The failure to reach agreement at Cancún on the next steps in the Doha Round of World Trade Organization (WTO) trade negotiations was widely deplored at the Annual Meetings. Many officials and other participants warned that delays in liberalizing trade rules and reducing trade-distorting subsidies and other practices harmed everyone, developing countries most of all. World Bank Chief Economist Nicholas Stern quoted Bank estimates that developing countries could gain up to $350 billion in additional income from trade by 2015 if the Doha Round succeeded.
United Arab Emirates—a regional role model
The seminar “Economic Policy, Investment Opportunities, and Regulations in the United Arab Emirates” (U.A.E.) spotlighted the economy of the country that hosted the Annual Meetings.
The U.A.E. economy has performed robustly in recent years, according to Mohammed Khalfan Bin Khirbash, U.A.E. Minister of State for Finance and Industry. Over the past decade, GDP has increased 5.8 percent a year, on average, while inflation has been kept low. Even more impressive, and in line with the policy of diversifying the U.A.E.s economic base, non-oil GDP—mainly manufacturing, finance, and tourism—has grown at an average annual rate of 8 percent for the past 10 years and now accounts for two-thirds of total GDP. The soundness of the U.A.E. financial sector, Khirbash noted, has recently been confirmed by official and private international agencies.
Drawing attention to the countrys political stability and security, he observed that many different nationalities live in harmony within its borders. Khirbash added that the U.A.E. is committed to accountability and inclusiveness—hallmarks of good governance—and has recently adopted performance–based budgeting. It has also introduced an electronic project providing real-time access to government information. In short, the U.A.E. is now clearly recognized as “a safe place to invest” and is well on its way toward “becoming a global business center and a regional role model.”
In an overview of bank regulation and supervision, U.A.E. Central Bank Governor Sultan Bin Nasser Al Suwaidi explained that the central bank has supervisory and regulatory authority over all types of financial institutions. He reviewed capital ratios, disclosure requirements, and examination procedures set by the central bank and noted that a Financial Sector Assessment Program report by the IMF and the World Bank last year had commended the country for its strong banking supervision and sound regulatory framework. He added that the U.A.E. was taking strong measures to prevent money laundering and the financing of terrorism and was the first country in the region to regulate informal money transfer systems (hawala).
Mohamed Ali Alabbar, Dubais Director General for Economic Development, surprised the large seminar audience by announcing that a business can now be started in just three hours in any of Dubais four free zones, where regulations and licensing paperwork have been cut to a bare minimum, 100 percent foreign ownership is permitted, and income and capital may be repatriated freely. As a result, foreign investment in Dubai has grown rapidly in information technology, telecommunications, media, finance, and transport.
In the ensuing discussion, Khirbash was asked what the U.A.E. had hoped to achieve by hosting the IMF–World Bank Annual Meetings. He replied that it wanted to send a positive message to the world about international cooperation, especially following the collapse of trade talks in Cancún.
Stern and fellow panelists Eduardo Perez Motta (Mexico’s Ambassador to the WTO), Francisco Thompson-Flores (WTO’s Deputy Director General), and Rashid S. Kaukab (Coordinator of the South Center’s Work Program on Trade and Development) agreed that the negotiations had been complicated by the broadening of the agenda and the wide differences of view remaining on the eve of the talks. But Thompson-Flores emphasized that substantial progress had been made in negotiations on agricultural, nonagricultural, and development-related trade issues. According to the panel, the talks broke down primarily because of disagreements about whether and how to include the so-called Singapore issues (investment, competition, trade facilitation, and government procurement policies affecting trade). However, Kaukab noted that the negotiation process itself had also become a sticking point for many developing countries.
Will governments be able to muster the political will to put the negotiations back on track? This question, according to the panelists, will be on everyone’s mind. Motta urged four steps for the near term: avoid finger pointing about Cancún, call on the major players to demonstrate leadership and political commitment on the main issues, avoid trade actions that could increase tensions, and discuss the decision-making process.
Hope for the MDGs?
Developing countries were the focus of the seminar “Getting Serious About Meeting the Millennium Development Goals.” The panelists were Luísa Dias Diogo (Minister of Planning and Finance, Mozambique), Ahmed Mohammed Sofan (Deputy Prime Minster and Minister of Planning and International Cooperation, Republic of Yemen), Kubat Abdul-daevich Kanimetov (Head, Economic Policy Unit, Kyrgyz Republic), and Evelyn Hefkens (United Nations Secretary General’s Executive Coordinator for the MDG campaign).
Low-income countries need more grant aid in short term
What is the role of the IMF in low-income member countries? A September 20 seminar moderated by Timothy Geithner, Director of the IMF’s Policy Development and Review Department, presented the views of Mark Plant, Advisor in the Policy Development and Review Department; M. Saifur Rahman, Minister for Finance and Planning, Bangladesh; and Ulan Sarbanov, Chair of the National Bank of the Kyrgyz Republic.
Low-income countries must adopt policies conducive to growth and poverty reduction to improve their prospects of realizing the Millennium Development Goals (MDGs). But they will also need to receive much more help from their development partners—both technical assistance and aid, with a larger proportion of grants. How can the IMF help most effectively, given that it is not primarily a development institution and has neither the capacity nor the mandate to contribute to the long-term flows of resources needed to meet the MDGs? Plant argued that the IMF could help countries establish macroeconomic stability as the foundation for sustained growth and deal with shocks.
In this context, he said, a number of questions must be addressed. How can IMF-supported programs promote sustained, faster growth and poverty reduction? In what areas does the IMF need to coordinate more closely with other development partners? How can the IMF support private sector development? Are the IMF’s facilities adequate to provide financial support and advice to low-income members? And, finally, what role should the IMF play in cushioning the impact of shocks on low-income countries?
Plant also highlighted several principles that would help guide the debate. Clearly, he said, the IMF will remain engaged with low-income countries over the long term by embracing the poverty reduction strategy paper (PRSP) process as the framework for helping countries achieve the MDGs. Although more aid is desirable, countries need to rely on private sources of financing in the long term. The IMF must also work with industrial countries to ensure that their policies especially in trade and agriculture—will improve low-income countries’ growth prospects. It will focus on its core areas of competence macroeconomic and financial policies—and provide policy advice through surveillance, financial assistance through programs supported by the Poverty Reduction and Growth Facility (PRGF), and technical assistance.
The discussants welcomed the IMF’s attention to the issues. Rahman argued that getting effective advice from the Bretton Woods institutions would require greater coordination between the World Bank and the IMF. Too often, he said, countries are left to sort out contradictory prescriptions; instead, the two institutions should ensure that their advice and programs fit together. Rahman also argued that the IMF’s increased emphasis on country ownership of policies should be matched by greater flexibility on its part, particularly in the timing of implementing policies, given that so many policy changes are highly political and thus need time to take effect. Countries should also be engaged much earlier in formulating policies. Rahman stressed, too, that private flows would come only after developing countries acquired the right enabling environment.
Sarbanov argued that the IMF also needed to pay attention to issues outside its core areas. For example, if a country has a large public sector, the IMF must look not only at tax policy but also at the energy sector or the financial sector if that is where, in fact, macroeconomic problems are rooted.
In the subsequent discussion, one participant argued that it would be better to concentrate on income distribution rather than growth. Others called for closer links between PRGF–supported programs and PRSPs to ensure that the conditions of the former did not hinder achieving the goals of the latter. It was also argued that there should be closer links between the PRGF calendar and the policy cycle of a country’s authorities. It is not possible to consult everyone, Rahman noted; governments are elected to represent citizens. Participants also questioned a number of aspects of IMF-supported policies, referring particularly to privatization, whose benefits, they argued, were not proved, and to what was described as a mechanistic approach to the formulation of stabilization programs. Other participants sought ways of getting IMF policy advice into low-income countries, including postconflict situations, without necessarily being tied to financial assistance.
The staff paper “The Role of the International Monetary Fund in Low-Income Member Countries,” has been posted on the IMF’s website, and public reaction is being invited. Please seehttp://www.imf.org/external/np/pdr/sustain/2003/072103.htm
Moderator Mamphela Ramphele (Managing Director, The World Bank Group) opened by recalling the strong commitments the international community had made in the Monterrey Consensus, the Doha Ministerial Declaration, the World Summit on Sustainable Development, and, more recently, the U.K. initiative to provide additional financing to help meet the MDGs. But she noted that all parties needed to work harder to ensure that these commitments were fully realized.
Communicating policy is as important as making it
The role of public communication in the success of economic and financial policies, including reforms, was the subject of a seminar moderated by Kemal Dervis (Deputy for the Republican People’s Party, Turkish National Parliament). The panelists were Fawzi Al-Sultan (Secretary General, Higher Committee for Economic Development and Reform, Kuwait), Salam Fayyad (Minister of Finance, Palestinian Authority, West Bank and Gaza), Agustín Carstens (IMF Deputy Managing Director), and Gus O’Donnell (Permanent Secretary to the Treasury, United Kingdom).
Despite the speakers’ diverse backgrounds and experiences, all agreed that communication was crucial to the success of economic policies. Dervis recalled advice he had received during the 2001 Turkish crisis from Central Bank Governor Guillermo Ortiz of Mexico to spend “as much time on communicating policy as on making it.” O’Donnell said communication was the most seriously undervalued element of effective policymaking, while Carstens viewed information and communication policy as critical for the development of efficient markets and crisis prevention. Al-Sultan and Fayyad said that they relied on public communication to help them respond to, and build up, coalitions and constituencies in support of reform in Kuwait and the West Bank and Gaza, respectively.
Outlining the strategy and instruments used in the ongoing public awareness campaign in Kuwait, Al-Sultan stressed the importance of systematic research and opinion surveys and of benchmarks to measure progress and trends. Communication, he said, is a two-way street, and he cautioned against a prescriptive approach to communication if the goal was to create partnerships and broad ownership of reform. Success stories, however, should be shared and disseminated to bolster reform constituencies within the country.
Fayyad emphasized the interaction between the context and the content of policy communication. In his experience, for example, there was already a strong public awareness of a problem and of the need for reform. What was needed, he said, was a clear announcement of policy intentions that would allow performance to be measured against a well-understood reform strategy. In addition, restoration of confidence in the Palestinian context required not only transparency but also “optimal exposure.” In the past, Palestinian officials used to speak about all issues all the time, reducing rather than increasing confidence. His experience has confirmed that measured and well-timed exposure that focuses on delivery is more effective in reestablishing credibility.
Carstens focused on the importance of communication and information policies for the development, efficiency, and stability of financial markets. He recalled Mexico’s experience before and after the 1995 crisis and the shift in official culture from withholding information to providing markets with all the information they needed. As a result, spreads declined dramatically. The earlier attitude reflected a more general view shared by many in industrial countries. In 1983, for example, the central bank governors of Mexico, Belgium, and the United States jointly advised the Chinese monetary authorities to withhold information on foreign exchange reserves, in keeping with practice at that time. Dervis noted that, 15 or 20 years ago, the IMF itself had a secretive attitude. The change and openness that have taken place have been good for the IMF and its member countries. Carstens stressed how important it was that different officials and government agencies communicate consistent messages to markets.
According to the United Kingdom’s O’Donnell, the separation that often exists between government economists and officials in charge of communication is dangerous. He shared his experience as a government spokesperson following the return of the Labor Party in 1997 and outlined a number of ways to help restore credibility. Among these are the use of constrained discretion (for example, assigning monetary policy decisions to a technical nonpolitical body); reaching a clear understanding of the causes of a problem and communicating that to the public to increase support for the solution; and viewing presentation as an integral element of policy from the outset. O’Donnell also put forth the concept of “optimum transparency.” Sometimes, he said, insufficient accountability (such as when the monetary policy authority is not elected) requires a large offsetting level of transparency; at other times, the optimal level may be lower. However, credibility is absolutely critical.
Panelists were asked about the failure to communicate the global harm caused by trade protection. O’Donnell acknowledged the lack of progress in this area and the need for better communication about the benefits of comparative advantage and of redistribution mechanisms to make everyone better off. Recalling again the Mexican experience, Carstens noted that the mentality and sentiment toward trade liberalization changed dramatically as a result of active communication of the government’s economic vision to various stakeholders and interest groups. Dervis concluded by pointing to other noneconomic concerns that often complicate attitudes toward liberalization and reform. Whether well founded or not, he said, perceptions that liberalization and globalization will somehow weaken distinct cultures and lifestyles need to be factored into the articulation and communication of reform messages, particularly in the area of trade.
Discussing individual countries’ prospects for achieving the MDGs and the obstacles they faced, the panelists said that development indicators at the country level were improving but that more still needed to be done. Diogo said that Mozambique had integrated the MDGs into its policy reduction strategy paper (PRSP), known as the PARPA, and established a body to monitor its effectiveness with the assistance of the United Nations Development Program. Yemen’s PRSP is consistent with the objectives and policies of the MDGs, according to Sofan, and the government is continuously assessing the country’s poverty situation. Some of the main challenges facing these countries include reducing vulnerabilities; enhancing national capacity for policy analysis, monitoring, and evaluation; increasing ownership of policies; and improving aid practices.
To achieve the eighth Millennium Development Goal—establishing a global partnership for development—Hefkens exhorted the international community to address the following seven challenges, which she presented under the acronym GO DUTCH: (1) Global partnership for development. (2) Ownership; (3) Debt sustainability; (4) Untied external assistance; (5) Transfer of resources, including in the form of budget support; (6) Contingency mechanism to address external shocks; and (7) Harmonization of aid procedures. The MDGs are the right policy and the right priority and are achievable, she concluded. What is missing is the political will to do what is necessary.
Following the markets
Another seminar delved into issues facing emerging market economies, including their prospects for foreign direct investment (FDI). Nicholas Stern, who chaired the September 21 seminar on this topic, observed that FDI levels had been impressively stable despite some decline since the late 1990s. The growing share of investment into services in emerging markets, especially finance and telecommunications, is an important trend.
Gerd Häusler, IMF Counsellor and Director of the International Capital Markets Department, highlighted key findings from a survey of 50 major multinational companies. The best news is that companies are not withdrawing wholesale from emerging markets but are instead taking a long-term view of investment opportunities and paying more attention to risk factors. Financing of long-term investment is becoming more challenging, however, as banks’ appetite for project financing has waned. Companies are giving more importance in their decision making to the domestic markets of the countries seeking inward investment, as well as to a stable macroeconomic, political, and security environment and infrastructure, including a predictable legal and regulatory environment. Geographically, Asia remains the top destination for planned investments, with slower growth of investments likely in Latin America and limited interest in Africa, apart from South Africa.
Middle East and North Africa need to spur private sector development
Another seminar centered on the Middle East and North Africa (MENA) region discussed the role of financial sector reform in promoting private sector development and growth; it reviewed the results of a decade of financial sector reform in this region and highlighted the challenges ahead.
Shaukat Aziz (Minister of Finance and Economic Affairs, Pakistan) pointed out that the financial system is a catalyst for economic growth and highlighted the main pillars of financial sector reform: an autonomous and independent central bank with appropriate capacity; strong prudential regulation and the capacity to strictly enforce it, together with high-quality professional management of banks; market-oriented monetary management; a clear legal framework and an effective judiciary system to enforce the law; and private ownership of financial institutions and a level playing field for all, including foreign banks. Government should not be in the business of financial intermediation, he said, and privatization of public banks is an important component of financial sector reform.
Panelist Jean-Claude Bérthelemy (Professor of Economics, Université Paris I Panthéon Sorbonne) noted that after a decade of financial sector reform, a number of MENA economies still had inadequate financial services and performed poorly. Gradual financial reforms have yielded only modest results in terms of financial deepening and capital market development. These countries now need to achieve a critical mass of reforms: strengthening the protection of creditors’ rights; reducing restrictions to entry of foreign banks; fostering competition; and providing adequate information on individual debtors’ financial situation, including through the establishment of private credit bureaus.
Ibrahim Dabdoub (Chief Executive Officer, National Bank of Kuwait) pointed out that financial sector reforms were necessary but not sufficient to significantly spur private sector development in the region. Key impediments remain, notably the crowding out of private sector investment by the public sector, ownership of many private banks by a few individual groups, and directed credit to a few companies and industries owned by the same people. The financial system also had not channeled capital to productive investments, and macroeconomic and credit risks, coupled with limited competition, had kept the cost of credit relatively high. Financial sector reform should be part of a broader effort to create an attractive environment for private sector investment, Dabdoub said.
While agreeing with the other speakers, the moderator, Mohammad Al-Jasser (Vice Governor, Saudi Arabian Monetary Agency), stressed the need for strong bank regulation, corporate governance, and high standards of accounting and auditing. He also saw merit in a division of labor that would allow investment banks and the capital market to develop services that were not provided by commercial banks while being subject to separate supervisory authorities.
The audience raised a number of questions about the degree of regulation, the quality of bank auditing, and the independence of auditors. In response, the panelists stressed that deregulation did not mean abdication; an independent regulator could play a strong role in setting capital adequacy ratios, provisioning, and promoting high-quality management but should not be involved in controls on lending margins or allocation of credit, which should be left to banks and the markets to determine.
Aziz concluded by reiterating the importance of the pillars of reform. He also emphasized the importance of political will in carrying out effective financial sector reforms, together with efforts to inform and educate the boards of directors of financial institutions, in particular, and the public, in general.
The speakers who followed Häusler reinforced the messages from the survey. Francisco Luzón, Member of the Board and General Director for Latin America for Banco Santander Central Hispano, reviewed the Santander Group’s rapid expansion in Latin America in the 1990s, which he attributed largely to opportunities arising from liberalization and privatization in the region. Santander has had a good return on its investments over the past few years despite the region’s problems and will consolidate its presence in Latin America.
Peter Puf, Director of Economic Research for DaimlerChrysler AG, said that his firm has a 10-year horizon for investments and tends to “go where the markets are.” He added that suppliers often follow DaimlerChrysler abroad, investing in the same locations. Puf encouraged countries to pay close attention to ensuring fundamental macroeconomic stability and property rights (including allowing foreigners to hold majority ownership) and to reducing uncertainty about the legal and regulatory environment. Herman Mulder, Senior Executive Vice President of ABN-AMRO Bank, said that his bank takes a holistic approach to assessing risk that helps it avoid undue concentration on single factors. He suggested that a forward-looking perspective is needed that considers forms of investment (such as licensing and joint ventures) other than FDI.