2002 Annual Meetings of the IMF and the World Bank Group
September 28, 2002
Documents Related to September 28, 2002 IMFC Meeting
France and the IMF
Statement by Mr. Francis Mer
Minister of the Economy, Finance and Industry, France
International Monetary and Financial Committee
Washington, D.C., September 28, 2002
Uncertainties have increased since our last meeting. Instability surrounding financial markets is a threat to economic recovery. We must act together to remedy the situation. It underscores the need for common rules and for strengthening international cooperation, which alone can provide sustainable solutions to the problems that arise with globalisation.
My colleague, Thor Pedersen, the President of the Ecofin Council, spoke on behalf of the European Union, setting out an ambitious and balanced vision of the various issues that will be discussed at the IMFC meeting. I fully share his analysis and would like to emphasize the following points.
1. We are facing major short-term uncertainties and unresolved structural issues need to be tackled ambitiously
In addition to geopolitical uncertainties, the world economy has experienced several negative shocks. A confidence shock occurred as inflated stock prices declined, doubts loomed about the truthfulness of corporate accounts, overall risk aversion increased and oil prices rose. These threats are still with us and the uncertainty that they create is holding back the start of a virtuous cycle of faster world growth. Therefore, we need to act together to make a coordinated response.
Volatility on capital markets is a major cause for concern. Recent business failures have shaken confidence in the reliability of financial information, which is one of the foundations of the market system. This means that the issue is indeed a structural one. The international community has not stood idly by and I welcome the FSF's work programme. One key objective is to coordinate the work done by the leading international organisations involved and to ensure that domestic or regional reforms are consistent with international programmes. Finding effective and sustainable responses to these events calls for a multi-faceted approach. Three particularly pressing reforms call for a comprehensive approach: convergence of accounting standards on best practices; regulation of auditors; and separation of audit and consulting businesses. I also think that there is a pressing need for international discussions on rating agencies.
The United States quickly took strong measures to allay market fears. These measures promote global convergence on the international standards, which have already proven to be very effective in many respects. Europe could also be affected by similar problems, but European initiatives currently under way highlight Europe's responsiveness and ambition. The financial security bill soon to be discussed by France's Parliament is aimed at improving market regulations in an international context of greater harmonisation.
Oil prices are still a risk factor and a cause of uncertainty. Current oil prices are not in line with fundamentals and could have a negative impact on world growth through their inflationary impact. Even though this impact might be limited, given the current economic environment, it would still erode consumers' purchasing power and it is bound to make companies more reluctant to invest. It is important to ensure the appropriate levels of prices on the oil market, that are compatible with the economic situation of both the producing and consuming countries, and particularly the poorest ones. The international community must therefore be ready to respond when prices exceed certain upper, and lower, limits. There should be cooperation and dialogue among producers and consumers on this subject.
The international context naturally calls for caution, even though a recovery, albeit a slow recovery, is under way. Our interest lies in a prompt resumption of stronger growth in all economies and in a solution to structural imbalances under satisfactory conditions.
The United States enjoyed stronger-than-expected growth at the start of the year, which is good news for the world economy. Yet, there is still a great deal of uncertainty. In addition to worries about short-term developments, and investments in particular, given the slide in capacity utilisation rates as well as consumption while consumer confidence falters, there are structural problems in the United States, characterised by a weak savings rate and worsening external imbalances. This situation is a real problem because financing the deficit drains off a large share of world savings. It also carries the risk of a sudden correction, particularly in circumstances where the American economy could lose some of its former attraction for foreign investors. In this respect, the downward revision of productivity growth in America's national accounts, along with the fact that the main beneficiaries of this growth were employees and not shareholders, raises questions about the sustainability of the direction taken by the American economy at the end of the nineteen-nineties, which rested on the assumption that return on equity would increase rapidly. The situation in Japan, with a weak financial sector and massive accumulated government debt, is still a cause for concern.
Under these circumstances, growth in the euro area was slack at the beginning of 2002. With no internal or external imbalances, the conditions are adapted to sustained economic recovery, but then again, there are major uncertainties about developments in the short term. Positive factors, such as falling long-term interest rates and inflation rates, should boost domestic demand. The economic policy framework established in the euro area, with credible monetary policy and mechanisms to attenuate short-term shocks means that automatic stabilisers will continue to work in most countries. France has done better than its leading partners, as household consumption has remained firm. Disinflation and tax cuts should help to sustain consumption in France. Looking beyond short-term developments, France's potential growth should increase : structural reforms will contribute to this increase. This is the purpose of continuing labour market reforms, such as reducing the cost of unskilled labour, extending youth employment schemes to the private sector and reviewing the 35-hour workweek provisions. Other measures, including tax cuts, are aimed at making our economy more vigorous.
With regard to the situation in emerging countries, and more particularly in Latin America, which is the primary cause for concern at present, I naturally welcome the agreement signed between the IMF and Brazil. This agreement, along with the measures taken by the Brazilian authorities to lend greater credibility to the programme, have stabilised markets. Naturally, we should follow developments in this situation with the greatest attention. I also welcome the nascent stabilisation seen in Uruguay after intervention by the international community at the end of July. I urge the Argentine authorities and the IMF to make every effort to reach an ambitious agreement that can provide the right macroeconomic environment for medium-term economic stabilisation and recovery. This will require efforts from both sides. Legal stability and security, which are critical for a smooth-running modern economy, also need to be established. We also need to give more attention to the effects that these crises have on the most vulnerable population groups and their often-irreversible social impact. Discussions with the IMF and the World Bank on these issues have made great progress in the poorest countries. Recent crises have taught us that such approaches now need to be used in the large emerging countries.
2. We need to achieve results soon in our current discussions on preventing and resolving financial crises
Progress has been made on the proposals put forward by the IMF Management for a new mechanism for restructuring sovereign debt. This discussion is essential to achieve a better international regulation. We should make progress on both tracks of the "two-track" approach (contractual and statutory) adopted in the spring since each track actually reinforces the other. Yet there are still many unanswered questions. It is hardly surprising that work on such important issues takes time. However, it is critical to maintain momentum and I strongly support continuing the work undertaken on the statutory track of the approach. This is necessary, since it ensures effective coordination among creditors. I am glad to see that a growing number of members are supporting this innovation promoted by IMF management and staff.
I welcome the prospect of concrete progress on the contractual approach achieved through the work of the G10 on models for collective action clauses in sovereign bond contracts. We expect strong involvement by market participants in this project. This calls for a strategy to promote wider use of such clauses. The European Union countries have committed themselves to this process by pledging to include such clauses in their bonds issued under foreign jurisdictions. Industrialised countries can and should promote the use of such clauses by setting an example in this way. In doing so, they will also make it easier to determine whether collective action clauses have any real impact on spreads.
In order to produce maximum benefits, the new structures for preventing and resolving crises must use all of the available IMF instruments, with closer monitoring and tighter discipline surrounding the use of exceptional amounts of IMF resources.
Ultimately, this work needs to be seen in the context of discussions on long-term financing for emerging countries. Theses countries need access to international capital, but opening up their capital accounts will only produce long-term advantages if it is orderly and gradual so as to limit the risks inherent in such reforms. The IMF has made progress towards a more balanced approach to these issues. I welcome this progress. We need to carry this forward and come up with more operational recommendations based on the following pillars: interaction between trade liberalisation and financial liberalisation; sustainability of foreign exchange regimes; managing the risks arising from business and banking balance sheet mismatch due to excessive foreign currency-denominated liabilities; and measures to promote a local currency debt market.
The push for greater transparency in the international financial system in the wake of September 11 has already produced substantial results. This effort must be maintained with the work at the FSF and IMF to enhance transparency in offshore financial centres and the work within the OECD on harmful tax competition. The efforts made by the Executive Boards of the IMF and the World Bank in mobilising forces to fight money laundering and terrorist financing in conjunction with FATF have been a great success. Now we have to put them into practice.
3. The IMF is a key player in mobilising resources to promote development and it should act in accordance with the decisions made in Monterrey and Johannesburg
In Doha, in Dakar, in Monterrey and in Johannesburg, the international community has mobilised in recent months to intensify its action to reduce poverty and promote sustainable development.
The new round of multilateral trade talks that was launched in Doha confirms the priority placed on development. The Monterrey Conference and the Johannesburg Summit underlines the importance of greater integration of developing countries in world trade and the priority that this should be given in the poorest countries.
The European Union has made considerable efforts to promote developing countries' exports. More than 40% of the EU's imports now come from developing countries and it buys two-thirds of Africa's exports. Its generalised system of preferences is one of the most generous in the world and its "Everything but Arms" initiative adopted last year makes a key contribution to the poorest countries. If all industrialised countries were to adopt this initiative, it would create a powerful leverage effect for poor countries' exports.
However, opening up markets is clearly not the only way that trade can play its full role in boosting economic development. The poor integration of many developing countries in world trade flows is also largely due to internal factors, such as inadequate infrastructure, high transport costs, poor governance and conflicts, not to mention the gloomy short-term outlook, and the volatility of commodity prices in particular.
I would back continued analysis and support from the IMF and the World Bank for these issues, while making sure to maintain a comprehensive approach to the trade-and-development problem. The IMF must also make proposals for concrete support, more specifically for managing the transitory negative effects of opening up markets. The Poverty Reduction and Growth Facility must play a strong role, which means it is critical to ensure that the facility is maintained.
Unsustainable debt service has been a key obstacle to development in too many cases. The HIPC initiative provides substantial support in terms of debt reduction and increasing social expenditure, even though it is a measure for exceptional cases. However, I think that its implementation is not moving ahead as quickly as we would like. But speeding up implementation of the initiative should not result in sacrificing the quality of the economic programmes, nor should it alter the need to treat all of the countries concerned equitably.
As the G8 Heads of State declared at the Kananaskis Summit, we must also provide the financing needed for the success of the initiative. France ranks first amongst creditor countries in terms of forgiving bilateral debt. It now intends to play its full part in financing debt forgiveness organised by multilateral institutions.
I would also like to see efforts continued to involve all creditors, in keeping with the universal scope of the HIPC initiative. The lawsuits that vulture funds have initiated against HIPCs are very disturbing in this respect.
Turmoil in international economy and development issues highlight the importance of international cooperation and joint action. The IMF plays a major role in these efforts. It has been subject to some fierce criticism. The Fund's legitimacy rests on our collective ability to listen to this criticism and to respond to it by making constant improvements in the way the institution works. Our primary ambition is to strengthen the governance of the IMF, which calls for a reinforced political legitimacy. This Committee must play its full role in asserting this legitimacy.