Speech

A Decade of Transition: Achievements and Challenges--Opening Remarks by Michel Camdessus

February 1, 1999

A Decade of Transition: Achievements and Challenges
by Michel Camdessus
Managing Director of the International Monetary Fund
Washington, D.C., February 1, 1999

It is a great pleasure for me to welcome you to this conference on "A Decade of Transition: Achievements and Challenges." This gathering includes high-level officials involved in policy making, academics who have been doing research on transition issues, and staff of international financial institutions who have been working closely on transition countries. This broad spectrum of participants should bring to bear a wide range of perspectives on the accomplishments thus far, as well as on the challenges ahead and the policies needed to address them.

The Berlin Wall fell in November 1989. The wrenching transformation that followed in countries east of that dividing line has brought liberty and--in many places also--prosperity, as well as economic, social, and political strain to those countries. Recognizing the historic importance and unparalleled difficulty involved in the transition, the Fund became involved very early on with about twenty of those countries to establish their Fund membership. Since then, in collaboration with the World Bank, it has been working closely with the countries in transition in formulating stabilization programs and structural reforms to develop market institutions. The Fund has, along with others, provided a vast array of technical assistance to build up the institutional capacity of the emerging market economies. It has supported those efforts through a new instrument specifically created for these situations, the Systemic Transformation Facility, as well as through stand-by arrangements, extended arrangements, and ESAF-supported programs.

Allow me to share with you a few basic thoughts on the legacy of the last decade. At the outset of transition, little was clear, except that there was no turning back. There was no master plan and scarce relevant experience to guide action. In the economic sphere, a host of proposals quickly filled the vacuum, jostling with the force of events and circumstance to determine what happened. In Central and Eastern Europe, German reunification defined the options for the German Democratic Republic; Poland and countries of the Former Yugoslav Republic confronted outright hyperinflation; in these and other countries, national consensus for change sometimes proved elusive; and, in some cases, hostilities broke out. All the countries had to grapple with the collapse of the trading arrangements under the Council for Mutual Economic Assistance (CMEA), of key export markets, and of economic activity. The breakup of the Soviet Union in 1991-92 brought further issues into play: planning mechanisms were more deeply entrenched there; hyperinflation was rife; and a raft of new countries and currencies were established.

The essential components of the transition reform agenda, however, rapidly crystallized: fiscal consolidation, monetary and financial reform, price and trade liberalization, and privatization. As a result of courageous decisions by many leaders, progress has been dramatic. Already by end-1997, inflation was close to or in single digits in many of these countries. Output has been growing in Central and Eastern Europe since 1993, and in many of the Baltics and countries of the former Soviet Union since 1995. And though much more remains to be done, a number of countries have all but completed the structural reforms that comprise the transition agenda. Indeed, some have already embarked on reforms aimed at accession to the European Union. So, undoubtedly, the foundations of prosperity have been laid. Even to those with no more than a passing acquaintance with the region prior to 1990, the transformation is obvious. Just one short decade later, centrally planned systems already seem like defunct and discredited relics of a distant past. What an exhausting job! And as many of you, in one capacity or another, have been actors in the transition, let me express our admiration and our pride in having been associated with these efforts. But, of course, not everything is rosy!

After the reversals in Albania, Bulgaria, and Romania in 1996 and 1997, and the events in Russia in 1998, surely no one still harbors the illusion that progress from here on will be straightforward. These events remind us of important lessons: that the region as a whole is exposed to developments elsewhere in the world; that incomplete transition reform is hazardous; and that interlinkages in the region remain strong.

We are clearly far from the end of the road. But even where structural reforms have been incomplete, they have at least provided the first foundations of private ownership, market pricing, and market discipline. Now, most of the countries can turn to the much more difficult and time-consuming task of implementing second-generation reforms, even though some of those countries still have a way to go in tackling the first generation. I will admit to taking an advance look at some of the conference papers. I was impressed that the one on privatization, while admitting that there have been problems and it is time to rethink privatization, gives compelling reasons as to why the new thinking should not be less privatization, but better privatization. More generally, I will hazard a guess that a similar theme--sustained and deeper reforms, rather than reversing the buildup of market institutions--will emerge in your discussions as key to other essential elements of reform: creating a market-friendly environment, developing a sound financial sector, establishing effective government operations, and providing equitable social protection. These issues are surely the right ones to examine in this conference and should provide a basis for exploring the policy strategy--the road map--for the next stages of the transition journey.

Let me highlight one specific task for the future, which I believe to be of great importance: enforcing the rule of law and fostering a culture that respects and, indeed, welcomes a framework of law, regulation, and codes of good practice. Within such a framework, governments, enterprises, financial institutions, and individuals should be able to deal with each other at arm’s length, in a transparent manner. An important ingredient is that the discipline of the market should be allowed to work. It will thus diminish restraints on the activity of enterprises, old and new, encouraging the initiative of entrepreneurs who are the source of productivity growth, new output, and more value added--in short, the growth of GDP. Ultimately, that is what stabilization, structural reform, and transition are all about.

In conclusion, I would venture that much has been learned in the last ten years about what does work in transition, but many questions still remain. I hope that the discussions in this conference will shed light on three issues that seem particularly important to me:

• For those countries that have completed the bulk of the "transition" structural reform agenda and that have achieved moderate inflation, what are the key next steps to stimulate growth and strengthen their resilience to external shocks?

• For the others that still have some distance to go on the reform agenda, what should the priorities be?

• And, in assisting these two groups of countries, what are the key reform areas on which the Bretton Woods institutions should focus in the period ahead?