Address by Mr. Rodrigo de Rato, Managing Director of the International Monetary Fund, on the occasion of his acceptance of the New Economic Forum Award
June 9, 2005
Managing Director of the International Monetary Fund
On the occasion of his acceptance of the New Economic Forum Award
Madrid, June 9, 2005
As Prepared for Delivery
1. Good morning. It is with great honor that I accept the New Economic Forum Award (El Premio Nueva Economía Fórum). Let me first congratulate my colleague and fellow award recipient Jean-Claude Trichet. Throughout his career, President Trichet has made major contributions to French, European, and international economic policy. I am therefore humbled to be honored here today with him.
2. The New Economic Forum's objective - to promote analysis and debate of subjects important to our society - is something that I can fully subscribe to. By encouraging well-informed discussion of the relevant issues, organizations like the New Economic Forum play a key role in building dynamic and vibrant economies. I would therefore like to take this opportunity, building on that spirit of open discussion and debate, to offer some reflections on two critical issues facing the international economy - that is, global imbalances and global poverty.
3. For some time now, international policymakers have warned about the consequences of current global imbalances. By this, we are of course referring to the large current account deficit of the United States - which measured a record 5.7 percent of GDP in 2004 - and its matching surpluses in a few countries, mainly in emerging Asia and the oil-exporting countries. Related to this situation is the increasingly lop-sided pattern of economic growth. In recent years, global growth has been, and remains, unduly dependent on the United States and China; performance in the euro area and Japan continues to be inconsistent and disappointing. If this trend persists, it risks widening existing imbalances, and increases the chances of drastic disruptions to world economic growth.
4. While current account deficits are not undesirable per se, experience shows that deficits of the size that the U.S. has been running cannot be sustained indefinitely. That deficit is already being financed by record levels of debt in the hands of foreign investors, and the demand for U.S. assets is not unlimited. Unless policymakers take action to facilitate an orderly resolution of these imbalances and maintain investor confidence, there is a risk that investors will reduce - or even reverse - their exposure to U.S. assets. This could in turn be accompanied by volatility in currency and capital markets, sharp interest rate increases, and disruptions to global economic growth and stability.
5. The broad strategy to address the imbalance problem is generally agreed. However, firm implementation of the necessary measures is still lacking. It is therefore worthwhile to review what these measures are, and why they must be carried out without further delay.
6. First, growth in the euro area and Japan must be increased, so as to re-establish their leading roles in global economic expansion. Structural reform remains the key to unleashing the potential of the European and Japanese economies. Policy requirements in the euro area would differ across countries, but in general, there is a need to increase labor utilization, further liberalize product markets, and promote greater financial sector integration. Similarly in Japan, greater improvements are needed in labor market flexibility and product market competition. Additionally, barriers to inward foreign direct investment should be lowered, and agricultural policies liberalized.
7. Second, in the United States, credible and sustained measures must be taken towards fiscal consolidation, particularly in the medium-term. This is a key step for maintaining investor confidence in U.S. assets. The U.S. administration's budget proposals for the next fiscal year contain some signs of fiscal restraint, a necessary step on the path towards sustainability. Implementation of the administration's proposals will be critical, and slippage must be avoided at all costs. Over the medium-term, even more ambitious fiscal objectives seem warranted, especially in view of the longer-term demographic challenges, the current account imbalance, and the relatively favorable U.S. cyclical position.
8. Third, in China and emerging Asia, moving towards greater exchange rate flexibility, and strengthening financial sectors, continue to be priorities. Exchange rate flexibility would also carry the added benefit of greater monetary control for countries. China's vibrant growth has benefited not only the region, but also other parts of the world. A more flexible exchange rate system, together with broad structural reforms in the financial and enterprise sectors, will facilitate China's continued global integration.
9. Through coordinated and determined effort as outlined above, the current global imbalances can be unwound with less disruption to international economic stability. The IMF stands ready to facilitate an orderly adjustment of the imbalances, including by helping to coordinate the various policy measures required. The maintenance of economic stability is a vital ingredient for continued economic growth worldwide. Both stability and growth, in turn, are critical elements in the fight against global poverty, the second subject of my remarks today.
Fighting Global Poverty
10. The universal reference point for poverty reduction around the world remains the Millennium Development Goals, or "MDGs". Established in 2000, these Goals address all aspects of the poverty problem, from child mortality, to access to clean drinking water, to primary education enrolment. There has been some progress towards the attainment of the MDGs. For instance, according to the World Bank's latest World Development Indicators report, the prognosis is good that the first Millennium Development Goal - to halve the percentage of people living in extreme poverty, defined as less than $1 a day - will be achieved by 2015. This is largely due to the impressive performance of China and India in poverty reduction. Most regions are also on track to meet the clean drinking water target.
11. However, notwithstanding these gains, progress towards the MDGs has been too slow and uneven so far. Indeed, the recently-issued report of the UN Millennium Project warns that based on current trends, most developing countries will fail to meet the majority of the MDGs by 2015. The situation in sub-Saharan Africa, in particular, is extremely urgent. As the World Bank's development indicators also point out, although 400 million people were able to climb out of poverty around the world in the 20 years between 1981 and 2001, the number of extremely poor in sub-Saharan Africa almost doubled over the same period, jumping from 164 million to 313 million.
12. Clearly, much more needs to be done to fight poverty, and by all members of the international community. The agenda here is a long and comprehensive one; I would hardly do it justice if I were to attempt to address all the issues in the limited time available today. Let me therefore just highlight three important avenues through which the world's poverty reduction efforts can be boosted.
13. First, developed countries need to scale up their aid to low-income countries, as pledged in the 2002 Monterrey Consensus. Despite rises in recent years, aid levels remain, in real terms, well below those seen in the early 1990's, and also well below the 0.7 percent of GNP commitment made decades ago. I welcome the declaration by the Organization of Economic Cooperation and Development (OECD), made in early May, in which OECD countries repeated their commitment to increase aid volumes, as agreed in the Monterrey Consensus. If such commitments are met, annual aid volumes from OECD nations could rise from $78.6 billion in 2004 to $115 billion by 2010.
14. Second, developing countries need more trade, in order to generate the kind of sustained and rapid growth that is needed for meaningful poverty reduction. Accordingly, developed countries have to go beyond providing aid, and make determined efforts to open up their markets to exports from developing countries. Likewise, developing countries also need to remove their trade barriers. Further multilateral trade liberalization, including through a completion of the WTO's Doha Round, will also bring sizeable benefits. For example, by some estimates, freeing up merchandize trade and removing all agricultural subsidies could generate gains of up to $280 billion by 2015, with a high share of these gains going to developing countries. I should also note that greater 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.
15. Third, low-income countries themselves need to intensify their efforts in economic and other reforms, including through further development of their own poverty reduction strategies. These strategies should continue to focus on sound economic policies and good governance.
16. The IMF is committed to supporting these efforts to fight poverty and reach the MDGs. Our role will include helping countries design macroeconomic policies that sustain growth and poverty reduction. We can also act as a key advocate and coordinator for more international support for low-income countries.
17. These are just some thoughts on two subjects that are occupying the minds of global leaders, policymakers, civil society, and ordinary citizens. On the part of the IMF, we will continue to provide whatever assistance and advice we can to address the issues I have raised.
18. Once again, thank you for this award - it is with great honor and humility that I accept it.