Sustaining Global Growth and Stability -- The Role of the IMF, Remarks by Rodrigo de Rato, Managing Director of the International Monetary Fund
April 6, 2005
Sustaining Global Growth and Stability—The Role of the IMF
Remarks by Rodrigo de Rato
Managing Director of the International Monetary Fund
Georgetown University, Washington, D.C.,
April 6, 2005
As Prepared for Delivery
Thank you, Professor Anderson, for that kind introduction. Good afternoon. It is a great pleasure to be here. Georgetown University is renowned for its work in international studies, and I appreciate the opportunity to interact with its faculty and students today.
Before I begin, let me again express the sense of loss felt at the passing of Pope John Paul II. It is a sentiment shared by people of all faiths and traditions, at the loss of a man of faith who championed justice and the reduction of poverty around the world.
At the end of next week, the IMF and World Bank will be holding their Spring meetings. Representatives of our members will be gathering to take stock of the two institutions' work over the past half-year, as well as to assess the current state of the global economy and discuss fresh initiatives. I would like to use this occasion to say a few words about some of the issues that are likely to be considered.
The Global Outlook and Risks
Let me begin with a brief overview of the global economic outlook. This will not only be a discussion topic at next week's meetings, but will also form an important backdrop for the consideration of other issues.
It is no longer news that the world economy performed very well in 2004, with possibly the highest rate of expansion in nearly 30 years. The impressive growth of such countries as the United States and China is well-known. Less well-known, but equally notable, is the fact that Sub-Saharan Africa posted its highest GDP increase in a decade, though this was still far less than the growth Africa needs to achieve significant poverty reduction.
Looking ahead, global growth should remain robust this year. Supportive policies, strengthening corporate balance sheets, and benign financial conditions are contributing to a favorable global environment. That said, the global expansion has become less balanced, with global growth continuing to be unduly dependent on the United States and China; in contrast, growth in Europe and Japan—which account for close to a quarter of global output—have fallen short of expectations. Among other things, this is complicating the resolution of the global imbalances, an issue which I will return to shortly.
Despite this generally encouraging outlook, a number of downside risks remain, some of which have increased in recent weeks. First, long run interest rates—notwithstanding recent increases - are unusually low, and corporate and emerging market spreads are also close to historical lows. This is partly due to improved fundamentals, but also reflects the continued highly accommodative monetary conditions across the globe, accompanied by a continuing search for yield. While inflation so far has remained generally subdued, some recent data point to a need for added vigilance. A sharp increase in U.S. interest rates, for instance prompted by a rise in inflationary expectations or weaker demand for U.S. securities, would adversely affect the expansion and lead to a significant deterioration in emerging market financing conditions. Against this background, the U.S. monetary authorities' present commitment, to moving toward a more neutral stance of monetary policy at a measured pace, is appropriate for now.
Second, oil prices have continued to rise and are above the peaks reached last October. So far, the effects of higher oil prices on global growth and inflation have been manageable, partly because higher oil prices owe much to strong global demand, and partly because of the improved anti-inflationary credibility of central banks. But, further sharp increases may have more serious effects: looking forward, supply and demand will remain in balance at best, with limited prospects for building spare capacity, and the oil market will remain vulnerable to shocks. Oil producing and consuming countries need to work together to ensure oil market stability, including through strengthening energy conservation, reducing obstacles to investment, and improving data transparency.
Finally, the continuing build-up of the large U.S. current account deficit—with counterpart surpluses mainly in Japan, emerging Asia and, increasingly, Middle-East oil-producing states and the CIS—is a mounting concern. To date, the U.S. deficit has continued to be financed relatively easily, aided by substantial flows from the Asian official sector, and the adjustment in the U.S. dollar has been orderly. However, the demand for U.S. assets is not unlimited. A sharp reduction, or a reversal, of capital inflows could entail serious consequences for currency and capital markets. The recent episodes of market reaction to the possibility of a diversification in central banks' international reserves remind us of the potential risks.
With this picture in mind, it is tempting to believe that U.S. policymakers alone hold the key to solving this problem of global imbalances. But that conclusion would be wrong. Today's global imbalances are a problem of global disequilibrium, requiring actions to be taken by several key economic actors. The measures needed are well-known, but bear repeating. They are:
· Medium-term fiscal consolidation in the United States;
· Structural reform in Europe and Japan to raise economic growth and turn their economies into additional centers of global expansion; and
· Greater exchange rate flexibility in China and emerging Asia, supported by financial sector reforms.
All these actions would not only promote the adjustment of global imbalances, they would also be in the respective countries' own best interests. The United States needs to undertake fiscal consolidation for its own economic and financial health, just as a more flexible exchange rate would give China greater control over its monetary policies. Similarly, key European countries need to undertake labor and product market reforms to tackle unemployment, as well as to contribute to a more balanced pattern of global growth. The IMF, with its mandate to facilitate international monetary cooperation, provides the natural forum for countries to collaborate in these policy efforts.
Reviewing the IMF's Medium-Term Strategy
Indeed, the facilitation and promotion of international monetary cooperation is a central purpose of the IMF. Here, I would like to move on to another major subject that has been on the IMF's agenda, and that is the review of the IMF's medium-term strategy.
This year marks the 60th anniversary of the IMF's founding. The world economy has witnessed dramatic changes in these 6 decades. Throughout this period, the IMF's role and operations have continually evolved in response. However, the central tenet of the IMF's mandate—its stress on maintaining open economies, exchange stability, balanced growth, and monetary cooperation—has not only remained unchanged, but has acquired added significance in today's world. For globalization has delivered not only new opportunities, but fresh risks as well. The challenge now, and for the future, is how the IMF can continue to be most effective in the pursuit of its purposes, as a foundation for sustained growth and poverty reduction worldwide.
In response to that challenge, in late 2004, I initiated an internal review of the IMF's strategic direction. This review is still in a preliminary stage—we are aiming to present a report to officials at our annual meeting in October. But, we have had some discussions so far, focusing on the following central themes.
First, the IMF is the natural forum for multilateral cooperation to promote stability and growth in the global economy. With increased trade and financial linkages among nations, and strong connections between economic performance, poverty, and security, cooperation to address problems that threaten economic stability and growth is now more important than ever.
Second, the IMF has a responsibility to help countries get their macroeconomic policies and underlying institutions right. In this way, we can help to improve their own economic performance, and avoid negative effects on other countries. Here, the quality and persuasiveness of our advice are paramount. And to maximize our effectiveness, we need to be selective and focused in dealing with the issues that matter the most for each country. This applies equally to all of our activities, be it surveillance, lending, or technical assistance.
Third, the IMF has an essential role in providing temporary financial support to help members address balance of payments difficulties, while mitigating the domestic and spillover effects of crises. Here, we still need to forge a more solid consensus on the appropriate scope for IMF financing in capital account crises, the framework for orderly resolution of sovereign debt problems, and our financing instruments for low-income countries.
Fourth, I believe it is essential that our members resolve the difficult issues that persist in the IMF's governance—notably, the under-representation and participation of emerging market and developing countries in our decision-making processes. There is also a need to pursue even more strongly maximum efficiency and accountability in our operations.
Underlying these central themes is a sense that two areas deserve particular attention. These are the IMF's work on financial sectors and its role in capital account liberalization. On financial sectors, the IMF is currently the one international organization capable of carrying out financial sector surveillance universally—that is, for all countries—and comprehensively. Given the importance of finance to growth and stability, the IMF's financial sector work needs to be more fully integrated into our operations.
Capital account developments and related vulnerabilities will continue to be an important focus of the IMF's efforts to promote financial stability and sustained growth. Our emphasis for the immediate future is not on reopening proposals, debated intensively a few years ago, to extend the IMF's legal jurisdiction to cover international capital movements. Rather, we will be looking at ways to reinforce the IMF's research and analysis of capital account issues, and our monitoring of global capital markets. It would also be important to consolidate our ability to advise countries on strengthening financial sectors, reducing vulnerability to shocks, and preparing for orderly access to international capital markets.
And, although the IMF is not a development bank, we have a crucial role in helping developing and low-income countries. Global poverty is, rightly, high on the agenda of the international community at present, and this aspect of our work will need special attention in the coming years. Let me therefore also bring attention to bear on poverty reduction in low-income countries, and the IMF's role in this effort.
Fighting Poverty and Helping Low-Income Countries
The international reference point for the fight against poverty in all its forms remains the United Nations Millennium Development Goals, or "MDGs". In that regard, the report of the UN Millennium Project, issued early this year, provides a stark account of how much remains to be done. The bottom line, on which the international community agrees, is this: Based on current trends, most developing countries will fail to meet the majority of the MDGs by 2015. This concern will be echoed next week in the release of the second annual IMF/World Bank Global Monitoring Report, which tracks progress towards the Millennium Development Goals.
The situation in much of sub-Saharan Africa, in particular, is very serious. Here, and in many other developing countries, the HIV/AIDS crisis must be addressed immediately. Quite apart from the humanitarian tragedy that it is, sustained growth in these countries cannot be achieved without tackling the HIV/AIDS pandemic. Achieving durable economic growth will therefore require a strong social framework as well as sound economic policies.
2005 is a milestone year for the war against poverty. We are 5 years into a concerted global effort to fight poverty, and only 10 years remain to 2015. It is therefore time to move from rhetoric to action. In this connection, although it is still early in the year, there have been many proposals and ideas put forward on this subject. I particularly welcome UN Secretary-General Annan's recent report on the Millennium Declaration, and its proposals on development and poverty-reduction. Likewise, the report of the Commission for Africa, chaired by U.K. Prime Minister Tony Blair, contains important recommendations that merit careful consideration.
The IMF is actively engaged in the fight against global poverty and the efforts to achieve the MDGs. As an international financial institution with near universal membership, our unique position enables us to contribute to building both pillars of the Monterrey Consensus, the international compact established three years ago in Mexico. On one side, we can work with countries to design policies and build institutions that will help them grow out of poverty. On the other, we can advocate for more and better international support, and help with its coordination.
There is much that we can do—and have been doing—to help, be it through financial assistance, providing technical advice, or a combination of both. For example, we are carefully studying the various proposals for new financing mechanisms and further IMF debt relief for developing countries.
Ultimately, debt relief should not be seen as an end in itself, but as a means to achieve sustained growth and lasting poverty reduction. It should also be recognized that IMF loans account for only a small share of low-income country debt. Yes, IMF debt relief can deliver benefits, but only if accompanied by real increases in overall donor aid to low-income countries. It is therefore discouraging that current aid levels remain, in real terms, well below those of the early 1990's. They are also far below the "0.7 percent of donors' GNP" commitment first made three and a half decades ago, and repeated so often subsequently.
But simply raising aid will not necessarily reduce poverty. According to ongoing research by IMF staff, it is not clear that there is a robust relationship between increased aid levels and higher growth. This does not mean that we should curtail aid. To the contrary, the research shows how important it is for donors and aid recipients to work together, to find effective and innovative ways of ensuring that increased aid achieves the desired results of sustained growth and poverty reduction. Developing countries themselves have a most important role to play, for the fundamental premise here is that low-income countries must have full ownership of the strategies to reduce poverty and raise growth. This talk about country-owned strategies is not rhetoric; it is at the heart of our engagement with low-income countries.
Any poverty reduction strategy must be based on sound economic policies and good governance. Crucially, high and sustained growth requires a vibrant private sector willing to invest and create jobs. Developing countries must therefore provide environments that are friendly to investment and business activity. Strengthening institutions and governance, eliminating corruption, and establishing predictable legal and regulatory frameworks are key steps to this end.
Prudent macroeconomic policies and strong institutions will also be key. The potential for increased and large inflows of aid requires that care be taken to keep inflation in check. Similarly, countries should guard against a real appreciation of the currency, and the consequent loss of external competitiveness. Continued vigilance must be exercised to prevent debt burdens increasing to unsustainable levels. Securing a sustainable flow of fiscal revenue, and reinforcing public spending management systems, are also important reform priorities. The IMF, with its mandate and expertise in macroeconomic policy, has been helping countries in the design and implementation of reforms in these areas.
Low-income countries also need more trade. In fact, in so many ways, trade is worth more than aid. I therefore repeat the call that has already been repeated by so many others—advanced economies should open up their markets to developing country exports. But, at least as important, developing countries must also lower their own trade barriers. The costs of these barriers—especially those imposed by low-income countries on each other—are often higher than the costs of rich country protectionism.
Recent years have also seen an increased focus on regional free-trade agreements. Although these arrangements can have important benefits, greater benefits are brought about through multilateral trade liberalization. The IMF is therefore fully supportive of efforts to complete the Doha Round. The benefits to be reaped are great. By some estimates, freeing up merchandize trade and removing all agricultural subsidies could generate gains of up to $280 billion by 2015, with a disproportionately high share of these gains going to developing countries. These real benefits aside, I should also mention that trade liberalization contributes to stable growth. According to recent research by IMF staff, more open economies are better able to withstand higher levels of volatility with less adverse effects on growth.
That, then, is an overview of some of the matters that will be on the minds of IMF meeting participants next week. It will be a busy weekend, and rightly so. The current favorable global economic environment provides a prime opportunity to step back and carefully consider these issues. Through international collaboration, we can all take action and implement policies that will not only lock in medium-term growth and stability, but also achieve significant advances in poverty reduction and the march towards the Millennium Development Goals!