Speech

1. Good Evening, ladies and gentlemen. And good morning to those of you watching via the on-line Media Briefing Center—I realize it is very early for those of you in Asia and late for those of us in Washington. Thank you all for taking the time to participate in this briefing.

2. As you know, in a little more that two weeks time, the IMF and World Bank will be holding their Annual Meetings in Singapore. I will be briefing you on the agenda for those meetings. But before doing that, let me say that I have just come from a meeting of the IMF Executive Board where we reached an agreement on a program of fundamental reforms of the Fund's governance and quotas. This meeting is proof that the spirit of international cooperation is alive and well. I will give you more details on this in a few minutes.

3. The Annual Meetings are returning to this region after almost a decade. And they are returning to an Asia which is today the most dynamic region in the world and a region which is growing in importance with every passing year. Asia now accounts for nearly a quarter of global GDP; its share of world exports is over 27 percent, and a third of global capital inflows. Asian growth prospects continue to remain bright, with growth forecast at 7¼ percent in 2006 and 7 percent next year. What happens in Asia affects not only the more than 2 ½ billion people who live there, but the world as a whole. So, I am very glad that our meeting is in Singapore this year and I look forward to productive discussions.

4. There are a number of important issues on the agenda of our ministerial committee, the IMFC. Today, I intend to briefly preview some of the likely discussions at the Singapore Meetings—in particular, proposals for reform of the Fund's governance structure, and the changes we are making in the way we conduct macroeconomic surveillance, which is a core function of the IMF.

5. Let me begin, however, with a few words about the outlook for the global economy, and for Asia in particular. The global economy has been resilient in the past year, and growth prospects are still very good. Here in the United States, the pace of the expansion is moderating, largely reflecting the slowdown in the housing market. But elsewhere in the world, growth prospects are encouraging. Europe has been above most people's expectations. Japan appears to have put deflation behind it. China and India continue to grow strongly. Many other countries, including in sub-Saharan Africa, are enjoying a continuation of the strong growth that we saw last year. Nonetheless, there are more clouds on the horizon than there were a year ago: inflation risks are a concern, high oil prices could adversely affect both inflation and growth, and there has been a major setback in the Doha Round of trade talks. And, of course, global economic imbalances remain large.

6. For Asia, with growth remaining strong, some modest rebalancing of growth is likely, as exports moderate with slowing global growth and domestic demand strengthens. China is becoming an increasingly prominent driver of growth in the region, and Japan's continued expansion is also contributing to buoyant activity. Inflation should remain subdued. The region's current account surplus is expected to remain broadly unchanged, although the surplus in emerging Asia (excluding China) is declining while that in China is remaining largely unchanged.

7. While the outlook is good, there are a some near-term risks that we should take into consideration. Asia faces similar downside risks that I just mentioned for the world economy, and Asia is particularly sensitive to growth prospects in the United States and oil prices. In addition, while the region has shown resilience to the financial market volatility in May and June of this year, further volatility in global financial markets could affect capital flows, growth prospects and inflation.

8. Let me now move on to my central theme, which is implementing two particular aspects of the Medium-Term Strategy, related to Fund governance and surveillance. The motivation for the changes proposed in my Medium Term Strategy is that the world is changing rapidly, and that the Fund must adapt to remain effective, credible, and relevant. And while financial globalization is creating tremendous economic opportunities, it has commensurately increased risks. One question we are now seeking to answer is, "How should the Fund adapt to help our member countries?" The Medium Term Strategy is our institutional agenda for modernizing the Fund and ensuring that it remains equipped to meet the needs of our members in the 21^st century.

9. One part of the agenda lies in addressing governance of the Fund, especially Fund quotas, which largely determine voting power and have a bearing on the amount members can borrow. At present the relative quotas and voting shares of our members do not adequately reflect the greatly increased economic weight of major emerging market economies in the global economy.

10. Take the situation in Asia. As I said, Asia accounts for about a quarter of world GDP. This is about one third higher than its share of Fund quotas. The situation of some individual countries is even more out of line. China's GDP is one and a half times its share of Fund quotas. Korea's share in world GDP is twice its share in Fund quotas. I therefore see a clear need for a rebalancing of quotas to reflect changed economic realities. At the same time, we also need to protect the position of smaller countries, especially low-income countries where the Fund continues to play an important advisory and financing role, but which have an even more limited share in Fund voting.

11. As I mentioned at the start, our Board has just agreed on a program of measures to address these issues over two years. And this will now be sent to the Board of Governors for their approval at Singapore. This two-year program of reforms will include initial ad hoc quota increases for four countries that are clearly underrepresented—China, Korea, Mexico, and Turkey. We also intend to work as quickly as possible on a new quota formula, one that will be designed to reflect more accurately members' positions in the global economy. And there will be further ad hoc increases in quotas for a broader range of members based on the new formula. To protect the position of low-income members, the Board will ask the Governors to enhance the voice of low-income members through an increase in basic votes and steps are envisaged to increase resources for the offices of African Executive Directors. However, it is important to recognize that revising the structure of Fund quotas is a challenging process. It needs persistence and patience to develop the needed broad support from the membership for change.

12. Let me now turn to the second key issue in the Medium-Term Strategy, which is adapting Fund surveillance of the international monetary system and the global economy to reflect the new realities that financial globalization has brought about. We have started introducing a new surveillance instrument—Multilateral Consultations—in which particular issues of systemic or regional relevance will be taken up with several members (or groups of countries) whose policy actions could contribute to addressing the issues concerned. Multilateral Consultations provide a forum in which analysis and common understandings can be strengthened to furthering international monetary cooperation.

13. The first Multilateral Consultation has already begun, which focuses on narrowing global current account imbalances. It is still at a relatively early stage. Fund staff have held discussions with each of the five participants—China, the euro area, Japan, Saudi Arabia and the United States. Over the coming months, we will continue the discussions in a multilateral format through meetings of IMF management and staff with the five participants together. Let me emphasize here that global imbalances are a complex problem that took many years to build up; it would be unrealistic to expect the problem to be resolved through a magic bullet.

14. Also as part of measures to strengthen and sharpen our surveillance framework, which is an ongoing and continuous process, we are seeking to improve the quality of our analysis, including of exchange rates. We are also in the process of extending to the countries of the major emerging economies, the analysis that the Fund currently does to assess whether exchange rates in industrial countries are broadly in line with fundamentals. This is something that needs to be handled with caution, given methodological difficulties and market sensitivities.

15. These two areas, the governance of the Fund and adapting our surveillance toolkit to the new needs of our membership, are important early deliverables on the Medium-Term Strategy. However, there are also other elements of the Strategy which we will be taking forward in the months after Singapore. In particular, we are working to develop better crisis prevention financial instruments for emerging markets with robust fundamentals; we will continue to strengthen and focus our support for low income members. So, we have an important and interesting agenda for Singapore but also for the months beyond.

16. Let me now open the floor for questions.