World Economic Outlook: Implications of Reform for Japan and the IMF- Remarks by Michel Camdessus
May 18, 199999/9
Remarks by Michel Camdessus
Managing Director of the International Monetary Fund
at the International Finance Seminar
Co-hosted by the Japan Center for International Finance
and the International Monetary Fund
Tokyo, Japan, May 18, 1999
It gives me tremendous pleasure to participate in this seminar today, offering as it does an opportunity for dialogue between the IMF and Japan's leading thinkers and policy makers and I look forward to an open and fruitful exchange. I last had the honor of addressing a forum at the JCIF in the immediate aftermath of the Mexican crisis. We were aware at that time of the potential for further crises, but few would have been bold enough to suggest that the next, and more perilous episode would start on Japan's doorstep, in the heart of the region of the world whose economic progress had been so widely admired. I will devote these remarks to the situation of the world economy, and the steps that are being taken to make a more stable global environment. But let me preface my remarks by taking stock of Japan's long relationship with the IMF.
Japan's formidable achievements and potential over the past decades have brought it to a position of leadership and first rank responsibility in the world economy. Japan's role in the world economy could not be illustrated better than in its vigorous participation in the IMF and other international agencies.
- Japan has strongly advocated increases in our financial resources to ensure that the IMF
play its essential role in maintaining the
stability of the international monetary system. Thanks to these efforts, both a major increase in
quotas and the New Arrangements to Borrow became effective within the past few months.
- Even in a time of economic adversity, Japan
has been tenacious in the search for effective solutions to the East Asian crisis, and in the
Miyazawa Initiative is providing an invaluable infusion of support to assist the region's nascent
- The generosity that has made Japan the
world's largest provider of official development assistance is reflected in your contribution to the
IMF's financial support for the poorest countries of the world, the Enhanced Structural
Adjustment Facility (ESAF) and our initiative for the highly-indebted poor countries (HIPC). The
extensive loan resources provided to the ESAF Trust by Japan, supported by sizable interest
subsidies represent one of the most effective contributions to poverty alleviation in the context of
- Japan is quietly making an immeasurable
contribution to the long-term advancement of the developing and transition economies by your
generous support for our continuing technical assistance and training programs that are an
essential part of these countries' efforts to build or to reform their economic and financial
institutions. The Japan Administered Account for technical assistance funded by your
has sustained this vital, but largely unsung, aspect of the IMF's work at a far higher level of
activity than would have been possible otherwise.
- And Japan, as befits its position as our second largest "shareholder", and as an industrial country with its own unique experiences and perspectives, has increasingly exercised its position, its proper role, in articulating its views within the Fund on international economic developments.
I have no doubt at all that Japan's role, extended in a spirit of "responsible cooperative internationalism", will continue and intensify in future.
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The decade that is drawing to a close has seen many developments that present new challenges and opportunities to national policy makers and international institutions. Old assumptions have had to be revised, and old certainties seem less sure. The world's financial markets, spurred by new technologies, have become increasingly integrated and globalized, yet more vulnerable to volatility and economic crisis. The past decade has witnessed the demise of the former Soviet Union, the birth of the euro, an exceptionally robust expansion in North America, and a period of remarkable growth in many Asian countries. What is more, for the time being, policy making in most countries is no longer overshadowed by the specter of inflation.
And here in Japan, even as you have responded to these global trends, you have faced unfamiliar challenges. An economy that for several decades had been a frontrunner in global economic activity has experienced a prolonged slowdown and stress in the financial sector. And looking ahead, sooner than any other country, Japan confronts the complex issues raised by a rapidly aging population. The world will observe closely your experience in dealing with these issues since many other countries face the possibility of recession or the certainty of demographic change.
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With so much talk of crisis during the past two years, how can we view the situation today? In the latter months of 1998 it seemed that global recession was a very real possibility, and indeed, the word "deflation" had increasingly crept into the vocabulary as a risk, perhaps nowhere more so than here in Japan. But, thanks to actions by governments around the world, including Japan, the risk of global recession or deflation has certainly receded. At present, our projections point to a gradual acceleration of world growth in the next two years.
The immediate challenge for the international community is to restore a more evenly distributed pattern of global growth.
- In North America, after almost a
decade of rapid growth, the challenge may be to secure a "soft-landing" to a
slowdown in growth closer to the long-run potential.
- In Europe, the priority of reviving flagging
output growth by support for domestic demand was well served by the recent interest rate
- In Japan, to which I shall turn in more detail
shortly, the challenge will be to finally put to rest the lingering problems inherited from the
"bubble period" and to achieve a robust expansion.
- Among the crisis-struck countries of
Asia—Korea, Thailand, Malaysia, and the Philippines—successive forecasts point to a more
rebound than we expected just a few months ago. Even in Indonesia, where the political and
social upheaval has been so much greater, the groundwork has been laid for
- Under Brazil's new program, inflation has
been unexpectedly low, investor confidence is returning, and prospects are good for a fast
rebound in activity.
- And in Russia, after a long hiatus, the policy dialogue has moved forward, and we hope that the new government will steadfastly implement the reform program undertaken by its predecessor.
All told, courageous policy actions by many emerging, developing, and transition economies to strengthen and protect their economies is beginning to have a virtuous effect. Thus the spillover of the latest Brazilian crisis has been finally contained, as many countries have shown themselves well placed to withstand contagion. In part this is due to the efforts of Asian governments to implement programs and to strengthen their defenses against any future crises that may occur. Here again, Japan has been taking a leading role in helping countries hit by crisis. Regional groupings such as ASEAN and APEC, are seeking to learn the lessons of the crisis, and to add a regional dimension to the essential IMF surveillance. I very much hope these efforts will continue with even greater vigor.
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No matter how much positive news may be coming country by country, the international community has recognized that we cannot afford the systemic risk posed by these crises. Japan has played a leading role in the debate on how to strengthen the architecture of—or more simply, to reform—the international financial system. How far have we progressed?
Many international fora have been reflecting on the causes of the crises and possible remedies. It has become almost cliched to state that these are enormously complex issues that are taking time to resolve. But in fact we are making sound progress. The recent meeting of the Interim Committee provided the opportunity for the international community to assess progress, reach consensus on many issues, and decide how to proceed on others.1 The APEC Finance Ministers' meeting last week made further headway in forging consensus.
The emerging consensus recognizes that the tremendous potential for the long-term development of open, competitive markets was undercut by shortcomings in the global financial system. If I were to reduce everything to a handful of keywords, I would choose: transparency, governance, and cooperation. But in many areas, the debate has now progressed beyond this definition of objectives to concrete decisions and actions, many of which reflect Japan's input to the debate. Let me illustrate in a few areas.
- Concerning transparency and
standards, much progress has been made both by the IMF and other agencies. The IMF has
strengthened its data dissemination standards, it is encouraging members to implement the code
on transparency in fiscal policy adopted last year, and it is working with other agencies to finalize
a similar code for transparency in monetary and financial policies.
- In the crucial area of financial sector
strengthening, the Basle Core Principles are already being actively used by the IMF, the
World Bank and other agencies to assess banking systems and are now being revised to reflect
more adequately present conditions. In a more recent development, the Financial Stability Forum,
established by the G7 will provide an invaluable contribution as it studies possible sources of
instability in the global financial system, including offshore financial centers, highly leveraged
institutions, and short-term capital flows.
- Considerable headway has been made on the most
complex area of the debate: how to share more equitably between the public sector and the
private sector the burden of forestalling and resolving crisis, although many contentious
issues remain to be resolved. In moving forward, we need an imaginative approach based on a
partnership between the public and private sector that should develop during normal
at preventing crises—and would lay the basis for engaging the private sector more
crisis does strike.
- The IMF's Executive Board in April approved the establishment of Contingent Credit Lines that will make precautionary financing available to countries whose economies are fundamentally sound and well-managed, but whose access to capital markets is threatened by the potential effects of contagion.
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How will these rather abstract ideas be put into practice? Let me reflect with you for a few moments on some of the implications for the policies of the industrial countries, for Japan in particular, for the Asian countries, and for the IMF itself.
Perhaps the most challenging task remains with the emerging markets, including the countries in Asia recovering from crisis, as they struggle to rebuild their economies and to prevent the re-emergence of an unsustainable level of external borrowing. Despite recent positive developments, there is no room for any of these countries to rest on their laurels. What must they do to regain the momentum of development?
- First, the key to sustained recovery lies
in the relentless pursuit of the economic reforms that were introduced from the very outset of the
programs. The highest priority must be accorded to banking reform and restructuring of the
- Second, domestic macroeconomic policies for
the time being should remain expansionary until recovery is firmly underway. Of course,
governments should be ready to revert to their traditionally prudent fiscal policy as soon as this
- Third, even if better times seem to be approaching, I would urge these countries to build strong social protection systems to supplement traditional community and family-based systems.
The industrial countries have a number of roles to play, in strengthening the global system, as they have acknowledged in various fora—notably the declaration by the G-7 last October. First, they can lead by example, by adhering to the new international standards for data dissemination, transparency in fiscal, monetary and financial policies, and disclosure of private sector information. In the financial sector, the regulatory and supervisory agencies in the industrial countries should seek to reduce the potential for volatility in global financial markets created by the highly-levered financial institutions and offshore centers. Also, since it is investors themselves who are primarily responsible for assessing the soundness of any investment, authorities need to prevail upon investors to refine and strengthen their strategies and techniques for risk assessment.
I see an increasing need for deepening the commitment to intensified cooperation among the leading industrial countries in the interests of balanced growth and international monetary stability. Increasingly we see the emergence of a tripolar system of currencies, reinforced by the recent launch of the euro, and yet the economic performance of the three currency areas remains quite unbalanced. Quite rightly domestic concerns will remain uppermost in each countries' decision-making, but, since decisions taken at home inevitably reverberate around the world, what we need is stronger cooperation at regional and international levels that aim to harmonize domestic policy goals with the common interest of all countries.
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But the task of paramount importance that your policy makers now face is to strengthen Japan's economy and thereby help it play its full part in this multipolar world. I welcome recent steps to provide fiscal and monetary support for the economy, and to put in place a comprehensive framework for dealing with banking problems. I am deeply impressed by the wide scope of ideas and proposals that have recently been initiated by Japan's analysts and policy formulators. This analysis, in particular the report by the Economic Strategy Council of Japan2, suggests that we are in close agreement on the broad strategy.
In dealing with the immediate problems posed by the current economic downturn, I concur with you in seeing two basic needs:
- First, maintaining expansionary fiscal
and monetary policies until a recovery is firmly under way. The clear priorities are: on the fiscal
side to implement the intended stimulus for this fiscal year and continue it until private demand
recovers, and on the monetary side to maintain a highly accommodative policy
- Second, following through the resolution of the problems of the banking sector, building on the tangible progress that has already been made. Again the key is the resolute implementation of a policy direction already in place, pressing ahead with steps to a full accounting of problem loans, establishing strong capital adequacy, and restoring bank profitability.
Japan's policy makers have identified the need to move forward vigorously with structural reform to increase the vitality of the economy and to lay the basis for a durable recovery. The "big bang" of financial sector reform is now well advanced. Some corporations have recently announced impressive restructuring plans. These efforts will be supported and accelerated by pushing ahead with other reforms that have been placed on the agenda: an overhaul of the bankruptcy code to facilitate more rapid workouts of corporate debt; reforms to the tax system to encourage reduction of excess capacity and greater labor mobility; and other measures to improve corporate governance. Let me make the modest suggestion that Japan should approach the period ahead with the mind-set of achieving another "big bang", this time of corporate reform through a well-defined strategy.
Policy makers in Japan are also acutely aware that, in looking to the future, the country cannot escape the reality of its aging population. Once recovery has become well established, the Japanese authorities will eventually be able to revert to a program of fiscal consolidation—to return to Japan's instinctive preference for prudent fiscal policy. To facilitate this consolidation when the time eventually comes, it would be desirable to move ahead straight away to put some of the key building blocks in place. Such efforts could focus on overhauling social protection and pension systems, strengthening project selection and implementation procedures for public investment, and restructuring the public administration. As you approach these problems, some issues will arise that will be uniquely Japanese, but others will have a clear resonance in other societies that face the same issues of demographic change, only in a slightly longer time frame. The rest of the world, and especially we in the IMF, have much to learn from Japan's experience in confronting this new challenge of the 21st century.
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What of the IMF itself? We stand ready—we are eager—to adapt ourselves to the needs of the evolving financial system. Indeed we are continuously doing so. Let me mention a few ways in which this happening.
First, policy advice. Macroeconomics remains at the top of the agenda in each country but it is formulated with more flexibility than is generally recognized. The flexibility of our policy advice is illustrated by the contrast between the strongly expansionary fiscal policies that now characterize the Asian programs, with the emphasis that is placed on fiscal retrenchment in Russia and Brazil. The Fund has also approached the question of exchange rate regimes and policy very flexibly. But it has been striking that each of the countries in crisis over the past two years was operating some form of adjustable peg arrangement. We must consider carefully whether such arrangements, per se, are defective or whether they simply have a finite life appropriate to certain stages of development, at certain times and under certain conditions. Indeed it may be argued by some that the problems are primarily technical ones reflecting poor composition of the basket of currencies, or too rigid adjustment mechanisms. Yet, it would appear that a preference is emerging, in some quarters at least, in favor of regimes that are closer to one end or the other of the spectrum: free floats at one extreme, or currency boards at the other. The IMF's Executive Board will be reviewing these issues in depth in coming months. I look forward to Japan's continued thoughtful contribution to this debate.Structural reform and social policies occupy an increasingly central role in the IMF-supported programs. Structural reform explicitly entered the menu of policy options as far back as the 1970s with the birth of multi-year arrangements under the extended facility, and became more widespread under the ESAF in the late 1980s and in the economies in transition during the early 1990s. At the same time, we have focused on the social implications of adjustment programs. Countries are routinely encouraged to make adequate provision for social safety nets and to build up their broader system of social protection. We have worked closely with the World Bank—and here in Asia with the Asian Development Bank—to ensure that social policy issues are integrated in our policy advice and in Fund-supported programs. But more needs to be done. The social policy agenda is broad and complex, and we will work closely with Bank and other institutions that have the mandate and expertise in these areas. In particular, we will be thinking about how to integrate the principles and good practices in social policy, recently considered by the Development Committee, as these are developed further by the United Nations and World Bank. The recent series of crises in the emerging markets has highlighted a new set of issues—primarily around the theme of governance—that need to be resolved in order to ensure sound economic management and to preserve market confidence. The first response, necessary to resolve crises, was to incorporate non-traditional elements into the programs—transparency, governance, etc.—underscoring the need to pay ever-closer attention to the institutional and structural characteristics of the countries.
But for the longer term, crisis prevention should occupy center stage. This means that we should look afresh at the IMF's surveillance to ensure that it is relevant to today's world. For many years, surveillance has gradually evolved beyond the purely macroeconomic, but now it needs to be examined from several new perspectives:
- First, in the wake of the Mexican crisis,
the IMF in close collaboration with the World Bank, has increased the prominence of financial
sector soundness in our policy dialogue with members.
- Second, with the critical importance assigned to disseminating standards and achieving greater transparency on the part of members, the Fund potentially has two broad tasks. One, very clear-cut, is to encourage the adoption of those standards for which we have direct responsibility—data dissemination, transparency in fiscal, monetary and financial policies, and financial sector soundness. The other, still under debate, is to draw on our framework of policy consultation with members to monitor the implementation of standards that are formulated by other agencies, for instance accounting, auditing, bankruptcy, or corporate governance. Of course this is new terrain for the IMF, and we shall have to work with other agencies to augment our expertise and resources. To help illuminate the practical considerations involved in monitoring standards, a first round of experimental case studies has been prepared, covering Argentina, Australia, and the United Kingdom, and a second round is under way.
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As we approach the end of the century, many challenges confront the international community, the IMF, and Japan. In certain respects, the domestic debate on Japanese economic policy and the international debate on global financial reform are at similar stages: many actions have been initiated, consensus has yet to emerge in a number of others especially, but a clear need is evident for determined implementation of the decisions that have already been made. I am confident that in the not-too-distant future, as this country once again creates the conditions that enable it to draw on its strengths—saving, investment, product quality, and technical innovation—Japan can regain its accustomed position as an engine of growth for Asia and the world economy.