I am honored to be here to share with you the IMF’s thoughts on the turbulent events of the past two years and what lies ahead. With growing signs that the worst of the financial crisis is over, we now have an opportunity to reflect on the weaknesses revealed and remedies needed. But that does not mean that we can afford to be complacent. We are being given a chance to right the wrongs, and delay would only sow the seeds of the next crisis.
Our globalized world offers many benefits, including the chance to quicken the pace of investment, job creation, and growth—something many developing countries, especially in East Asia, know quite well, because they have benefited greatly from their openness over the past few decades, with impressive economic growth and an enviable record on poverty reduction. And recent events, although they represent a setback—with very high social costs—do not undo that achievement.
But there are also many countries, particularly the poorest ones, that have not yet been able to benefit from globalization, and this is unacceptable! The international community and the countries themselves must redouble efforts—and urgently—to ensure more universal participation in the globalized world economy. This will entail creating a conducive economic setting, at the global and country level, and putting in the needed safeguards to minimize the risks of volatile capital flows and contagion. But before I go into the specifics, a few words on the economic environment in which we will be operating.
A Snapshot of the World Economic Environment
What sort of world economy is there likely to be at the dawn of the new millennium? Is the cup half empty, or is it half full? We at the IMF would vote for half full, although this is no time to put away the saucer. After last year’s slowdown, the IMF sees world growth bottoming out around 2¼ percent this year before a partial recovery to about 3½ percent next year. Such an outcome implies a more moderate and short-lived slowdown than the three previous episodes of global economic weakness since 1970. It also represents a significant achievement given the concerns about global recession risks that prevailed only a few months ago. Much of the credit goes to prompt policy responses in the crisis countries—as well as those threatened by contagion—and to timely moves to ease monetary policy in the major industrial countries. Moreover, timely and targeted policy advice and financial support from the IMF and other international agencies played an important role.
How about developing countries? They have reason to hope that they can resume their relatively strong rates of economic growth soon. Many Asian economies are showing clear signs of a nascent recovery. The spillovers from Brazil’s financial crisis to markets elsewhere in Latin America have generally been moderate, and Brazil itself appears to be recovering faster than was widely expected. Investor sentiment toward the emerging markets is improving. Africa is ready to build on its markedly better performance of recent years. And global inflation remains subdued.
Moreover, despite a sharp slowdown in the growth of world trade in 1998 and the fall in commodity prices, there are virtually no signs of a generalized resort to protectionism. It is also striking that, with very few exceptions, countries have responded to the crisis by deepening their commitment to outward-looking policies and market-oriented reforms.
But there are several downside risks in the outlook. As regards the engines of the world economy, there is uncertainty whether the United States, after almost a decade of rapid growth, can achieve a “soft landing.” There is uncertainty whether Europe can breathe new vigor into its flagging economic expansion. And there is uncertainty whether Japan can soon achieve its long-awaited recovery. Moreover, the uneven pattern of growth among the large currency areas since the early 1990s has resulted in a marked widening of current account imbalances—in turn, raising the risk of increased protectionist pressures or destabilizing movements in exchange rates.
At the same time, the emerging market economies are not completely out of the woods yet. Brazil must persevere with its economic reforms. Russia needs to lift the cloud of uncertainty that is hanging over it once again. And substantial challenges remain in Asia, where further progress with structural reform is needed to ensure sustainable recovery. We cannot rule out the possibility that setbacks in one or two key emerging market countries could trigger further financial market instability.
Yet if this should happen, are countries powerless? Can they take steps to make themselves less vulnerable to contagion? I believe they can. A recent IMF study (World Economic Outlook. April 1999) shows that the circumstances of countries that experienced foreign exchange market pressures during the major crises in the 1990s differed from those that did not. Those hit usually exhibited pre-crisis weakness in economic fundamentals, especially in their external positions and banking system vulnerability. Spillovers associated with trade linkages also played a role in some cases.
In other words, domestic economic policies play a central role not only in preventing crises but also in reducing vulnerability to contagion. This underscores the old virtues: pursuing fiscal and monetary discipline, avoiding large external imbalances and overvalued exchange rates, and addressing financial sector weaknesses and excessive short-term foreign borrowing—that is, making macroeconomic stability a top priority; otherwise, little else matters.
But here I would like to note that we are increasingly realizing just how important it is that sound macroeconomic policies are supported by transparency and accountability. Developing countries must persevere with their efforts to promote good governance and ensure respect for human rights. I am pleased to note that throughout Africa, political systems are gradually being liberalized, and a popular consensus is building for the establishment of more democratic systems. This means that checks and balances are being strengthened, creating a more secure environment for private sector activities to flourish.
Mutually Reinforcing Policies
Another lesson we have learned from the recent crises is the importance of mutually reinforcing policies at the country and global level. After all, if one hand doesn’t know what the other is doing, it is unlikely that the desired outcome will be achieved. Sadly, there is far too much of the two hands not being coordinated—when it comes to trade policy, aid policy, and postconflict policy—and this has to end or we will never integrate all the developing countries, especially the least developed countries (LDCs), into the global economic system.
At this stage, an increasing number of LDCs face better growth prospects, thanks to improvements in policy implementation. But many still risk becoming further marginalized, which is worrisome given the well-recognized link between open trade regimes, economic efficiency, and growth. Thus, we must guard against reverting to the inward-looking policies of the 1960s that served countries so poorly.
The LDCs should latch onto trade as an engine for growth. They should also go to great lengths to attract private capital flows—especially the productive, longer-term flows—which, for the developing world, tend to be concentrated in a limited range of sectors in the relatively more advanced countries. Renewed efforts in these directions are essential to avoid an excessive dependence on official development assistance, which has fallen to a historic low for all developing countries—a trend that must be reversed!
For these reasons, the marginalization of the LDCs warrants exceptional treatment. Now here is where both hands must work together! If we are serious about development, the more outward-oriented policies of these countries must be met by greater openness around the world. The industrial countries in particular could help greatly by opening up their markets in which these countries have the greatest comparative advantage, such as agricultural products, textiles, and clothing. And they should grant across-the-board, dutyfree access for all exports of the LDCs—as former World Trade Organization Director-General Ruggiero has proposed.
What can the IMF do to help developing countries’ reform efforts? Besides putting the Enhanced Structural Adjustment Facility (ESAF)—our concessional lending window—on a self-sustained footing, and providing technical assistance, policy advice, and training, we are undertaking two special initiatives, one aimed at the poorest heavily indebted nations and the other at countries trying to rebuild after political turmoil, civil unrest, or armed conflict.
First, the IMF is working closely with the World Bank to provide more debt relief to a broader range of Heavily Indebted Poor Countries—by enlarging the so-called HIPC Initiative. We have heard the calls for faster, deeper, and broader debt relief, and are working hard, together with the World Bank, to strengthen the Initiative. We aim to agree on an enhanced Initiative this year, guided by the G-7 Summit in Cologne this month, and by the Annual Meetings of the IMF and World Bank this fall.
But however the Initiative is strengthened, more generous debt relief must go hand-in-hand with incentives that encourage countries to adopt strong programs of adjustment and reform, provide additional resources for greater investment in education and health that can contribute to poverty alleviation, and promise a clear exit from unsustainable debt burdens.
This is exactly what the IMF is trying to achieve under the ESAF—namely, high-quality growth, supporting sustainable development policies that will reduce poverty and improve living standards. To this end, we recognize the need for government and civil society ownership of ESAF-supported programs. And to this end, in turn, we recognize the need to better integrate social sector policies in these programs. This is why we are working more closely with our development partners to assess the poverty and social impact of these programs.
But let me go back to the right hand and left hand again for a moment. It makes no sense to offer debt relief to the poorest members of the international community while at the same time denying them the opportunity to grow their way out of poverty. Debt relief must go hand-in-hand with trade reform, geared toward the exports of low-income countries.
Second, efforts by the international financial institutions to enhance postconflict assistance need to be placed in the broader context of enhanced efforts by the international community as a whole. The IMF’s Executive Board recently agreed on steps to improve the terms of postconflict assistance to our poorest members and, where appropriate, greater access to IMF resources over a longer period of time. We expect that many of the poor postconflict nations will eventually be able to avail themselves of the HIPC Initiative, including those with large and protracted arrears to the IMF. We are also mindful of the economic burdens and additional demands now being faced by the so-called frontline states in Central and Eastern Europe. And as we reach out to the refugees in the Balkans, let us not forget the large number of refugees in Africa. A coordinated effort is needed to assist in the orderly transition from situations of conflict to conditions conducive to economic security, stability, and growth.
Creating a Healthier Global Environment
As the LDCs and other developing countries better integrate themselves into the global financial system, it will become even more imperative that the international community create a healthier global economic system—what we often refer to as strengthening the international financial architecture. With this in mind, we have been debating in many forums new “rules of the road” to help governments and businesses navigate the global marketplace, along with measures to ensure that contagion is contained and the social costs limited. These initiatives will change the very way that governments, banks, and enterprises promote economic development. They will also help ensure that developing countries benefit from globalization by reducing the risk of crises and enabling countries to better adjust when crises do occur, for they will.
So where does the international community stand on these efforts? In four of six major areas of activity, significant progress has been made: practices are changing, policies are being implemented, or broad agreement exists on how to go forward. Let me mention these briefly.
First, improving transparency and raising standards are at the heart of the changes. And here we have, in fact, come the furthest. The IMF has strengthened its data dissemination standards, especially on international reserves and external debt; it is encouraging members to adhere to the code of good practices on fiscal transparency that was adopted last year; it is working with other agencies to finalize a similar code for transparency in monetary and financial policies; and we have moved swiftly to increase the IMF’s own transparency.
We now look to developed and developing countries to adopt these standards, and where possible, to do even better than the minimum. For a lack of transparency has figured in all the recent crises, and it has been a pernicious feature of the “crony capitalism” that has plagued most of the crisis countries and many more besides.
Second, on the financial sector, the IMF and the World Bank are working closely to promote stronger financial systems, drawing in part on the internationally accepted Basle Core Principles. We look to all countries to align national practice with these principles, and we are stepping up our own efforts to assist them. In addition, the recently established Financial Stability Forum will make an important contribution as a vehicle for strengthening cooperation among agencies and expert groups with responsibilities for financial regulation and oversight. We support the efforts of the Forum to find ways to involve national authorities from countries outside the G-7.
Third, on social policies, the IMF has taken an increasingly active stance on social safety nets, the composition of public expenditures, and the equity aspects of economic policies over the past decade. Toward this end, we will continue to work closely with the World Bank and other UN agencies. We look to them to take the lead in helping developing countries better adapt social sector mechanisms to absorb the impact of the changes in factor markets that occur in a dynamic market economy and globalized markets.
Fourth, on IMF financial assistance, the newly established Contingent Credit Lines signal a fundamental change in the way the IMF operates, moving us from a reactive to a preventive mode. This facility will enable countries that are basically sound and well managed to put in place precautionary financing should their access to capital markets be threatened by contagion.
In two other principal areas of activity, the debate has clearly advanced, but a number of important issues remain to be resolved.
First, on capital account liberalization, we do not advocate a blind rush into lifting controls. As the Asian crises brought home, countries need to liberalize in an orderly, properly sequenced manner. We look to all countries to ensure that capital account liberalization is supported by a consistent macroeconomic framework and strengthened domestic financial systems—for only then will financial intermediaries and other market participants be able to manage risk.
Second, on involving the private sector in forestalling and resolving crises, clearly the most complex area, considerable headway has been made but many difficult and contentious issues remain. We need to find a way to stop creditors from rushing for the exits when crisis strikes, and even trickier, to encourage them to act in a way that permits a more orderly process of adjustment for the country involved. To facilitate this search, we look to all countries to maintain effective communication with private capital markets, establish or strengthen high-frequency monitoring systems, and adhere to sound principles of debt management.
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In closing, I would just like to emphasize that we are fortunate to now have a calmer economic constellation that permits us to press forward with our efforts to better integrate all countries into the global economic system. We must seize this opportunity to ensure that we have a healthy economic environment in which all countries can prosper and grow in the new millennium.