential public services and that such services are accessible to the general population.

Likewise, we are working with countries to strengthen and increase the transparency of budgetary procedures to ensure that government revenues are fully accounted for and used as agreed in the budget.

We are also seeking to improve the quality of government expenditure by reducing outlays for unproductive purposes, such as costly military buildups and large projects that benefit influential groups while stroking the egos of the high and mighty. The savings will make room for spending on primary health care, basic education, vocational training, and essential infrastructure.

At the same time, the IMF seeks to promote more effective and accountable economic and financial institutions.

To this end, we are working to improve the quality of financial sector regulation and supervision and enhance the transparency of financial sector operations.

Similarly, we are encouraging countries to improve the quality of the data they provide to the public about domestic economic and financial policies and performance.

We cannot overemphasize the importance of high-quality statistical data; such data are an influential factor in improving economic policy and an essential aid to potential investors in evaluating countries' economic policies and performance.

They allow the markets to become more informed and selective and constitute a first-class protection for countries with good policies that will be less vulnerable to the often capricious fluctuations and herd behavior on the financial markets.

Regarding corruption, our institution has a macroeconomic mission, and our mandate is restricted to those specific instances that may have a significant macroeconomic impact.

We do not hesitate to bring such cases to the attention of the authorities.The macroeconomic nature of corruption may be identified by the large amounts involved or the fear that specific cases of corruption are symptomatic of a wider governance problem.

Examples might include tax and customs fraud with the involvement of senior public officials, the misuse of official foreign exchange reserves, and abuses of power by bank supervisors or failure on their part to take action.

This has led us in some cases to delay or suspend our support until the member in question has taken appropriate corrective action.

In our view, good governance is essential for countries at all stages of development—from the poorest countries that are still in the process of building up domestic institutions and undertaking the basic reforms needed to accelerate economic growth, to the advanced countries, both as regards their own internal governance and their dealings with developing countries.

Governance in Asia

In recent months, the world has been shocked to see how quickly countries renowned for outstanding economic performance have been engulfed in crisis.

Although the causes of the crisis are varied and complex, many of the problems that lie at the heart of Asia's difficulties are bound up with poor governance.

In Korea, for example, opacity had become systemic. The lack of transparency about government, corporate, and financial sector operations concealed the extent of Korea's problems — so much so that corrective action came too late and ultimately could not prevent the collapse of market confidence, with the IMF finally being authorized to intervene just days before potential bankruptcy.

The situations in Thailand and Indonesia have forced us to deal with similar problems — although to a lesser or different degree. In each case, the centerpiece of the program is a thorough restructuring of the financial sector.

The goal is to ensure that owners and managers are genuinely more accountable for the prudent operation of their banks, that loans are made on the basis of objective commercial criteria, and that banks return to their essential role of mobilizing domestic savings and promoting sound investment.

Also required are institutional changes to strengthen financial sector regulation and supervision.

The programs for the corporate sector are no less ambitious. They include measures to improve the transparency of corporate balance sheets through independent external audits, disclosure, and publication of consolidated statements for business conglomerates so that markets can monitor corporate performance.

At the same time, the programs seek to create a more level playing field for private sector activity by dismantling monopolies, eliminating government - directed lending, increasing the transparency of foreign trade procedures, and revising government procurement and contracting regulations.

Just as corporations and financial institutions must become more open and transparent, so too must their governments.

All three programs call for governments to improve the publication of key economic data and bring off-budget activities into the budget so as to provide a clearer picture of the financial position of the wider public sector and improve its governance.

The programs are far-reaching and confirm the basic intuition of Transparency International: that anyone who takes the need for transparency seriously will profoundly change the course of events. Such reforms will require a vast change in domestic business practices, corporate culture, and government behavior.

Obviously, this will be a long-term process — one in which the IMF the World Bank, and others can assist, but whose success depends on the efforts of the countries themselves.

The positive effects are already being felt: witness the attitude of the Korean unions, which were persuaded to give up the idea of a general strike in return for a tripartite dialogue with the government and employers regarding the accounts of the chaebols, which are finally more transparent and more widely disseminated.

For the IMF, which for fifty years essentially confined itself — in accordance with its mandate - to helping its member countries accept essential monetary and macroeconomic discipline, these are entirely new frontiers — both vast and promising — as they are for the World Bank and the other major international organizations.

However, we must guard against leaving this work to the international organizations, which risks setting them up as the scapegoat for all the world's ills progress should come too slowly. Like all revolutions this one will be successful only with the unrelenting and ultimately irresistible pressure of civil society.

Cyberspace to be made a tax free zone

President Bill Clinton has called for a U.S. and international ban on new taxes on cyberspace business transactions, saying economic prosperity depended on "full development" of the Internet.

"There should be no special breaks for the Internet, but we can't allow unfair taxation to weight it down and stunt the development of the most promising new economic opportunity in decades," Clinton told some 300 high-tech industry executives at a conference here.

"The next big step in our economic transformation it seems to me is the full development of this remarkable device, and the electronic commerce it makes possible," he said.

Clinton endorsed legislation pending before Congress that would impose a moratorium on taxes that discriminate against electronic business transactions and the Internet.

He said he would ask Treasury Secretary Robert Rubin to seek a similar ban internationally. Clinton will back domestic legislation introduced by Oregon Democratic Sen. Ron Wyden and California U.S. Rep. Chris Cox, a Republican, the White House said in a statement.

The legislation would block states or localities from imposing new taxes on the electronic sale of goods and services.

The White House said state and local governments could continue to apply existing taxes to electronic commerce as long as they did not discriminate by taxing such business differently from other transactions.

Clinton said a bi-partisan group of elected officials, business leaders, consumers and Treasury Department representatives should study the issue.


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