Rodlauer: "I'm quite optimistic here"
Poland had been a founding member of the IMF, then pulled away in the 1950s as posts of the Iron Curtain were planted. The nation rejoined the international financial institution in 1986, but as Rodlauer says, the IMF's involvement really started at the "first gong of the big bang on Jan. 1, 1990, when Poland was really the first country to embark on this major transformation from command to market economy." Five years later, Poland has paid back its more than $1 billion IMF debt, and later Poland negotiated a reduction of the stand-by agreement to $70 million. "The way it has worked in Poland," Rodlauer says, "is a classic example of how it should work with the right policies." Rodlauer recently spoke with WBJ's Managing Editor Stephen Kirkland about the IMF's current relationship with Poland and potential threats to continued economic growth. Rodlauer, a native of Innsbruck, Austria, and formerly with the Austrian Foreign Affairs Ministry, joined the IMF in 1984 and has worked on program design and conditionality issues in European, Latin American and Asian countries. Since 1989, Rodlauer held posts in the Philippines and Washington before coming to Warsaw.
Q: How does the reduction in the standby agreement affect IMF's activity here?
A: Formally Poland has paid all of its outstanding obligations to the fund and it has requested a reduction. This has de jure removed the conditionality but de facto this conditionality hasn't been there over the last year. Poland's reserves have been increasing tremendously, over $7 billion in 1995. It was clear to everybody involved that Poland would not draw under its stand-by arrangement in 1995. This fact has now been legalized. There is no more quarterly performance criteria under a stand-by arrangement. There is no more requirement to formally complete a review, so there is no formal conditionality by the IMF. If I observe how the budget discussions have been conducted this year for next year's budget, how they were conducted last year and the year before, there is no difference. Poland has received a lot of advice from us, but the budget has not been shaped by conditionality. That's the way it should be. The only truly successful programs are those that are designed and fully backed by the political consensus of the country. If there had been a reverse situation, where Poland had come in with a lax program, then the fund would have come in and given different advice and basically made the country adjust, we can almost be sure that the program would not have had the success it has had. But no success is forever. Each success has the seeds for slippage. It's up to the government. The usefulness of financial organizations like the IMF is that they try to spot weaknesses early. We don't know where Poland's weaknesses will be in two years. Transformation is moving so fast.
Q: What has been the IMF's role here?
A: Poland had from the beginning a kind of pioneer status for us as well as the whole transformation experiment. It was the first to receive a major stand-by arrangement from the IMF, a large financial package that revolved around the standby with major resources from the IMF and a major currency stabilization fund for the zloty of $1 billion at that time, as well as the debt reduction packages of the Paris Club and the London Club.
Q: What was the IMF's role in the debt reduction?
A: A fund program is a fairly rigorous exercise. It looks at a country's economic policy and objectives and how all these fit together. The fund had been involved for over five years in analyzing the situation and then the fund and the Polish government turned to international creditors, the Paris Club, and was able to say: "Based on our best judgment, Poland in all likelihood will not emerge from its problems, will not be able toachieve sustained rapid growth and a successful transformation unless you also contribute to a major reduction of your credits to Poland." The judgment was a 50% reduction of Poland's debt. The rigor, tightness and toughness of the conditionality served to underscore the credibility of the government's program and our support of its program. Here was a country that needed and also deserved the reduction, because it was in the process of implementing a fairly rigorous economic program.
Q: What's at stake with IMF support?
A: The main asset of the IMF, as I see it, is the fund's predictability and credibility. The fund tries to protect this major asset. When we support a country in its reform effort, I don't think we would serve the country well if we would let ourselves be fooled. If we add external support, which is not charity, but loans that add to the debt burden of a country and have to be repaid - we would not help the country if we would add external debt without underlying improvement. For the countries the same principle applies. They are not well-served by fooling themselves - setting inflation objectives that they have no chance of achieving with an underlying fiscal policy. Once a country is in dire economic straits, once its economy is weak, its balance of payments is weak, once it has lost its creditworthiness - often the international financial institutions and other governments are the last lenders to support the country Despite the extremely difficult political, economic circumstances that Poland has gone through during the last six, seven years, it has almost never come to the brutal, bottom-line financial element where the fund has to tell a country either you do what we say or we cut you off.
Q: Since the IMF essentially began in Poland with then-Finance Minister Leszek Balcerowicz, a half-dozen governments have steered economic policy. How does the IMF view this political "musical chairs"?
A: The bottom line is clearly that we have been able to do business with all the governments over the last five years. That says a lot about Poland, mainly because now that virtually every major political force has been in the government, they all have from the start been committed to prudent financial management. This is a very important lesson that we draw from.
Q: You haven't seen any faltering away from rigorous financial management in five years?
A: Of course, the financial adjustments over the last five years have not been a straight line. That's quite clear. We had an initial, very strong program implemented by Prof. Balcerowicz and his team. Like in all the other transition countries, in Poland everybody, including the IMF, was surprised by a number of unexpected developments. The first was the collapse of output. Who would have expected output to fall 17% in two years, in 1990 and 1991. As my friend Prof. Stanislaw Gomulka says, "When output is collapsing around you, there is terror in the corridors of power." Implementing programs in such an environment is very difficult. So there was a period around the second half of 1991 and early 1992 when things looked gray, bleak and dark, when the deficit was rising. No additional revenues were coming in yet and social expenditures were rising. Nobody really knew where this all was going except for the few faithful, some of whom were then in government. By the end of 1992, Poland was able to pull things together and put in a macro program that basically delivered the goods in 1993 and 1994. There was, of course, an up and down and up, but I wouldn't attribute it too much to weaknesses and strengths of individual governments We have been impressed by the unwavering commitment to financial stability, to tight budget constraints, to "no soft money for soft policies." Financial stability has been a constant over the last few years that has served the country well.
Q: Given the outcome of the first presidential ballot, are you concerned about a potential monetary instability resulting from a possible shake-up at the head of the central bank?
A: We do not support specific governments, specific people within the government or institutions. We do support policies that are supposed to deliver stability and rapid growth. Clearly, one principle is budget discipline. Another is prudent monetary policy and this is usually assured by the regime of an independent central bank. So, what we are really looking for is the independence of the central bank. That needs to be preserved.
Q: Inflation remains a threat to continued economic growth. How can you spur growth at the same time reigning in monetary reserves?
A: A balance obviously has to be struck between preserving the competitiveness of the export sector, which is the engine of growth, and maintaining the macroeconomic balance in terms of managing demand and supply so that inflation doesn't get out of hand. Here, perhaps the lessons of some East Asian tigers are quite instructive for Poland. Some Southeast Asian countries have been able to maintain very, very rapid export growth, very large balance of payment surpluses and low inflation for many years. The reasons are mainly twofold. One, they had very tight fiscal policies. In fact, many of these countries have a fiscal surplus, not a deficit. In addition they had very, very high private-savings rate. So, both public- and private-sector savings were very high, which then created room for very large foreign earnings without overheating the economy. So, I'm convinced if Poland wants to maintain its very rapid export growth over the medium term and if it wants to become a growth tiger itself, it has to reduce the budget deficit further and stimulate private sector savings.
Q: At a recent banking conference, CS First Boston's David Mulford urged the government to step up pension reform efforts. Finance Minister Grzegorz Kolodko responded that he was reducing government budget pension expenditures from 16% to 15% of the GDP but that any significant reforms would be five to ten years coming. What can be done to develop private sector savings?
A: This is perhaps the most urgent macroeconomic issue in Poland over the next year or two. Social transfer reform (mainly pension, unemployment and other entitlement programs) is not just about social transfers and how to make them more efficient. It's really about the whole economy, about savings, about growth, about investment, about this possibility for Poland to become a growth tiger. The present social transfer system is extremely costly and the tendency of these expenditures is rising, given the underlying trends of the system and eligibility criteria which allow more and more people to take part in these transfers and because of the underlying demographics of Poland. Under the present system, a lot of the young people, who are at the productive age, in about five to ten years will enter the eligibility for those benefits and become part of the passive population. This is putting continuous pressure on the budgets, so that virtually every two or three years the budget is being forced into some kind of ad hoc solution to make it work for another two, three years. Hence, the 1993 reduction of benefits by 10%. Hence, the 1996 solution, which is necessary, to cut pensions by a simlar percentage. This continuous process of putting the budget under pressure will become evermore difficult to manage. Rather than going down to make room for more exports and growth, the underlying pressure from social transfers is for rising expenditures and deficits.
Q: But how can you convince middle-aged workers to jump away from the public dole?
A: Clearly, it's a complex political issue, but other countries have been at the same crucial point in their history, for example, Chile in 1981 and Uruguay very recently. It is important that the political leaders both in the government and the trade union, the political leaders of pensioners, understand that nobody in the country is served by a system that is blowing up like a balloon and eventually will burst. It's only a fiction that the present system will provide for adequate retirement 20-30 years down the road. Even pensions under the present system are subject to periodic interference - look at the ad hoc solutions the government was forced to implement for 1993 and 1996. That's why I say a "pay-as-you-go" system - taking from one part of the population to give to another - probably is not politically sustainable. "Pay-as-you-go" pension systems throughout the world are in trouble. Half the population is conspiring against the government to minimize contributions and the other half of the population conspiring to increase benefits. Inevitably, the system will get into trouble. It doesn't serve those who contribute or those who receive, because it's subject to political maneuvering, cutbacks and ad hoc solutions. The "pay-as-you-go" has to be cut through in the middle, and you have to create a basically funded system. A large part of the pensioners have to provide for themselves in funded and defined pension schemes, where eventual retirement income is related to one's contribution.
Q: How do you make the transfer into a new system?
A: You allow everybody to move to a funded pension system. The person who had 25 years of pension rights under the government you ask to go to a private pension fund. You give this person a bond, a state paper, that he can bring to his pension fund, that will say: "In 10 years I will pay a certain amount that corresponds to the 25 years of pension rights." Basically, you're grandfathering in the acquired pension amount. Of course, you can't tell the person retiring next year to take a hike. One part of the pension reform in Poland has to be a shift from the fully state-provided, undefined, "pay-as-you-go" pension system to one that relies much more on the individual foresight, on the private, defined system. This is where the pension reform is linked to the very necessary increase of the private savings rate. Countries have done it before with great success, with big debates, with huge social concerns. Of course, these solutions have to be tightly regulated and very tightly supervised. We're not dealing with just a private market, but a public good, which is the pension rights of individuals.
The second aspect is that you need to narrow the entitlements. The range of benefits under the current system in Poland is a tremendous cost. The average retirement age is 55 and probably has to increase to make the pension system sustainable under demographic trends. Disability benefits have placed too much emphasis on damage to health and too little on inability to work. I'm quite optimistic here. The public debate has progressed quite fast to an extent that I'm seeing quite some recognition on a general level, including trade unions. One of the biggest aspects of success in Chile has been the enormous increase in private savings that came from this change in the pension system, the enormous increase in funds available for investment and, therefore, growth of the economy. So all of this hangs together. As I said, pension reform is not just about pensions, it's about budgets, inflation, growth and investment.
Q: How does the reduction in the standby agreement affect IMF's activity here?
A: Formally Poland has paid all of its outstanding obligations to the fund and it has requested a reduction. This has de jure removed the conditionality but de facto this conditionality hasn't been there over the last year. Poland's reserves have been increasing tremendously, over $7 billion in 1995. It was clear to everybody involved that Poland would not draw under its stand-by arrangement in 1995. This fact has now been legalized. There is no more quarterly performance criteria under a stand-by arrangement. There is no more requirement to formally complete a review, so there is no formal conditionality by the IMF. If I observe how the budget discussions have been conducted this year for next year's budget, how they were conducted last year and the year before, there is no difference. Poland has received a lot of advice from us, but the budget has not been shaped by conditionality. That's the way it should be. The only truly successful programs are those that are designed and fully backed by the political consensus of the country. If there had been a reverse situation, where Poland had come in with a lax program, then the fund would have come in and given different advice and basically made the country adjust, we can almost be sure that the program would not have had the success it has had. But no success is forever. Each success has the seeds for slippage. It's up to the government. The usefulness of financial organizations like the IMF is that they try to spot weaknesses early. We don't know where Poland's weaknesses will be in two years. Transformation is moving so fast.
Q: What has been the IMF's role here?
A: Poland had from the beginning a kind of pioneer status for us as well as the whole transformation experiment. It was the first to receive a major stand-by arrangement from the IMF, a large financial package that revolved around the standby with major resources from the IMF and a major currency stabilization fund for the zloty of $1 billion at that time, as well as the debt reduction packages of the Paris Club and the London Club.
Q: What was the IMF's role in the debt reduction?
A: A fund program is a fairly rigorous exercise. It looks at a country's economic policy and objectives and how all these fit together. The fund had been involved for over five years in analyzing the situation and then the fund and the Polish government turned to international creditors, the Paris Club, and was able to say: "Based on our best judgment, Poland in all likelihood will not emerge from its problems, will not be able toachieve sustained rapid growth and a successful transformation unless you also contribute to a major reduction of your credits to Poland." The judgment was a 50% reduction of Poland's debt. The rigor, tightness and toughness of the conditionality served to underscore the credibility of the government's program and our support of its program. Here was a country that needed and also deserved the reduction, because it was in the process of implementing a fairly rigorous economic program.
Q: What's at stake with IMF support?
A: The main asset of the IMF, as I see it, is the fund's predictability and credibility. The fund tries to protect this major asset. When we support a country in its reform effort, I don't think we would serve the country well if we would let ourselves be fooled. If we add external support, which is not charity, but loans that add to the debt burden of a country and have to be repaid - we would not help the country if we would add external debt without underlying improvement. For the countries the same principle applies. They are not well-served by fooling themselves - setting inflation objectives that they have no chance of achieving with an underlying fiscal policy. Once a country is in dire economic straits, once its economy is weak, its balance of payments is weak, once it has lost its creditworthiness - often the international financial institutions and other governments are the last lenders to support the country Despite the extremely difficult political, economic circumstances that Poland has gone through during the last six, seven years, it has almost never come to the brutal, bottom-line financial element where the fund has to tell a country either you do what we say or we cut you off.
Q: Since the IMF essentially began in Poland with then-Finance Minister Leszek Balcerowicz, a half-dozen governments have steered economic policy. How does the IMF view this political "musical chairs"?
A: The bottom line is clearly that we have been able to do business with all the governments over the last five years. That says a lot about Poland, mainly because now that virtually every major political force has been in the government, they all have from the start been committed to prudent financial management. This is a very important lesson that we draw from.
Q: You haven't seen any faltering away from rigorous financial management in five years?
A: Of course, the financial adjustments over the last five years have not been a straight line. That's quite clear. We had an initial, very strong program implemented by Prof. Balcerowicz and his team. Like in all the other transition countries, in Poland everybody, including the IMF, was surprised by a number of unexpected developments. The first was the collapse of output. Who would have expected output to fall 17% in two years, in 1990 and 1991. As my friend Prof. Stanislaw Gomulka says, "When output is collapsing around you, there is terror in the corridors of power." Implementing programs in such an environment is very difficult. So there was a period around the second half of 1991 and early 1992 when things looked gray, bleak and dark, when the deficit was rising. No additional revenues were coming in yet and social expenditures were rising. Nobody really knew where this all was going except for the few faithful, some of whom were then in government. By the end of 1992, Poland was able to pull things together and put in a macro program that basically delivered the goods in 1993 and 1994. There was, of course, an up and down and up, but I wouldn't attribute it too much to weaknesses and strengths of individual governments We have been impressed by the unwavering commitment to financial stability, to tight budget constraints, to "no soft money for soft policies." Financial stability has been a constant over the last few years that has served the country well.
Q: Given the outcome of the first presidential ballot, are you concerned about a potential monetary instability resulting from a possible shake-up at the head of the central bank?
A: We do not support specific governments, specific people within the government or institutions. We do support policies that are supposed to deliver stability and rapid growth. Clearly, one principle is budget discipline. Another is prudent monetary policy and this is usually assured by the regime of an independent central bank. So, what we are really looking for is the independence of the central bank. That needs to be preserved.
Q: Inflation remains a threat to continued economic growth. How can you spur growth at the same time reigning in monetary reserves?
A: A balance obviously has to be struck between preserving the competitiveness of the export sector, which is the engine of growth, and maintaining the macroeconomic balance in terms of managing demand and supply so that inflation doesn't get out of hand. Here, perhaps the lessons of some East Asian tigers are quite instructive for Poland. Some Southeast Asian countries have been able to maintain very, very rapid export growth, very large balance of payment surpluses and low inflation for many years. The reasons are mainly twofold. One, they had very tight fiscal policies. In fact, many of these countries have a fiscal surplus, not a deficit. In addition they had very, very high private-savings rate. So, both public- and private-sector savings were very high, which then created room for very large foreign earnings without overheating the economy. So, I'm convinced if Poland wants to maintain its very rapid export growth over the medium term and if it wants to become a growth tiger itself, it has to reduce the budget deficit further and stimulate private sector savings.
Q: At a recent banking conference, CS First Boston's David Mulford urged the government to step up pension reform efforts. Finance Minister Grzegorz Kolodko responded that he was reducing government budget pension expenditures from 16% to 15% of the GDP but that any significant reforms would be five to ten years coming. What can be done to develop private sector savings?
A: This is perhaps the most urgent macroeconomic issue in Poland over the next year or two. Social transfer reform (mainly pension, unemployment and other entitlement programs) is not just about social transfers and how to make them more efficient. It's really about the whole economy, about savings, about growth, about investment, about this possibility for Poland to become a growth tiger. The present social transfer system is extremely costly and the tendency of these expenditures is rising, given the underlying trends of the system and eligibility criteria which allow more and more people to take part in these transfers and because of the underlying demographics of Poland. Under the present system, a lot of the young people, who are at the productive age, in about five to ten years will enter the eligibility for those benefits and become part of the passive population. This is putting continuous pressure on the budgets, so that virtually every two or three years the budget is being forced into some kind of ad hoc solution to make it work for another two, three years. Hence, the 1993 reduction of benefits by 10%. Hence, the 1996 solution, which is necessary, to cut pensions by a simlar percentage. This continuous process of putting the budget under pressure will become evermore difficult to manage. Rather than going down to make room for more exports and growth, the underlying pressure from social transfers is for rising expenditures and deficits.
Q: But how can you convince middle-aged workers to jump away from the public dole?
A: Clearly, it's a complex political issue, but other countries have been at the same crucial point in their history, for example, Chile in 1981 and Uruguay very recently. It is important that the political leaders both in the government and the trade union, the political leaders of pensioners, understand that nobody in the country is served by a system that is blowing up like a balloon and eventually will burst. It's only a fiction that the present system will provide for adequate retirement 20-30 years down the road. Even pensions under the present system are subject to periodic interference - look at the ad hoc solutions the government was forced to implement for 1993 and 1996. That's why I say a "pay-as-you-go" system - taking from one part of the population to give to another - probably is not politically sustainable. "Pay-as-you-go" pension systems throughout the world are in trouble. Half the population is conspiring against the government to minimize contributions and the other half of the population conspiring to increase benefits. Inevitably, the system will get into trouble. It doesn't serve those who contribute or those who receive, because it's subject to political maneuvering, cutbacks and ad hoc solutions. The "pay-as-you-go" has to be cut through in the middle, and you have to create a basically funded system. A large part of the pensioners have to provide for themselves in funded and defined pension schemes, where eventual retirement income is related to one's contribution.
Q: How do you make the transfer into a new system?
A: You allow everybody to move to a funded pension system. The person who had 25 years of pension rights under the government you ask to go to a private pension fund. You give this person a bond, a state paper, that he can bring to his pension fund, that will say: "In 10 years I will pay a certain amount that corresponds to the 25 years of pension rights." Basically, you're grandfathering in the acquired pension amount. Of course, you can't tell the person retiring next year to take a hike. One part of the pension reform in Poland has to be a shift from the fully state-provided, undefined, "pay-as-you-go" pension system to one that relies much more on the individual foresight, on the private, defined system. This is where the pension reform is linked to the very necessary increase of the private savings rate. Countries have done it before with great success, with big debates, with huge social concerns. Of course, these solutions have to be tightly regulated and very tightly supervised. We're not dealing with just a private market, but a public good, which is the pension rights of individuals.
The second aspect is that you need to narrow the entitlements. The range of benefits under the current system in Poland is a tremendous cost. The average retirement age is 55 and probably has to increase to make the pension system sustainable under demographic trends. Disability benefits have placed too much emphasis on damage to health and too little on inability to work. I'm quite optimistic here. The public debate has progressed quite fast to an extent that I'm seeing quite some recognition on a general level, including trade unions. One of the biggest aspects of success in Chile has been the enormous increase in private savings that came from this change in the pension system, the enormous increase in funds available for investment and, therefore, growth of the economy. So all of this hangs together. As I said, pension reform is not just about pensions, it's about budgets, inflation, growth and investment.
