The need for better balance in the global economy was a prominent theme in the speeches of both IMF Managing Director Horst Köhler and World Bank President James Wolfensohn to the Boards of Governors of the two institutions at their Annual Meetings. Köhler spoke of the risks posed by global payments imbalances, and also of the need for long-term social and political balance and of the importance of social equity. Wolfensohn emphasized the importance of redressing the imbalances between developed and developing countries, and rich and poor.
Köhler focused on challenges facing the world economy. He referred to the increasing signs of recovery. But he cautioned against complacency and noted that the setback in the Doha Round trade talks in Cancún had not contributed to global confidence. He warned that “achieving a balanced recovery and return to sound and sustained global growth requires broadening our focus from the short-term requirements to the serious underlying problems that many of our economies continue to face.”
Köhler noted a number of risks that continue to jeopardize global growth and international financial stability, including large global current account imbalances and high public debt in many countries. For example, Europe and Japan, which face looming pressures from aging populations, must take immediate steps to place their public finances on a sound medium-term footing. He observed that, in several emerging market economies where reserve accumulation has been rapid and current account surpluses are large, greater exchange rate flexibility would be helpful both domestically and globally. Finally, he said, while the sharp swing in public finances in the United States has provided economic stimulus to the global economy during this period of economic weakness, “we now look to the United States to establish a credible framework for a return to a balanced fiscal position over the cycle”
In his opening address, Wolfensohn drew attention to the imbalances in income, spending, and population between the world’s rich and poor, noting that “too few control too much, and too many have too little to hope for.” Rich countries, for example, spend $56 billion a year on development assistance, but $300 billion on agricultural subsidies and $600 billion for defense. Poor countries themselves spend $200 billion on defense, more than they spend on education. He described the Millennium Development Goals, which world leaders agreed upon three years ago, as remarkable. These goals have become the basis for a bargain between developing and industrial countries. Developing countries have pledged to improve their policies, and they have made progress, Wolfensohn said. But they need to implement more reforms, in particular to tackle cronyism and corruption.
For their part, developed countries have agreed to support developing countries’ efforts by enhancing capacity building, increasing aid, and opening their markets to trade. They, too, have made progress, Wolfensohn said, but not enough. Debt relief is insufficient, and aid today is at its lowest level ever. Moreover, two-thirds of the world’s poor people depend on agriculture for their livelihood. In Cancún, he observed, the developing countries signaled their determination to push for a new equilibrium and a new set of priorities but saw the rich countries putting forward proposals that did not respond to their central demands in this crucial area.
The breakdown of the Cancún trade talks, according to Köhler, must be a wake-up call for the international community. “We all know that trade is the most powerful force for global growth and poverty alleviation” he said, emphasizing that success would depend on the leadership of the major industrial countries. He agreed with Wolfensohn that more financing for development was needed to reach the Millennium Development Goals, and he reminded advanced countries that they need to live up to their commitments.
But Köhler also noted that some progress had been made in the fight against poverty. “I look forward to further close cooperation with Jim Wolfensohn and the World Bank, which must have the lead role in our joint work on low-income countries” The heads of the two institutions recognized that more cooperation was essential, both to achieve stronger worldwide growth and to change the world for the better.