Speech

Macroeconomics and Sustainable Development--Address by Alassane D. Ouattara

October 7, 1997

But what does sustainable development mean? At last count, back in 1992, a World Bank study estimated that there were at least 33 definitions surfacing in the literature—all covering one or more aspects of economic, social, and environmental objectives. Over the years, as all of you have searched to define the term, so have we at the IMF. Perhaps the definition we are most comfortable with is one that takes the viewpoint of the economist, with the concerns of the sociologist and ecologist at heart. We see economic growth and the efficient use of resources as the paramount objectives. But we also believe that these objectives must be achieved in ways that allow the simultaneous pursuit of social and ecological objectives. Where there are tradeoffs—and that is inevitable—we support the adoption of complementary policies, such as targeted social safety nets, protection of essential public education and health care expenditures, and fiscal and non-fiscal measures to help conserve natural resources and control pollution.

This definition fits nicely with the IMF’s concept of "high quality growth," which we believe is central to sustainable development. We define such growth as "economic growth that brings lasting employment gains and poverty reduction; provides greater equality of income through greater equality of opportunity, including for women; and protects the environment." The third element, "protects the environment," may sound odd coming from an institution so concerned with macroeconomy stability. So let me first say something about this link, and then reflect on how the necessary resources can be raised for sustainable development and how the IMF can help countries pursue high quality growth.

Link Between Macroeconomics and the Environment

At the time of the Rio Earth Summit, the link between macroeconomics and the environment was largely unexplored. But since then, a lot of research has been carried out, and we now know, without doubt, that macroeconomics and the environment are inextricably linked. The old concept of environment as a constraint to development has given way to one of environment as a partner in growth and development.

How does this link work? Studies show that macroeconomic stability is a minimum and necessary condition for preserving the environment. Stability enhances growth prospects, increases employment and incomes, and ensures that the right price incentives work to preserve the environment. Furthermore, any strategy to preserve the environment will be undermined by macroeconomic instability. It is true that macroeconomic policy reforms may hurt the environment, but the only time this occurs is when sound environmental policies are lacking. Thus the answer is not to forgo the necessary macroeconomic policy reforms, but to ensure that sound environmental policies are in place.

We also know that environmental problems, including those relating to specific regions and the world as a whole, hurt growth. Human welfare is reduced by ill health and premature mortality caused by environmental problems. Moreover, health problems can lead to higher outlays aimed at mitigating or avoiding the health and other direct welfare impacts of environmental degradation—further constraining growth. Studies also give abundant evidence of lost labor productivity resulting from ill health, forgone crop output from soil degradation, and lost fisheries output and tourism receipts from coastal erosion.

Where Financing Stands

But where are we going to find the money to finance sustainable development? The Earth Summit’s Agenda 21 puts the annual cost for developing countries at about $600 billion, with about $125 billion of this amount needed as grants or concessional external financing. Can such resources be found? On this score, we are optimistic.

Agenda 21 had emphasized official development assistance as the main source of external financing for developing countries. Yet despite the pledges made by developed countries in 1992 to increase ODA to 0.7 percent of GNP from 0.34 percent, ODA has languished well below, reaching an historical low of 0.25 percent in 1996.

Moreover, progress in reducing the burden of external debt has been mixed. Middle-income countries have made significant strides, but many low-income countries still shoulder a heavy burden. It is for this reason that the IMF and World Bank now have under way a debt initiative for the heavily indebted poor countries, most of which are in sub-Saharan Africa. The HIPC Initiative is designed to ensure that all heavily indebted poor countries that pursue strong reform policies reach a sustainable external debt position and can thus exit from the debt rescheduling process. Three countries—Uganda, Bolivia, Burkina Faso—have already won commitments of assistance. Preliminary discussions for three others—Côte d’Ivoire, Guyana, Mozambique—have been held, and we hope that a decision on assistance can be reached over the next few months, provided they continue with their necessary reform policies. Next in line, in 1998, we expect to be Ethiopia, Guinea Bissau, and Mauritania.

While official financing remains essential for many low-income countries, no doubt the brightest spot on the external financing front has been the unexpected surge in private capital flows to developing countries, more than doubling since Rio. But much remains to be done to harness this resource. The poorest countries have not been able to attract these flows, and in the middle-income ones, very little is flowing to the critical social and environmental sectors.

Against this backdrop, domestic resource mobilization looks to be the main hope, both through better using existing resources and mobilizing additional ones. So far, no large amounts have been raised, but most countries are moving in the right direction. There are at least three areas where we see enormous potential.

The first area, raising additional fiscal revenues, builds on the reality that developing countries typically have complex tax systems with a narrow tax base. Add in poor tax and customs administration and the result is high collection costs, high rates of tax evasion, and low tax revenues. While the taxable base is typically limited, there is scope for increasing tax-to-GDP ratios. Not, as a rule, by raising tax rates. But by a comprehensive reform of existing tax systems to broaden the tax base, simplify the tax structure, and improve tax and customs administration. If developing countries raised their tax-to-GDP ratios by perhaps 1 percent—and this would not be unrealistic, given that several low-income sub-Saharan African countries did so in the early 1990s—it could yield some $65 billion, a sum somewhat larger than total ODA.

Another way to raise revenues is by levying appropriate levels of user fees and charges for energy, water, forests, fisheries, and mining resources. In many countries, these fees are set too low, leading to rent-seeking, excessive exploitation of natural and environmental assets, and low government revenue.

Yet another way to raise revenues is by imposing environmental taxes, always mindful that should the incidence of some of these taxes be regressive, a portion of the revenues would need to be used to compensate the poor and the needy. Industrial countries and some developing countries have started down this road with the imposition of taxes on the use of energy and carbon emissions—although progress is extremely slow. Harmonizing these taxes across countries would facilitate adoption and improve global welfare.

The second area where we see potential for boosting finances is increasing public saving through rationalizing expenditures. This could be done in several ways:

• Unproductive expenditures need to be reduced, in particular military expenditures. It is well known that in too many countries, government bureaucracies remain excessively large. Curtailing the share of the costs of government by even a small margin could release large amounts of resources.
• Policymakers could also remove or reduce subsidies that are costly to the budget and detrimental to environmental or social objectives. The World Bank estimates that the global resource cost of subsidies for energy, transportation, water, agriculture, and fisheries exceeds $870 billion—split 50-50 between developed and developing countries. This is not small change.

How the IMF Fits In

How does the IMF fit into this picture? Certainly, we see our main contribution to sustainable development in the economic arena. That is, encouraging countries to adopt policies that foster a stable macroeconomic environment. In recent years, taking note of the new globalized world, we have broadened the reform agenda, as was evident at our recently concluded Annual Meetings in Hong Kong.

• Our new agenda seeks the orderly liberalization of capital markets, in the interest of better allocating saving and investment, thereby enabling countries to grow more rapidly in a more sustainable manner;
• Our new agenda encourages countries to pursue good governance—and by that I mean transparency, accountability, and the rule of law—which is absolutely essential if countries are to realize the benefits of the global economy and manage its risks; and
• Our new agenda is one that emphasizes "second generation" reforms as essential ingredients of high quality growth. These include comprehensive trade reform, restructuring and privatizing public enterprises, reforming the financial sector, and improving the environment for private investment. Without them, the poorest countries risk being marginalized. But with them, they stand to benefit by fully integrating into a globalized world.

But we know we can do more. We need to focus on the level and quality of social spending in a more systematic manner, in close collaboration with the World Bank. We also need to better understand and improve the links between social spending and social indicators. And this we are moving to do. I am pleased to note that the Fund is giving more attention to helping countries improve data on government spending on health and education. It is alsostrengthening the monitoring of social policies and basic social indicators, including through social spending targets in Fund-supported programs. In particular, programs for countries qualifying under the HIPC initiative will incorporate monitorable targets for social spending and social indicators. The Managing Director has also recently issued guidelines to IMF staff specifying ways to strengthen our work on health and education outlays, given the crucial links between efficient health and education outlays and growth.

As for environmental objectives, many IMF-supported programs involve the adoption of "win-win" policies that benefit both the economy and the environment—for example, curbing environmentally damaging subsidies and stabilizing farm prices. Nonetheless, in certain countries, especially in the developing world, we realize that environmental issues—such as weak forestry management and severe air and water pollution—can have significant macroeconomic implications.

Here, too, working closely with the World Bank, we have increasingly tried to integrate environmental concerns into our policy dialogue. Bank and Fund staff work together to help member countries prepare Policy Framework Papers that incorporate economic, social, and environmental concerns in a consistent manner. In fact, a number of country programs, supported by our concessional facilities, have featured environmental concerns. In Cambodia, the preparation and publication of a forest management code constituted a benchmark in the program, and the completion of the mid-term review hinged on the implementation of an effective forestry policy. In Mauritania, the preservation of fishing resources constituted an important element of the medium-term adjustment strategy. In the Lao People’s Democratic Republic, a key consideration was the need to quickly develop the hydropower sector to reduce dependence on timber and wood exports and to conserve forest resources.

Finally, in order to enhance the environmental content of our policy dialogue, the Fund has initiated country-specific studies to analyze the links between macroeconomics and the environment and assess the scope for improving environmental conditions through appropriate policy and institutional reform. In fact, in our talks with some industrial countries of late, energy taxation and ecological tax reform have been key concerns.

Where does this leave us? Clearly, environmentally and socially sustainable development is a mammoth task—one that requires an unprecedented global partnership, and urgently. For real progress to take place, governments need to take the objectives seriously, politically commit themselves, and be willing to redesign policies. Specialized institutions need to provide advice in a consistent manner. International financial institutions need to ensure that adequate funding is available. And NGOs need to bring information to the debate and help build a national consensus for sound policies.

For our part, the IMF stands ready to do its share. We can advise countries on how to strengthen macroeconomic policies and structural reforms—including good governance—that will help mobilize the maximum financial and economic support from all who are able to contribute. Together, I do believe, we can change the way we live on this planet.