Sustaining Development in Low-Income Asia: Infrastructure Investment and Financial Sector DevelopmentRemarks by Naoyuki Shinohara, Deputy Managing Director, International Monetary Fund
At the IMF-JICA Joint Conference, Tokyo
October 11, 2011
As prepared for delivery
Ladies and Gentlemen.
It is my great pleasure to welcome all of you to the joint IMF-JICA conference on challenges facing Low-Income Asian economies. I am also very happy to welcome you to Japan. After the devastating earthquake and tsunami in March, the whole international community, including your countries, has shown warm sympathies to the Japanese people, for which we were so grateful. I hope that in every street corner you have witnessed the resolute determination of the Japanese people towards reconstruction.
Let me also thank JICA for its help in organizing this conference. As one of the leading aid agencies in the world, JICA has accumulated experience and knowledge through its activity especially in Asia. During tomorrow’s discussions, I am sure all of us will benefit from JICA’s insight based not only on its intellectual prowess but also on their practical expertise in the field. In this sense, I do hope that this joint conference will be a model for similar events in the future.
Now I want to turn to a few key issues facing Low-Income Asia and the IMF’s role in assisting these economies.
Past progress, but new risks
Over the past decade, we have witnessed a remarkable transformation in the low-income countries. Strong economic growth has lifted millions of people out of abject poverty. A globalized world economy has provided new opportunities for growth. This impressive performance is a testament to the hard work and dedication of policymakers across the developing world.
But the news has not all been good.
The food and fuel crisis of 2008, and the global financial crisis that followed, have been devastating for the poor. And this year, we have seen a renewed surge in commodity prices that could plunge an additional 44 million people globally into poverty, even though a rise in commodity prices may benefit some commodity exporting economies.
At the same time, downside risks to global growth have increased markedly—at a time when the capacity of many low-income countries to absorb further shocks has yet to be re-built from the recent crises. Also, low-income countries remain vulnerable to continued commodity price volatility, given in particular the severe impact of high food prices on poverty.
In short, although many low-income countries coped well with the global financial crisis, and staged a rapid recovery, they face continued challenges in continuing to show good performance towards sustainable, inclusive growth.
Navigating the storm, rebuilding resilience
So, what policies are needed at this challenging time? And how best can low-income countries rebuild resilience to shocks?
These questions are not easy to answer, as a more uncertain global environment requires varied responses in different countries, according to country-specific circumstances.
For instance, in the event of a sharp downturn, low-income country authorities will rightly focus on mitigating the impact on growth, and protecting the most vulnerable. However, in some cases the scope for countercyclical fiscal policy has become more limited, and in some others monetary and exchange rate policies are constrained by the need to restore external and price stability. The limited policy space could weigh on the ability of the authorities to implement effective measures, so could the fragility of macroeconomic stability.
Moreover, there is a possibility that key advanced economies will succumb to a prolonged sluggish recovery, bringing the world economy as a whole to a period of anemic activity. If this scenario materializes, further realignment of macroeconomic policies may become necessary. Spikes in global commodity price rises also present low-income countries with difficult trade-offs between inflation, external and social objectives. A pragmatic response could include targeted measures to protect the most vulnerable and a monetary response that may largely accommodate the first-round impact on inflation. But again, the limited policy space could weigh on the ability of the authorities to implement effective measures.
In this environment, I want to make three suggestions for low-income countries.
The first is to build up “self insurance” while we still can, by reining in deficits and shoring up reserves. This builds a cushion for the bad times—and especially for protecting the most vulnerable.
The second is to strengthen social safety nets, so that in times of difficulty, support can reach the most vulnerable quickly and efficiently.
The third is to advance structural change, to boost longer-term resilience. Economies that are more diversified—and not overly dependent on a few products and trading partners—are better able to withstand shocks. More diversified economies are also likely to deliver more inclusive growth—growth that creates jobs for more people, and shares the benefits more widely. This is important, as we learned from recent experience how much the social dimension matters for long-run stability.
To enhance long-term growth potential, we should look at issues such as education, privatization, deregulation, economic and trade liberalization, private investment, financial deepening and of course infrastructure improvement. I hope tomorrow’s discussion, especially on the last two areas, will help you sharpen your national strategy.
What can the IMF do to help?
This is a broad and extremely challenging agenda. It is up to the low-income countries themselves to chart the course, and set the priorities. And it is up to the donor community and the international organizations to support them.
As for the Fund, a deeper dialogue—with the IMF listening even more carefully to the needs of our low-income country members—will help us serve them even more effectively.
We have also made our lending instruments more flexible. Two years ago, we boosted the capacity of our concessional lending window to $17 billion through 2014, and doubled the amounts countries can draw. We also cut interest rates on all concessional lending to zero through 2011—and are on track to keep rates at or near zero next year. We will continue reviewing and improving the debt sustainability framework and our debt limits policy to help countries meet the twin challenges of investing efficiently in infrastructure and financing that investment in a sustainable manner.
Partly thanks to these reforms, as of end-August this year, there are more than thirty Fund-supported programs for low-income countries globally. In the Asia-Pacific region, since the 2008 crisis the Fund has extended financial assistance to three low-income countries, Maldives, Mongolia, and Solomon Islands , and potentially more countries may join them.
Conclusion: helping LICs help themselves
In conclusion, the low-income countries have achieved remarkable gains during recent years—and they should be commended for that. But today, these gains are under threat.
Challenges for low income countries cannot be tackled by low income countries alone, because they are part of the challenges facing the global economy as a whole We all must do our part. Low income countries must take right steps towards resilience and growth. Emerging economies must further strengthen their economic fundamentals and rebalance growth drivers. Advanced economies must quickly take measures to calm the market and to ensure long-term fiscal sustainability. The IMF is committed itself to providing advice and support to all its members in their respective endeavor. Needless to say, when we work for low-income countries, the IMF works closely with the donor community, including the World Bank and the Asian Development Bank, a collaboration we value very highly.
With these efforts, I do believe that the low-income countries will be able to withstand this new phase of the crisis—and we will be able to help bring lasting gains to the world’s poorest and most vulnerable people.
While unfortunately I am scheduled to leave Tokyo tomorrow without participating in the conference, I am confident that you will have stimulating and fruitful discussions. I have no doubt that each of us will learn something which could prove useful when you go home and be engaged in policy development, as the main themes of the conference—infrastructure investment and financial sector development—are critical to nurturing a fertile ground for sustainable and inclusive growth in your countries.
Thank you very much for your attention.