IMF Managing Director Horst Köhler trav-eled to Latin America on December 6–12 to

offer the IMF’s support to the region, where sev-eral large countries are working hard to stabi-lize their economies, following Argentina’s diffi-culties. “At the end of the trip,” Köhler said,“I remain convinced that lessons from successesin the region can help point the way forwardfor other countries currently experiencing diffi-culties.” Köhler’s three-nation tour, which heundertook at the invitation of the presidents ofBrazil, Colombia, and Chile, was his secondvisit to Latin America since he took over thereins at the IMF in May 2000.

Köhler’s first stop was Brasilia, where hemet with outgoing President Fernando EnriqueCardoso, President-elect Luiz Inácio Lula da Silva,

outgoing Finance Minister Pedro Malan, and AntonioPalocci, who will succeed

InternationalMonetary FundVOLUME 31NUMBER 23December 16, 2002

In this issue

385Köhler meets withLatin Americanleaders

385Global FinancialStability Report

389New IMF liquiditymeasure

390Boughton on IMF’snew conditionalityguidelines

392Turkey’s programnegotiations resume

392Globalization and Africa

393Developing countriesneed safety nets

394Pensions andannuities

398Abed and Guptaon corruption

and…

389Use of IMF credit

396Recent publications

397IMF arrangements

399New on the web

400Selected IMF rates

385

IMF’s Köhler optimistic aboutworking with new Brazilian government

Global financial markets continue to demonstrateresilience, but the third quarter saw rising investor

risk aversion—much of it attributable to a naturalreaction to past excesses and current uncertainties.

The new issue ofthe IMF’s GlobalFinancial StabilityReport underscoresthe need to pursuemeasures to restoreinvestor confidence.

Concerns aboutthe strength anddurability of theglobal economicrecovery, uncertainprospects for cor-

porate profitability, and unsettled geopolitical condi-tions dampened investor sentiment in the third quar-ter of 2002, according to the IMF’s recently releasedGlobal Financial Stability Report. Together, these factors heightened investor risk aversion and con-tributed to tiering by credit quality and to continueddifficult financing conditions for higher-risk corpo-rate and sovereign borrowers.

Despite this unusually high volatility, global finan-cial markets remain resilient. The key now will be,the report indicates, to avoid an excessive swing awayfrom risk taking.

In major financial centers . . .The global financial system, the new report notes, hasexperienced economic recessions and growth slow-downs in various countries, the bursting of the technology-media-telecom

Global Financial Stability Report

Markets remain resilient, but recent losses andheightened risk aversion pose significant dangers

(Please turn to the following page)

(Please turn to page 387)

www.imf.org/imfsurvey

Brazil’s President-elect Luiz Inácio Lula da Silva (right) held a “getacquainted” meeting with the IMF’s Horst Köhler in Brasilia.

The next issue ofthe IMF Survey will appear on

January 20, 2003.

Malan when the newgovernment takes office on January 1. “My trust inBrazil and President-elect Lula da Silva is strengthened

after the meeting,” Köhlertold a news conference.“This impression is basedon his increasing emphasison social equity, ethics,honesty, respect for con-tracts and contract rights,and respect for institu-tions,” he added.

The IMF approved arecord $30.4 billion loanfor Brazil in September tosupport the country’s eco-nomic and financial pro-gram through December2003. The next $3 billioninstallment is expected to

be disbursed after a review by the IMF ExecutiveBoard, tentatively scheduled for December 19. IMFExternal Relations Director Thomas Dawson said in a press conference that Köhler’s visit to Brazil was nota negotiating visit, but a chance for Köhler to getacquainted with President-elect Lula da Silva and“offer him the support of the IMF and the interna-tional community as he works to formulate a pro-gram for the new government going forward into2003 and beyond.”

Köhler praised the outgoing government ofPresident Cardoso for strengthening and democratiz-ing Brazilian institutions, saying it provided a firmbase on which Lula da Silva can build once he takesoffice. “We stand ready to work with the new admin-istration to think and work out what can be done tosupport social objectives in a framework of macro-economic realities,” Köhler said. “What is importantis that Brazil is achieving what it has promised withinthe program with the IMF,” Köhler added in an inter-view with the Brazilian daily O Globo.

In Colombia . . .Köhler’s second stop was Colombia, where he metwith President Alvaro Uribe in Bogotá. “In the shortperiod of time that the government has been in office,it is impressive that it has already taken prompt actionsto address a weakening fiscal position and develop acomprehensive strategy for stability and growth,”Köhler said in a statement following the meeting.

The government has requested a new loan to succeed the present loan, which expires on Decem-

ber 19, 2002. Speaking at a press conference followingthe same meeting, Köhler said that the IMF andColombia are expected to sign a two-year $2 billionloan agreement in January. He was confident that aseries of reform bills, which include plans to signifi-cantly change pension, tax, and labor laws, will beapproved soon.

And in Chile . . .Köhler praised the Chilean authorities’ for the coun-try’s “strong and credible” macroeconomic policyframework, which is based on a floating exchangerate, inflation targeting, and clear rules on fiscal pol-icy. “This framework has been supported by lowpublic debt, a strong belief in free trade, and the virtual absence of dollarization,” Köhler said inSantiago after meetings with Chilean PresidentRicardo Lagos, Finance Minister and former IMFofficial Nicolás Eyzaguirre, and central bank officials.“Thus, Chile—like Mexico—has been able to betterprotect itself from adverse external shocks and main-tain positive growth even during periods when international capital markets have been unsettled,”he added.

While Köhler was in Chile, the United States andChile signed a wide-ranging free trade agreementafter two years of intense negotiations. The stickingpoint was the U.S. Treasury’s insistence that Chiledrop all controls on foreign capital entering or leav-ing the country, which Chile uses to protect itselffrom rapid movements in capital. Under a compro-mise, the United States will allow Chile to use suchcontrols for as long as one year without imposingsanctions provided they don’t “seriously impede”capital outflows.

The trade agreement with Chile, which must beapproved by Chilean lawmakers and the U.S. Senate,will eliminate tariffs on more than 85 percent of allgoods shipped between the two countries. Köhler,quoted in wire service reports, noted that “It’s morethan just the prospect for higher or sustained tradeincreases. That this agreement came together now isalso a good signal for further confidence buildinginto Chile’s policy approach.”

December 16, 2002

386

Köhler praises Chile’s policies(Continued from front page)

Köhler (left) laudedChile’s “strong and credible”macroeconomic policy framework.With him are thehead of Chile’sCentral Bank, Carlos Massad(right), andGuillermo Le Fort(center), IMFExecutive Directorfor Chile.

The announcement of the Managing Director’s trip to

Latin America (News Brief No. 02/118), and Köhler’s

remarks in Colombia (News Brief No. 02/121) and

Chile (News Brief No. 02/122) are available on the

IMF’s website (www.imf.org).

December 16, 2002

387

bubble, uncertaintycreated by corporate accounting irregularities, and sig-nificant financial losses in key sectors of the global eco-nomic and financial system. A considerable retrench-ment of risk taking has accompanied these develop-ments, amid heightened risk perceptions or risk aver-sion and the unwinding of bubble-period excesses.Sharp declines in equity prices (see chart, this page)—including financial-institution stocks, widening creditspreads, and record defaults—have created losses forretail and institutional investors and financial institu-tions. In response, major financial institutions haveadjusted their business strategies, and, going forward,this may influence credit conditions and capital flows.

Despite these varied and significant adjustments,however, financial stability has been maintained, inpart because financial institutions have been able torepackage and distribute financial risks more broadly.The global financial system remains resilient, thereport says, but its robustness in the face of shocksand its ability to cope with further losses have proba-bly declined to some extent.

What lies ahead? The report sees the principalsources of risk for global financial stability as likelyto be associated with an excessive retrenchment ofrisk taking in financial markets. In its analysis ofwhat could trigger an overly large retrenchment,the report identifies potential risks in each of themajor financial centers—notably, the householdsector in the United States, the financial sector inEurope, and weaknesses in both corporate and finan-cial sectors in Japan. More specifically, it notes that

• because the U.S. household sector owns (directlyor indirectly) the lion’s share of U.S. corporate andfinancial sector risks, it remains critically importantto the global financial system’s capacity to assumeand intermediate risks. A substantial rebalancing ofhousehold portfolios—for example, a further sizablesell-off in equities—would have wide-ranging effects.

• in Europe, where financial institutions retaina significant share of corporate sector exposures,a worsening economic and financial environment hasaggravated long-standing structural weaknesses insome European financial systems. Such weaknessesmay affect financial institutions’ willingness and abil-ity to continue to take and manage risk, particularlyexposures to high-risk mature and emerging-marketborrowers.

• and, finally, the Japanese financial system contin-ues to struggle with long-standing structural prob-lems relating to the nexus between the corporate andfinancial sectors.

To address these concerns, the Global FinancialStability Report highlights policy actions that, takentogether, should mitigate risks to financial stability,bolster investor confidence, and strengthen the markets’self-correcting mechanisms. It encourages policymakersin the advanced economies to ensure that their macro-economic policies remain responsive to any signs thatrecovery may be faltering. In Japan, strong implemen-tation of financial and corporate sector reformsremains critical to restoring investor confidence.

In several countries where there are ongoing initia-tives, further work will be needed to improve trans-parency and to address those shortcomings that havebeen identified in corporate governance, accounting,auditing, and investment banking practices. The reportalso recommends that supervisors of nonbank financial

Excessive risk aversion poses its own dangers(Continued from front page, bottom)

Data: IMF, Global Financial Stability Report, December 2002 1For United States, Standard & Poor's 500; for United Kingdom, FTSE 350; for Germany,

Dax 100; for France, SBF 250; for Italy, MIB 30; and for Japan, Topix.2For United States, Nasdaq Composite; for United Kingdom FTSE techMARK 100; for

Germany, Nemax All-Share; and for France, Nouveau Marché. Data for Nemax All-Share and Nouveau Marché start in March 1997 and March 1996, respectively. Therefore these indices are rebased to the level of the Nasdaq on these dates.

Italy France

Germany

United Kingdom

Japan

United States

France

Germany

United Kingdom

United States

Broad stock market index1

Technology sector index2

0

50

100

150

200

250

300

350

400

020120009998971996

0

500

1,000

1,500

2,000

2,500

020120009998971996

U.S. and European stock indexes fell to their lowest level since 1997 (January 1, 1996 = 100)

December 16, 2002

388

institutions, particularly insurance companies—and, ina number of cases, pension funds—be vigilant for signsof significant capital erosion stemming from fallingasset prices. Finally, the report cautions that credit risktransfer instruments—which financial institutions haveincreasingly relied upon to manage their risks—warrant enhanced disclosure and regulatory scrutiny.

In emerging markets . . .The anxiousness and uncertainty evident in majorfinancial centers have reverberations in the emergingmarkets as well. The external financing environmentfor emerging markets—characterized by unusuallyhigh financial market volatility, asset price weakness,increased risk aversion, and tiering by credit qual-ity—remains a difficult one. Like mature markets,emerging markets have experienced a sharp tiering bycredit quality, and countries with large borrowingrequirements are the focal point of investor concern(see chart below). There have been, however, onlylimited signs of broad-based contagion, reflectingcontinued investor discrimination. And, while volatil-ity has increased, it has remained well below that ofprevious crisis periods.

In short, the external financing environment foremerging markets was difficult:

• Wide corporate bond spreads in the mature mar-kets have made it hard for emerging markets toattract investors.

• Continued mature equity market weakness andvolatility have proved detrimental to emerging mar-ket financing, including foreign direct investment.

• Bank lending to emerging markets has beeninhibited by financial losses from lending in maturemarkets. In particular, continued concerns arising

from the experience of foreign banks in Argentinahave led banks to reassess the risks of operating inemerging markets more generally.

• Heightened risk aversion, a reduction in thenumber of emerging market bond dealers, and deal-ers’ reluctance to accommodate sellers by taking secu-rities on their balance sheets have reduced liquidityand trading volume in the secondary market foremerging market bonds.

This difficult external environment, coupled withconcerns about policy continuity in Brazil and otherkey emerging markets, has led to a continuation ofsharply reduced flows and external financing toemerging markets, particularly for noninvestment-grade issuers. The cumulative gross issuance ofbonds, loans, and equities by emerging markets in thefirst nine months of 2002 lagged issuance levels ofprevious years by a wide margin and was highly con-centrated in investment-grade credits. Although inthe primary markets unsecured access was effectivelyclosed to noninvestment-grade issuers, broad-basedcontagion was limited, and investment-grade issuersand Asian and Eastern European issuers benefitedfrom relatively open access.

Performance and yield spread developments in thesecondary market for emerging market bonds contin-ued to reflect investor discrimination across regionsand the credit spectrum. Emerging market borrowerswith low borrowing requirements, stable debt struc-tures, strong fiscal positions, and good prospects forpolicy continuity were able to maintain primary mar-ket access and experienced positive returns in the sec-ondary markets. Nevertheless, the emerging bond mar-ket was not spared the aversion to risk that character-ized global financial markets in the third quarter, whenthere was a general tendency for spreads to widen.

Emerging market economies, the report suggests,can take a number of policy measures to enhancefinancial stability. The continued ability of someemerging markets to tap international capital mar-kets, notwithstanding the difficult external financingenvironment, illustrates how vital it is for countries toremain strongly committed to implementing policiesthat maintain macroeconomic and financial stabilityand strengthen institutional frameworks.

According to the report, effective policies shouldinclude the implementation of sound debt manage-ment strategies that, market conditions permitting,avoid debt structures that amplify external shocks.Deepening local financial markets to facilitate theissuance of longer-term instruments denominatedin local currency would help buffer global capitalmarkets from turbulence. And, more generally, a firmcommitment to the preservation of property rights,

1Emerging market bond index.Data: IMF, Global Financial Stability Report, December 2002

200

400

600

800

1,000

1,200

Nov.Sep.Jul.MayMar.Jan.2002

Brazil (right scale)

500

1,000

1,500

2,000

2,500

EMBI+1

Russia

Mexico

Asia

Spreads on emerging market bonds widened substantially(basis points)

The emergingbond marketwas notspared theaversion torisk thatcharacterizedglobal financialmarkets.

—Global FinancialStability Report

December 16, 2002

389

the rule of law, transparency, and stability in the legaland regulatory frameworks are key to fosteringgreater investor confidence and building a morestable investor base.

Successive issues of the Global Financial StabilityReport have underscored the importance of developinglocal financial markets as a means of fostering financialstability. While previous reports highlighted the role oflocal equity and bond markets, the current issue con-siders emerging derivative markets. Derivatives cancontribute to a more efficient allocation of risks infinancial markets but can also be used to avoid pru-dential safeguards and to take on excessive leverage.

To maximize the benefits that can be gained fromderivatives, the report recommends developing localderivative markets within the context of a broad andwell-sequenced strategy for developing local securities

markets. Such a strategy should emphasize the cre-ation of the necessary underlying legal, regulatory,accounting, and market infrastructures. To this end,transparency and adequate financial supervision arecritical for ensuring that derivatives play a positiverole in helping market participants price and managerisks and for preventing the buildup of financial sys-tem fragilities.

David J. Ordoobadi and Garry J. Schinasi IMF International Capital Markets Department

To give the public a clearer understanding of theamount of its regular financial resources that is

available for new lending, the IMF on December 16announced a new method of measuring its liquidity.The new yardstick—known as the one-year forwardcommitment capacity or FCC—indicates the amount of the organization’s quota-based and nonconcessionalresources on hand for member country needs. As ofDecember 13, the IMF’s one-year FCC amounted toSDR 48.951 billion (about $65.668 billion).

How is this liquidity figure arrived at? The FCCreflects the IMF’s stock of usable resources minusundrawn balances from current lending arrange-ments, plus projected repayments by IMF borrowers(the repayments that the IMF refers to as “repur-chases”) over the coming 12 months. A prudentialbalance—intended to safeguard the liquidity of credi-tors’ claims and to take account of any potential ero-sion of the IMF’s resource base—is also deducted toarrive at the final FCC amount.

The prudential balance represents an indicativelevel of uncommitted usable resources that the IMFwould normally not use to make financial commit-ments. This balance reflects the judgment of theIMF’s Executive Board, and it is calculated as 20 per-cent of the quotas of member countries whose cur-rencies are currently used for lending purposes andany amounts activated under borrowing arrange-ments. The prudential balance is not a rigid mini-mum; the IMF’s uncommitted resources could, on astrictly temporary basis, fall below this level.

The FCC takes fully into account current IMFlending commitments, including those under precau-

tionary arrangements and any commitments madeunder Contingent Credit Lines. In assessing IMF liq-uidity on the basis of the FCC, actual availableresources may be larger than the FCC indicates, to theextent that commitments are not fully disbursed.

The FCC will be posted on the IMF’s websiteweekly (Week-at-a-Glance) and monthly (FinancialResources and Liquidity). The Executive Board hasdecided that the FCC will replace the traditional liq-uidity ratio, but the IMF will continue to publish thetraditional liquidity ratio for the time being.

For the full text of the IMF’s press release, includ-ing explanatory notes, see the IMF’s website(www.imf.org).

Copies of Global Financial Stability Report: MarketDevelopments and Issues, December 2002, are availablefor $42.00 (academic price, $35.00) from IMF PublicationServices. See page 396 for ordering details. The full textof the report is also available on the IMF’s website(www.imf.org).

IMF devises new measure of lending capacity

Members’ use of IMF credit(million SDRs)

During January– January–November November November

2002 2002 2001

General Resources Account 0.00 22,667.60 21,358.70 Stand-By 0.00 21,654.01 20,616.70

SRF 0.00 7,903.67 12,662.31EFF 0.00 986.61 742.00CFF 0.00 0.00 0.00EMER 0.00 26.98 0.00

PRGF 111.72 1,223.52 696.53Total 111.72 23,891.12 22,055.23

SRF = Supplemental Reserve FacilityEFF = Extended Fund FacilityCFF = Compensatory Financing FacilityEMER = Emergency assistance programs for countries that have

emerged from conflicts and natural disastersPRGF = Poverty Reduction and Growth FacilityFigures may not add to totals shown owing to rounding.

Data: IMF Treasurer’s Department

The newyardstick—known asthe one-yearforwardcommitmentcapacity or FCC—indicates theamount of theorganization’squota-based andnonconcessionalresources ison hand formember countryneeds.

December 16, 2002

390

James Boughton, former IMF Historian and nowAssistant Director in the IMF’s Policy Development

and Review Department, was a key player in the two-year review of IMF conditionality—that is, the com-mitments on economic and financial policies thatcountries must fulfill when they borrow from the IMF.The process culminated in the adoption in September2002 of new guidelines to replace those in place since1979. Boughton speaks to the IMF Survey about thereview process and what’s new about these guidelines.

IMF SURVEY: Why did the IMF adopt new guidelines? BOUGHTON: The review of conditionality wasprompted by trips that IMF Managing Director HorstKöhler made to Africa and Latin America shortlyafter he took office in the spring of 2000. What struckhim in a number of borrowing countries he visitedwas that very few country officials objected to theidea of IMF conditionality. What officials did tend toobject to was the growing intrusiveness of condition-ality. The IMF sometimes seemed to be telling themhow to run their economies. Out of that initialimpression came the idea that the IMF should findways to make its work less intrusive and more of acooperative venture with member countries.

To do this, the IMF embarked on a review ofalmost all aspects of conditionality—how the IMFinteracted with countries, how it designed andselected conditions on structural policies, and how itpresented those conditions. The IMF held a numberof consultations with outside groups, such as non-governmental organizations, officials from both bor-rowing and creditor countries, and academics. It alsoheld seminars in various parts of the world and putnotices on its website asking people to comment onwhat it was doing. We were trying to take a fresh lookat the way the IMF was doing business and be com-pletely open and transparent about it.

IMF SURVEY: What, specifically, is new about theseguidelines?BOUGHTON: They specify that ownership is a criticalcomponent of a reform program. Countries areresponsible for implementing their own policies. TheIMF’s job is to advise its member countries and tojudge what policy changes are needed. If the IMF hasserious doubts about a country’s commitment toimplementing essential reforms, then that’s a reasonfor it to step back and say it’s not ready to approve

financing for the program. The IMF had not previ-ously been concerned enough about ownership,although it always recognized it as an important issue.It’s something that we will be paying a lot of attentionto in the coming years.

Another idea that is not completely new but hasnew emphasis in the guidelines is what we call “parsi-mony,” or streamlined conditionality. The old guide-lines tried to limit the range of policies that the IMFlooked at. But, over time, the IMF started gettinginvolved in more aspects of policymaking in countries.

We are now trying to define more precisely whichpolicies are “fair game” for conditionality and whichones are not. If there’s a debate about whether astructural reform should or should not be a condi-tion for an IMF loan, the burden of proof is now onthe person who is making the case that it should bein—that it is essential to making the program work.Before, the burden of proof may have been on theperson trying to take the condition out.

If the IMF wants to include a condition in an areawhere it lacks expertise, the new guidelines specifythat it has to consult the World Bank, which will haveprimary responsibility for determining what the rightcondition is, how it should be monitored, and theappropriate time frame. The IMF has established anew, closer relationship with the World Bank to makeconditionality work better.

The IMF is also specifying more clearly what thedifferent types of conditions are. The most commontype is a “performance” criterion—a measurable,quantitative target that the country must meet toqualify for financial assistance. For example, a perfor-mance criterion might say that a country’s monetarygrowth will be no higher than a certain percentageover a period of time.

There are other kinds of conditions, too: indicativetargets, such as a ceiling on the inflation rate, to mon-itor whether the program is working properly; andstructural benchmarks, which indicate the steps acountry is taking to implement structural reforms,such as privatizing an industry to make it more effi-cient. Failure to achieve these other types of condi-tions would signal problems but would not necessar-ily interrupt IMF financing.

The IMF has also clarified which parts of a country’sreform program are, strictly speaking, subject to IMFconditionality and which are not. In other words,when a country applies for help from the IMF, it might

Countries arewilling to listento the IMF, butthey would like to have a dialogue in whichthere aresome genuineoptions tochoose from.

—James Boughton

Interview with James Boughton

New conditionality guidelines putcountry officials back in the driver’s seat

December 16, 2002

391

describe wide-ranging reforms it is undertaking to usethe resources provided to it. But some of these mea-sures are not necessarily conditions. The IMF is goingto make an effort under these new guidelines to distin-guish what is and what is not conditionality.

IMF SURVEY: The review was notable for the time andeffort expended on consultations. How do the newguidelines reflect what the IMF heard during theprocess?BOUGHTON: Through the review, we were able to gaina much better understanding of the importance ofownership. Country officials are quite willing to workwith the IMF to design the best possible reform pro-gram, but they don’t want to be told unilaterally whatthe best reform program is. We learned that owner-ship is a flexible concept. Countries are willing to lis-ten to the IMF, but they would like to have a dialoguein which there are some genuine options to choosefrom. The guidelines introduced the idea of owner-ship in a way that was much more conducive to dia-logue and more adaptive than it might have been hadwe not consulted so extensively.

We also learned that flexible timing is very impor-tant to a lot of countries. The IMF frequently lendsto low-income countries with limited administrativecapacity to implement a large number of reforms allat once. Expecting countries to do so, especiallywithin a short time, is asking a lot of them. Even ifa reform such as strengthening tax administration isimportant, it might not have to be completed by aspecified date. When the main purpose of the reformis to create more efficient conditions in the economy,then it does not necessarily have to be achieved by,say, next February. So, the IMF is trying to be moreflexible. That message became very clear throughthese external consultations.

IMF SURVEY: Conditionality has a long history. Fromthe beginning, there was a sense that the IMF wouldhave to review it periodically and adapt it as neces-sary. What has all of this taught us about the needfor conditionality and how to “get it right”?BOUGHTON: Conditionality is something that willalways have to be adapted to circumstances. In theearly days of the IMF, in the 1950s, conditionalitywas limited to a small number of policies because theIMF was concerned only with trying to smoothcountries’ international flows of payments.

Over the past quarter century, the IMF has beencalled upon to provide more than just short-term help.And that has meant getting involved with a muchwider range of policies than before through moreextensive conditionality. It has also meant that the IMF

has had to be more disciplined to keep from being toointrusive, which was never an issue when the IMF con-cerned itself only with short-term problems. So aprocess of adaptation has come about in response tochanging circumstances.

I’m sure that, as we apply the new guide-lines, we will find new problems with themeither because they are not clear enough orbecause the IMF will be drawn into newissues that we have not thought of yet. TheIMF is committed to conducting a full, thor-ough review of the implementation of condi-tionality every two years.

In those reviews, the IMF will addressmany hard questions. Has practice been con-sistent with the new guidelines? Is the IMFsucceeding in promoting ownership? Has itsucceeded in cutting the number of condi-tions it is requiring countries to implement? Are theremaining conditions properly focused on achievingprogram goals?

From the answers to these questions, the IMF willjudge whether the guidelines need to be adapted orstrengthened. I’d like to believe that the guidelines arenow perfect and that we’ll never have to change themagain. But history suggests that they will require fur-ther adaptation over time.

IMF SURVEY: Now that we’ve adapted conditionality,what difference will it make for our members and forthe IMF? What do you expect the impact to be?BOUGHTON: The impact depends on the IMF’s abilityto change the way it interacts with member countries.If the IMF can put country officials back in the dri-ver’s seat, then I would expect two real benefits. First,IMF-supported programs would be more successful.Second, and even more important, we should see bet-ter policymaking in many countries, not just becauseconditionality is better but because countries are tak-ing more responsibility for policymaking.

When the IMF tells countries what they have to doto receive financial support, countries tend to shift thatresponsibility to the international community. Thatresponsibility should be with the countries themselves.But this will take time because we are trying to changethe culture within the IMF and the culture of policy-making in developing countries, and because thedemands of having to solve financial crises quickly will,in many cases, have to take precedence over thoselonger-run goals.

Getting the new guidelines on paper was a big job,but it’s a much bigger job to actually get the benefitsoff the ground. The IMF is going to make a majoreffort to see that that happens.

Boughton: “Gettingthe new guidelineson paper was a bigjob, but it’s a muchbigger job toactually get thebenefits off theground.”

December 16, 2002

392

IMF talks with Turkey on the release of a $1.6 billionloan—part of a $16 billion loan pact aimed at cut-

ting chronic high inflation—resumed on December 9with the arrival of a mission that is expected to stay inTurkey for about two weeks. This follows preliminarydiscussions in October.

As Turkey positions itself for accession to theEuropean Union, it has been trying to recover fromits deepest economic slump since 1945, which wassparked by a February 2001 financial crisis. Thefourth review of Turkey’s program supported by theIMF is expected to be completed after a follow-upvisit in January, when the full 2003 budget will bediscussed and a new letter of intent—which lays outspecific measures the Turkish government intends totake to meet its economic goals—will be finalized.

In early December, the newly elected PrimeMinister of Turkey, Abdullah Gül, and several gov-ernment ministers held initial discussions with seniorIMF officials. The IMF announced on December 3that Turkey had made “major strides” this year in lay-ing the groundwork for economic growth and finan-cial stability. Economic growth and progress in disin-flation have exceeded expectations, and these achieve-ments, combined with the recent resolution of politi-cal uncertainty in the country and prudent signals bythe winning party, have bolstered financial markets’confidence in the country’s prospects. Turkey now

has “a golden opportunity,” the IMF indicated, “tomake a final break with its high-inflation and low-growth past.”

With a solid parliamentary majority, the new gov-ernment is now well placed to build on recent devel-opments and take decisive measures to establish last-ing macroeconomic stability and growth that willbenefit all Turkish citizens. The IMF said it had been“impressed by the government’s ambition and deter-mination to pursue policies aimed at restoring highgrowth through debt reduction and structuralreform.”

The IMF’s press statement noted, in particular, thegovernment’s intention to achieve a sustained reduc-tion in Turkey’s high debt burden, which the IMF sawas the key to lowering interest rates and increasinggrowth over the medium term. The IMF looks forwardto discussing with the new Turkish government how itcan achieve these goals while keeping sight of its priori-ties for spending, including in the social areas, and rev-enue policies.

The IMF also welcomed the government’s supportfor independent agencies, notably its central bank,which will play a key role in bringing down Turkey’sstill-high inflation rate, and its banking supervisionagency. In addition, the IMF lent its support to the gov-ernment’s intention to speed up privatization, encour-age foreign direct investment, and fight corruption.

Turkey negotiations back on track

Globalization offers great potential, but Africa has achieved mixed results

Africa has not benefited as much as it should have from

greater economic openness and sound macroeconomic

management, Governor Charles Konan Banny of the

Dakar-based Central Bank of West African

States told IMF Executive Directors at a

November 14 seminar at IMF headquarters.

“From the African standpoint, globaliza-

tion—although perceived as unavoidable and

irreversible—is frequently treated as an eco-

nomic and financial phenomenon whose ben-

efits and risks are unevenly distributed

between rich and poor countries,” Banny said.

African countries recognize that opening up

to the outside world is the basis for growth,

prosperity, and development. A number of

them have committed themselves to pursuing

sound macroeconomic policies and liberalization since the

early 1980s, but results to date have been mixed, at best.

Several domestic and international factors explain this

state of affairs, Banny suggested. In Africa, he pointed to

the impact of armed conflicts, political and social instability,

neglect of human development, and an uncertain business

environment that saps private investment. Elsewhere, protec-

tionism in industrial countries, worsening terms of trade,

and declining levels of official development assistance have

also been important constraints to growth.

According to Banny, overcoming these challenges will

depend on Africa’s own efforts and the support of the inter-

national community. Political leadership is required to

implement a new generation of policies that can bring about

prosperity, reduce poverty, and raise standards of living to

acceptable levels. A longer-term perspective that goes beyond

simply achieving short-term financial equilibrium is also

needed. Trade liberalization in industrial countries, stronger

governance and respect for the rule of law, greater capacity-

building efforts, and additional debt relief and development

assistance to finance investments in education, health, and

infrastructure will all help Africa achieve its development

goals.

In concluding, Banny stressed the need for new instru-

ments in the international financial institutions to support

integration projects and programs that could modernize

economic structures and accelerate regional growth.

Turkey nowhas “a goldenopportunity,”the IMFindicated, “to make afinal breakwith its high-inflation andlow-growthpast.”

December 16, 2002

393

Social protection can help cushion workers indeveloping countries from the unwelcome side

effects of globalization. But speakers at a panel in aDecember 2–3 Washington conference, sponsored by theInternational Labor Organization (ILO), the CarnegieEndowment for International Peace, and the BrookingsInstitution, found that real protection may be hard toachieve. Among panels on globalization, poverty,inequality, employment, and labor standards, socialprotection proved to be a hot topic.

Speakers at the conference’s concluding panelagreed that the biggest challenge was how to establishsocial safety nets that would not break the budget. Ina globalized economy, all countries need social safetynets—either formal or informal—to help thoseadversely affected by change, but, as IMF EconomicCounsellor and Director of Research Kenneth Rogoffnoted, it was important to strike a balance betweeninsurance and efficiency.

“Throughout modern history, there has been atension between the need for a dynamic economythat embraces change and the need to provide socialsafety nets and social insurance that don’t lose thebenefits of a dynamic economy,” he said.

“Globalization and change are good for some andbad for others. Technological change and global growthare good overall—there will be more people who winthan lose. Over time, maybe whole generations willwin,” Rogoff noted.“How do you deal with the fact thatchanges cause some people to lose, while at the sametime retaining the benefits of a dynamic economy?”

While social safety nets could sap the energy of aneconomy by slowing change, Rogoff argued that thiswas not always the case. Indeed, the lack of a goodpublic social safety net in Japan appeared to be block-ing change because politicians were worried aboutthe rise in unemployment that would result. Socialinsurance could help populations embrace tradeopenness and technological change.

Crisis of confidenceBut providing insurance coverage is not easy, par-ticularly for developing countries. Dalmer Hoskins,Secretary General of the International Social SecurityAssociation (ISSA), which works closely with the ILO,said that social security systems in many countriesfaced a growing crisis of confidence. Schemes in somecountries were losing ground because of declining

membership; in others, corruption meant thatmembers would not receive the full payouts towhich they were entitled.

“This creates a tremendous challenge for theILO and the ISSA,” Hoskins told the conclud-ing session of the conference.“It means thatthe models we relied on in the past have to beretooled and rethought. We have to assumethat our existing models are not going to pro-tect a large number of people in the rural andinformal sectors.”

The ISSA, with a membership of over 400institutions in 145 countries, serves as aninternational clearinghouse for informationon social security policy and helps memberorganizations improve administrative andpolicymaking capacities.

Carol Graham, Vice President andDirector of the Governance Studies Programat the Brookings Institution, said it wasimportant to ensure that the middle class wasprotected, and not just the poor. “A satisfiedmiddle class is important for markets anddemocracy. In my view, this suggests that weneed to start thinking about a social contractin these societies that really includes the mid-dle class and that no longer focuses only onthe poor through ad hoc policies, such associal funds and other kinds of safety netpolicies.”

New models for protectionGraham, whose research focuses on LatinAmerica, added that effective social safetynets did not have to mean the classic modelof “universal expenditures with high levels oftaxation.” Many new models were evolvingbased on private contributions and non-governmental organizations. “Nonstateactors can be very effective in providingsocial services,” she said.

Hoskins agreed but said fitting togetherthe different systems of social protection wasgoing to be messy. Countries could end upwith combinations of social insurance, socialassistance, and some noncontributory social benefitslike those Brazil and South Africa were experimentingwith. “Of course, a major part of it is going to be pri-vate sector–managed insurance for health or for pen-

ILO–Carnegie–Brookings conference

Developing countries need social safety nets to temper side effects of globalization

Kenneth Rogoff

Dalmer Hoskins

Carol Graham

December 16, 2002

394

sions, and some of it is going to be the old ideas ofthe mutual benefit societies, cooperatives, and othergrassroots-based organizations,” he said.

Fitting these pieces together will also be a challenge,Hoskins added. While the ILO and the ISSA have notyet developed a comprehensive approach, a key rolefor international organizations in this area in comingyears will be to provide benchmarks for the different

schemes, so that countries can compare how they aredoing.

Annuities are a venerable financial instrument, butthey have not been a particularly popular one. That

sentiment seems about to change. As more countries pri-vatize all or parts of their public pension systems, thedemand for annuities will rapidly rise. That increase, inturn, will spur lively debates on a host of issues, includingwhether purchases of annuities should be mandatory andhow their providers should be regulated.

Annuities, which provide regular payments over a set period in return for an up-front investment, dateback to ancient Rome. They played a significant rolein government finance in seventeenth- and eighteenth-century Europe, when life annuities helpedthe governments of France, Great Britain, and theNetherlands pay for their periodic wars. Morerecently, the variety of annuities has expanded, butthe market for them has generally remained small.

In the coming years, however, annuities are likelyto become a household word in a growing numberof countries. Increasingly, traditional state pensions,whose amount is determined by the pensioner’s salaryand work history, are being replaced or supplementedby privatized defined-contribution pension plans.Participants in these plans contribute to individualaccounts. When they retire, pensioners need to with-draw their accumulated contributions plus earnings,which provide them with a steady income stream.This will increase the demand for annuities and otherfinancial instruments, depending on how withdrawalsare regulated.

In Chile and other countries that have introducedprivatized systems, restrictions apply to withdrawalsfrom individual accounts. Typically, contributorselect to purchase an annuity from a life insurancecompany.

The demand for annuities is also likely to increasesharply in countries that have not yet opted forChilean-style reform. In the United States, for exam-

ple, a combination of changes in tax laws and theincreasing reluctance of employers to assume the riskand administrative burdens of defined-benefit planshas greatly expanded the role of individual savingsvehicles. As holders of these individual accountsretire, they will decide to use some of the accumu-lated funds to purchase annuities. Not surprisingly,annuity markets are larger and more sophisticatedin countries that already have a significant individualaccount component in their pension systems.

Designing annuities for retirementWhy should countries be concerned about howretirees spend their accumulated savings? Traditionaldefined-benefit pensions—if offered by a financiallystable country—possess two very valuable properties.They provide income for life (and thus ensure thatretirees will not outlive their resources) and areindexed (that is, their benefit is adjusted to keep pacewith the cost of living). Few private financial institu-tions can duplicate these features because indexedannuities require indexed bonds. At present, only ahandful of countries, notably the United Kingdom,Chile, and Israel, issue such bonds.

The relatively limited private market for annuities inmost countries is also thought to reflect some specialfeatures of the annuity market, particularly adverse selec-tion. Insurance companies, which sell annuities, knowthat prospective annuitants are longer-lived than thepopulation at large and price their products accordingly.

The risk of premature death may also deterprospective annuity purchasers, whose estates wouldsuffer a large loss. But annuities can offer valuableinsurance against the risk of living too long andexhausting one’s savings. For most retirees, the realissue should be how much of their wealth to annu-itize—not whether to annuitize. Some funds needto be set aside for large unexpected expenditures, butannuitizing too small a share of wealth is dangerous,

Privatized pensions and payout options

Is there an annuity in your future?

A transcript of the conference “Making GlobalizationWork: Expanding the Benefits of Globalization to WorkingFamilies and the Poor” is available on the website of theCarnegie Endowment for International Peace(http://www.ceip.org/files/events/events.asp?EventID=540).

For mostretirees, thereal issueshould be howmuch of theirwealth toannuitize—not whetherto annuitize.

December 16, 2002

395

given the difficulties many people have in controllingtheir expenditures and the impossibility of predictingpostretirement life spans.

Mandatory annuities Society has a stake in what individuals decide to dowith the funds that accumulate in individual accounts.The standard argument for a compulsory public pen-sion system rests on the assumption that many of usare short-sighted—left to our own devices, we do notsave enough to provide for our long-term needs.Moreover, public charity creates an incentive for somenot to save. Mandatory annuitization—or otherrestrictions on distributions from individualaccounts— simply reduces the rate of dissaving.

How much of the funds in an individual accountshould be annuitized? For some individuals, fullannuitization would be excessive. The Chileanapproach offers an attractive compromise. It requiresretirees to buy an annuity that equals or exceeds astipulated income and replacement ratio (the ratioof pension to wage and salary income). They maythen withdraw the amount left over.

Another approach, applicable where there has been a partial privatization of the pension system,is to require that the combination of the annuity (purchased with individual account funds) and thepostreform state pension not fall short of the level ofthe prereform state pension. A more radical approachwould require only that the combined income exceedsome minimum related to the poverty line. Whateverrule is chosen, exceptions should probably be kept toa minimum to avoid administrative complexity andincentives for fraud.

The state could also require retirees to purchaseindexed annuities. Indexation remains a valuable prop-erty of a pension even when inflation is low. Retireesare living longer, and even a modest annual rate ofinflation can, over time, seriously erode the purchasingpower of a nominal annuity. It is possible to self-insureagainst inflation by saving a substantial part of thenominal pension in the initial years of retirement, but,apart from the self-control this requires, self-insuranceis hard when inflation is high and variable.

Mandatory annuitization also raises the questionof whether there should be a guarantee on the mini-mum value of the annuity that the individual accountwill finance. What should the consequences be ifindividual account funds fall short of the amountneeded to finance the minimum annuity? A policy ofguaranteeing the sum in an individual account mustavoid creating undue incentives for risky investing,especially if there are few restrictions on the alloca-tion of funds across asset classes.

Yet another issue that arises in connection with pri-vate sector annuities is price discrimination. Women,because they live longer than men, cannot purchase thesame income stream with the same initial payment.This is not an issue with state pensions, where the valueof the pension depends only on age and work history.A pooling arrangement or a tax-cum-subsidy arrange-ment could conceivably allow the private sector to offerthe same premium to both women and men.

Mandatory annuitization, in fact, offers a partialsolution to the consequences of adverse selection.If the demand for annuities becomes universal, insur-ance companies could offer the average annuitant bet-ter terms. Group annuitization schemes could reducepremiums even more markedly. Group schemes wouldentail assigning individuals who reach the normalretirement age in a given year to one of a number ofgroups. Insurance companies could then offer thesegroups annuities that meet the applicable requirements.

Regulating the annuity marketAs the role of private annuities in providing retire-ment income increases, so does the need for soundregulation and supervision of the life insurance com-panies or other financial institutions that providethem. Insurance companies do go bankrupt, even inthe best regulated and most stable financial markets.If retirees are required to annuitize at least a part ofthe funds they have accumulated, the state is likelyto be under an implicit obligation to see that theirannuity contracts are honored, even if there is noexplicit insurance arrangement or guarantee.Unfortunately, insurance, explicit or implicit, can alsoentail a serious risk of moral hazard. Too generous aguarantee gives insurance companies an incentive tooffer terms that they would not otherwise consider.

The insurance business is complex and demandshighly specialized actuarial and financial expertise.The regulatory bodies that oversee the insuranceindustry must be similarly staffed with highly quali-fied professionals. The heavy demands that effectiveregulation places on the state may, in fact, explainwhy some countries have opted to apply simplifyingmeasures—such as strict rules for calculating premi-ums that embody conservative assumptions aboutmortality and restrictions on the assets that may fundannuities—to all annuity providers.

Private or publicThe private sector can provide a substitute for the statepension, but it will have to surmount a number ofobstacles first. For many countries that partially priva-tize their pension systems, the most expedient policymay, in fact, be to keep the distribution phase of the

If the demandfor annuitiesbecomesuniversal,insurancecompaniescould offerthe averageannuitant better terms.

December 16, 2002

396

system public. Part, if not all, of the funds that accu-mulate in the individual accounts could simply be con-verted automatically into a traditional public pension.This would ensure that individuals beginning retire-ment are charged a reasonable premium—one thatwould be substantially less than the premiums of pri-vate insurance companies, given the low administrativecosts of group provision and the absence of adverseselection—and might receive an indexed pension.

Even if the state retains its traditional role asprovider of a basic pension, however, population agingand the private sector’s enhanced role in annuity pro-

vision will ensure that in the years to come annuitieswill be a growth industry in many countries.

G.A. (Sandy) MackenzieIMF Fiscal Affairs Department

This article is drawn from IMF Working Paper 02/161,The Role of Private Sector Annuities Markets in anIndividual Accounts Reform of a Public Pension Plan,by G. A. Mackenzie. Copies of the paper are available for$15.00 each from IMF Publication Services. See page 396for ordering information. The full text is also available onthe IMF’s website (www.imf.org).

IMF Working Papers ($15.00)

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02/189: Institutions Rule: The Primacy of Institutions over

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02/190: Tunisia’s Experience with Real Exchange Rate

Targeting and the Transition to a Flexible Exchange

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Laframboise, E. Martin, Randa E. Sab, and Izabela

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02/191: Quantifying the Impact of Trade on Wages:

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02/192: Islamic Financial Institutions and Products in

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02/193: Bedfellows, Hostages, or Perfect Strangers? Global

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02/194: Growth-Financial Intermediation Nexus in China,

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02/196: The Challenge of Diversification in the Caribbean,

Peter Berezin, Ali Salehizadeh, and Elcior Santana

02/197: Modern Hyper- and High Inflations, Stanley

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Year 2002 (free)Governance, Corruption, and Economic Performance,

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Recent publications

Publications are available from IMF Publication Services, Box X2002, IMF, Washington, DC 20431 U.S.A.Telephone: (202) 623-7430; fax: (202) 623-7201; e-mail: publications@imf.org.

For information on the IMF on the Internet—including the full texts of the English edition of the IMF Survey, the IMF Survey’sannual Supplement on the IMF, Finance & Development, an updated IMF Publications Catalog, and daily SDR exchange rates of45 currencies—please visit the IMF’s website (www.imf.org). The full texts of all Working Papers and Policy Discussion Papers arealso available on the IMF’s website.

December 16, 2002

397

Stand-By, EFF, and PRGF arrangements as of November 30

Date of Expiration Amount UndrawnMember arrangement date approved balance

(million SDRs)Stand-By Argentina1 March 10, 2000 March 9, 2003 16,936.80 7,180.49Bosnia & Herzegovina August 2, 2002 November 1, 2003 67.60 48.00Brazil1 September 6, 2002 December 31, 2003 22,821.12 20,539.01Bulgaria February 27, 2002 February 26, 2004 240.00 156.00Dominica August 28, 2002 August 27, 2003 3.28 1.23

Guatemala April 1, 2002 March 31, 2003 84.00 84.00Jordan July 3, 2002 July 2, 2004 85.28 74.62Latvia April 20, 2001 December 19, 2002 33.00 33.00Lithuania August 30, 2001 March 29, 2003 86.52 86.52Peru February 1, 2002 February 29, 2004 255.00 255.00

Romania October 31, 2001 April 29, 2003 300.00 165.33Turkey February 4, 2002 December 31, 2004 12,821.20 2,892.00Uruguay1 April 1, 2002 March 31, 2004 2,128.30 1,016.60Total 55,862.10 32,531.80

EFF Colombia December 20, 1999 December 19, 2002 1,957.00 1,957.00Indonesia February 4, 2000 December 31, 2003 3,638.00 1,651.48Serbia/Montenegro May 14, 2002 May 13, 2005 650.00 550.00Total 6,245.00 4,158.48

PRGF Albania June 21, 2002 June 20, 2005 28.00 24.00Armenia May 23, 2001 May 22, 2004 69.00 39.00Azerbaijan July 6, 2001 July 5, 2004 80.45 64.35Benin July 17, 2000 March 31, 2004 27.00 8.08Burkina Faso September 10, 1999 December 9, 2002 39.12 0.00

Cambodia October 22, 1999 February 28, 2003 58.50 8.36Cameroon December 21, 2000 December 20, 2003 111.42 47.74Cape Verde April 10, 2002 April 9, 2005 8.64 7.41Chad January 7, 2000 December 6, 2003 47.60 10.40Congo, Dem. Republic of June 12, 2002 June 11, 2005 580.00 160.00

Côte d’Ivoire March 29, 2002 March 28, 2005 292.68 234.14Djibouti October 18, 1999 January 17, 2003 19.08 10.00Ethiopia March 22, 2001 March 21, 2004 100.28 31.29Gambia, The July 18, 2002 July 17, 2005 20.22 17.33Georgia January 12, 2001 January 11, 2004 108.00 58.50

Guinea May 2, 2001 May 1, 2004 64.26 38.56Guinea-Bissau December 15, 2000 December 14, 2003 14.20 9.12Guyana September 20, 2002 September 19, 2005 54.55 49.00Honduras March 26, 1999 December 31, 2002 156.75 48.45Kenya August 4, 2000 August 3, 2003 190.00 156.40

Kyrgyz Republic December 6, 2001 December 5, 2004 73.40 49.96Lao People’s Dem. Republic April 25, 2001 April 24, 2004 31.70 18.11Lesotho March 9, 2001 March 8, 2004 24.50 10.50Madagascar March 1, 2001 February 29, 2004 79.43 56.74Malawi December 21, 2000 December 20, 2003 45.11 38.67

Mali August 6, 1999 August 5, 2003 51.32 12.90Mauritania July 21, 1999 December 20, 2002 42.49 6.07Moldova December 21, 2000 December 20, 2003 110.88 83.16Mongolia September 28, 2001 September 27, 2004 28.49 24.42Mozambique June 28, 1999 June 27, 2003 87.20 16.80

Niger December 22, 2000 December 21, 2003 59.20 25.36Pakistan December 6, 2001 December 5, 2004 1,033.70 689.12Rwanda August 12, 2002 August 11, 2005 4.00 3.43São Tomé and Príncipe April 28, 2000 April 27, 2003 6.66 4.76Sierra Leone September 26, 2001 September 25, 2004 130.84 56.00

Tanzania April 4, 2000 June 30, 2003 135.00 15.00Uganda September 13, 2002 September 12, 2005 13.50 12.00Vietnam April 13, 2001 April 12, 2004 290.00 165.80Zambia March 25, 1999 March 28, 2003 278.90 124.20Total 4,596.06 2,435.11

1Includes amounts under Supplemental Reserve FacilityEFF = Extended Fund FacilityPRGF = Poverty Reduction and Growth FacilityFigures may not add to totals owing to rounding

Data: IMF Treasurer’s Department

Members drawing

on the IMF “purchase”

other members’

currencies or SDRs

with an equivalent

amount of their

own currency.

December 16, 2002

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Corruption has long been deplored, but onlyrecently have economists begun to focus on its eco-

nomic impact. A new compilation ofresearch on the subject, Governance,Corruption, and EconomicPerformance, discusses the causes andconsequences of corruption and possibleways to curb it. The IMF Survey metrecently with the book’s editors, GeorgeAbed, Director of the IMF’s MiddleEastern Department, and Sanjeev Gupta,Assistant Director, IMF Fiscal AffairsDepartment, to discuss its findings.

IMF SURVEY: The IMF traditionally didnot view corruption as relevant to its

macroeconomic mandate, but that seems to havechanged. Why? ABED: Most economists working in the policy areanow realize the importance of sound institutions forgood economic performance. The recent crisis inAsia highlighted this amply and led us to take acloser look at institutions. We asked ourselves howefficient they were, what role special interests played,and whether there was rent seeking.

We discovered that we didn’t know as much as weneeded to. We now realize that the morewe know about financial markets, bank-ing systems, and government operationsof member countries, the more effectivewe will be in preventing crises. All thishas led to a greater focus on the impor-tance of good governance and theadverse effects of corruption.GUPTA: The thinking in the economicsprofession has also evolved. Much ofthe scholarly research until the 1980sfocused on weaknesses in public insti-tutions and incentives for seekingrents. Some even argued that corrup-

tion didn’t really hurt an economy, that it “greasedthe wheels” of production.

Earlier textbooks on development economics didnot even mention the word corruption. It is onlyrecently that good governance is seen as critical forachieving good social and economic outcomes. Thestudies in our book provide evidence that corruptioncuts into government revenue and leads to wastefulpublic spending and thus does affect a country’smacroeconomic position.

IMF SURVEY: Your book’s overview says that, duringthe Cold War, bilateral donors paid little heed to thestrict criteria of economic performance and commit-ment to reform when dispensing aid. But why didn’tthe international financial institutions look at theeconomic criteria and perceive corruption as aneconomic problem earlier?ABED: I think, for the most part, the internationalfinancial institutions did focus on the merits of eachcase. However, they were not exempt from the pres-sures of the moment during the Cold War. If youlook at the history of these institutions’ involvementin some of the more politically sensitive countries, therole of Cold War politics in influencing financingdecisions was no doubt important.

But, more generally, economists at the time didn’tunderstand the development process very well. Wefocused on models of growth and theoretical policydesign, and we assumed that governments weresomehow competent to implement these policies andthat the necessary institutions were in place. In time,we discovered that designing a good policy is notenough—one has to go deeper to see how the institu-tions function, by what performance standards theyoperate, and how much capacity countries possess toimplement policies effectively.

IMF SURVEY: How does the IMF’s anticorruptionwork fit into the larger picture of the institution’spoverty reduction strategy?ABED: Reducing poverty is an enormously importanttask. It’s such a large problem that it dominates almostany other that we face in developing countries. In try-ing to mobilize funds for these countries, we realizedthat it was crucial that resources be channeled in atransparent and accountable manner to reduce povertyand enhance the welfare of recipient countries.

A lot of other organizations also got involved in thedevelopment process—nongovernmental organiza-tions, the media, and so on. They, too, insisted that weexamine the channels through which resources aredirected and the activities to which they are dedicated.That prompted us to look at how institutions functionin poor countries, how money is allocated and spent,

Interview with George Abed and Sanjeev Gupta

Reducing corruption’s heavy toll

Abed: “Designing agood policy is notenough––one has to go deeper to seehow the institutionsfunction, by whatperformance standards they operate, and howmuch capacity countries possess to implement policies effectively.”

Gupta: “Most ofthe book’s studiesuse indicesthat measureperceptions of corruption incountries, ratherthan corruptionper se.” Photo credits: Denio Zara, Padraic Hughes,

Pedro Márquez, and Michael Spilotro for the IMF;Mauricio Lima for AFP, page 385; and Cris Bouroncle forAFP, page 386.

December 16, 2002

399

and whether there are enough safeguards to ensurethat these funds go to reducing poverty and are notsiphoned off into other, less desirable activities.GUPTA: The book’s conclusions are useful for the IMF’swork on the Heavily Indebted Poor Countries (HIPC)Initiative as well as on the Poverty Reduction andGrowth Facility (PRGF). Both initiatives call forincreasing public spending to reduce poverty and pro-mote economic growth. If public resources are notproperly allocated, you will not achieve the desired eco-nomic and social outcomes. Corruption lowers eco-nomic growth, worsens poverty and income distribu-tion, and limits the access of the poor to social services.

It is important that debt relief reach its intendedbeneficiaries—that is, the poor—and that there be noleakages. In this regard, both the World Bank and theIMF are helping countries improve their publicexpenditure management systems, and this is some-thing that is closely linked to the IMF’s work on theHIPC Initiative and the PRGF.

IMF SURVEY: Have recent IMF initiatives—such asthe code of good practices on fiscal transparency, theReports on the Observance of Standards and Codes(ROSCs), and safeguards assessments—made muchheadway in the fight against corruption?GUPTA: The ROSCs, which are voluntary, assess theextent to which a country’s practices differ frominternationally recognized good practices. Typically,these reports lead to the formulation of a reformagenda. To the extent that these countries are imple-

menting reforms on the basis of these reports, ROSCsare helping reduce rent-seeking behavior and incen-tives for corruption.ABED: The transparency initiative and the codes andstandards that we are promulgating, and to whichmany countries have already subscribed, provide afirst assessment of the soundness of government andbanking sector institutions as well as a statistical baseon which policy is formulated. This first diagnosishelps reveal inefficiencies and areas where misman-agement, malfeasance, and corruption could possiblybe taking place. By identifying the problems, thisassessment paves the way for governments to followup and tackle these issues.

IMF SURVEY: Do you see these voluntary transparencymeasures eventually becoming compulsory?ABED: For most emerging economies, it’s important,almost imperative, for them to undertake thoseassessments because of their need to maintain accessto financial markets. A fiscal transparency report or afinancial sector assessment from the IMF and theWorld Bank could only help these countries—evenif only by reducing uncertainties.

The very poor countries don’t have access to inter-national markets, but they do receive a lot of financialassistance through the HIPC Initiative, the PRGF, andother initiatives. Many donors are beginning to insistthat these countries’ public expenditure and financialmanagement systems be subject to some kind ofassessment. These assessments, therefore, may never

When you seea number ofindices, basedon the opinionsof differenteconomicagents,agreeingto rate onecountry ashaving bettergovernancethan another,it most likelyis true.

—George Abed

Available on the web (www.imf.org)

News Briefs

02/116: IMF and World Bank Publish Accompanying

Document to the Guidelines for Public Debt

Management, November 21

02/117: IMF Completes Review Under Zambia's PRGF

Arrangement and Approves $55 Million, November 27

02/118: IMF Managing Director to Visit Brazil, Colombia,

and Chile, December 4

02/119: IMF Completes Sixth Review Under Mauritania's

PRGF Arrangement and Approves $8 Million

Disbursement, December 4

02/120: IMF Completes Seventh Review of Indonesia

Program, Approves $365 Million Disbursement,

December 5

02/121: IMF Managing Director Horst Köhler’s Remarks

in Colombia, December 9

02/122: IMF Managing Director Horst Köhler’s Remarks

in Chile, December 12

Press Releases02/51: IMF Extends Argentina’s SRF Repayment

Expectation by One Year, November 20

02/52: IMF Executive Board Approves 12-Month Anti-

Money-Laundering Pilot Project, November 22

02/53: IMF Approves in Principle a Three-Year

$129 Million PRGF and $2.5 Million in Interim

HIPC Assistance for Nicaragua, December 4

02/54: IMF Approves Three Year $87 Million PRGF

Arrangement for the Republic of Tajikistan,

December 11

Public Information Notices02/134: IMF Concludes 2002 Article IV Consultation

with Vanuatu, December 11

02/135: IMF Concludes 2002 Article IV Consultation

with Malaysia, December 10

Transcripts Press Briefing, Thomas C. Dawson, Director, IMF External

Relations Department, December 5

December 16, 2002

400

become compulsory, but there is definitely peer pres-sure on countries to undertake them, and they arebecoming more commonplace.

IMF SURVEY: Is it possible to accurately assess thefull impact of corruption on an economy?GUPTA: Most of the book’s studies use indices thatmeasure perceptions of corruption in countries,rather than corruption per se. The indices are basedon polls of a particular group and what that group hasfaced in a given country. One index, for instance, isbased on polls of foreign investors and whether theyhad to pay bribes at the different levels of government.A range of indices has been created over the past fouror five years. We find these indices are highly corre-lated, and the statistical results reported in the bookare broadly similar using different indices.ABED: Perception indices have improved over the pastfew years; they are more broadly based—that is, moreand more relevant groups are being asked questionsabout practices in each of the countries being sur-veyed. Some surveys try to measure not just corrup-tion but also the general openness and competitive-ness of a country’s markets, the prevalence of the ruleof law, and other important elements of good gover-nance. Of course, there’s no smoke without fire.So when you see a number of indices, based on theopinions of different economic agents, agreeing torate one country as having better governance thananother, it most likely is true.

IMF SURVEY: What future direction should the fightagainst corruption take, and do you see the IMF’scontribution to this effort changing?ABED: There are many ways to deal with corruption,including administrative or legal measures. That is,

improvements can be made in the laws and regula-tions that govern markets and the operation ofgovernments. These can ensure that playing fieldsare level, transactions are transparent and account-able, institutional checks and balances are in place to reduce or eliminate illicit rent seeking, and public funds are not subject to malfeasance ormisdirection.

Another way is to provide a proper economic pol-icy framework and an incentive system. This is wherethe IMF plays an important role. If a country has veryhigh tariff rates—say, 300 or 500 percent—on a com-modity like alcohol or perfume, you can be sure thata lot of people will try to smuggle these goods intothe country by bribing officials to let them in.

The tariff and customs reforms that the IMF andthe Bank undertake rationalize the tariff structureand improve the operation of customs. These, inturn, reduce the opportunity for corrupt practicesand fraud. The IMF is involved in these activitiesthrough its technical assistance and policy advice.GUPTA: We also need to do further policy research—such as the work presented in our book—to stimulatedebate on this important issue, both inside and out-side the IMF. Unless we keep thinking about thecauses, the consequences, and the remedies needed tocurtail corruption, we will not be able to highlight itspernicious impact on the macroeconomy. So the IMFshould persist in its current multipronged approachto fighting corruption.

Selected IMF rates

Week SDR interest Rate of Rate ofbeginning rate remuneration charge

December 2 1.96 1.96 2.51December 9 1.92 1.92 2.46

The SDR interest rate and the rate of remuneration are equal to aweighted average of interest rates on specified short-term domesticobligations in the money markets of the five countries whose cur-rencies constitute the SDR valuation basket. The rate of remunera-tion is the rate of return on members’ remunerated reserve tranchepositions. The rate of charge, a proportion of the SDR interest rate,is the cost of using the IMF’s financial resources. All three rates arecomputed each Friday for the following week. The basic rates ofremuneration and charge are further adjusted to reflect burden-sharing arrangements. For the latest rates, call (202) 623-7171 orcheck the IMF website (www.imf.org/cgi-shl/bur.pl?2002).

General information on IMF finances, including rates, may be accessedat www.imf.org/external/fin.htm.

Data: IMF Treasurer’s Department

Laura WallaceEditor-in-Chief

Sheila MeehanSenior Editor

Elisa DiehlAssistant Editor

Natalie HairfieldAssistant Editor

Jeremy CliftAssistant Editor

Lijun LiEditorial Assistant

Maureen BurkeEditorial Assistant

Philip TorsaniArt Editor/Graphic Artist

Julio R. PregoGraphic Artist

_______

Prakash LounganiContributing Editor

The IMF Survey (ISSN 0047-083X) is published in English,French, and Spanish by the IMF23 times a year, plus an annualIMF Survey Supplement and anannual index. Opinions andmaterials in the IMF Survey donot necessarily reflect officialviews of the IMF. Any mapsused are for the convenience ofreaders, based on NationalGeographic’s Atlas of the World,Sixth Edition; the denomina-tions used and the boundariesshown do not imply any judg-ment by the IMF on the legalstatus of any territory or anyendorsement or acceptance of such boundaries. Text fromthe IMF Survey may bereprinted, with due credit given,but photographs and illustra-tions cannot be reproduced inany form. Address editorialcorrespondence to CurrentPublications Division, RoomIS7-1100, IMF, Washington, DC20431 U.S.A. Tel.: (202) 623-8585; or e-mail any commentsto imfsurvey@imf.org. The IMFSurvey is mailed first class inCanada, Mexico, and the UnitedStates, and by airspeed else-where. Private firms and indi-viduals are charged $79.00annually. Apply for subscrip-tions to Publication Services,Box X2002, IMF, Washington,DC 20431 U.S.A. Tel.: (202)623-7430; fax: (202) 623-7201;e-mail: publications@imf.org.

Governance, Corruption, and EconomicPerformance, edited by George T. Abed andSanjeev Gupta and featuring papers by IMF staff andothers, highlights some ofthe latest research on cor-ruption and reflects thegrowing interest in the connection between gover-nance and economicperformance.

The volume covers arange of topics, includingthe causes and conse-quences of corruption,the link between corrup-tion and governmentexpenditure, and how corruption affects tax rev-enues. The book also looksat corruption in transition countries and the IMF’s rolein promoting good governance.

Copies of the Governance, Corruption, and EconomicPerformance are available, for $37.50 each, from IMFPublication Services. See page 396 for ordering details.