The Agenda for Global Financial Cooperation
June 13, 1997
Managing Director of the International Monetary Fund
to the Association of Japanese Business Studies
Washington, D.C., June 13, 1997
Thank you, ladies and gentlemen. It is a pleasure to participate in this conference on "Making Global Partnerships Work."
As you may know, the IMF itself began as a partnership among some 40 countries to help restore economic stability and growth in the aftermath of World War II. It was founded on a simple, but enduring, premise: that all countries shared certain basic economic goals--notably, high levels of employment and income--and that these goals could best be achieved if countries adhered to sound macroeconomic policies, opened their economies to foreign trade, and worked together to make the international monetary system function more smoothly. Fifty years later, we can see the wisdom of this approach. Among the countries that followed this course, trade expanded briskly, incomes rose, and employment grew, bringing the world a half century of unparalleled prosperity. In the meantime, the partnership that began with about 40 members has grown to 181, making the IMF a truly global institution.
Now, as the 20th century comes to a close, the world economy is undergoing another profound change: globalization. To some extent, globalization is the continuation of the post-war trend toward greater openness and integration. The difference is that markets are larger, more complex, and more closely integrated than ever before, and capital has achieved an unprecedented degree of mobility. Moreover, the availability of massive amounts of private capital has opened new opportunities for investment and growth to an ever larger number of developing countries, allowing new economic powerhouses to emerge. Certainly, these developments have had many benefits, both for individual countries and for the world economy at large. But they also raise new challenges for the IMF and its member countries. In my remarks to you today, I would like to discuss how this process is unfolding in Asia, what it means for the region, and what it implies for the global partnership embodied in the IMF.
In many respects, Asia is a microcosm of the changes taking place in the global economy. Of course, Japan remains the world's second largest economy, its second largest exporter of goods and services, and its largest capital exporter. However, the rest of Asia--that is, Asia excluding Australia, Japan, and New Zealand--is growing rapidly in economic size and importance.
As recently as a decade ago, the developing and newly industrial economies of Asia accounted for only one sixth of world output; today, they represent about one quarter of world GDP on purchasing power parity-adjusted terms. On this trend, these countries could account for one third of world output by the year 2005. Why? In large part because these countries have been able to grasp the opportunities that globalization has to offer. This has not only enabled Asia to become more fully integrated into the world economy, but also contributed to Asia's own regional integration.
As you know, Asia attracts almost half of total private flows to developing countries, the largest share of any region--nearly $100 billion last year. More than half of these inflows now take the form of non-debt creating foreign direct investment. But portfolio investment flows have also risen dramatically, which has helped deepen domestic capital markets in Asia. In fact, in some countries, the relative size of the equity markets now matches that in many industrial countries; indeed, in Hong Kong, Malaysia, and Singapore, the capitalization of the stock market as a share of GDP, exceeds that of France, Germany, and Italy.
Financial flows within the region have also become more significant. Tokyo is the most important financial center in the region, and no doubt its importance will increase further as Japan liberalizes its financial markets. In addition, Hong Kong and Singapore--with their well-capitalized banks, efficient clearing and settlement systems, and expanding range of financial products--have also emerged as major financial centers. All of these centers will be increasingly involved in intermediating saving within Asia, as well as channeling saving between Asia and other parts of the world.
On the trade side, the newly industrial and developing countries of Asia have achieved the highest rates of export growth of any region in the world. As a result, their share of world exports has nearly doubled over the last decade, to almost one fifth of the total. But trade among the new industrial and developing countries of Asia has also increased substantially and now represents about 40 percent of these countries' exports. Meanwhile, the composition of production and trade continues to change, in keeping with the evolution of countries' comparative advantage. Thus, economies with relatively high wage costs are shifting toward higher value-added products, including services. One dramatic example of this is the shift of labor-intensive manufacturing from Hong Kong to mainland China, and the associated boost to Hong Kong's economy from the growth of trade and financial services.
Clearly, these developments have been good for a number of countries in Asia. Over the last 30 years, per capita income levels have increased tenfold in Korea, fivefold in Thailand, and fourfold in Malaysia. In China, per capita income has increased fourfold over the last 20 years. Moreover, per capita income levels in Hong Kong and Singapore now exceed those in some industrial countries. In fact, the economies of Hong Kong, Korea, Singapore, and Taiwan, China share so many characteristics with industrial economies--including high income levels, well-developed financial markets, and growing service sectors--that the IMF now classifies them as "advanced economies," in the same group as the United States and Japan. Now that is a sign of the times!
Viewed in these terms, Asia's economic success is extraordinary indeed. Little wonder that the region has won the world's admiration, and at times, a bit of its envy. But in this regard, it is important to keep several things in mind about the Asian experience. First, its economic success has not just been good for the countries concerned; it has been good for the world. Let us remember that Asian countries are not simply major exporters; they are also major importers. In fact, the developing and newly industrialized economies of Asia have been taking a larger share of industrial country imports, a factor that helped cushion the impact of successive downturns in industrial countries on the world economy during 1991-93. And they are not simply recipients of private capital flows; they are a source of attractive investment returns, and an avenue for improving the allocation of global resources. For all of these reasons, Asia is a major engine of growth for the global economy.
The second point concerns the so-called Asian "miracle" itself. Asia's growth performance is impressive; it is admirable; but it is no "miracle." Rather, it is the result of good policies in a growing number of countries. And it is what more countries around the world could achieve if they adopted better policies and stuck to them. While there has been no single blueprint for economic success, the most successful Asian economies have had certain things in common. Among these are:
- domestic economic policies that promote savings and investment, including investment in
- a domestic environment that encourages innovation, entrepreneurship, the use of modern
technology, and a speedy response to market signals; and
- outward-looking policies that expose domestic producers to foreign competition.
Finally, it must be borne in mind that even if Asia appears to be particularly adept at taking advantage of global economic opportunities, it still faces the same challenges that confront the rest of the world. Let me mention three of the most important ones.
The first concerns the region's poor. Although a number of countries have made substantial progress in reducing poverty and improving income distribution, close to three quarters of the world's poor live in Asia--that is, nearly 1 billion people. Thus, one must ask: how can growth and development be spread more widely throughout the region? Certainly, there is no substitute for stable macroeconomic policies--policies that give confidence to financial markets and attract private savings. Transparent and predictable regulatory policies, and a reliable legal system are also essential ingredients in creating a favorable investment climate.
Beyond this, countries that hope to duplicate the success of the fastest growing Asian economies should emulate the openness of their economies. Trade restrictions in the less advanced economies, especially on imports of capital goods, will prevent the movement of labor-intensive, lower value added industries toward these countries. Thus, a number of countries in the region, including India, China, and Indonesia, as well as many countries elsewhere in the world, will need to expand their trade reform programs to benefit fully from the dynamic nature of trade and production in the global economy.
To sustain growth, a number of countries will need to improve their infrastructure, especially in transportation, telecommunications and power supply. The challenge will be to do this without straining public finances or external positions. Private sector participation can be very helpful in this regard, but some countries will need to increase the transparency of their regulatory regimes and clarify pricing policies in order to attract substantial private investment.
Some countries also need to catch up in the development of their human resources, a key factor in the sustained growth of the successful Asian economies. For example, Korea and India both had literacy rates of roughly 30 percent in the mid-1950s, but by the early 1990s, Korea's literacy rate had increased to over 95 percent, while India's had increased to only 45 percent. The need for public investment in education and infrastructure points, in turn, to the need to reduce outlays in other less productive areas, such as military spending. In many countries around the world, growth has been accompanied by widening income disparities between rich and poor. Those countries could learn a lesson from countries like Malaysia, which has not only reduced poverty substantially, but avoided a widening of income disparities through high levels of investment in education and health.
The second challenge concerns the emerging market economies. With Asian financial markets more closely integrated with each other and the rest of the world, one must ask: what can be done to avoid a reversal of market sentiment and potentially destabilizing capital outflows? Certainly, the first step is for countries to maintain sound policies. In some countries, this should include reducing reliance of foreign savings and undertaking structural reforms, such as trade liberalization, privatization, and deregulation, that will help ensure that inflows take the form of long-term investment. Countries can also reduce the chances of spillover effects from other markets by providing more information to the market about their policies and performance. Meanwhile, countries must also ensure that their domestic financial institutions, especially the banking system, are strong enough to accommodate tighter fiscal and monetary conditions, as the need arises. The main emphasis should be on strengthening internal bank management and reinforcing market discipline over banking practices, but there is a clear need to improve bank regulation and supervision, as well. Trying to deal with destabilizing capital flows with capital controls or other policies that distort markets is only a short-term palliative, particularly as off-balance sheet derivative products become more widespread.
The third challenge concerns advanced economies, such as Japan. With global competition intensifying, how can they position themselves to continue prospering in the global economy? The answer lies in ensuring that the domestic economy remains flexible, so that domestic resources can continue to shift to higher valued-added activities, thereby creating new opportunities for growth and employment. Japan's financial market deregulation is very important in this regard, both from the standpoint of developing the financial services industry and of increasing the efficiency of financial intermediation in Japan and the region. The initiatives set out under Prime Minister Hashimoto's principles of free, fair, and global markets are especially important if Japan's financial markets, which already serve as the artery of the Japanese economy, are to play their full role, as the markets of New York and London do, in the optimal allocation of the world's resources. Over the medium and longer term, Japan also faces the task of reducing the size of its fiscal deficit; this is all the more important in view of the increasing fiscal burden of its aging population in the years to come. The faster growth that would result from greater deregulation would, of course, lighten Japan's fiscal task.
So far, I have emphasized countries' individual responsibilities for sustained growth and development. But in today's increasingly interdependent world, many problems defy purely national solutions, and others are more readily solved on a multilateral basis. Let me say a few words about what the IMF is doing to address such issues, including the ones that I discussed a minute ago.
Clearly, it is to the advantage of every member of the international community that all economies pursue strategies that lead to high-quality, non-inflationary growth; this is what expands the opportunities for investment, employment, and growth in the global economy and helps avert changes in market sentiment that could trigger private capital outflows. The Fund promotes such policies through its "surveillance" over members' policies. Surveillance is the process through which the staff of the IMF continually evaluates the policies, performance, and prospects of each member, and provides its candid assessment to the membership at large at least once a year. The membership, through its Executive Board, discusses the situation in each member country and provides the member with recommendations as to how its policies and performance could be improved. All IMF members are subject to this surveillance, and cooperating in this process is one of the basic responsibilities of IMF membership.
Certainly, the Fund cannot force a country to change its policies. Nevertheless, surveillance does increase the transparency of countries' economic policies--by bringing key policy issues to the attention of the full membership, providing a forum for a frank exchange of views, and allowing members to assess the impact of one another's policies on their own economies and on the international economy at large. Through this process, the membership can exercise considerable moral suasion over the direction of individual countries' policies. Surveillance also allows the Fund to identify emerging imbalances and suggest corrective action before an actual crisis develops.
Nevertheless, countries do encounter balance of payments problems--because of inappropriate policies, adverse developments beyond the government's control, or a combination of the two. In such cases, the Fund agrees to make its resources temporarily available so that the member can take action to correct the problem, without inflicting undue harm on itself or its trading partners. This economic adjustment is never easy, but the resources provided by the Fund allow the member to adjust more easily and in a more orderly way than would otherwise be possible--without, for example, imposing exchange restrictions or cutting off imports when foreign exchange reserves run out. This is also beneficial for the rest of the world because it minimizes the adverse effects on trade and economic activity on which the health of the international economy depends.
Through its surveillance over its members' policies, and when appropriate, through its financial support, the IMF encourages countries to strengthen their macroeconomic policies and undertake structural reforms that will allow them to grow and develop, deal successfully with the challenges of large capital inflows, and otherwise take advantage of the opportunities of globalization. Indeed, a number of the Asian countries that have made extensive use of IMF resources in decades past have graduated to relying exclusively on private capital and among the region's outstanding performers. Now IMF resources are supporting the next generation reformers--so that the Vietnams of today can become the Malaysias and Singapores of tomorrow.
But as we are discussing a global partnership, let me point out that Asia is not always on the receiving end of international support. Japan is a major contributor of official development assistance, and I hope it will retain this distinction, even in the current budget-cutting environment. In addition, there are ten countries in Asia that have shown their solidarity with the poorest countries of the world by giving their financial support to ESAF, the IMF's concessional lending facility. Likewise, five countries and the Hong Kong Monetary Authority have agreed to participate in the New Arrangements to Borrow--that is, the special credit lines that have been put in place to supplement the IMF's resources, if needed, in exceptional situations. These efforts are another aspect of Asia's growing role in the world economy.
Through its surveillance, the Fund has also been able to identify and help address a number of issues that transcend national borders. For example, through our surveillance work in 181 member countries, we have seen the perilous state of many banking systems around the world. Knowing how weak financial sectors can undermine macroeconomic stability and market confidence, we now place greater emphasis on banking and financial sector problems in our policy dialogue with member countries. At the same time, the IMF has pointed to the need for a set of "best practices" in the financial area that are internationally recognized and applicable in countries at varying stages of development. We have also indicated our readiness to help disseminate these "best practices" through our policy discussions with member countries. I am happy to say that, important steps are now being taken in this direction--such as the Basle Committee's "Core Principles for Effective Banking Supervision." We applaud these steps and hope to see more work in this direction.
Similarly, we are using our policy dialogue to encourage countries to increase the transparency of their policies and performance. Market perceptions of economic fundamentals determine where capital will flow. As a result, there is now a much higher premium on accurate information about country economic policies and performance. Besides, better information makes for better investment decisions, fewer market surprises, and less "bandwagon behavior" on the part of investors. For these reasons, the IMF is actively encouraging all countries--but especially those tapping, or hoping to tap, international capital markets--to improve the economic and financial data they provide to the public. In particular, we have helped develop and disseminate a set of standards regarding the coverage, frequency, and timeliness of data; their quality and integrity; and their availability to the public. Countries subscribing to this Special Data Dissemination Standard agree to abide by its principles and to post information on their own specific data practices on an electronic bulletin board on the Internet maintained by the Fund. I am pleased to report that so far, 42 advanced and emerging market economies have subscribed to this Data Standard, and 7 have established "hyperlinks" to their actual economic data.
We are also turning our attention to the issue of capital account liberalization. The benefits of an open and liberal system of capital movements--for individual countries and investors, and for the world economy at large--are widely recognized. But in order to benefit fully from such a system, countries have to open their capital accounts. Up until now, the IMF's mandate has covered only current transactions, not capital transactions. Now, there is agreement among the membership that another chapter should be added to the unfinished opus of the Bretton Woods agreement--that is, an amendment to our charter specifically calling upon the IMF to promote capital account liberalization and giving the Fund appropriate oversight over restrictions on capital movements. We hope that the provisions of this amendment will be worked out over the next few months.
Needless to say, the point is not to encourage countries to remove capital controls prematurely. Rather, the emphasis will be on fostering the smooth operation of international capital markets, and encouraging countries to remove capital controls in a way that is consistent with sustainable macroeconomic policies, strong monetary and financial sectors, and lasting liberalization. This is good for recipient countries, good for investors, and good for the world economy.
This, then, is the agenda for global financial cooperation: freer capital markets, sounder financial systems, greater transparency, and more countries following sounder policies--all with the goal of enhancing stability and growth in the global economy. The IMF, with its nearly universal membership and mandate to promote international monetary cooperation, is uniquely placed to help advance these goals.