Annual Meetings 2003
2003 Annual Meetings: News Releases, Speeches, Committee Papers, Documents and Background Information
Statements Given on the Occasion of the IMFC Meeting
September 21, 2003
Documents Related to the September 21, 2003 IMFC Meeting
Australia and the IMF
Federated States of Micronesia and the IMF
Kiribati and the IMF
Republic of Korea and the IMF
Republic of the Marshall Islands and the IMF
Mongolia and the IMF
New Zealand and the IMF
Philippines and the IMF
Republic of Palau and the IMF
Papua New Guinea and the IMF
Solomon Islands and the IMF
Seychelles and the IMF
Vanuatu and the IMF
Samoa and the IMF
Statement by The Hon. Peter Costello, M.P. Treasurer of Australia1
To the International Monetary and Financial Committee (IMFC) Meeting
Dubai, September 21, 2003
It has proved timely that this year's IMF/World Bank Annual Meetings are being held in the Middle East. It serves as a reminder of the importance of international efforts to ensure peace, stability and economic prosperity in this region, particularly in Iraq and Palestine, as well as in all parts of the world.
Globalisation has brought great benefits, but it has also brought responsibilities. There is a collective responsibility on all countries to not only ensure the maintenance of strong and stable economic growth, but also that the benefits of increased growth and rising living standards are shared by all. This should be central to the deliberations of the IMFC, including through the recognition that, in an increasingly inter-related world, the policies adopted by a country affects not only itself, but other countries.
We also need to be very mindful that the statements that are made at this meeting, and the communiqué that is issued, will be largely worthless unless they are supported by concrete policy action. Perhaps there is no clearer demonstration of this at present than the failure to make progress at Cancun, where all the positive rhetoric in the lead up was not matched by a willingness to deliver outcomes.
The Global Economic Outlook
The IMFC met last April at a time of particularly heightened uncertainty. The concern was over the consequences of the conflict in Iraq and the potential ramifications of the unexpected outbreak of SARS, coming at a time when the world economy was still showing no signs of strengthening. Global economic activity in the first half of 2003 was weak and this has had a significant impact on the members of this constituency.
The global economic outlook has brightened somewhat in recent months. Geopolitical tensions have eased, the SARS outbreak has been brought under control, and there are signs, particularly in financial markets, of a strengthening in global growth for the remainder of 2003 and 2004, assisted by very supportive policy settings in some countries.
We are encouraged that there has been some improvement in the outlook and that the risks are no longer so significantly on the downside as they appeared last April. Nevertheless, the signs of a recovery in the global economy are still tentative and it is appropriate that we focus on reducing the considerable vulnerabilities that exist so as to ensure that stronger growth does in fact eventuate and is sustained. If there is one thing that events in recent years have demonstrated, it is that a benign environment should not be assumed.
The experience of some countries, including that of a number of members of this constituency, is that the best defence against shocks and a weak global economic environment is the existence of dynamic and competitive internal markets, liberal trade and investment regimes and a sound macroeconomic framework with a clear medium-term orientation. Of course, to the extent that the major economies adopt such a policy framework, this would be the best insurance that strong, global economic growth will be sustained.
Global growth prospects remain centered on the outlook for the US economy, where there are some encouraging trends in recent economic data and stronger forward-looking indicators. Nevertheless, there remains much uncertainty in the outlook and it is of concern that the expected recovery in the global economy involves continuing growing economic imbalances, particularly rising US current account and budget deficits. Stronger growth in the US economy will benefit the rest of the world but, unfortunately given the continued uncertain outlook for the Euro area and Japan, the price of this stronger growth could be further increases in the already large current account imbalances. We remain concerned about the risk this poses for disorderly currency movements and rising protectionist pressures.
The policy messages that should come from this meeting are familiar. Given the still tentative global outlook, macroeconomic policies in the major economies need to remain broadly supportive. However, a credible fiscal framework aimed at restoring public finances to a sustainable position is essential for all the major economies, including in the US. Moreover, if the concerns over the continued reliance on the US economy are to be addressed in any meaningful fashion, then it is vital that the pace of financial and structural reform in the Euro area and Japan be reinvigorated.
The outlook for the Asian region is positive and it will remain the world's fastest growing region. China in particular has experienced sustained economic growth and, over the medium to longer term, should become an increasingly important driver of global growth, both through intra-regional trade and the development of a large consumer market. As in other countries, continued growth in the region will need to be underpinned by macroeconomic discipline and sound institutions and structural reforms. Consequently, acceleration of the pace of structural reforms will need to be the centerpiece of Asia's growth strategies.
As noted, these messages are not new and what counts is action rather than words. We should also not underestimate the confidence-boosting impact that would come from decisive policy action. In this respect, we are deeply disappointed with the progress of the Doha round of trade negotiations. The failure to make progress at Cancun was a major lost opportunity for all countries. A good outcome would have been of particular benefit to developing countries. It is unfortunate that the negotiations were conducted in a corrosive 'win-lose' atmosphere, when the reality is that all countries stood to gain from a successful outcome. We should reflect on the lessons from Cancun and redouble our efforts to progress the ambitious objectives of the Doha declaration.
In that regard, we would like to acknowledge the efforts by the Fund, and in particular the Managing Director and First Deputy Managing Director, to achieve a positive outcome for the Doha round.
Effectiveness of the Fund
The Role of the Fund
The agenda for the IMFC meeting covers the important issue of progress in crisis prevention and resolution, as well as Fund support for low-income countries. There are significant issues to be discussed under each item, but we should not compartmentalise these topics or get distracted by the detail. It is important that this Committee take a holistic view of the overall effectiveness of the Fund, its role in an ever-changing world, and the future challenges it may be facing. The IMF must evolve, as it has done so, but it must not lose sight of its basic mandate and objectives, for to do so will undermine its effectiveness.
The Fund has responded to the Asian financial crisis as well as the recent crisis in Latin America, by focusing on its crisis resolution and prevention activities. This has been appropriate, but the prime objective of the organisation must not develop, or be seen, as responding to and reducing the risk of crisis in emerging markets. The organisation has to be vigilant to addressing all risks to the stability of the international financial system. As noted previously, the main source of vulnerability to the world economic outlook at present stems from imbalances among the major economies.
The activities of the Independent Evaluation Office (IEO) are proving to be very valuable. The reports to date have been instructive and many important recommendations have been offered. The work of the IEO has understandably focused on specific topics, but what is also required is a high level assessment of the common themes that have been identified and the inter-relationship between the various IEO findings—such as the importance of the role of surveillance and questions over its effectiveness, along with the decision-making process within the organisation.
The Fund has significantly increased its activities in supporting the development of low-income countries. In that regard, the Fund has a comparative advantage in financing short-term stabilisation and in improving macroeconomic foundations as a necessary support for sustained growth. Yet for most low-income countries, a sustained effort is also required in building capacity and institutions that allow market economies to function effectively. It is important that the Fund's role complement the work of other agencies involved that have the mandate and expertise to address these issues. As such, we consider the work that is underway in reviewing the role of the Fund in low-income countries as being particularly important. The forthcoming IEO evaluation on the PRGF/PRSP process and technical assistance will make an important contribution. However, as previously noted, the focus should not stop at assessing the role of the Fund in low-income countries. There needs to be a regular stock-taking of the role and effectiveness of the Fund across all its activities to ensure it is meeting the objectives set by its members.
The implementation of the HIPC Initiative is a significant achievement to deal with the unsustainable debt burden of the poorest and most indebted countries. In some cases, it will be necessary to consider additional debt relief at the completion point. Decisions on top-ups, however, must be informed by robust debt sustainability analysis and should only be considered on a case-by-case basis where there is a fundamental change in the country's economic conditions due to exogenous circumstances.Surveillance
The importance of surveillance, and how critical it is to fulfilling the Fund's mandate, was a common theme coming from the IEO's evaluations on prolonged use, capital account crises, and fiscal adjustment in Fund programs. It is also central to the question of the long-term role of the Fund in low-income countries. We must not lose sight of the fact that surveillance has an important role to play for each and every country. Furthermore, the ultimate test of the effectiveness of surveillance is whether Fund advice makes a positive contribution to actions taken by those responsible for national economic policies.
If surveillance is to be effective, it has to be realised that its nature and scope should differ depending on the circumstances facing the country. In that regard, the Fund must be sensitive to the social and political context facing each country and, bearing that in mind, should move beyond simply giving advice on what needs to be done, to also assisting with the difficult task of implementing reforms. Central to this role is assisting governments in convincing the public and legislators that the reforms are necessary.
The Executive Board has a key role to play in assessing whether surveillance processes are working as effectively as possible and by suggesting what could be done to improve them. In particular, the Executive Board has to avoid excessively focusing on the detail of the country consultations at the expense of a more strategic oversight of the process. In that context, it would be appropriate to initiate a review of the role of the Executive Board including, in particular, its contribution to making surveillance as effective as possible.
The past year has seen a turnaround in the use of collective action clauses (CACs) in international sovereign bond issues governed by New York law, including by a member of this constituency, Korea. The work of the Fund in advancing the Sovereign Debt Restructuring Mechanism (SDRM) was central to achieving this progress on the use of CACs, along with initiatives to develop a voluntary Code of Conduct. While progress to date is encouraging, not all emerging market issuances since March 2003 contain CACs, and there is a large stock of sovereign debt without CACs. There is still much to be achieved and it is important for the Fund to continue to explore the potential contribution that aggregation provisions can make to the resolution of collective action and creditor coordination problems.
Representation and Quotas
Much has been made of the importance of ownership when it comes to Fund programs. Certainly no reform program can be imposed on a country. It has been recognised that policy development and implementation will only truly be effective if the country concerned takes ownership of the reform processes.
However, ownership is a two-way street. If the Fund is to be effective, all members must have a genuine sense of ownership in the organisation. Questions of governance and `voice' are being raised in the context of developing countries, and a number of practical steps have been taken to increase the resources of the African constituencies in the Fund and World Bank. We support these measures.
Nevertheless, concerns over governance and voice extend beyond those of the African countries. The legitimacy of the Fund as a representative international financial organisation is regularly questioned. This stems not only from imbalances in the distribution of quotas but, as mentioned, from an overly process-driven approach to surveillance and policy prescription that reflects a `G7' type perspective and takes insufficient account of the degree of economic advancement and the political, social and cultural circumstances of individual members. Moreover, as identified by the IEO, there have been shortcomings in the decision-making process in the Fund and the credibility of the organisation is undermined when individual program decisions are taken contrary to agreed policies.
Addressing these concerns is a major challenge confronting the Fund. At its heart is the difficult issue of quota distributions but, as noted, it also covers the existing decision-making processes and operational practices within the Fund.
If the IMF is to be a truly representative international organisation, the distribution of quotas has to be brought into line with the relative economic position of countries in the world economy. In particular, the quota shares of Asia have not kept pace with the rapid growth of economies in this region. Korea is particularly under-represented. It is essential that work continue on quota-related issues, even if it is difficult and agreement seems elusive. Progress in addressing concerns over representation and governance within the Fund cannot be put on hold until the next general quota increase. Work on quota-related issues should be advanced in an effort to resolve these concerns. It is crucial that there be a relatively large increase in the selective component of the next general quota increase, whenever such an increase takes place.
Failure to address these issues will continue to erode the credibility and effectiveness of the Fund in fulfilling its mandate, including through reducing the receptiveness of countries to its advice.
1 On behalf of the constituency comprising Australia, Kiribati, Korea (Republic of), Marshall Islands (Republic of the), Micronesia (Federated States of), Mongolia, New Zealand, Palau (Republic of), Papua New Guinea, Philippines, Samoa, Seychelles, Solomon Islands and Vanuatu.