Transcript

HOW SURE ARE WE THAT WE KNOW THE RIGHT ANSWER?

not very

a little

fairly

very

HOW RELEVANT IS THIS ISSUE TO BALANCE OF PAYMENTS PROBLEMS?

not relevant

religion

capital punishment; drug policy

democratic elections; labor rights

human rights; environment

a little

social capital

IPR rules; executive compensation

Legal systems; competition policy; land tenure

poverty; education; military spending

fairly

how to close banks & dispose of NPLs; what are the best accounting rules; bankruptcy procedures

corporate governance; financial systems (e.g. capital adequacy; or relationship banking vs. securities markets)

property rights; trade policy

corruption; fiscal transparency

very

how to restore confidence in a crisis

exchange rate regime; capital controls; PSI

budget deficits

monetary policy

This table has two dimensions, and I mainly just want to get across the concept that both dimensions matter.

Across the top is how sure are we that we know the right answer, and across the different roles is how relevant is this particular issue to balance of payments problems and the purview of the IMF, narrowly defined and as traditionally defined.

In the bottom row, I have in the bottom right column "money policy"—we are pretty sure we know how that works. Monetary expansion—we know what the effects are on the balance of payments and the exchange rate.

The budget, I have one row over; we are not quite as sure we know everything about that. There is some disagreement about whether raising taxes when you have a budget problem can make things better, or not.

More disagreement about exchange rate regimes, private sector involvement, capital controls.

And then under "We haven't a clue," I have how to restore confidence in the midst of a crisis—that's not quite an institution.

And then, the other dimension is how relevant is this issue to balance of payments problems. The last row is clearly in the purview of the IMF. The top one is clearly not.

I have "religion" under "We are not sure what the right answer is." I don't know what the right religion is, if there is one.

We have a lot of disagreement about drug policy, capital punishment, and so on.

Go over to the right—"human rights" and "environment"—that's something we all believe in, and furthermore, I think we have a pretty good idea about the policies that would bring them about. Nevertheless, whatever the protesters say, I think it is not in the purview of the IMF.

The middle two rows are probably the ones that we are talking about in terms of institutions that have not previously been considered in the purview of the IMF or the World Bank, but may now are more.

But before I talk about the role of the IMF, I want to talk about where the growth literature is. There are some people who think we have run too many regressions on the level of growth in income and that that literature has outlived its usefulness. I don't believe that. I think we are still learning a lot from it.

There is a group of papers recently which I cite here at the bottom—Acemoglu et al., Easterly and Levin, Engerman and Sokoloff, Rodrik and co-authors—that have come up with some pretty striking conclusions about institutions lately.

Of course, the standard growth regression has found that some variables like investment, education, stability, openness seem to do a good job at explaining growth rates.

But the critique is that, well, those are endogenous. And it's not just that they are not the policies—because you could put the policies in—you could put tariffs, and you could put spending on education and all that—and we still worry that they are endogenous, that they may be the result of deeper societal factors.

So I'm going to describe this literature now the way Dani Rodrik does—that we are not looking at the three deep fundamental determinants, and that there are three competing theories or views.

One is what is sometimes called "geography," but I think it is important to say that we're talking about tropical geography; the second is openness, and the third is institutions.

They each have their measures. For tropical geography, we are talking about malaria and other diseases, how long is the growing season, some things that Jeff Sachs has talked about.

Under openness, we are talking about trade-to-GDP, tariffs, direct investment.

Under institutions, we are talking about various measures of property rights and rule of law.

In each case, there are some serious endogeneity problems. There are some countries—Panama, Singapore—that had malaria, and it has been suppressed once you get superior technology, societal organization. So that is endogenous.

Trade is certainly endogenous—some goods or luxury imports increase, or investment increases with trade. Tariffs—where countries get their revenues from—changes with the degree of development, so that is endogenous.

And on institutions, regulation and tax systems are endogenous; when countries become more developed, they do more redistribution, they do more regulation.

So in each case, the literature has come up with, I think, some pretty good instrumental variables given that it might seem like insoluble simultaneity problems.

In the case of tropical geography, that one is pretty obvious—latitude, what percentage of land is in the tropics, temperature, rainfall. Those are pretty good exogenous instruments.

In the case of trade, variables out of the gravity model—how well-situated geographically is the country for trade, remoteness, land-locked, linguistic and historical links with other neighbors.

And then, more recently, in the case of institutions, there is this interesting work, Acemoglu et all, on European settler mortality rates, the idea being that in those regions, everybody, among all the countries that were colonized, in some of them, the early settlers died off quickly and didn't settle in, and in others, they lasted longer, and so that's where they brought their institutions.

Another version, the Engerman and Sokoloff version, is related, that some countries, some regions, are well-situated for extracted industries—mining and big plantations, sugar and all that—and those are the ones that got the bad institutions. And [inaudible] worries that Spain left the bad institutions in South America, and we got the good ones in North America, in this version because of that initial difference.

Well, these papers, to generalize, come up with quite a remarkable finding. They say that institutions dominate. One of them is titled, "Institutions Rule." Some of the papers claim that institutions knock out everything else. I think that's too strong, but for present purposes, it doesn't matter. I think the idea is correct that institutions are very important, and I suppose for present purposes, it doesn't matter if they really knock everything out.

There is this interesting disagreement between Rodrik and Acemoglu, Johnson, Robinson and Thacheren. Rodrik accuses them of being "pre-destinationists"; that because they have this instrument or variable of where the early European settlers did well and where they didn't, they are claiming it is all destiny, that you can't do anything about it. And there are some interesting case examples, Ghana, for example, where the claim is that for historical and social reasons, the elite are going to take resources away from the internal inland cocoa farmers no matter what—they can do it through an overvalued exchange rate, they can do it through a cocoa marketing board. If the IMF prevents them from having an overvalued exchange rate, they will just do it in a different way. That says that it is the deeper institutions that matter, to the point where the advice is basically that you can't impose macroeconomic or maybe even structural conditions on these countries.

I think I agree with Dani that just because there has been a particular pattern in the past, and it accounts for a certain share of variation, that doesn't mean that you can't change institutions or policies in the future.

Let me turn to the role of the IMF. I couldn't read that, fortunately.

When we turn to the role of the IMF, it comes up in four ways, I think. First, the technical assistance, national statistical standards, and the IMF Institute, and all that. Second is the FSAPs and ROSCs—if I've got that right—Financial Sector Assessment Program and Reports on Observance of Standards and Codes, which I understand are increasingly linked to Article IV missions and in some cases even to country programs.

So number three is the most important and where most of the controversy is, and that is the structural conditionality in the country program. And the accusation is that there has been mission creep—back to my first slide—that the IMF used to stick to its knitting, which is the bottom slide, and that lately, they have been imperious and marched their way up this table. And certainly, financial sector institutions are now considered a major part of the Fund's business.

My view is that there has been some expansion in that direction and that it is appropriate. We have had, obviously, increasing degree of integration across countries; that creates a certain tension between sovereignty and regulation. I don't think anyone thinks that the right solution is therefore for the IMF to start dictating policy on the environment—but some movement at the margin like a roll-up seems to me to make sense, especially on the right margin where yo are more sure what the answers are. And of course, for the World Bank, it is their role to be probably another row farther up from that.

Let me say a bit about the issue of if you can force policies on countries. It used to be that an IMF staffer would say one of our roles is to take the heat politically for changes that a country, a finance minister, know they have to make anyway but cannot make. And there would be some pride in that.

Now, it is much less of that. It is much more that the local country has to take ownership of reform. Of course, it is much better to have ownership of reform, but that begs the question what do you do if they don't seem to want to own reform or if it hasn't seemed to work in the past.

The fourth place where the role of the IMF comes in on institutions, and the last one—it seems to me perhaps on this problem of prolonged users it is a desirable goal to increase differentiation. It shouldn't be that good performers and bad performers all basically keep continuing; I think there should be more differentiation. How do you cut a country off, particularly a country that has been a repeat borrower and has missed their targets over and over and over again?

I guess I am going to suggest that one should look not just at performance, but should also look at that point—and it is permissible to look—at deeper institutional causes. If a lack of democracy and a lack of stability is giving rise to repeated failures, then it may be appropriate to take that into account when deciding to cut a country off.

One more sentence. It is not the case that history is entirely destiny. There are important cases where countries have changed institutions fundamentally—Japan and Germany after World War II; the colonial empires when they broke up; the former Soviet countries; and recently, East Timor and the breakup of Yugoslavia. These are cases where institutions are being made today, and one can have an effect notwithstanding past history.

MR. ANINAT: Thank you, Jeffrey.

I think that after Frankel, and by popular demand, this session will extended by a further 10 minutes; so instead of 12:30, we will be aiming to finalize all of the work by 12:40 so we will give room for interaction by the floor as needed.

Our last panelist—last, but certainly not least—is our friend Jeffrey Sachs, who is Director of The Earth Institute and a professor at Columbia University.

He was formerly Director of the Center for International Development and Harvard Institute for International Development, and a professor at Harvard University.

In January 2002, Professor Sachs was appointed—and this is relevant for the IFIs here, because we are involved in that work, as he know—by Secretary General Kofi Annan as his special advisor on the Millennium Development goals after the Monterrey Summit.

Jeffrey, you have the floor.

MR. SACHS: Thank you very much. It is a pleasure to be here.

I think I have one message, which is to avoid trivializing this complicated issue. I happen to think all of the papers that Jeffrey mentioned do exactly that, but I am not going to dwell on those papers.

I am going to stress why it is so easy to get this issue wrong, of institutional reform. It is tougher than it looks, and we are not always on the right track.

I want to start with a general methodological observation, which is that for along time, certainly since Valraux [phonetic], economists aimed to create a statistical mechanics of economics. We tried to fashion economics in the image of classical physics, and that was a great mission of general equilibrium analysis, and it had a lot of merit.

But I think we are finding more and more that real economic analysis has to be like ecology—that is, the operation of complex and interdependent systems—and that is a very different kind of analysis, and it is one in which I view the institutions as being embedded.

The analogy that I would use is, among many bad analogies, that maybe we can think of the institutions in a society like the organelles of a cell—the ribosomes, the mitochondria, and the other functions of a cell that need to be performed for the help of that complex entity—and that it is the interconnectedness of those functions which is critical.

One of the features of a complex interconnected system like a living cell is that when any one of those organelles is misfiring, the whole cell can die. If you are very naively looking at your favorite institution of choice and see that it is not flourishing, you may easily believe that the problem lies there, even though what you are finding is a failure of interconnections where the real problems are lying someplace else.

This is a particular problem for the economics profession, because we run to try to isolate the problem in the place we always know best, and whether that is the budget or the tax policy or the exchange rate, we have endless debates about manipulating macroeconomic variables, when the deeper problems in the system—the organelles that are misfiring—may be someplace completely different in the society.

There is another point about living systems that is particularly important for a lot of the countries that I am dealing with on behalf of the Secretary-General, and that is that living complex systems are open energy systems, as Schroedinger [phonetic] told us 50 years ago. They need to be fed and cared for. They eat. That means the energy has to come from the outside. And when you don't have enough energy input, enough basal metabolism, the whole society or the cell collapses, and the same thing is true with some of the poorest societies in the world. They cannot function at the level of—they cannot survive physically right now at the level of productivity of the internal system, and there is not enough energy coming from the outside. So we are literally dealing with mass death in a lot of parts of the world that we talk about as macroeconomic crises. But Southern Africa is a region of mass death right now. It is not merely a macroeconomic crisis, and we have to understand that if we are going to get this right.

A second—just one more point—actually, two more points on this perhaps dreadful analogy. Another point about cells is that if you compare organisms, there are homologous functions, so-called. You don't always find exactly the same DNA doing the same thing. You have to satisfy a way to metabolize, a way to get out waste, a way to protect against foreign invasion and so forth. But it is not the same proteins or enzymes that are working. We cannot expect one DNA template, of course, for each of the functions, each of the institutions that we are talking about. I think this is obvious, but I am going to point out a real place where we make some serious mistakes.

The last medical or public health or biological analogy—when you have an organism that is not functioning or a cell that is misfiring, you have to do a differential diagnosis, because it is a complex system. It is not good enough to say that the heart stopped beating, and therefore, the person had a cardiological problem. Maybe the heart stopped beating because it stopped being profused with oxygen, and that was a pulmonary problem; or maybe there was a cerebral stroke or something else. And that is what a doctor does; a doctor makes a differential diagnosis and doesn't go for the immediate effect, whereas we tend to. We translate in the end everything into a balance of payments problem or a macroeconomic problem, when sometimes the roots of the crisis are much deeper.

What is the range of interesting institutions to deal with? They are not just the so-called rule of law and budget and tax policy; they are also the judiciary, the water system, the power, the sanitation system. These are institutions when you look at them in any viable society—they are not self-organizing—anywhere in the world where they function.

The education system, the health system, the science and technology institutions—instead of textbooks, look at any operating systems in the world. These are institutions that I am talking about and not self-organizing. There is a tremendous role of cooperative or forced mechanisms that are at play—environmental management, ecosystem function management and the like.

Now, why do I go on perhaps at this trivial point? Because we are sometimes really barking up the wrong tree when we are trying to understand what is going on in a country. And we go straight for the jugular, if you will, of the tax policy or the exchange rate, and we think we are doing something, when the problems are really much deeper.

Let me turn first to the poorest countries. The IMF has been in the business of the poorest countries, really, for about 20 years intensively and since the first structural adjustment fund, since the late 1980s. The record is dismal by the objective standard—not the counterfactual, but just the objective standard of what has happened in the poorest countries in the last 15 years. It is generally a continuation of decline, disease, pandemics out of control, environmental degradation in almost all parts of Sub-Saharan Africa and in many other unstable parts of the world. I would argue that it is because we don't have a realistic diagnosis of what is happening in those countries, and therefore, the instruments that we are turning just are not the right instruments.

For the countries that I am dealing with in Sub-Saharan Africa, you have a basal metabolism problem. These are literally—not just figuratively—these are literally dying societies where there is not enough food intake, there is not enough food productivity, there is too much disease, there is not enough control of basic instruments. The macroeconomics, the way that it is practiced, of saying that a budget balance and an exchange rate that is convertible, will not be sufficient to address these problems. They need an infusion of help, of real help, of a much larger amount than is on play right now.

The Managing Director makes this point all the time these days, but it is not operationalized in any way in the IMF programs and what the Board reviews and how we talk about it in the Article IVs. No place is there a realistic assessment of what would be needed institutionally to make these societies function. That is very bad, and we continue to get crises absolutely out of control.

So that is the poorest countries. There are other countries—I would say the Andean countries have this quality—where again, the basic problems are not macroeconomic. Some of the basic problems are the same problems of the last 300 years, 12,000 feet above sea level. Those are really serious problems—the highest transport costs in the world.

Drug trafficking is a phenomenally important part of the real life of Bolivia, Peru, Colombia, and increasingly, Ecuador and other countries in the region. The level of corruption that it causes, the distortions of the macroeconomic environment, the inability to run other, normal functions is profound. Militarization of that crisis by the United States solves nothing. But we don't talk about the real things—we talk about the pretend things—and we have a whole region that remains in profound crisis.

For a lot of emerging markets, when we talk about Argentina, for example, we can talk forever about the exchange rates—a fascinating question; we can talk about provincial government budgets.

I actually think that in the end, that doesn't get to the core of what Argentina's problems were myself. Argentina, it strikes me, was a society that had another set of missing institutions—the science, the technology, the higher education that could have allowed Argentina to move away from dependence on the pompous and foreign money in hydrocarbons to something that could be a sustained, competitive, industrial and service sector for the economy.

Well, that is just my own hunch, and I don't have time to justify it, but the basic problem was the underlying economy, and the budget deficits were a symptom of uncompetitiveness. Then, there is the proximate cause, which is like bleeding out, when the exchange rate regime, despite promises of 10 years, was changed.

But I think, again, there is a huge missing element even for the emerging markets, which is that a major institution which we don't talk about but which is the core institution of U.S. competitiveness is the science and technology component of our society. It is the public money that puts $110 billion into research and development in the United States, quote, "free market system." It is the higher education system which is dependent on tens of billions of dollars of non-market funding in order to run the innovation part of the economy.

Okay. What I want to say is that when we think about institutions, we are just thinking about extremely narrow aspects of what are complex phenomena.

What should the IMF do in this context? I used to think the argument was "Get out of Africa—it is not your business." But the decision was taken that, "No—we want to be in Africa." But then, I would say that's okay, too—you have to take the responsibility of understanding, then, what's going on. And if you want to be in Africa, you have to understand that macroeconomics is not the essence of the issue in Africa. And if you try to force it into that peg, you will continue to fail, because that is not what is happening in Africa.

It is not a failure of macroeconomics, and this has to be understood.

A final point—can there be a Washington consensus about the right range of institutions? Well, not the kind that we have. The phoney, textbook, simplistic, simple-minded list doesn't stand up to any scrutiny of how any real societies function. But the last thing a United States official will tell you is: "We don't have a free market economy in science and technology. We spend $110 billion. And we have an industrial policy to get the internet going, and we have an industrial policy for nano-technology, and we have an industrial policy in many different areas."

They don't tell you that. That is not on the Washington consensus list. So what we call the good institutions were not even getting the accurate picture.

Thanks a lot.

MR. ANINAT: Thanks, Jeff. As expected, you were polemic, very polemic.

I am not a panelist, but I'm sure we would have a lot to say about his setting of the record about our experience in Africa and Latin America, but let me turn to the public here.

I will only request that you identify your last name and make your question very precise to one or all or combinations of the panelists, so that we give them time at the end to close.

Is there a walking microphone somewhere? If not, simply shout.

The gentleman at the back, Mr. Boughton, please.

QUESTION: Thanks very much.

This whole panel discussion has been absolutely fascinating. I think the analysis of why institutions and social compacts and environmental and health policy are at the root of problems is extremely persuasive.

What I find less persuasive, though, is the idea that this implies a different role for the IMF. And in fact, we are at a point where the IMF is moving in exactly the opposite direction, and I think we need to have a serious discussion about what the right direction is.

In a way, you could argue that we are in a world in which we have a lot of people who are having heart attacks—to pick up Jeff's analogy—a lot of people are having heart attacks for a lot of different reasons. What we have is a brilliant cardiologist coming in and treating everybody's heart symptoms—but the question is should we be turning the cardiologist into a holistic medicine person or institution, or should we be focusing on how to get the other parts of the profession coming in to deal with all these other different things and getting a better solution that way.

MR. ANINAT: Thank you for the question to all four panelists.

The gentleman at the back.

QUESTION: Thank you. Mario Riete [phonetic] from Transparency Honduras, who is [inaudible] by Cardinal Rodriguez.

I really agree that it is necessary to move from the Washington consensus to Monterrey and Johannesburg consensus. A very important thing is how to put research into action.

My feeling is that it is necessary first to have transparency. Transparency is the most important part of everything. As Guillermo Ortiz said, this is something that we have to push in our countries.

In the case of Central America—Professor Jeffrey Sachs knows very well the Central American case—we have been signing letters of intent for many years with the IMF without results. And if we are putting more effort now—there is a mission of the IMF in my own country, Honduras, signing another letter of intent, and what is going to happen?

I agree with you that we have to change from the macroeconomic to the diagnosis of the real problem. it is a structural problem, and the structural problem—what we are going to do, for instance, on the agricultural sector with the subsidies—it is easy to produce—I mean, here in the States, we can import any type of agricultural thing—

MR. ANINAT: Mario, what is your question?

QUESTION: What I want to know is how to move to put research into action, and how can we move from the theoretical to the practical things for structural change in our countries.

MR. ANINAT: Thank you very much.

QUESTION: My name is Marty Weiss, and I'm with the Library of Congress.

I have a quick question for Nancy. I am curious as to how you think the IMF should be working with the World Bank and the multilateral development banks; how you see the cooperation between the institutions going forward to promote better institutions.

MR. ANINAT: We have two more questions.

The gentleman with the beard; yes?

QUESTION: Andrew Wilson, Center for International Private Enterprise.

Following up on this medical analogy, my question is who does the diagnosis, and how do we develop the criteria to make the diagnosis.

MR. ANINAT: In the back; yes?

QUESTION: [Inaudible; no microphone.]

MR. ANINAT: Thank you for two very interesting questions.

The lady here; yes?

QUESTION: Andrea Ati [phonetic].

I want to have a definition of what you call "national institution," because the each country has a different size, so when you try to put an analogy on a SAL in this case, the society meaning household—each country may have a lot of different institutions, because their size is totally different.

China and Singapore in this case are totally different in the multi-complexity of the institution.

I believe that there should be an international institution that compares one-to-one with the national institutions so they can work together to improve the quality of the national institutions.

Thank you.

MR. ANINAT: Thank you.

One more question, please.

QUESTION: Yes. Jeff Frankel gave a taxonomy along two dimensions—one, what we should do to save balance of payments; and the other is what we know it helps.

Nancy Birdsall seems to have gone to the wrong case. Building a social contract is something that we don't know how to do, and it is not clear how it helps the balance of payments. So I would like a clarification.

MR. ANINAT: I think we have a whole array of questions that go from methodological, conceptual, clarifications needed certainly in this complex debate, to very precise questions about positions held and regions in particular.

Let me start perhaps by mixing the order a little. This will be your last participation given the time, and certainly I will be generous and concede about three to three-and-a-half minutes to each of the four if you wish the floor.

Let me start with Nancy Birdsall for your 3.5 minutes, and this has to be arithmetically correct.

Nancy, please.

MS. BIRDSALL: I won't ask you to tell me when I have taken up 2.5 minutes.

What is the difference in the role of the IMF, thinking about a social contract? First, do no harm. And here, I didn't include, because I was running out of time, but I think the push for the opening of capital markets is an example where, in some societies, that had negative effects on the capacity of those societies to strengthen their own social contract in the short run. We know that from empirical work that, particularly in Latin America, the opening of capital markets has increased wage gaps. Okay.

Second, intervene with transparency when—or, at least, maybe not intervene and tell countries that they have to do something in the sense of imposition—but we have Article IV consultations, we have make transparent what the issues are.

I raised the case of Argentina. It wasn't just about the aggregate. It wasn't just about having a small fiscal deficit of one or two percent overall in the late nineties. Where was the IMF—telling the Argentines, telling the world, clarifying what was going on.

So, first, do no harm.

Second, be clear and transparent, and link IMF issues to effects in terms of the social contract in a transparent and clear and visible way that takes into account concepts like fairness. Let's not be so timid that economics is only about stability and growth. It also can be about justice, social justice.

And third, obviously, understand the impacts, just as now the IMF is eager to understand the impact of everything it suggesting and recommending on poverty. Think more institutionally. Think about the impact of these macro policies on the institution that is so central to open, democratic societies, namely, the social contract.

MR. ANINAT: Thank you very much.

MS. BIRDSALL: I can't say anything more?

[Laughter.]

MS. BIRDSALL: I think the issue of how to put research into action and link it to all those letters of intent and all those repeated adjustment loans in Central America and Sub-Saharan Africa has to do with the enforcement issue and the exit option which Jeffrey Frankel raised, and I think he raised it in a brilliant way.

If a country is not fulfilling the conditions, you have got to get out, or you have got to explain why you are not getting out and you are changing the diagnosis, which goes to what Jeff was saying.

And finally, if I can say one other thing on the cooperation going forward, I was on a Commission of the Overseas Development Council several years ago which thought very deeply and recommended that facilities like the PRGF, which are essentially for the poorest countries that Jeff was talking about that have basal cell metabolism problems, that that facility, with the money that finances it, be moved to the World Bank and that the World Bank consult with the IMF on the piece of a strategy in a poor, disease-burdened country—let there be consultation with the IMF on the macro part. It is completely wacky to have it the other way around, because what Jeff was saying and Guillermo and Ken and myself is that institutions are not really, in the end, the domain of the IMF, but the IMF does sometimes dangerously affect them.

MR. ANINAT: Thank you, Nancy.

Let me go now to Jeffrey Frankel, who was just alluded to; so, Mr. Frankel, you have the floor.

MR. FRANKEL: I'm going to use my three minutes to ask Jeff Sachs a question. It is a question and answer he alluded to at the end and that Jim Boughton said before, which is even if it is very important, is it the IMF's job.

Jeff, if I heard you right, you said that not long ago, your advice to the IMF was "Get out of Africa; it's not your job; you have no business there," and that now your answer is, "Well, if you're going to be there, okay, but then you should take responsibility for absolutely everything—for health and environment" and I think you had drug policy, and some things that I had at the very top of my list, you mentioned.

If you want the audience to be well-rounded people and to understand that the world is a complicated place, and history and culture, I agree with you—those are important things to understand. But are you actually saying that IMF missions should have to get involved in all these things? To my mind, the right answer is not to be at one extreme or another but to be somewhere in the middle, which means a couple of things. It does seem to me appropriate that the IMF has expanded one step up in the table to look at financial sector institutions. It seems to me that they should be in the African countries—not all of them all the time, but when there is a balance of payments problem which is in their purview, they should work on that and look around at the broader context a little more than in the past—and among other things, that means cutting countries off if it really looks hopeless and giving up on them for a while.

But that is a kind of intermediate solution. It isn't that we should either not be in Africa at all, or we should be responsible for everything, even while recognizing that everything is important.

MR. ANINAT: Thank you, Jeffrey Frankel, for making my life easier.

We will follow the rational order, then, and go to Jeffrey Sachs—and again, time is running.

Jeff?

MR. SACHS: The issue is—what I meant by being "in" is the current process in which there are about 30 countries that are long-timers and are going to continue to be long-timers on the way the system works. That is because these are not viable countries right now against a standard of decent health, education, and so forth, so they become dependent on a donor world and the way the system is organized; therefore, within the context of an IMF purview.

What I wasn't saying was that the IMF should therefore take responsibility for everything; it should take responsibility for understanding what it is doing.

Where this comes to the nub of the question is the framework of the macroeconomic policy, which of course is the core of the IMF's business. When the IMF says that the financing gap for country "X" is so-and-so, that has got to be against a standard. The standard that it has been against up until now, roughly speaking, has been: Here is what the donors are going to do, and you live within your means. And since we are against inflation, open credit creation, and instability, live within your means.

What I am saying is that the international system can't stop there. We have to put the perspective a different way, which is what does the country need in order to be able to achieve some internationally-accepted goals, for example, of controlling disease, staying alive, reducing hunger, and so forth—and if that's not available financially within a macroeconomic framework as currently funded, then it is the IMF's responsibility, actually, to go back to the donors and say that's the financing gap. The financing gap is not the gap to fill some notional balance of payments target that leaves million of people dying this year. The financing gap is the gap that is needed to close the gap with the development goals that the international system has achieved. That requires a deeper knowledge of what the underlying problem is.

If you think the underlying problem is that your property rights institutions are wrong, then it is free—there is no financing gap. If you think, like I do, that malaria and AIDS and drought and soil nutrient depletion and transport costs that are enormous and other real things are at the nub of the crisis, then there is a financing gap from a development goal point of view.

And what I would like to see the IMF do is to understand those factors enough to say not that you have a balance of payments gap, but you have a development gap, and the donor world which has signed on in Monterrey and in Johannesburg and in the Millennium Summit and in a dozen other places, to be partners in addressing that gap—that is what is needed to get to the core of the issue. That is very operational.

And a final point—sorry; it is important, I think—when I say "operational," I'm not saying the IMF should become experts in malaria. I am saying that you need to look at those goals and then ask the WHO for advice; ask UNICEF for advice; ask UNAIDS for advice, and build up a financing gap which is realistic to the underlying realities of the countries—not to make a Malaria Department at the IMF, but to understand that that is part of your responsibility, and we have a big, complex international system that you can draw upon to get the financial assessment to put into your macroeconomic framework so that we are finally addressing real variables that can make a real difference in achieving real results.

MR. ANINAT: Thank you, Jeff Sachs.

Our last closing panelist will be the policy banker, Mr. Guillermo Ortiz.

Guillermo?

MR. ORTIZ: This has been, I think, a very difficult discussion on this last part, because it goes to the heart of how far can the IMF go. And I think that Jeff just made a very effective and emotional appeal to the understanding of the underlying causes of the problems in that subset of African countries.

Just to point out the complexity, let me turn to another of Jeff's examples—the Andean countries. You say that the problem there is drug trafficking.

So what is the IMF to do? We can start a big discussion here, but my own view, at least, is that as long as drug consumption in the United States is what it is, and the double standard that we all know applies, then the problem will not be solved, and the structure of these societies will be dissolving gradually and slowly.

Then, given that framework, what is the IMF going to do? Obviously, these countries all have balance of payments problems and so on and so forth.

I think that the IMF can continue to play a very useful role and traditional role. And by analogy to what you just said, it has to take a stand on these kinds of issues. This is a new role for the IMF and a very difficult one.

So I will just conclude by pointing out some of the complexities of this thing, but my own inclination is that the IMF should actually narrow its scope on this cardiologist approach and be very careful about trying to quote-unquote "change" institutions, but do things that are already proven right—for example, transparency, information, these kinds of things that do work.

MS. BIRDSALL: And the cardiologist could be listening to the other specialists, too.

MR. ANINAT: We are listening, Nancy, we are listening—very much.

[Laughter.]

MR. ANINAT: Let me just in closing refer here in the last half-minute to the issue of, as we know it, the subject of institutions is going to be complex, fascinating, and challenging for all of us—for the four panelists, for the academic world, for the policymakers' work, and for us, the international institutions.

I think this has really been a very polemic, thoughtful, but also challenging panel, and in closing, I would like the floor to join me in giving them recognition by your applause.

Thank you very much.

[Applause.]

MR. ANINAT: The meeting will resume at 2 o'clock in this room.

[Whereupon, at 12:35 p.m., the proceedings were recessed, to reconvene at 2 o'clock p.m.]