Let me begin with some thoughts on the global recovery and how to sustain it. Over the last year, the recovery has become increasingly well established. Global GDP growth this year is expected to be the highest in nearly three decades. In financial markets, the start of the transition to higher interest rates has been successfully managed by most countries. In short, the world economy has mounted a vigorous recovery from the slowdown of 2001. This is a remarkable performance in the face of the shocks experienced in the past few years. Looking ahead, there is much for our members to do to sustain the global recovery, and, therefore, there is much for the IMF to do to nudge them in the right direction.
Sustaining the global recovery
First, policymakers need to monitor carefully—and be prepared to address—the near-term effects of higher oil prices on their economies. To date, in many of our member countries, the impact of higher oil prices on output and inflation appears moderate. But a high oil bill places an especially heavy burden on the poorest countries, in part by reducing their ability to finance other much-needed imports.
Second, the challenge of maintaining an orderly transition to higher interest rates has not ended. The move to a neutral monetary policy stance should be continued through timely actions by central banks. Of course, the desirable pace and timing of monetary tightening vary among countries, depending on their cyclical situations and the extent to which oil prices are contributing to inflationary pressures.
Third, we also need to continue policy actions to have an orderly adjustment of current account imbalances. This is a global problem and the solution requires efforts by many countries. What is now needed is for U.S. fiscal policy to carry out a more ambitious deficit reduction over the medium term. European countries should use the recovery to implement structural reforms. Greater exchange rate flexibility in emerging Asia will serve both multilateral and national needs. In addition to reducing global imbalances, it would help countries in the region to better withstand external shocks.
Strengthening medium-term growth
We should also use this time of cyclical recovery to address structural challenges to continued global growth. First, there is a need to strengthen fiscal positions over the medium term, which will help developed and developing countries deal with the pressures from aging populations.
Second, we need energy policies that can bring about a better balance between energy supplies and demands. This balance can be achieved through changes in the structure of taxation, other policies to boost energy efficiency, and policies to encourage more innovation in alternative sources of energy, as well as investment in capacity expansion. In many oil-producing countries, there is a need to save windfall revenues. Increased transparency about the use of revenues from natural resource sectors is much needed, too.
Third, Doha Round negotiations are central to sustained growth. While recent framework agreements contain welcome commitments to reduce agricultural subsidies as part of an eventual settlement, they also leave many loose ends to be tied in other areas. A stepped-up political commitment is needed so that all countries can continue to benefit from a multilateral trading system.
Keeping the IMF effective
Promoting global financial stability. Surveillance is being sharpened to help countries adopt policies that will deliver sustained economic growth. A number of initiatives are also under way so that surveillance can provide early warnings of problems and hence serve as a better tool for crisis prevention. But to be effective, IMF surveillance must also prompt early action. There is room for improvement here.
First, a prerequisite for effective surveillance is that our analysis and arguments should be convincing and expressed candidly. We should not shy away from pointing out problems with countries’ economic policies to their policymakers and to the international community. Making markets and the public aware of problems can prompt early action and strengthen the incentives for the adoption of good policies.
Second, country surveillance must be based upon a clear understanding of the specific circumstances of each country as well as the linkages across economies implied by financial integration. This requires that we intensify our firm surveillance of systemically important countries and of global capital markets.
Third, we must continue with the intensive health checkups of financial sectors conducted through the Financial Sector Assessment Program. In a world of contagion, a clean bill of health for a country’s financial sector is good news not only for the country itself but for its trading and financial partners too.
But however good our surveillance is, crises will not disappear, and the IMF will be called upon to help mitigate their impact. That said, we also need an IMF that can say “No.” The prospect of the IMF declining to provide financial support would strengthen the incentives to implement sound policies, thus avoiding the need for IMF support in the first place.
Assisting in the global war on poverty. Promoting financial stability through better crisis prevention and resolution is one aspect of the IMF’s work. No less important is our work in low-income countries. National ownership remains the foundation of successful poverty reduction strategies. A homegrown initiative such as the New Partnership for Africa’s Development is a very positive example. It acknowledges the responsibility of developing countries themselves to implement sound economic policies and strengthen governance and institutions.
We have seen encouraging results where such stability has been complemented by structural reforms and by targeting public spending to areas of greatest benefits to people. Where such improvements in policymaking are evident, developed nations should fulfill their end of the bargain by liberalizing trade and delivering aid. They should improve access to their markets for developing countries’ exports and dismantle trade-distorting subsidies. There must also be increased aid, not just for the countries under the HIPC [Heavily Indebted Poor Countries] Initiative but for others as well.
Managing the IMF. Keeping the IMF effective will also require changes in its management practices. In addition to the work on the strategic direction of the IMF, we are working to ensure that the IMF is managed in a way that meets the highest standards of efficiency and financial integrity. This includes adopting a medium-term budget framework and conducting a review of the IMF’s financial structure.
Voice and participation. We must continue to find ways to guarantee that the voices of all our member governments are heard. Many members want deeper progress on issues of voice and participation that would take into account changes happening in the world. But changes in quota and voting shares will require a political consensus among our members that is not yet evident.