The IMF's role in governance issues has been evolving over the years, and good governance has taken on increasing importance in our traditional mandate of promoting economic stability and what I call high-quality growth. It is not only the IMF, but also its member countries that have awakened to this concern, although with varying degrees of enthusiasm.Indeed, as recently as a few years ago, there was little support among our members for the IMF, or for any other international financial institution, to become more actively involved in governance issues.
Some of our shareholders feared that in taking on such issues the institutions would become politicised and lose their effectiveness-don't we have enough to do in our missions to preserve monetary and exchange stability? Others attached higher priority to other issues. In short, there was no shortage of excuses for keeping us at arm's length. Today, however, not only have governance issues moved to the forefront of discussion, but in many cases governmentreform has moved to the top of the policy agenda. What has changed?
One important change has been in the perception of what constitutes sound economic policy. As more and more evidence has come to light about the adverse consequences of governance problems on economic performance-among them, losses in government revenue, lower quality public investment and public services, reduced private investment, and the loss of public confidence in government-a broader consensus has emerged on the central importance of transparency and good governance in achieving economic success.
Numerous studies have shown that where governance is poor, domestic investment and growth suffer. Moreover, in a world in which private capital has become more mobile, there is mounting evidence that corruption undermines the confidence of the most serious investors and adversely affects private capital inflows-this is the case in all too many countries in Africa.
Even Asia is no exception; we have seen there that governance problems canalso undermine the ability of countries to channel private capital inflows into productive, long-term investment. Moreover, the Asian crisis has demonstrated in a very dramatic ways how the lack of transparency about underlying economic and financial conditions can feed market uncertainty and trigger large capital outflows that can, in turn, threaten macroeconomic stability. Conversely, progress toward greater transparency can radically alter the very terms of the public debate.
Other factors also come into play. With government budgets under pressure in virtually every country in the world, bilateral aid donors have become more conscious of the need to direct their resources to countries that they believe will use those resources most productively and in which such use can be monitored.
The IMF itself has a responsibility to its members to ensure that the resources they provide to the fund are put to good use. For all these reasons, our member countries have come to recognise the vital importance of goodgovernance, and, at our Annual Meetings in September 1996, a declaration on partnership for sustainable growth was adopted, though, paradoxically, despite its fundamental importance it appears to have gone unnoticed.
It reflects a now universal consensus on these issues, and state that "promoting good governance in all its aspects, including ensuring the rule of law, improving the efficiency and accountability of the public sector, and tackling corruption" is an essential element of an environment in which countries can achieve prosperity. It may seem like a catch-all, but its words give legitimacy to our efforts in this area and to the "second generation of reform" that we are now trying to promote.
Subsequently, the IMF's executive board met a number of times to develop guidance have been in effect since last July 2. They confirm and strength the approach that the Fund has been taking for some time, and also stress the importance of addressing governance issues evenhandedly in all member countries and,of course, the need to work together on these issues with other multilateral institutions, especially the World Bank, since we are jointly confronted with these problems.
So how does the IMF go about promoting good governance? Not by systematically seeking out all cases of corruption in the world, but h/by helping members improve the management of their public resources and establish a stable and transparent regulatory environment for private sector activity, a sine qua non for economic efficiency and the eradication of corruption. Broadly speaking, our approach is to maximize the transparency of government financial operations and create systems that minimize the scope for making decisions on an ad hoc basis and for giving preferential treatment to individuals and organisations.
(To be concluded)(The above text is the excerpts from the address by managing director of the IMF at Transparency International, Paris, on January 21, 1998)
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
