Restoring Confidence to the Global Economy, An Article By IMF Managing Director Horst Köhler
November 6, 2002Restoring Confidence to the Global Economy
By Horst Köhler
Managing Director of the International Monetary Fund
November 6, 2002
The world is in a state of heightened uncertainty. The economic recovery that started in the major advanced economies has weakened, and while there are still reasons to see a firmer recovery down the road, that road is far from smooth. Financial markets have reflected the uncertain prospects in falling equity prices and sharply higher cost of borrowing for all but the most solid risks. Many emerging market economies, in particular, are feeling the pain.
The increased integration of world goods and capital markets magnifies perceived economic weaknesses or political uncertainty - resulting in heightened risk aversion that affects everyone, even countries pursuing fundamentally sound policies. Faced with these difficulties, we should not be surprised that we are seeing unease in many quarters about globalization..
What can the international community do to restore the world economy to good health? Ministers and Governors recently meeting at the IMF supported the notion that the first critical task of all parties is to restore confidence. A key role falls to the governments of Europe and Japan; they need to become the locomotives of the world economy, and pursue policies to promote growth, including by accelerating long-overdue structural reforms.
For the IMF, the priorities are to strengthen the infrastructure of the international financial system, to improve crisis prevention, while making the framework for crisis resolution more predictable. To overcome the current difficulties we do not need less globalization, we need better globalization, offering all countries a level playing field to seek their own road to prosperity. And we need, both in national governments and in multilateral institutions, to restate our commitment to international solidarity: without rapid and significant inroads into tackling world poverty there is little chance for truly sustainable global prosperity.
The global economy at a cross-roads
After a strong start to the year, prospects for the global economy have clearly weakened in recent months. In the United States, the upturn seems likely to be considerably slower than earlier expected; recent indicators in Japan suggest that the economy may be bottoming out, but domestic demand remains very weak; and the recovery in the euro area is sluggish, at best. The robust pick-up in emerging Asia is welcome, but the weaknesses in Latin America continue to cast a pall over emerging markets. And the possibility of armed conflict in the Middle East adds a further element of uncertainty.
It is in situations of uncertainty that governments have a heightened responsibility to inject confidence - and only confidence in the future will encourage the private investment needed for a resumption of sustainable economic growth. What can and should be done? In the short term, macroeconomic policies in the advanced economies need to remain accommodative and, should the recovery falter, some further easing in monetary policy, especially in Japan and the euro area, may prove necessary.
But the key to medium-term sustainable growth lies in structural reforms, many of which are long overdue. In the United States, corporate and accounting scandals have illustrated the fragility of financial market sentiment to a perceived lack of transparency. Rebuilding confidence will require strong leadership to strengthen corporate governance - a process that is already underway. In Europe, labor markets in some countries remain mired in inefficiency, with labor force participation in the larger euro area countries, in particular, at strikingly low levels. Europe must improve the functioning of its labor markets and utilize its human resources more efficiently. And in Japan, the burden of non-performing loans on the banks' balance sheets, a ten-year hang-over from the asset price bubble of the 1980s, needs to be tackled decisively.
The agreement to resume trade negotiations in the Doha Round last year was a welcome step. Rapid progress in trade liberalization could play a crucial role in strengthening confidence. Subsidies to the agricultural sector in the OECD countries alone exceed $300 billion, and high barriers to trade in textile and clothing products are especially costly to developing countries. Better access to advanced economy markets would provide a critical boost to developing and emerging economy exports, supporting investment and growth. And growth, in the end, is essential for successful integration in the world economy and for poverty alleviation.
The IMF in a Process of Change
What can the IMF do to support a return to sustainable global growth? Over the coming six months, I see two overriding priorities:
- First, to strengthen our framework for crisis prevention. Much has already been done, in particular through the development of international standards of good practice in a variety of economic and financial areas. But we need to ensure that best practice standards are implemented, thus increasing transparency, accountability, and good governance. We also need to further sharpen our policy advice to member countries to make it more useful and more effective. Key in this area is the development of rigorous debt sustainability analysis. Crisis prevention would also be enhanced by the creation of a better safety net for countries pursuing sound policies - a strengthening of the traditional role of the IMF to make its resources available to safeguard the international financial system by supporting members in times of need. These steps will benefit all our members, including the poorest, which are often most vulnerable to financial markets volatility.
- Second, to formulate a more predictable approach to crisis resolution. This approach should consist of at least three mutually-reinforcing components: clearer and more predictable policies on access to IMF resources; a framework for dealing with unsustainable sovereign debt burdens in a more orderly manner; and a commitment by the membership of the IMF that it will ensure that the Fund has the necessary resources to remain a confidence-building anchor for the international financial system.
In this time of uncertainty, the debate about globalization reflects deep-seated unease in some quarters about the rapid pace of change in the world. It is a debate that we should not shun. The many benefits of growing global integration have been accompanied by new problems, problems that can sometimes seem intractable. But we are not powerless. We need to find ways to make globalization more inclusive, and better balance its risks and opportunities. It must be a collaborative effort. National governments have the responsibility to pursue sound domestic economic and social policies, supported by strong institutions and good governance. But the international community also has a key role to play in assisting those who are willing to help themselves, in establishing global equitable rules of the game, and in providing an international safety net. The IMF stands ready to play its part to make globalization work for the benefit of all.