People's Republic of China and the IMF
United States and the IMF
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East Asia Economic Summit
Economic Outlook: Asia after SARS?
Remarks by Shigemitsu Sugisaki
Deputy Managing Director
International Monetary Fund
World Economic Forum, Singapore
October 12, 2003
1. It is a pleasure for me to be here today to address such a distinguished audience. It has been nearly two years since I last participated in a meeting organized by the World Economic Forum. I am glad to be able to say that we are meeting at a time of rising optimism about the global economy. Although uncertainties remain, the increasing signs of a recovery in a number of regions, including Asia, are a welcome indicator that the world economy may have turned a corner.
2. Global growth is projected to rise from 3¼ percent in 2003 to about 4 percent next year. This recovery is expected to be led by the United States, and would be supported by policy stimulus in the pipeline, improving corporate finances, and lower—but still significant—geopolitical tensions. Although tentative signs of improvement are appearing in the Euro area, short-term prospects remain subdued, especially among the largest economies. In Japan, there are signs that the economy is gaining some traction and could experience a moderately paced recovery this year and next.
3. Asia once again is a bright spot in the global economic picture. Timely macroeconomic stimulus and decisive policy action by governments across the region have helped minimize the economic impact of SARS and sustain the pace of economic activity. The acceleration in U.S. growth has resulted in renewed export growth across Asia, especially in the electronics and technology sectors. Asian financial markets have also done well, outperforming other regions in most asset classes. Asia is expected to grow at 5 percent in 2003 and 5¼ percent in 2004, making it the fastest growing region in the world.
4. The balance of risks to world economic growth has improved. The predominance of downside risks that characterized the outlook over the past two years has diminished. On the positive side, financial markets have remained remarkably resilient and will be a further source of strength in the period ahead, and world growth could pick up more quickly than projected.
5. Nevertheless, I would caution us against complacency. Nurturing the recovery will require vigilance and decisive economic policy management. We need to focus on policies needed to achieve a more balanced and sustainable global growth. And international cooperation is essential to bring this about.
6. Specifically, the continued dependence of the world economy on growth in the United States and the related large global current account imbalances remain major concerns. These imbalances are unsustainable over the medium-term, creating a danger of a disorderly adjustment that would be disruptive to world economic growth. Ensuring a gradual and orderly correction will require the participation of all regions, involving more attention to domestic sources of growth in some countries, and further adjustments in exchange rates.
7. As part of this cooperative effort, the advanced countries need to tackle their deep-seated structural problems. In particular, labor and product market reforms are needed in Europe. Corporate and financial sector restructuring has to be carried further and faster in Japan. And in the United States, a credible medium-term framework to restore budget balance is urgently required.
8. In Asia, the current confluence of favorable conditions affords a very good opportunity to push ahead forcefully with the unfinished reform agenda. What exactly does this entail? Clearly, the policy implications will be different for different countries.
• In countries with high and unsustainable public debt, the authorities need to urgently implement policies to reduce deficits and restore fiscal sustainability, primarily through raising revenues. In turn, the revenue effort needs to be focused on base broadening measures—the elimination of incentives and exemptions and the inclusion of more sectors of the economy in the tax net. Reducing the public sector's claim on resources will make room for the private sector to play a more active role in economic activity.
• In other countries, the priority is to make faster progress with structural reforms to strengthen financial and corporate sectors. This is a critical prerequisite to establishing a sound basis for robust and sustainable domestically generated growth.
9. Increasing attention also has been paid to the significant current account surpluses and rapid rise in international reserves in many Asian countries, prompting considerable discussion of exchange rate policies in the region. The IMF's position on this issue is that greater exchange rate flexibility in Asia should also be part of a gradual process of reducing global current account imbalances.
10. With comfortable reserves and a strong economic growth outlook, Asia is well placed to heed this advice. Specifically, we have advised emerging Asian economies with flexible exchange rates to allow their currencies to respond more to underlying market forces and avoid undue intervention. For China, the IMF has—in recent years—advocated increased flexibility in the exchange rate as being in China's best interest. Such flexibility would facilitate China's ability to control monetary growth, cushion the impact of external shocks and the major structural changes underway in the economy, and would encourage other countries in the region to move in the same direction. I should note that we do not advocate an immediate move to a freely floating exchange rate, but rather a phased approach toward flexibility that would not present a major risk of disrupting the economy.
11. Finally, we need to reinvigorate the world trade discussions which was set back by the failures at Cancún. Asia has reaped significant benefits from the multilateral trade framework and therefore, I call for a renewed commitment to work toward getting the Doha round back on track.
IMF EXTERNAL RELATIONS DEPARTMENT