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<text> <title> IMF Strategy for Economic Transformation in the FSU </title> <article> <hdr> Foreign Policy Bulletin, May/June 1992 IMF Strategy for Economic Transformation in the Republics of the Former Soviet Union </hdr> <body> Michael Camdessus--Managing Director of the International Monetary Fund, to the Georgetown University School of Foreign Service, Washington, April 15, 1992. We live at a turning point in history. The people who suffered under communism have torn down the Iron Curtain. The Soviet Union has been dismantled, and in its place are emerging fifteen republics. Like their neighbors in Eastern Europe, they have opened the door to freedom--the political freedom of the market system. They are putting in place the basic structures of a free society. Recent events in Moscow, Warsaw, and elsewhere, remind us that this is a formidable task. They face serious obstacles. There will be setbacks, time and time again. We must help make the move to freedom irreversible. For the IMF, there is no more important task than to assist countries to become integrated into a growing world economy. We were created to do that, and this has been a large part of our work since 1945. This has always been a demanding task, but never more so than now! For several months now, the IMF has been working intensively with Russia and the other republics, in close cooperation with our sister institution the World Bank and the newly created EBRD [European Bank for Reconstruction and Development], the EC, and other multilateral institutions. We have visited all of them, in some cases several times. We are extending technical assistance, and conducting an in-depth dialogue to help these countries to design their strategies of economic transformation. The IMF's Executive Board is close to completing the work on preparations for their full membership, which will make the IMF at last a virtually universal institution--something that we have looked forward to since our establishment. I would like to share with you, and especially the students of Georgetown University who are preparing for careers of international service, some of the experiences of those who have the privilege to be part of this historic process. And to explain: -- the strategy that we are helping these countries to design; -- the financial support they are likely to need from the rest of the world; -- and the feasibility of achieving this support, in a world with a limited supply of savings and competing demands on them. Three topics to cover, then, and a conviction to share with you that the solution to this major challenge is within our reach--and that it can be an important component of a global strategy to revive growth in the world economy. I. A Strategy for Transition The magnitude of the problems facing the fifteen republics is unprecedented. They go far beyond what is generally understood by the concept of economic transformation. These peoples are creating new nations, from scratch and in a very brief period. The responsibilities of their leaders are immense. The fifteen republics need to devise a strategy that is appropriate to their special situation. There are useful lessons for them, both from the recent experience of the countries in Eastern and Central Europe, which are a little bit more advanced in the transition to a free economy, and from the rest of the IMF's members. But basically we must operate there without rigid preconceptions, and be prepared to learn from experience. a. An Unprecedented Problem The fifteen republics must overcome major handicaps. -- They are taking charge of their own destiny at a time when the many years of central command and mediocre performance have left the old systems and institutions exhausted and depleted. They are just emerging from a long and devastating man-made catastrophe. Is it not striking to hear a Minister from Georgia tell us "Our country existed as an independent nation ten centuries before Christ, but after centuries of feudalism, and seventy years of Soviet Government, this spring will be the first one in which our farmers will be planting seeds in their own land..." -- Their economic structure is crippled with deeply-embedded inefficiencies, including the dead weight resulting from years of misallocated investment, misuse of their vast energy resources, and the "black hole" of the military-industrial sector. When you visit the fourteen republics (other than Russia), you hear that they have been run essentially as suppliers of materials to the centralized system, and that nothing was done to foster their own balanced growth--indeed, on the contrary. But then visit Russia, and you don't find evidence of accumulated wealth; the people there don't look more prosperous than in the other republics. -- The social and physical infrastructure everywhere is degraded, and in many respects the environment has been devastated. -- These republics are only a few months old! They are starting to hold free elections, some of them for the first time in history. They are still in the early stages of discovering the responsibilities that accompany independence. They lack a competent public administration in many fields essential to good management of a market economy. There is no more central planning to dictate what to do, to people who have become unused to the responsibility of taking the initiative. But in some quarters there still exist powerful vestiges of a well-entrenched bureaucracy that is hostile to the reform process, and is fighting to retain power. -- They are also in the early stages of dealing with powerful forces that may disrupt the social fabric and hamper economic relations. The latent problems of the many different nationalities, which Stalin thought he had laid to rest, are reemerging as powerful forces. So we see the resurgence of old rivalries, the dangerous tendency of some to protect themselves by restricting exports to the others, and the mounting risk of retaliation. As you know there has been recent violence in Armenia, Azerbaijan, and Moldova. -- And, finally, they have little or no experience of market mechanisms, and no enterprise culture. How to create market economies when there are almost no entrepreneurs? Indeed, they have to telescope into a dramatically short time all that the industrial countries achieved through slow and progressive evolution over centuries. b. A Diversified Strategy The republics are also rediscovering their diversity. They include Russia, with its immense natural resources, which should within a few years be able to assist again its poorer neighbors--but also the smallest and poorest, whose situation may be compared to that of some of the low income developing countries in Asia. This diversity requires that the reform programs reflect their special circumstances. They need to develop a diversified strategy that responds to their circumstances. Moreover, if such a strategy is to succeed, it should be their choice. We can offer advice, technical assistance, and the experience gained with other countries, but in the end the bold and comprehensive programs they design must reflect their strategy. They will take responsibility for it, explain it to their people, muster the necessary popular support, and implement it. But they are in an emergency situation, with no option to delay the implementation of reforms until there is a better economic environment. As a matter of fact, even though we all recognize that their transformation will be a long process, they must address three problems from the outset: simultaneous adoption of basic structural reforms and stable macroeconomic policies, renovation of the social protection system, and correction of common problems from the old Union. A. Structural Reforms and