For more information, see Japan and the IMF
at the Second Meeting of the International Monetary and Financial Committee
September 24, 2000
In April of this year, the International Monetary and Financial Committee (IMFC) held its first meeting after the Board of Governors decided at the Annual Meeting last autumn that the Interim Committee should be transformed into a permanent body to be known as the IMFC. I am very pleased that this second meeting of the IMFC is taking place against a background of continuing vigorous world economic growth.
I applaud the fact that Mr. Horst Köhler since taking up his position as Managing Director in May of this year has actively addressed the issue of strengthening the international financial architecture, including reform of the IMF. We expect that he will work in close cooperation with member countries and exercise leadership in addressing the important challenges that lie ahead. Japan will give full support to his endeavors.
II. World Economic Outlook
a. World Economy
The world economy continues to enjoy vigorous growth. Robust growth in the United States has been leading the growth of the world economy, and this has been supported by economic expansion in Europe and Japan's recovery from recession. The world economy is expected to achieve its highest growth in the past decade.
The U.S. economy has seen productivity growth brought about by information technology and the longest-ever economic expansion supported by buoyant domestic demand, with low rates of both unemployment and inflation--a combination that nobody could have imagined before. The labor market continues to be tight, and there is still a risk that this may lead to higher inflation. While the Federal Reserve has taken several steps to tighten its monetary policy, the U.S. authorities need to continue their prudent management of economic policy in order to ensure a soft landing.
The economy of the euro area is expanding, led mainly by external demand. The increasing inflationary pressures brought about by the recent hike in oil prices and the depreciation of the euro are a matter of concern, however. I believe the authorities will need to continue sound macroeconomic policies in both the fiscal and monetary areas as well as to promote structural reforms in areas such as the labor market in order to ensure robust growth without inflation.
Most East Asian countries received a severe blow in 1998 from the currency and financial crisis, but almost all of them have recovered markedly, achieving positive growth in 1999 and continuing on this course in 2000. Challenges for the future include more sustainable macroeconomic policies and transition to exchange rate regimes and capital flow mechanisms that are consistent with those policies.
Ten years have passed since the transition countries began to move to a market economy. Their experiences so far demonstrate the importance of maintaining institutional infrastructure such as governance and the rule of law in order to firmly establish the principles of a market economy and promote economic development. We have also learned the lesson that gradual reform is effective.
An especially noteworthy and welcome trend in this favorable world economy is the emergence of fields like information technology, which are expected to accelerate growth and trigger a new phase of economic development through increases in productivity.
The recent volatile movement in crude oil prices may have undesirable effects on the growth of the world economy. I think the stabilization of oil prices is an indispensable condition for the continued growth. Given the rising world demand, we call for appropriate increases in supplies and other necessary measures to promote long-term price stability as this is in the mutual interest of consumers and producers.
b. The Japanese Economy
The Japanese economy continues to improve gradually, thanks to various policy measures. There have been some encouraging signs of recovery in the corporate sector. In addition, we have recently witnessed some increases in overtime hours worked and in the number of job offers. Reflecting these developments, the IMF has revised the Japanese growth forecast upward from 0.9 percent, the figure predicted in spring, to 1.4 percent. The supportive macroeconomic policy will be continued to put the economy on a self-sustaining recovery track led by private demand, which is expected to take over the leading role currently played by public demand. As for fiscal policy, the Prime Minister has instructed the government to formulate an economic policy package. Accordingly, the cabinet will propose a supplementary budget to the current session of the Diet. On the monetary policy front, we intend to continue the current accommodative policy stance.
III. Strengthening the International Financial Architecture
The international community has engaged in a series of efforts aimed at strengthening the international financial architecture. As host of the Kyushu-Okinawa Summit this July, Japan also contributed to the reform efforts of the international community by compiling the Finance Ministers' report on Strengthening the International Financial Architecture. At the IMF, in addition to the establishment of this Committee, I welcome the progress that has been made by the Executive Board on various agenda items.
a. The Key Principles for Reform of the IMF
The rate of change in the international financial environment is intensifying, and the role of international capital markets, especially in meeting the funding needs of developing and emerging market countries, has increased in importance. Against this background, a review of the role and functioning of the IMF is essential in order for the institution to continue to perform a central role in the international financial system into the twenty-first century and to cope with the changes in the international financial environment. In particular, it is vital that the IMF maintain and strengthen its function as a kind of international lender of last resort in crises caused by temporary shortages of liquidity. We should also note, however, that it is still important that the IMF continue to perform its traditional cooperative function, supporting the efforts toward structural reform of member countries with balance of payments difficulties, even in the absence of a crisis.
We believe the following principles are important in the advancement of IMF reform:
(i) The IMF is a universal institution that represents the entire world, and it must be transparent and accountable to its members as well as to the public.
(ii) In performing its central role in promoting macroeconomic and financial stability, the IMF should work in closer cooperation with relevant international institutions such as the World Bank.
(iii) The IMF should concentrate its resources in fields where it has comparative advantage and should make clear the priority that it gives to its various activities.
I look forward to substantial progress in reform of the following areas: transparency, accountability, and governance of the IMF; review of quota shares, voting power, and the number of Executive Directors; surveillance; the implementation of international codes and standards; streamlining of the IMF facilities; and private sector involvement in crisis prevention and resolution.
The statement of the Managing Director to this Committee on progress in strengthening the architecture of the international financial system and reform of the IMF also highlights major principles that Japan considers of great importance, such as strengthening the focus and ordering the priorities of IMF operations and cooperating with the World Bank. Japan hopes that further improvement of the functions of the IMF will be made in the new century. Japan welcomes and fully supports the Managing Director's leadership to this end.
b. Strengthening the Transparency, Accountability, and Governance of the IMF
In order to enhance its transparency and accountability, the IMF has started to publish its staff papers. I am pleased to note that the pilot project for voluntary release of Article IV Reports has been well received and that a consensus has been achieved on continuing their publication and broadening the scope of papers subject to voluntary publication. We should move forward with these efforts to strengthen the IMF's accountability. I endorse the proposed systematic review of the IMF's publication policy.
The involvement of the Executive Board in the process leading to the formulation of country programs should be further enhanced. The Board should be briefed at an early stage on important and sensitive cases.
I welcome the agreement that has been reached to establish a permanent independent evaluation office within the IMF. It is important to establish such an office as soon as possible in order to enhance the legitimacy of the IMF's activities. It should be made clear that the evaluation office is accountable to the Executive Board, and the office should report on its activities regularly to this Committee.
In the interest of further clarification of the IMF's role as an international institution representing the entire world, I greatly appreciate that the Executive Board submitted a report to this Committee that the Working Group to Review the Process for Selection of the Managing Director had started reviewing the process for the nomination, selection, and appointment of the Managing Director and discussing possible improvements to the selection process. I look forward to further work by the Working Group including proposals that will contribute to further strengthening the transparency of the IMF.
Regarding the relationship between the IMF and its member countries, we should immediately examine and review what the IMF's lending conditionality should be in light of the need to strengthen the ownership of member countries. Conditionality should be limited to areas where the IMF has comparative advantage, such as macroeconomic policies, capital flows, structural issues related to macroeconomic stability, and exchange rate regimes. Although conditionality plays a very important role in facilitating policy efforts of member countries and in strengthening safeguards for IMF resources, Japan believes that overly detailed conditions and criteria that are beyond the control of member countries' governments are inappropriate, and that conditionalities should be set up to reflect the institutional capabilities of individual countries.
c. Review of Quotas Shares, Voting Power, and the Number of Executive Directors
Almost fifty-five years have passed since the establishment of the Bretton Woods Institutions. The rapid development and economic success of Asian economies during this period have brought about dramatic changes in the relative importance of various regions in the world economy. Looking at the Asian economies' share of total world GDP, we see that while it was a mere 10 percent in the early 1950s, by the second half of the 1990s it had climbed to 25 percent.
In considering the issues of enhancing the IMF's transparency and improving its governance and accountability, we cannot avoid reviewing the allocation of quota shares, voting power, and representation on the Executive Board to more appropriately reflect changes in the world economy. While emerging market economies have increased their importance in the world economy, their quota share, voting power, and number of Executive Directors have remained limited. An immediate review and correction is essential.
In this connection, I welcome the ongoing effort in the IMF to review the quota formulas so that they better reflect changes in the world economy. However, changing the formulas is not sufficient. We need to reconsider the convention in past general quota increases that gave more weight to the component that is distributed according to the existing quota than to the component that is based on the quota formulas. This convention has seriously slowed the adjustment necessary to bring quota shares in line with economic realities.
With regard to voting power, the 250 basic votes allocated to each member country has not been changed since the original Articles of Agreement came into effect in 1945. As a result of a number of increases in quotas, the ratio of basic votes to overall votes has decreased dramatically so that it is now only 2 percent compared to about 10 percent in 1945. In light of this situation, I think it is worth considering increasing the voting power of countries with small quota shares by raising the number of basic votes.
I believe we also have to reconsider the current situation in which one region is over-represented on the Executive Board. I believe the time has come to reconsider the regional distribution of the elective Executive Directors, giving due consideration to inter-regional balance to better reflect economic realities.
I believe an immediate review of quota allocation, voting power, and Board representation to reflect the changes in the relative importance of member countries' economies is urgently needed to further enhance the IMF's effectiveness and governance, to increase the transparency of its activities and decision-making procedures, and to strengthen the cooperative relationship among member countries. In light of the urgency of this matter, I strongly urge establishment of the Committee of the Whole to consider the Twelfth General Review.
d. Strengthening Surveillance and the Implementation of International Codes and Standards
Strong surveillance by the IMF is vital for strengthening the world economy and the international financial architecture. We need to review the nature and scope of IMF surveillance, taking into account the advance of globalization, the large-scale private capital flows, and the emerging framework of internationally agreed codes and standards. IMF surveillance should be focused on the following four core areas: macroeconomic policy, capital flows, structural issues related to macroeconomic stability such as financial sector issues, and exchange rate regimes in member countries.
In order to promote the implementation of internationally agreed codes and standards, it is essential that the IMF, in close cooperation with other international financial institutions, take a leading role in the coordination of standards assessment in broad areas. One way to do this would be to establish a coordination unit within the IMF to coordinate codes and standards set by these institutions.
In this context, I welcome the IMF's ongoing work in this area through the Reports on the Observance of Standards and Codes (ROSCs) as well as the Financial Sector Assessment Programs (FSAP), and look forward to consideration of the modalities for voluntary publication of Financial System Stability Assessment (FSSA) reports.
To prevent the occurrence of financial crises and secure the stability of international monetary and financial systems, in addition to enhancing IMF surveillance, capacity building in developing countries is necessary in order to enable them to conduct sound economic policies, including macroeconomic policies and banking supervision policies. For this purpose, it is essential for developing countries to show strong ownership in implementing these policies. Of course, there need to be effective systems of policymaking and implementation in developing countries. For this purpose, Japan is willing to give more active support to the IMF's technical assistance to developing countries.
e. Reform of the IMF's facilities
Against the background of globalization and the increasing importance of private capital markets, the IMF facilities must be continuously reviewed in order to provide appropriate support to member countries. In addition to the elimination of unused facilities agreed this spring, I welcome the recent developments in the review of facilities with respect to the following points.
- Regarding the Stand-by Arrangement and Extended Fund Facility (EFF), it was agreed to introduce repurchase expectations and an access-based graduated rate of charge to discourage unduly long and large use of IMF resources.
- For the Contingent Credit Line to be more effective, it was agreed to reduce the commitment fee and the rate of charge and to make disbursement more automatic.
- For arrangements under the EFF, it was agreed that they should be granted only in cases where a member country's balance of payments difficulties are expected to be long-lasting.
Related to facilities reform, it is important for the IMF to enhance its capacity to monitor the performance of member countries while funds are outstanding, in order to ensure that those countries receiving IMF resources maintain strong policies and avoid returning to the IMF for financial support. On this point, I welcome the progress of the discussion within the IMF on issues such as the introduction of a presumption that countries that meet certain criteria would engage in post-program monitoring.
f. Ensuring Private Sector Involvement
It is widely acknowledged that private sector involvement (PSI) must be ensured in the prevention and resolution of financial crises, and key principles of PSI have already been laid out. Now it is essential that further efforts be made to examine how these principles should be operated.
We believe on one hand that it is necessary to further improve the transparency and predictability of the PSI process. On the other hand, constructive ambiguity is also important to the PSI operation, and we believe it is necessary to maintain enough flexibility to address diverse crises. Accordingly, we look forward to developing an operational framework and more concrete operational guidelines that will be useful for future crises, and adjusting those guidelines as we gain further experience with crises.
In recent discussions in the IMF, it has been acknowledged that PSI, including voluntary PSI, should be sought whenever the IMF provides lending. It has also been agreed that staff reports on IMF programs will detail how PSI will be secured. I welcome these developments as first steps toward improvement of PSI. I also welcome the fact that agreement was almost reached on cases when "concerted" PSI is necessary.
As the private sector has pointed out, it is essential for crisis prevention to promote dialogue among all concerned parties, including private sector creditors. I believe that the newly created Capital Markets Consultative Group would be an effective means of making progress on this problem.
The relationship between PSI and official bilateral debt is an exceedingly difficult problem with respect to such matters as comparability. In particular, I believe that the fact that the relationship between the examination of PSI by the IMF and of debt reduction by the Paris Club in each crisis is unclear provides important issues for future discussion. I strongly hope there will be dialogue on these issues between the staffs of the IMF and the Paris Club.
In order to secure effective PSI, the possible use of measures to impose standstills by debtor countries, if necessary, is under consideration, and we look forward to further examination on this topic.
IV. The enhanced HIPC Initiative
Regarding debt relief measures for the heavily indebted poor countries (HIPCs), ten countries so far have reached their decision points under the enhanced HIPC Initiative. The international community must take further steps toward speedy and effective implementation of the Initiative in order to expeditiously set up a virtuous cycle of poverty reduction and economic development in HIPCs. The IMF, together with the World Bank, should make full use of the Joint Implementation Committee established this May and redouble its efforts toward speedy and effective implementation of the Initiative. Japan has committed to extending 100 percent debt reduction on commercial claims, and, as the largest ODA donor among creditor countries, 100 percent debt reduction of its ODA claims.
Japan has pledged up to US$ 200 million to the HIPC Trust Fund, part of which has already been disbursed. It is crucial that countries that have already pledged to contribute to the HIPC Trust Fund make their contributions in a timely manner in view of the increase in the number of HIPC countries reaching their decision points.
In addition, HIPCs themselves need to more actively tackle their economic reforms and develop poverty reduction strategies that will ensure the participation of all parties concerned, including civil society as well as bilateral donors.