What we have witnessed during the last few years—the most severe economic crisis of the last 50 years, unconvincing progress in fighting poverty in the world, and war undermining the prospects for development in Africa and elsewhere—has reminded us of the fragility of the progress accomplished and the magnitude of the challenges we face as we approach the millennium.
Overcoming and avoiding crisis
The global economy has just passed through a perilous period. Less than a year ago, a worldwide recession was a distinct possibility, and many observers had jumped to the conclusion that our forms of cooperation were ineffective and that the process of globalization, which had brought such clear benefits to many economies, was fundamentally flawed and should be reversed. None of these predictions has come to pass. Although growth rates are still below the long-term averages, and performance has not been evenly distributed, the global economy has quickly overcome the risk of recession. And despite the still difficult external situation faced by many countries, almost universally the governments of the world have resisted the temptations of retreating behind protectionist barriers, restricting capital movements, and drifting into financial isolation.
This outcome owes a lot to the courageous policy action of many countries. A major contribution to the cause of long-term global stability and progress has come from the efforts of the emerging markets in Asia and Latin America to adopt reforms right away. They have shown that resolute policy implementation, with appropriate international support, does prevail. Their experience offers hope to other countries that remain in difficult circumstances or may face challenges in the future. We in the IMF have been proud to be with these countries in their search for solutions for these unprecedented crises, and we are most encouraged by the bright prospects they have helped to create.
But the cost of this crisis remains enormous, giving us a terrifying illustration of the risks that accompany the opportunities of the new century. What lessons should we draw from it for all countries?
• Excellence in macroeconomic policy is a must in international markets where complacency is an invitation to speculation; firmness goes hand in hand with flexibility.
• The health of the corporate and financial sectors must be kept under much stronger surveillance once crisis has struck, and a comprehensive strategy of strengthening and/or restructuring must be put in place without delay.
• Exchange rate regimes and the conduct of exchange rate policy have to be adapted to the economic fundamentals.
• Transparency and governance must be seen as essential components of sustainability of policies.
• Countries must act—before crisis strikes—to set up social safety nets adapted to the needs of vulnerable groups and to implement social policies consistent with a country’s values and culture.
• Only participatory decision-making systems can guarantee durable popular support for in-depth reform. A program of economic stabilization or reform will not work unless it is effectively “owned” by the authorities of the country.
These six lessons tell us why the countries in Asia are beginning to emerge from crisis, with strong prospects for the future. But it must also be recognized that the crisis was not entirely of their own making. Significant, too, were poor investment decisions by external creditors and the deficiencies in international monitoring and supervision that allowed exposure to risk to accumulate to the extent that it threatened global financial stability. That is why the international community has been intensively debating how to strengthen the architecture of the international monetary and financial system. Avoidance of crises, or at least the reduction of their frequency or intensity, hinges on the success of those efforts.
Struggle against poverty
The fight against poverty has two dimensions—the national and the international. Ultimately, the key to generating employment, alleviating poverty, and narrowing gender differences is high-quality growth. And the most indispensable ingredient in promoting growth is investment: investment in countries’ human resources, especially education, health, infrastructure, and investment—especially private investment—to promote productive activity. How can the level of private investment be raised? Here, the six lessons of the recent crisis are applicable, with particular emphasis on a stable macroeconomic foundation. Practical, institutional policies can also be adopted to improve access to opportunity for households—especially women—to promote their investment. A leading example is micro credit and financing.
Another essential foundation of the environment for investment is respect for the rule of law and a judicial system that enforces property rights and honors contracts.
Trade liberalization offers another far-reaching contribution. Individual countries can take a leaf from the book of many countries in Asia and Latin America that have achieved accelerated growth through outwardly oriented economic policies, including progressive trade liberalization. The international community can also make a major contribution. The industrial countries could open their economies to all exports of the poorest countries, not only encouraging existing primary commodity exports, but—more important for long-term growth—creating the potential for new, more diversified, export production.
This brings us to the international dimension of the fight against poverty. It starts with an effort to optimize the macroeconomic policies of industrial countries so as to bring their growth to full potential and to generate the external demand indispensable for developing countries. Beyond that, the recent renewed emphasis on social issues in international forums provides a golden opportunity to press forward with a major offensive on poverty alleviation.
Three tangible elements comprise an enabling international environment for poverty alleviation and investment in human resources. The first is debt relief. The poorest countries cannot face a globalized world unless the millstone of unsustainable debt is removed from around their necks. We in the IMF see with immense satisfaction that a broader part of the Heavily Indebted Poor Countries (HIPC) Initiative we launched in 1996, with the World Bank, is now endorsed by the Group of Eight. The Cologne Initiative [see IMF Survey, July 5, page 214] is a major step forward, and I hope that the necessary actions can be taken well before the end of this year to bring the proposal to fruition, including the financing.
The significance of the revised HIPC Initiative is reflected in its estimated cost, now projected to more than double. To meet this cost, we will make the best use of the resources at our disposal, and we are ready, if agreement is reached among our membership, to play our part, including through use of our gold, as we first proposed three years ago.
The second element is also part of the Cologne Initiative—namely, the establishment of a tighter link between debt relief and social spending, especially for education and health. This link can help make structural adjustment programs much more effective in setting the priority of human investment and development.
The third element should be the most straightforward. To accelerate the alleviation of poverty, a supplement of official development assistance (ODA) is necessary. But here let us stop lamenting our failure to reach our pledge of devoting 0.7 percent of industrial GNP to ODA by the year 2000. Of course, we must reverse this deplorable trend, but we should also remember the pledges that both industrial and developing countries have adopted at past ECOSOC conferences in the 1990s. They include a commitment not only to reduce extreme poverty by half but also to achieve universal primary education, reduce infant and child mortality by two-thirds and maternal mortality by three-fourths, achieve universal access to reproductive health service, and ensure that current trends in the loss of environmental resources are reversed—all by the year 2015. And they include this essential precondition for the durable empowerment of women: elimination of gender disparity in primary and secondary education by 2005. Taken together, and steadily implemented, they could lead to a formidable change for the better for all the poorest people of the world.
As human beings and as heads of institutions striving for improving economic conditions around the world, we cannot accept the fact that time and again the efforts of so many countries and the world community for economic progress are annihilated by new armed conflicts with all their consequences of human suffering, and destruction of property, jobs, and opportunities. I believe the global community has a sacred duty to address this issue.
I dare to raise this sensitive matter, which is much more your business as diplomats than mine as the head of a financial institution, because it is not purely a political issue but an economic and social one too: excessive military expenditure diverts resources from human development. It is tragic that military conflicts in many of the poorest corners of the world are creating new pressures for increased military spending. Accordingly, as you certainly recognize that the sale of military equipment, beyond what can reasonably be justified, severely undermines peace and development, I propose we revisit four suggestions:
• We should adopt agreements that would restrain sales of military equipment in sensitive regions well in advance of any open belligerence.
• We should pledge to banish any export credit for military purposes, as a means to reduce debt accumulated for unproductive purposes.
• African nations—indeed, poor nations everywhere—should accept the recommendations made by the Secretary General one year ago to reduce military expenditure to 1.5 percent of GDP and to maintain zero growth of defense budgets for the next decade.
• We should interdict the smuggling of raw materials and natural resources used to finance armed insurgency in many African countries.
Speaking from my own limited experience, for high-quality growth, for employment and work, for poverty eradication, for empowerment and advancement of women, and for education and opportunities for a better life for the children of the world, remember: peace is a must.