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Brazil and the IMF

United States and the IMF

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Opening Remarks

Address by Mr. Alassane D. Ouattara
Deputy Managing Director of the International Monetary Fund
at the Academie de la paix et de la securité internationale
Conference on Crises and International Security
Monaco, March 4, 1999

Mr. Secretary-General, Mr. President, Ladies and Gentlemen:

It is a great pleasure for me to participate once again in your reflections on crises and international security. We do not have to look far back in time for inspiration on this topic. The past year has been punctuated repeatedly by crises and contagion. Some crises have been solely political, others more economic. Although even the economic ones have reminded us how closely politics and economics are intertwined.

We had hoped to end this millennium on a higher note—one that set the tone for the new millennium ahead. But let us not be discouraged. We have come so far since the great depression and world wars that characterized the first half of this century. Indeed, the past 50 years have been a period of unparalleled prosperity for countries that have adopted policies conducive to economic growth and financial stability, opened their economies to foreign trade, and supported one another when adjustments had to be made. And recent events, although they represent a setback—with very high social costs—do not undo that achievement.

As a backdrop for our discussions, I would like to begin by briefly analyzing the world economic outlook as viewed by the IMF. It appears that the financial crises in emerging market economies that began in Asia in mid-1997 have been contained—although we are clearly still not out of the woods, as recent events in Brazil have shown. The IMF is looking for world growth of around 2 ╝ percent this year, little changed from 1998. This is slower than the strong global growth of the mid-1990s, to be sure. But with sound policies, and with a little luck, growth could rise above 3 percent next year and return close to its potential rate of 4–4 ╝ percent early in the new millennium.

What are the bright spots? First, most of the world's industrialized economies have been doing reasonably well, especially the United States—in fact remarkably so. Central banks in most industrial countries have lowered interest rates in recent months, recognizing that the balance of global risks has shifted away from inflation, which is now under control, to a need to support growth. In Europe, where the launching of the euro has been a success, interest rates have converged at the lower levels prevailing in the core countries. But if the recent slowing of growth persists, there is more scope for interest rate cuts in the period ahead.

Second, the Asian countries that were struck by crisis have persevered with the stabilization and reform programs agreed with the Fund, thus bringing about the recovery of growth. This is particularly true for Thailand, and even more so for Korea, where growth has resumed at a higher-than-expected rate. The Indonesian economy should at least bottom out, and perhaps even rebound, in the latter part of this year.

Third, most countries have resisted the temptation to adopt protectionist or isolationist measures, even in the face of fierce competition and financial strains.

Fourth, the international community has taken several steps to ensure that sufficient resources are at hand to assist countries in crisis. The IMF's quota increase is in place, and the New Arrangements to Borrow could be activated at any point. Japan, through the "Miyazawa Initiative," has promised financial support to Asian countries in crisis. And the Group of Seven has proposed enhanced financial facilities at the IMF and World Bank to help ward off financial market contagion.

But uncertainties and risks still exist, and they are far from negligible.

  • There is considerable uncertainty about the prospects for recovery in Japan-which, among the industrial countries, has the biggest problems. The economy remains depressed, although activity seems to have stabilized recently after 18 months of decline.

  • There is considerable uncertainty about the recovery of private capital flows to the emerging markets, which have been running at very low levels since the Russian crisis of last August.

  • There is uncertainty about how deep the Brazilian recession will be in the wake of policy measures to stabilize the now floating real and avoid a resurgence of inflation. Contagion from Brazil has been limited, but Latin America as a whole is unlikely to post any growth in 1999.

  • There is uncertainty about the very uneven pattern of world trade adjustment that has been taking place in the wake of the large shifts toward surpluses in the Asian crisis economies. The United States has been assuming by far the bulk of this adjustment, a welcome contribution to easing tensions elsewhere. But if the very large U.S. current account deficit continues, it could bring with it destabilizing movements in exchange rates among the dollar, euro, and yen.

  • There is also the risk that these considerable and inevitable trade adjustments will unleash a resurgence of protectionist pressures.

  • And, lastly, there is considerable uncertainty about the sustainability of the recent stock market rebound—especially in the United States, where wealth gains associated with the rise in equity prices have supported domestic demand growth and induced a sharp decline in private saving.
  • The bottom line is that if these risks materialize as disappointments, even on a relatively moderate scale, world growth could be less than the 2 ╝ percent projected for this year. The outcome, as always, will hinge on policies.

    Here there is no single recipe. Policy needs vary among countries, depending on priorities and economic circumstances. In recent months, there has been a widespread easing of monetary policies, and appropriately so, given the absence of inflationary pressures. This means that in a large part of the world, macroeconomic policies—in particular, monetary policy—have been helping to stimulate economic activity.

    But there are two important exceptions to the scope for expansionary policies. First, some emerging market economies must continue to implement relatively tight macroeconomic policies to correct unsustainable fiscal or external imbalances, if they hope to regain investors' confidence and adjust to adverse developments in financial and commodity markets. Second, most countries in North America and western Europe still face considerable medium-term fiscal problems, related partly to aging populations. Thus, it would not be advisable for these economies to loosen fiscal policy to a greater extent than occurs almost automatically as slower growth brings lower tax revenues and higher social outlays.

    The euro area can, nonetheless, contribute to recovery. I mentioned earlier the scope that exists for further monetary easing if growth remains weak. In addition, a successful economic and monetary union (EMU) will bring a broader and deeper European capital market, offering new opportunities to savers and borrowers the world over. It should facilitate European growth in the medium-term, and all that entails for the world economy. It also offers new scope for global cooperation-and the IMF looks forward to playing a major role in this process.

    But formidable challenges remain to be addressed if EMU is to realize its full promise. In the fiscal area, the task of bringing budgets into balance or small surplus is not yet complete. But it is in improving the working of labor and product markets, reforming public spending programs, and lightening the burden of taxation that the progress now needs to be made. These are the key to realizing Europe's full potential for lasting job creation and growth.

    In sum, we are in challenging times. We must now learn all we can from the recent financial crises in Asia, Brazil, and Russia—and adapt both the international financial system and the international institutions to the new environment—so that together, we can lay the foundation for a millennium filled with prosperity and peace, a subject that I intend to address at greater length on Saturday morning.


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