Japan and the IMF
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Japan and the IMF
1. Thank you, Minister Shiokawa, for your kind words of welcome. It is truly an honor for me to join you today, to celebrate the 50th anniversary of Japan's membership in the IMF and the World Bank.
2. The economic performance of this country over the past 50 years has been a remarkable tribute to the energy and creativity of the Japanese people. At the time Japan joined the IMF, it was still recovering from the devastation of World War II. In subsequent decades it grew and prospered, transforming itself into an industrial and technological powerhouse. Now Japan is one of the wealthiest nations in the world, and the second largest shareholder in both the IMF and the World Bank. At a time when there sometimes seems to be too much pessimism, Japan's accomplishments during 50 years of membership in the IMF should be a source of pride, and of confidence that this country has the capacity to respond to the challenges of the future.
3. These achievements have naturally enabled Japan to play an increasingly important part in world economic affairs, and particularly in the IMF. Japan has shown leadership in shaping the Fund's policies, especially on relations with low-income countries, crisis management, and measures to strengthen the international financial architecture. The IMF is fortunate to have Shigemitsu Sugisaki, a former senior official of the Ministry of Finance, as Deputy Managing Director. Moreover, Japan is the largest provider of resources for lending by the IMF's Poverty Reduction and Growth Facility, and for technical assistance and training through its Administered Account with the Fund. These resources represent a wise investment for Japan, to help build a more peaceful and prosperous world. Japan has a clear interest in open markets, free trade, and international financial stability-objectives which lie at the heart of the IMF's mandate.
4. I am confident of Japan's intention to play a continuing leadership role in the IMF's response to the challenges of a new millennium. Above all, there is need to define a policy concept for one world—one that promotes broadly shared growth, respects environmental sustainability, values the richness and diversity of the human experience, and helps to fight world poverty. Japan's own experience demonstrates that integration into global trading and financial system is crucial for sustained growth. But we need to guide and shape the process of globalization, to ensure that it is more inclusive and to promote a better balance of risks and benefits. This requires appropriate local, national, and regional institutions, and strong international cooperation. I am convinced that the IMF can best contribute to this process by fulfilling its core responsibilities:
5. Despite the terrible shock of the terrorist attacks on the United States one year ago, global economic growth has resumed. And I think it was important for this purpose that the membership of the IMF came together last November in Ottawa to define a collaborative approach to strengthen the global economy. Although growth prospects have weakened somewhat in the United States and Europe, our assessment is that the recovery will continue. But there are still risks and uncertainties, related especially to regional political tensions, oil prices, and developments in international financial markets. What is required now above all is strong leadership from the advanced economies, to bolster investor confidence and help sustain and strengthen the recovery.
6. There are welcome signs that Japan may at last be emerging from recession. But the consensus among forecasters is that the recovery will be modest, heavily dependent on external demand and, in particular, linked to economic developments in the United States. Rapid US economic growth over the past decade has served the global economy well, but it has also contributed to a rising current account deficit and concerns about the possibility of sharp and destabilizing movements in capital flows and exchange rates. Much of the solution must lie in policies to increase national savings in the United States. But it is also crucial for Europe and Japan to be more open to structural change in their own economies, so that they can do a better job of unlocking self-sustained growth. Restoring a growth performance that corresponds to Japan's demonstrated potential demands nothing less than an integrated policy approach, based on decisive restructuring of the banking and corporate sectors and macroeconomic policies designed to bring an end to deflation. Prime Minister Koizumi deserves strong support for his commitment to carry through the structural reforms needed to restore confidence in the Japanese economy and foster sustained growth and job creation.
7. Japan is a major force in the world economy, but its influence is perhaps even more decisive within the East Asian region. Following Japan's example, other countries in East Asia have used integration into the global economy successfully to create new and expanded opportunities. They have benefited from strong trade and investment linkages with the United States and Europe and within the region, including direct investment and bank lending from Japan. This approach has brought dramatic progress in raising standards of living and reducing poverty.
8. The Asian financial crisis of 1997/98 was therefore a particularly wrenching experience. It exposed weaknesses in domestic policies and institutions, and led to a process of reform that has reduced external vulnerability and revitalized growth prospects, most notably in South Korea. But the crisis also revealed risks and uncertainties in global financial markets, and in the arrangements of the international community for crisis prevention and management. It was only natural that this gave rise to critical debate about the process of globalization, the reform of the international financial architecture, and the role of IMF. And while we have not reached the end of the debate, the lessons of the Asian crisis have already led to many important changes in the IMF's policies and internal culture.
9. I am convinced that these reforms have helped to make the international financial system more resilient today than it was before the Asian crisis. But recent experience should also make us even more humble: the fact that it was not possible to avoid the current difficulties in Latin America suggests that we still have a lot to learn.
10. In particular, we must draw firmer conclusions about the indispensable role of sound institutions and good governance for sustained growth and financial stability. And equally, we must recognize that the social dimension is an essential part of any economic reform strategy. But the IMF cannot impose solutions in these areas. To resolve home-grown problems, no external advice, however sound, and no amount of external financing can substitute for self-responsibility and political cohesion in a society. This is true, not least, because there is no single economic and social model that can meet the needs of every nation in the world. Indeed, I believe that some competition among systems is healthy for the global economy. But whatever model a country chooses, it should be guided by the spirit of international cooperation, and thus be mindful of how its actions affect other countries.
11. In recent months the Enron collapse and, even more, the WorldCom scandal have also made it clearer than ever that we must devote as much attention to risks and vulnerabilities arising in the advanced countries, as we do to problems in emerging markets and developing countries. The broad discussion and legislative response in the areas of accounting and corporate governance that has gotten underway in the United States is welcome. But I also think that the international community as a whole should take up these issues, as part of a broader effort to reduce excessive volatility in international capital flows. Here I see a need for intensified collaboration among standard-setting bodies, the IMF and World Bank, Asian regional institutions, and the Financial Stability Forum. I would encourage the responsible institutions to concentrate on refining accounting standards; on enhancing corporate disclosure, including off-balance-sheet activities; and on better aligning management incentives with shareholder objectives, to reduce the potential for conflicts of interest. At the same time, it will be important to resist the temptation to over-regulate. The willingness of entrepreneurs to experiment and take risks is one of the essential characteristics that makes markets a force for greater prosperity, higher employment, and better standards of living. I trust that these will continue to be guiding principles for the process of regulatory reform in Japan.
12. IMF surveillance and crisis prevention will always be our first line of defense in dealing with external shocks and vulnerabilities. But we are also working to strengthen the IMF's capacities for crisis resolution. An indispensable part of this work program is the ongoing effort to make our policies on access to IMF financing clearer and more predictable. But recent experience has also demonstrated the need for better ways to deal with cases in which sovereign debt has become unsustainable—to restructure debt more promptly and in a more orderly manner, while protecting asset values and creditors' rights. I do not want to be misunderstood—it remains our intention to work as long as possible, and as far as possible, with voluntary, market-oriented solutions. But our experience shows that more is needed to deal with the most difficult cases. We are contributing actively to the effort to promote the use of collective action clauses in debt contracts. But I also remain convinced that the proposal of IMF Management, for a statutory Sovereign Debt Restructuring Mechanism, is essential to fill a major gap in international financial arrangements—and I would therefore urge the IMF's shareholders to accelerate their consideration of the SDRM.
13. Asian countries have rightly embraced regional economic integration as a powerful way to take advantage of the benefits of globalization and enhance crisis prevention. I view intensified regional economic and financial integration not as a contradiction, but as an important complement to stronger global cooperation and governance. And having spent much of my life involved in the process of European integration, and having seen how much it helped to enhance wealth and stability in Europe, I would strongly encourage Asian countries to continue along this path. The finalization of the expanded swap network among the ASEAN+3 countries was a welcome development, which I see as complementary to financial assistance from the IMF for members undertaking necessary economic reforms. And I can assure you that the IMF stands ready to assist in the implementation of the new swap network, as well as the further development of regional economic surveillance, trade, and financial cooperation.
14. During my first two years as Managing Director of the IMF, I have welcomed the ambition and determination of Japan and other Asian member countries to improve the functioning of the international financial system. It is important for countries in this region to participate actively in the initiatives already underway, like the work on standards and codes, and the Financial Sector Assessment Program, and help them reach their full potential. And it is just as important to search for new ways to make the global economy more equitable and efficient. Today it is clearer than ever that diversity in cultures, and in economic and social models, is an indispensable resource for the people of the world. I count on the creativity of Japan to help make the most of the unique spirit of cooperation in the IMF, and guide us productively through another 50 years.
IMF EXTERNAL RELATIONS DEPARTMENT