United States and the IMF
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Globalization: Challenges Arising from the Sources of Global Economic Growth|
Address by Anne O. Krueger
First Deputy Managing Director, IMF
G 20 Ministerial Meeting
I'm pleased to be speaking here at a time when the prospects look brighter than they have for some time. As you know, the World Economic Outlook that we published last month was distinctly more optimistic in tone than our assessment earlier in the year. Many of the uncertainties that had been hampering growth prospects back in the spring have diminished. And in the last few weeks, most developments have tended to confirm our view that a pick-up in the world economy is under way. We now expect global growth to average around 3¼% this year, rising to around 4% in 2004.
Chairman Greenspan has spoken in some detail about the performance of the American economy‚still the principal source of global growth.. Although the labor market has yet to respond firmly to the recovery, most other indicators continue show it is on track. Indeed, the pace of growth may be more vigorous than we anticipated even last month.
In Europe, too, there are signs that the worst may be over. Confidence seems, slowly, to be returning, though hard evidence of recovery is still difficult to find. The pace of European recovery, however, is likely to be moderate when it begins in earnest. Stronger external demand will help accelerate growth, but further appreciation of the euro could hinder an upturn. In Japan, a moderate recovery seems to be in place, but the economy's structural problems are likely to hold back sustained stronger growth in the period ahead.
The prospects for emerging market economies are also generally improving, though there are considerable regional differences. Emerging Asia remains the world's fastest-growing region, and the recovery from the SARS setback earlier in the year has been surprisingly swift. Indeed, the very latest information suggests that many economies in the region are performing even more strongly than anticipated in the latest World Economic Outlook. China, India, Thailand and Singapore are all showing signs of more buoyant activity.
Much of this is a result of stronger domestic demand, though export growth is making a significant contribution in some cases.
Domestic demand is also picking up in some countries here in Latin America, supporting the export-led recovery from the steep downturn in 2001-2002. That recovery is more tentative than in Asia and prospects vary markedly across the different countries of the region.
Emerging market economies in Europe are, of course, heavily dependent on developments in the euro area: this has been reflected in slowing export growth in some countries. In the Middle East, by contrast, relatively robust growth is in prospect, with geopolitical tensions lessened, though certainly not eliminated. Africa has experienced surprisingly resilient growth during the global downturn which reflects, among other things, improved macroeconomic policies in an increasing number of countries. Growth is expected to approach 5% next year, aided by continued improvements in policies, weather conditions, and by some positive developments in the oil sector.
Of course, any optimism about the short-term global outlook has to be tempered with a warning about the downside risks, especially in the medium and longer term. We think that, on the whole, these risks have moderated a little. But given that my last visit to Mexico was to attend the opening of the WTO Ministerial meeting in Cancun, I can hardly avoid mentioning the risks to the multilateral trading system that we now confront. This is especially relevant given the focus of our session this morning.
Cancun was a disappointment for everybody involved. It was unfortunate that no agreement could be reached on many of the key issues of the Doha round. It will be even more unfortunate if progress continues to be stalled. Trade liberalization, in a multilateral context, offers the best hope of a significant improvement in medium and longer term growth prospects‚for all economies, industrial and developing.
We believe that the Doha talks should restart as soon as possible, based either on the WTO Secretariat's draft, or the Cancun chairman's text.
It also remains important to press ahead with policies that will support sustained medium-term growth and reduce the heavy dependence of global growth on the United States. This requires structural measures to boost growth outside the US‚especially through labor and product market reforms in Europe, corporate and financial restructuring in Japan, and wide-ranging reforms to improve the level and resilience of growth in emerging markets. A stronger medium-term fiscal position in the United States would also help. More balanced global growth would help reduce current account imbalances, and lower the risk of abrupt exchange rate movements.
It is, of course, much easier to tackle difficult reforms during periods of economic recovery, which is why it is important for governments to seize the opportunities offered by the current relatively benign environment. This is especially important for emerging market economies, given the concern about the level and nature of public debt in many of those countries.
The brighter economic outlook has been accompanied by a recovery in capital flows to emerging market countries as a whole. But the rebound masks the vulnerability of many countries to even modest economic shocks: this in turn represents a potential threat to global financial stability that is dangerous to ignore. The levels of public debt in many of these countries are high‚higher on average as a proportion of GDP than in the industrial countries‚and rising. In many cases it is well above what would be sustainable if countries do not improve on historical growth and budgetary performance.
The economic upturn could provide governments with the breathing space they need to take difficult decisions that could help make them more resilient in the future. Fiscal balances need to adjust to render debt burdens more sustainable. Tax collection and public expenditure management need to be improved. Stronger growth, accompanied by base-broadening tax reform, would bring the opportunity to create fiscal cushions that could help reduce the need for pro-fiscal tightening during periods of slowdown.
The Fund is working with countries to develop appropriate policies and the tools they need to assess and resolve sources of vulnerability. In our regular surveillance of all member countries we now conduct enhanced debt sustainability analyses. Conditionality in Fund programs now involves improving debt structures. We're looking again at our advice on reserves adequacy, and improving our analysis of balance sheet mismatches.
The speed of the global downturn in 2000-2001 caught many people by surprise, especially those countries that thought they had become less vulnerable to an economic slowdown in the United States. In its broadest sense, globalization means the integration of the world economy: what happens in one country can have far-reaching effects elsewhere in the world. This makes it more necessary than ever that economies are well-managed, with sustainable growth-oriented policies that help provide protection from outside shocks, or at least make it easier to weather the storm. Constructing such a policy framework is essential if the world economy is to develop the potential for steady growth without relying on one country as the engine of growth.
Thank you very much.
IMF EXTERNAL RELATIONS DEPARTMENT