PRESS RELEASE
Speech of the Governor of the Bank of Albania, Mr. Ardian Fullani at the High Level Regional Policy Dialogue "Strengthening Domestic Anchors to Assist with Crisis Exit Strategies", Washington D.C., April 23, 2010

Dear participants,

It is a great pleasure to come back in Washington and continue our dialogue. Previous meetings confirmed and clarified the value of building up stronger domestic fiscal anchors. In my discussion I hope to show the extent to which domestic and foreign anchors are related, and that capacity building needs to be considered for foreign anchors too. It is even more interesting that the issues discussed today are at the very heart of the problem, not only in economies of the region but also for the entire world economy. I believe that this is the best way to serve the anchoring policies.

The points we discuss today are not different from what Blanchard and co-authors (2010) talk about recently in the perspective of developed economies. Capacity building in the area of policy coordination is becoming increasingly important because fiscal policy implications are imposing serious threats on other policies, especially on monetary policy.

One of the lessons we have learned is that in any case fiscal policy does matter. Not only in the context of problem making but also in the context of problem solving. Recent developments did in fact show that under certain circumstances, monetary policy might have limited room for maneuvers; therefore fiscal policy must take over. Yet when this taking over happens, the situation can get very unstable as the budget and debt are getting larger.

Differently from the monetary policy which puts in place correction mechanism to eliminate collateral damage to final objective - fiscal policy leaves the economy with considerable debt at the end of the crisis.  Therefore the most imperative macro task today is to put the fiscal sector back in order.

What anchors can be used in this respect? A fiscal rule might be a solution.

A fiscal rule which ensures a long rung macro fiscal stability, is definitively a good domestic anchor. A fiscal rule does not imply a simple quantitative restriction. It is a dynamic and complex issue. It incorporates all other economic and social policies. It is developed and implemented in full compliance with objectives of other major economic and social policies of a given country.

This is to make sure that it fits with EU compliance under the stability and growth pact or any other political arrangements according to specific countries circumstances.

I would like to discuss the EU compliance and several related issues later as part of the discussion of external anchors, and rather focus here in another important issue: that of independent fiscal agencies, like a fiscal council. This discussion logically follows the arguments on the fiscal rule.

The core issue of the rule is to decide, to agree or to build a consensus on what is considered sustainable in the long run. The general proposal here in the form of policy coordination capacity building is to establish an independent agency that will, in fact, play the role of the referee between the fiscal agent and the other involved parties that share interests into or with fiscal policy.

Now before answering the question of whether we need these agencies let's explore the following issue:

To announce a new agency is like admitting a problem. What sort of problem? Was this a problem of behavior of the political system or a problem of institution and capacity building?

There is no easy answer to this question. It bears important implications for the nature of the therapy. Assuming that this is a problem of political behavior, establishing a new institution from the same political (democratic) system will not likely be a solution.

This is because the new institution will exhibit the same political behavior problem as the existing constitutional bodies. It is hard to believe that such institution can solve the adverse selection and moral hazard problems in fiscal policy. We all know that fiscal problems do not rest within specific institutions. Those are always product of the domestic political system.

Under such circumstances, new state agency will have the capacity to diminish the independence of the central bank. Therefore, if the solution to such behavioral problems is a new constitutional 'independent' agency then the solution has the potential to become worse than the problem itself.

It is worth mentioning the latest right wing victory in Hungary. If a clear majority will be confirmed what is going to happen with the Fiscal Council and its Policy? There is under big potential threats. The chair of the Council might be removed, their financial status might change or their salaries might be affected, and so on. It is not possible to equip the Council with the same central bank style of independence like financial independence, objective independence and tradition.

Need for capacity building

If the problem rests with institutions than there is need for capacity building, and probably institution building.

Our experience evidences to important shortcomings regarding fiscal rule, which indicate direction for reform and capacity building. This applies in the field of setting fiscal goals. The evidence points not only to technical inadequacies e.g. revenue elasticity, but also to a certain lack of prudence and realism in assessing risks and trade-offs. The rule is a ratio which measures the government behavior relative to GDP. Hence if one doesn't have a good, reliable and timely GDP figure it is almost impossible to have a useful fiscal rule. As it can be seen, the fiscal rule requires a tremendous push in policy and capacity building in statistics. Without a satisfactory level of transparency, integrity and devotion, the rule becomes a meaningless mathematical exercise.

Take the case of Greece: What could be a better example to illustrate this point?

Another key element has to do with the need for coordination amongst main policy decision makers. At this point I recall one of my answers to journalist: Isolation is loneliness.

This brings me to another issue: Independence versus isolation. The way Bank of Albania has approached the anchor issue, in particular after the IMF agreement ended, is be independent but do not isolate yourself? We have invited the minister of Finance along with his staff to participate at joint meetings where we share and discuss our views on economic developments and the arguments behind them. In fact these meetings have been a learning process for both sides, and I can firmly state that this was definitively capacity building in the policy coordination area.

Among others, another lesson we understood is that sometimes differences emerge not from policy objectives but predominantly from different opinions on current and expected economic developments statistics that in fact must have been readily available for policy analysis. It is hard to discuss the issue of capacity building and domestic anchors separately since they are so interrelated with each other. In my opinion I believe that best domestic anchor is a technician who is an independent thinker, proud of what she does, and who understands the consequences of her actions and results.

The real question is how to build such an anchor?

First is to educate, then to make her independent politically and financially, and then to educate further in those areas where her actions and results play an important role with immediate implications. On the other hand, capacity building is not a persons' issue; it is an institutions' issue; it is in fact a process invariant from the human being.

That is because capacities must be build in 'processes' and not in people in order to be long lasting.   From this point of view, every one can realize that institutions are part of the government payroll even under political influence. In fact much is said in regard to central bank independence but not much is said in regard to other independent agencies, for example statistical office. Good anchors are not supposed to be used only by institutions which relate their policy to the anchor. They must become a strong argument at the hand of the public to pressure government agencies to design and implement sustainable policies. This brings me to the point that the public itself must be able to understand and use the anchor. Thus there is need for capacity building in our societies beyond institutions.

Let me illustrate the point with a funny but sad story from my own experience. After one public speech on TV a friend of mine called me to congratulate. He told me every single world was properly placed. Even my wife, who is a medical doctor, did understand everything - he told me. However, at the end she asked him to explain what does GDP mean' His answer was: Mathematics was never one of my strongest skills.

Capacity building and the role of the foreign anchors

In the developed Europe there are natural poles where researchers converge naturally to discuss such issues from the critical point of view.  Forums like policy think tanks or universities whose respected opinions play an important role in public perception in the context of credibility of public institutions.

The real question is why such institutions are not as strong in our economies as they are in EU?

In this regard I strongly believe that European values can play a decisive role, by strengthening and supporting the establishment of reputable institutions where the critique can develop independently of political process and political objectives.

From a general prospective the support of EU policies have targeted political process and consolidation of government institutions. In the mean time our societies are evolving fast in several other important ways and dimensions, which so far are not part of European convergence initiatives. Just to give few examples, I would like to mention the fast extension of universities, academic programs and academic institutions.

These examples are in fact the natural poles that are supposed to establish, shape and strengthen domestic anchors, as discussed above. Neglecting the process of capacity building is the same as to neglect the creation of important domestic anchors.

In other words, all those institutions which are capable to bring together groups of individuals and philosophies which regardless of their professions, ideas, interests, political and social affiliation, will be able to stage the critique for unsustainable fiscal policies.

With regard to other issues like Economic Fiscal Program (EFP) and Precessions Economic Program (PEP), I have expressed my views in the significant contribution of both programs. However I believe that EU can play a bigger role as a foreign anchor. EU guideline refers to the budget or debt situation at any point in time. Therefore if it is a conditional criteria current policies under normal circumstances must leave room for emergency fiscal intervention that does not break the limit. The recent crises show that EFP and PEP-s are somehow rigid and might not perform well under stressed economic conditions. Some of the key goals would be to develop more reliable baseline and risk scenarios for the economy and public finances; and create adequate fiscal space to deal with adverse shocks. Therefore it will be advisory that EU requires that all aspiring countries of the region to have functional IMF agreement during the entire road to EU accession.

This is not only to check but also to guaranty immediate intervention in case of crisis; and better integrating structural reforms including adoption of the acquis communitares. It will be to optimistic to expect that aspiring economies of the region can resist as long as Greece while EU considers the options. After all under current legal arrangements EU does not have or assume any responsibility for solution of potential crisis in our countries. In this respect, EU alone is hard pressed as a foreign policy anchor and surveillance institution along with the other political, legal and intuitional role.

While this more or less summarizes in general my opinion (expressed last year), I would like to add few notes on this discussion. The most important aspect of these two arrangements is that they are unique for all countries and therefore do not account for country specific needs or situations.

The fiscal rules that we are discussing today might and need to be different for different countries, tailored to country specific needs, based on individual economic needs and priorities in structural reforms.

In fact all, such specific needs, have received detailed attention under IMF programs. Structural benchmarks of these programs have played a similar role as fiscal rules, however they have been different across countries and across periods. In this respect they have allowed for temporary adjustments without compromising long run sustainability of macro fiscal balances. Our countries have also gained substantial experience in negotiation and execution of such agreements. In the absence of these agreements or arrangements, the countries can not make use of this accumulated experience, simply that the counterpart in the new arrangement does not follow the same setup as the IMF.

Therefore it might be a responsible and wise choice for all aspiring countries including new members, during the EU integration process until full economic convergence is achieved, the macro fiscal framework should be designed, and implemented under a three party agreement respectively the Country, European Commission and IMF.

I believe this will be beneficiary on both sides: EU and the country. They both will gain the experience of the IMF in the area of policy harmonization, capacity building and implementation of economic policies.

Although now most countries in the region qualify for 'emerging market economies', we need to keep in mind that, economically wise the threshold between transition and emerging market is very thin. Advancement to 'emerging market economies' carries greater responsibilities and more vulnerability. Getting out of transition does not mean the end of economic troubles, nor does it automatically provide confidence in the markets.

As such, I believe that these countries are not yet capable of pursuing aggressive economic and financial policies entirely on their own without relying on international expertise. Such expertise would provide additional guarantee for markets. That will bring greater confidence, higher FDI-s, a faster convergence, and of course sustainable economic growth.      

Dear participants, this initiative proved to be useful and I take this opportunity to thank Centre for Excellence in Finance for their contribution. I am confident that Centre for Excellence in Finance has helped a lot to flag and prioritize capacity building efforts in the region. Several methods or approaches to capacity building need to be explored in the future; and I see CEF as an active leading agency. At the end I would like to conclude by considering the experience sharing, more diagnostic workshops, focused technical assistance, learning networks and the enhancement of human resource skills as complements not as alternatives.

Thank you for your attention.