Yesterday, also, Raghu said—and I agree totally with him—that this is not only the time to realize that things are going generally well, but it is clearly the time of making sure that this will keep going well, and I think that is the challenge. There are some risks, and some of them important risks affecting the global economy: certainly, the continued high oil prices, the continuation and deepening of global imbalances—and we have to be aware that we are in a process of tightening global financial conditions from the current benign state—and also, although this is a remote possibility, of an avian flu outbreak. With respect to this last question, there are actions governments and central banks can take to reduce the risks of that outbreak, and we are making sure that all partners in this respect are aware of what they can do.
Managing Director, de Rato
Let me now say a few words about oil and global imbalances. The impact of higher oil on the global economy has so far been moderate, but it remains a serious risk. It is likely that higher prices are going to last and that, among other things, has to show all of us that we have to adjust to a situation that is going to last. Moreover, rising prices are now being driven primarily by concerns about supply and sometimes about geopolitical concerns. In that respect, they are more likely to feed into inflation and adversely affect growth.
The view of the Fund is that what is needed to improve the medium-term, supply-demand balance is clear: to reduce obstacles to both upstream and downstream investment, ensure full pass-through of prices, and also to reinvigorate conservation programs, and certainly, last but not least, to improve market statistics. The Fund is engaged in all of these areas with different partners. These measures would take some time to have their full effect, but surely the sooner we start acting on them, the better.
Regarding global imbalances, we have been talking about this for some time. Certainly, the Fund has been making clear what is our view. We think that the risks from the problem of global imbalances are serious risks. I have to say very clearly that these risks increase the longer the imbalances continue. In that respect, coordinated action by policymakers around the world to address the problem would enable a smoother adjustment for all of them. So, this is not a zero-sum game, but there is something to gain by all partners and the global economy if there is coordinated action.
There seems to be a broad consensus among policymakers on the measures that are needed to reduce global imbalances. I have to say that, if we judge by what governments are saying, most agree that what is needed is fiscal adjustment, and measures to stimulate private savings in the United States, exchange rate appreciation and measures to stimulate domestic demand in emerging Asia, and structural reforms to stimulate demand and improve productivity in the non-tradable sectors in Europe and Japan.
But that consensus has, in most cases, not been translated into action. The question is, Why?. Well, the answer is that things are looking good so there is a complacency situation in governments. To maybe back that complacent attitude, there is some use of arguments often coming from policymaking institutions in the countries concerned. The arguments are in the sense that global imbalances will either persist forever with no consequences or that it will dissipate gradually of their own accord. I have to say very clearly that those arguments, in our opinion, are not only unrealistic, but could bring the world to a not very good situation. The global economy remains vulnerable to an abrupt and disorderly adjustment of global imbalances and we all have to realize that. Even if times are good right now.
In that respect, the IMF can play a very important role in doing what is needed, and that is coordinated action by major players in the global economy. Coordinated action would be both politically easier and, as I said before, economically more effective than governments in systemically important countries acting alone. To promote these actions—and this is another issue for this weekend—I have made a number of proposals in the IMF's medium-term strategy.
Perhaps the most significant, I have proposed that the Fund complement its existing arrangements for consultations with individual countries with multilateral consultations which would allow the Fund to take up issues comprehensively and collectively with systemically important members and were relevant with entities formed by a group of members such as the European Union and the Gulf Cooperation Council.
I realize that this is not a modest proposal. Such multilateral consultations are going to be something new for us, for the IMF, and for our members. We believe that that would be an important vehicle for analysis and consensus building prior to policy action. These consultations will enable the Fund and members to propose action to address vulnerabilities that affect individual members and the global financial system. If used well, they would help policymakers to show that the measures they propose would be matched by measures that will be taken by others and that, by that, coordination benefits will be greater. I think there is strong support among the membership for coming into an area of multilateral consultations, and I certainly look forward to the Fund putting this proposal into operation in the near future. I do not have any doubt that the quality of the staff is more than capable to put this forward.
Let me mention another question that will be addressed during this weekend and that also refers to the IMF. These are certainly questions referring to governance of the institution.
Since I became Managing Director of not even two years ago, I have spoken several times about the need for increases in voting power for some countries, including a number of emerging economies, to ensure that they have a role in the Fund's decision-making process that accords with their increased importance in the world economy. It is essential for IMF relevance that we make early progress on this. I hope, therefore, that the IMFC will give me a mandate to make some proposals based around an ad hoc quota increase for the most under-represented members, and, also following further steps, to cover other issues, including the formula for quota distribution and the needs of small countries. In that respect, if that mandate is formulated, I would then plan making some proposals, some specific proposals for discussion by our Governors at the Annual Meetings in Singapore in six months.
Finally, let me return to a broader context of the IMF and the global economy. This is the time of great opportunities for many countries. We are seeing historic rates of growth in many areas of the world. If the opportunities are to be taken, problems have to be faced. In the IMF, the world has an institution with a mandate and the capacity to help its members address these problems. Preparing the IMF to help all its members meet the challenges of the 21st century's globalization is the main purpose of the strategy we will be discussing at these meetings.
I now welcome your questions but, first of all, I want to thank Tom Dawson for all his very fantastic and good work in this institution. This could be—you never know—his last Spring Meetings as Director of a part of the IMF. He has done a great job, and I want to thank him personally, and in the name of the Board, and the staff and management.
MR. DAWSON: I am confident this is the last one, as I said once more, on this side of the podium at least.
Could you please observe good etiquette and identify yourself and your institution?
QUESTION: Turkey's parliament yesterday passed a key legislation on social security reform, and do you have any comments on that? Under these conditions, would the IMF mission be able to travel to Turkey for the program's third review? Finally, how would the oil prices factor specifically affect Turkey's fledgling economy?
MR. DE RATO: First of all, I want to say, as we have said on more than one occasion, that Turkey is a very good example of a country that has implemented good macroeconomic policies and experiencing very strong growth and a change in the future of the country that we welcome. I believe the Fund has played a role in that transformation and that positive look for the future. We have been following decisions by the Turkish government, some of them regarding budget and taxes; in previous months, we have had some reservations. We see this approval of structural reform laws as extremely important and they were part of the program. But I really would like Anne to maybe add some more specific thoughts about Turkey.
Ms. Krueger and Mr. de Rato
MS. KRUEGER: Well, as the Managing Director said, Turkey's overall economic performance, as you know, has been very, very good. Inflation is down well into single digits; the growth rate remains very satisfactory. So, overall things are good. The Social Security reform measure, from what we have learned so far, does seem to address some of the underlying issues in a way that will enable turkey to sustain its growth and I think, on the whole, our viewpoint of that is very positive.
Certainly, we will shortly send a mission to Turkey on the basis of that, with the hope that we can conclude the third review. As the Managing Director said, there are just a few issues on the fiscal side that need discussion, but we would expect at that that mission would go shortly, after the IMFC meetings, perhaps a week later or something like that, and go from there. As to oil prices, Turkey is an oil importer and all countries that are importing oil are obviously facing some deterioration in their terms of trade on that account.
We do not even understand exactly why but, so far at least, countries have been able to manage much better with this round of oil price increases than they have in the past. Now, whether that will continue is an open question. Certainly, those countries—and that includes Turkey—with current account deficits need to look at the issue and to see what they need to do in terms of making sure that there is appropriate energy conservation and use within the country, but I do not see that there are special problems, in particular, for Turkey more than any other oil-importing country.
QUESTION: I wonder if you could explain a bit more about how you envisage this new consultative committee working. Would it be a permanent committee meeting on a regular basis or would it be an ad hoc committee meeting as and when the Fund thought there was a problem that needed addressing? And how would it dovetail with the existing IMF work, particularly the IMFC?
MR. DE RATO: It will not be a committee. It will be a Fund instrument, a consultation process. We have a bilateral consultation process that you are all aware of, the Article IV consultation process we have with countries. This will be a multilateral consultation process with systemically important countries that are the ones who can affect, through their linkages and spillovers, the evolution of global imbalances. That, of course, does not refer strictly to developed countries. There are developed countries and also emerging economies right now that clearly have systemic implications for the world economy, and probably the composition of that group will change over time. It would depend very much on the evolution of growth, imbalances, and savings and investment conditions.
As the IMF is a global institution, all of the countries are members of this institution, that consultation process would allow us to discuss with the governments affected their policies that are affecting other systemically important countries, systemic countries, and at the same time, through our institutions, the Board and the IMFC, that discussion would also allow the rest of the countries to participate.
So, what we are working on is a process that will match—at the global level—what we are doing at the bilateral level, and we think that process is what the world economy needs now. We have lived in the last 15 years through different arrangements, formal/informal group of countries, more homogeneous countries. We think that that time is passed in terms of what the world economy needs, and what the world economy needs now is a global institution with the capacity to produce those discussions and those consultations, and at the same time a global institution in which not only are present some number of countries, but all the economies in the world, or most of them.
QUESTION: Sir, I am slightly at a loss about the IMF recommendations to Russia. On the one hand, there is the expression of concern about the fact that growth is primarily fed by domestic consumption. At the same time, there is a recommendation for the central bank, and to Moscow in general, to tighten fiscal and monetary policy, which means stifling growth. Do you not think that there is a slight contradiction on that?
MR. DE RATO: Well, no. I will ask Anne, also, to add her ideas on this. Inflation is a clear danger for any economy, and Russia is no exception. In that respect, it is very difficult to find an example in the world of a country that sustains growth and at the same time increases inflation. What is clear is that Russia is benefiting from very important prices of energy and commodities, that there have being improvements in policy in terms of sustainability of the fiscal framework. We have certainly, seen with a lot of sympathy, the efforts done by the economic team in that respect. But there are a lot of structural reforms, business climate issues that are needed for Russia's non-oil sector to contribute more effectively and probably with less inflationary pressures to the economy, and at the same time for the oil sector to be more transparent and also more efficient.
But I think Anne probably has ideas to add to this.
MS. KRUEGER: Just to continue along the lines the Managing Director was saying. The fact that oil prices are high and have been rising means that there is some degree of pressure on prices and on the money supply in Russia, and the real question is how does one handle that from a macroeconomic viewpoint. Quite clearly, unless something is done, that will be, as the Managing Director said, inflationary, so that needs to be tackled.
Another question relates to the non-oil economy in Russia, and there, of course, as the Managing Director said, issues of structural reform come center stage and raise questions as to how much growth or how much growth there can be potentially without more structural reforms. So, for this reason, we would advocate attention to the structural reforms, which would then enable more rapid growth and more rapid growth of demand if output growth is greater, and at the same time obviously some tightening up of policies so that indeed we do not just see the potential benefits that Russia can get from the oil earnings just dissipate in inflation.
QUESTION: A couple questions about my country, please. Yesterday, Mr. Rajan asked the new government to take urgent measures to adjust the budget deficit. As you know, the new coalition has got a very tiny majority. The question is, do you think the new government will, in this situation, be strong enough to take those measures? Again, you will certainly meet Mr. Tremonti during this day but, as you know, he is gone or is about to go. Did you have any contact with the new government, with somebody and, more specifically, what kind of measures should be taken?
MR. DE RATO: Well, first of all, of course, I will contact the new Italian government when it is formed, and I will have as close a relationship personally and institutionally as I had with the previous one. I had the privilege of knowing many of the people who are involved right now, and certainly Mr. Prodi, whom I worked with when I was Finance Minister of Spain and he was both President of the Council in Italy and then later President and later President of the Commission, and I have a high respect for him.
But let me tell you that experience of different countries does not show that the only key factor for putting forward a program is having big majorities. You have many countries with big majorities that wait too long to make programs and then they are not able to do it. Time is a key issue. The credibility of governments is certainly related to parliamentary backing, but it is also related to the timing of putting forward decisions.
So, our opinion is that the beginning of a government is a very good, important time. If the government has a majority or has a relative majority is certainly an important issue, but the timing is as crucial as that. So, in that respect, we certainly will encourage the new Italian government to put forward an ambitious agenda of reform. Italy has benefited from reform in the past years. Certainly, we have seen the cyclical position improving; we see the projections of growth to recover; and we see inflationary pressures very subdued in Italy.
In that respect, not only that we have a new government and that is always a new opportunity, but we have also an immediate economic situation that is improving, relatively improving. What we cannot hide is that the medium-term outlook is troublesome, so measures have to be taken. If they are not taken, this actual outlook will deteriorate. There are a lot of challenges on the fiscal side, the level of public debt, but also challenges that are going to be looming harder which are the ones related to the aging of the population, which is not only an Italian problem but is certainly an Italian problem.
In that respect, not only to have a clear fiscal position is going to be very important, but also to have a good reform agenda. Italy is losing competitiveness and, in that respect, rigidities and inefficiencies of the economy have to be addressed the sooner the better. The need for a more dynamic economy, more dynamic labor market, more dynamic financial sector, among other things, is crucial for the Italian economy.
So, in that respect, we worked before with the previous government. We have seen some reforms moving forward in Italy. We think the agenda of reforms is clear, which we would certainly be discussing with the new government. We understand perfectly the constraints or the limitations that a limited majority can entail, but experience shows that the question here is do things at the beginning.
QUESTION: I have two questions on the governance issue. You mentioned quota and voice, the need to change the quota system or the representation and increase for the most under-represented members. We know about China, obviously. Is there already a list? If there are underrepresented countries, we assume that there are overrepresented countries, also. Could you elaborate on that?
The other issue is related to one thing that you recently, with Mr. Wolfowitz, called a number of policymakers to constitute some sort of commission to study the cooperation between the two institutions. I would like to understand what the World Bank and the IMF should be doing together that they are not doing now, and how does it fit into your overall reform agenda.
MR. DE RATO: Well, I am not going to give you a list of countries, plus or minus, because I do not think this is a question of losers and winners; this is a question of making the institution more legitimate. This is an institution based on the representation of countries based on their economic weight in the world economy. The world economy is not a frozen thing; it changes over time. This is not the first time. If you look at the power vote or the weights of countries 30 years ago, you will see that this has changed over time, and it has to change again.
My proposal will be around an ad hoc increase and that, of course, means that some countries will adapt, not probably totally but will adapt to their actual weight in the world economy. I think there are clear examples of countries that have really changed in the last 15 years. There are also other issues that I have mentioned in my first sentence, like how the quota is calculated, a question of basic votes. There is not only one single issue that probably we will be asked that we work on this not only once but more than once.
This is a crucial issue. I am very glad to see, for instance, that the biggest shareholder of the Fund has already expressed publicly its support for this agenda. Other very significant countries have done that, too, all of them significant, because everybody significant is given a positive opinion. This is not an easy matter for countries; I understand it perfectly. It is not done. I think that if I get a mandate by the IMFC on Saturday, I would certainly propose positive movements by the Singapore Meetings if I get the consensus to do that.
On the issue of the World Bank and the IMF, we work together not only here but, more importantly, in many countries in the world. We have a very fluent relationship. We are both aware that we have to work together to the benefit of the countries. We are, the IMF, an institution where its mandate is global, its financial stability, macroeconomic stability. The World Bank has a different mandate, which is development. Development without growth is probably impossible. Growth without macroeconomic stability is not sustainable.
There are, of course, a lot of areas in which we collaborate. Some of them we do joint analyses, debt sustainability, but in many others we do part of the work, they do part of the work, and that is based not only on guidelines, but it is also based on the capacity of teams to work together.
We are moving into new challenges for low-income countries: challenges related to the Millennium Development Goals; challenges related to the need for those countries to integrate into the global economy. We are seeing encouraging signs of that growth is being stronger than has been on record in very many low-income countries. We still have to realize that growth is translated into a reduction of poverty. So, it is a good time for both institutions to look at how we work together and find out if we can do it better. At the same time, as other public institutions, we have budgetary constraints. We have to guarantee that the use of resources is efficient, so it is crucial for us to sit down with the Bank and to look at how we are doing things together and how can we do those things better. The Concordant was 20 years ago?
MR. DAWSON: .
MR. DE RATO: So, it makes sense for us to look again at how that works. I think the people who have accepted to do this review with us, I am very glad for them, I am very thankful to them. I think it is very generous of them to devote time this, and I take this opportunity to thank them all.
QUESTION: The global imbalance is a real challenge, and I agree. I have realized that it is sometimes exacerbated by both political and economic factors, and Zimbabwe is one country where this is absolutely clear. It was a surprise when there was with a report that you refused to pay Zimbabwe out. I was wondering if you would allow political factors to affect the people of Zimbabwe on issues which you can easily and, you know, affordably intervene and save the country. That is one issue.
The second issue is sub-Saharan Africa as a whole would be the biggest victim, is the biggest victim virtually now of this global imbalance. I can foresee that the failure of the WTO talks, the Doha Round will further exacerbate this. Does the IMF have any input or any advice or any influence in a bit advancing success in these talks?
MR. DE RATO: First of all, regarding Zimbabwe, I want to say that we are really engaged in the future of Zimbabwe. We have been advising the authorities of Zimbabwe to change their course both in macroeconomic terms and also in respect of human rights and governance. Zimbabwe has had a prolonged situation of arrears with the Fund that has prompted the application of our rules. Those arrears have been cleared, but also there are issues right now regarding the consistency of data and we are working on that.
At the same time, only in recent weeks, months, not very long ago, there was a mission of the Fund in Zimbabwe and we have certainly stressed to the authorities the need for the authorities to change their course in more than one respect. We had the opportunity to send really a message of the need for the authorities to take up the responsibility in changing the course of Zimbabwe for the benefit of the Zimbabwean people, who are suffering a tremendous situation in many respects, but certainly in the economic respect, too.
For sub-Saharan Africa, I want to say that, first of all, growth in sub-Saharan Africa is going to be the best in the last 30 years at least, and it has been sustained in the last three-four years. That is encouraging. We have seen that the macroeconomic situation of sub-Saharan Africa has improved and the managing of institutions is improving. All that is encouraging, and we believe that is the road to pursue.
At the same time, we are aware that sub-Saharan Africa needs a very comprehensive agenda. That comprehensive agenda is based on growth, that of macroeconomic stability, but it also needs new resources, many of them in the form of grants and debt relief. I have to say that we have not only backed the idea of debt relief, but we have implemented it. We are the first international and financial institution to have granted a hundred percent debt relief to some HIPC countries. Many of them in sub-Saharan Africa. But that is not going to be sufficient; more levels of aid are needed. Those levels of aid have to be absorbable by African economies and that's also the role of the Fund.
Certainly, more trade is needed and more foreign investment is needed. We see also signs that foreign investment is increasing in Africa not only related to the extractive industries, but mainly related to extractive industries. Also, there is a need for change in Africa. We need better governance, more trade among African countries, a better business climate; we need to make Africa a place in which people can do business, and we need to remove constraints that are today not only related to economic circumstances, but also to impossible regulations.
So, the agenda is a very comprehensive agenda. I have had the chance to meet with many African leaders in the last month. I was in two meetings with African leaders, one in Equatorial Guinea and the one in Zambia. The Fund is very importantly engaged in work with them. We believe the agenda is a possible agenda. The economic environment of the world is giving a chance to that. There is a need for donors to not only increase their aid, but make it more reliable and more coherent. There is clearly a need for African governments to match that in terms of governance and in terms of reform.
QUESTION: I have a question on Latin America. In the WEO you point out this trend of appreciation of the exchange rates in the region. I mean, there are complaints there from, for example, exporters, that this is hurting their business, and so forth, and some countries have been actually intervening in the markets to contain that appreciation. I wonder if you could comment on that, what you think should be the policy of those countries.
MR. DE RATO: Well, it is clear that this is a very important moment for Latin America, because a lot of elections, democratic elections are happening there and that is very good news. We are going to have new opportunities open in many countries, because we are going to have new governments with new mandates. This is a very good moment for Latin America to take advantage of very good economic circumstances. Latin America is benefiting, importantly, from the situation of the global economy. Questions like interest rates, risk premia, spreads, the price of commodities, are all favorable to Latin America. In that respect, Latin America should be ambitious in responding to its needs. They need sustainable growth; Latin America is known by what is called the "two lost decades" that shows that growth has not always been sustainable. Now there is a chance for growth to be sustainable. Inflation rates are low and public deficits are decreasing. Debt management is becoming much more efficient. Latin America needs growth, sustainable growth and higher growth. It also needs the reduction of social disparities and, on that, social policies have to be strengthened and made more efficient. We are seeing examples in Latin America of good targeted social policies, and we need also to see broader tax bases.
Latin America still is not in a position to use fiscal policy in a counter-cyclical way. Debt sustainability has improved but, if we will face a change in the global economy, the price of money and interest rates and in spreads, in world growth, the room for maneuver of many Latin American countries has not been yet sufficient to use fiscal policy in a counter-cyclical way and that is a very important tool for any policymaker. So, the continuation of a reduction of debt is key in the strategy of Latin America.
We have been engaged with all Latin American governments. We are proud to see that macroeconomic conditions have improved and we are certainly looking forward to working with the new government in many countries; we are already doing that in all of them. We see clearly an agenda for growth and for social cohesion in Latin America.
QUESTION: Sir, can you talk a little bit about your conference on global imbalances scheduled for tomorrow; what is your purpose, who will be attending? Also, the United States has been very critical on how the IMF has been handling this issue of global imbalance, especially in the context of foreign exchange surveillance. Is this conference, in part, a response to this criticism?
MR. DE RATO: The conference is an invitation by me to a group of persons, not a conference of countries, to come here tomorrow and discuss different issues regarding the world economy, global imbalances, growth, exchange rates, coordination of policies, different issues that you can imagine, because the agenda is very clear.
The conference is not supposed to have a communiqué or a conclusion. It will allow us to discuss freely our views and probably listen to others and learn more about how these global international issues can be addressed. Many of the participants will be participating in the IMFC on Saturday, and hopefully the conference will help them also to sharpen and to focus the decisions that we will have to take on Saturday, because Saturday certainly is a formal meeting with a formal communiqué.
So, the conference is not a political conference in the sense that no governments are participating. ...It is only people who are participating, individuals. Many of them are policymakers, others are academicians, but an invitation to the conference is not to have any specific conclusion.
As for exchange rates, certainly exchange rates are at the center of the mandate of the IMF. In all our Article IVs, we make an analysis of specific exchange rates of countries. But we believe that in the actual global circumstances, with a change in the role and in the situation of emerging economies, the exercise that we have been doing in the last 20 years of analyzing the situation of developed industrial countries' exchange rates, we will have to enlarge that exercise to include a good number of emerging economies' exchange rates. We will start doing that in the next round of analysis. That is a very useful tool for us to work with countries, and we believe that the clear new role of emerging economies and the new situation of emerging economies—which is a good one—demands that we include their exchange rates in our analysis.
QUESTION: Mr. de Rato, I was wondering if you could comment on the rising tide of protectionism, which is a theme that came up very strongly from the WEO but that you have not mentioned. It seems that five or six years ago the opponents of globalization were out on the streets throwing stuff at the IMF and now it seems that some of the opponents of globalization are government members of the IMF. I was wondering whether you fear that perhaps you are losing the argument on globalization and whether that will impact your hopes for the multilateral forum that you talked about.
MR. DE RATO: Well, first of all, I would like to emphasize the importance of the satisfactory conclusion of the Doha Round. I want to emphasize that this is a very important opportunity for the world economy, that multilateral trade liberalization is key for the quality and growth and the opportunity of countries, and that there is a shared responsibility of emerging economies and developed economies to really come forward in a multilateral agreement on the Doha framework. It would not only be a pity, but it would be a very important missed opportunity to move forward in this respect, and I take this opportunity to call on developed countries—certainly Europe, United States, Japan, and others—but also emerging economies to learn from their own experience. All of them have benefited tremendously by free trade. All countries, especially the most important countries in the world both on the emerging and developed side, if you want to maintain that distinction, have had very important successes, internal domestic successes because of free trade. They will lose a lot of jobs and a lot of opportunities by missing this target and that also will have not very good consequences to the less developed countries in the world.
On top of that, we are witnessing—and that is clearly stated in the WEO—that protectionism has been showing its face in some countries, and I have to say that in some leading countries, developed countries. That is a big mistake, a big mistake for them. The rates of growth, the rates of employment, certainly the rates of inflation, the opportunity for consumers in those countries—United States and Europe—are related to free trade. The first that will pay a heavy price for protectionism will be those consumers and those citizens and those countries. So, in that respect, some policymakers can think that protectionism can have their economies but, at the same time, there is a responsibility of those countries with the world economy and with the rest of the world.
Once again, I have to really say that not only do we see protectionism as a risk, but that we will certainly take a very strong stance on every occasion we have to avoid and to denounce protectionist measures in countries.
IMF EXTERNAL RELATIONS DEPARTMENT