Shigemitsu Sugisaki
Shigemitsu Sugisaki

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Japan and the IMF

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Strengthening Global Cooperation
A Commentary
By Shigemitsu Sugisaki
Deputy Managing Director
International Monetary Fund
Business Standard
May 31, 2003

The leaders of the major industrial countries will have an opportunity to demonstrate strong leadership and cooperation when they meet for the G-8 summit in Evian, France, during the first days of June. Even though the welcome end to war in Iraq and the sharp fall in world oil prices have been positive developments for the world economy, significant challenges and uncertainties remain. Assuring a sustained global recovery will surely be high on the agenda in Evian.

Policymakers in the major industrial countries must begin by tackling the impediments to higher growth in their own economies. A sustained and balanced global recovery requires a revival of demand not just in the United States, but in the other large economies as well. The recent weakening of the U.S. dollar is helpful in adjusting global current account imbalances. But it could retard recovery prospects in Japan and Europe, making offsetting policy actions that much more important. Policymakers in the euro area would do well to remember the experience of Japan in the first half of the 1990s, when a sharp yen appreciation contributed to the prolonged recession. Action is therefore needed on several fronts.

Low inflation provides ample room for monetary policy to support demand in the major industrial countries. IMF staff do not view global deflation as a significant risk at this stage, but deflationary pressures have risen in some cases, and history points to the importance of early, aggressive action to ward off such pressures. In the euro area, the scope for further monetary easing has increased. Deflation has become entrenched in Japan, and more aggressive measures are needed. I welcome the initial steps taken in this regard by the new leadership of the Bank of Japan.

Scope for fiscal expansion in the major industrial countries is limited. Indeed, a modest start on deficit reduction may even be appropriate in Japan and some highly indebted euro area economies. Still, governments should allow deficits to widen (as they automatically will) if a weakening economy lowers revenues or increases benefit payments. Tax reductions in the United States should not be allowed to undermine the credibility of commitments to medium-term fiscal balance.

More progress on structural reforms is essential for stronger growth. This includes more aggressive corporate and financial sector reform in Japan, and accelerating labor and product market reforms in Europe. Forceful implementation of corporate governance reforms is also important to boost investor confidence in the United States and elsewhere.

International trade is a vital ingredient for building confidence in a strong and lasting global recovery as well as reducing poverty in developing countries. The expansion of global trade and prosperity since World War II provides vivid testimony to the benefits of reduced trade barriers within a multilateral framework. The G-8 leaders could provide no clearer signal of their commitment to international cooperation for the benefit of all, including the world's poorest nations, than by giving renewed impetus to the successful completion of the Doha Round of trade negotiations.

Agriculture is at the heart of the Doha Round agenda. It is particularly important for developing countries, as most of the world's poor depend on farming for their livelihoods. Those industrial countries that continue to heavily protect their agricultural sectors have a chance to demonstrate leadership in the global war on poverty. The round is now entering a critical phase in the run-up to the September meeting of the World Trade Organization in Cancun, Mexico, and such leadership at this time would pay major dividends.

Global prosperity does not depend only on the G-8. Worth highlighting as well is the importance of disciplined macroeconomic policies and continued progress on structural reforms in emerging market economies. Most such economies are now benefiting from lower oil prices and improved financial market conditions, but experience has demonstrated that financing conditions for emerging market borrowers can change quickly, and policymakers should not become complacent.

Moreover, efforts to prevent financial crises, and to improve methods of crisis resolution, must continue. Much has already been achieved, building upon the lessons of the financial crises in the 1990s. The recent resilience of the global economy in the face of several severe shocks is testimony in this regard. The IMF will continue to work to strengthen the effectiveness of its work in this area.

In sum, the global economy continues to face significant challenges and uncertainties, but with the right policies they can be overcome. The G-8 leaders will have an important opportunity in Evian to demonstrate their resolve, in the spirit of international cooperation, to tackle the impediments to stronger growth, and ensure that the benefits are shared by all. A positive outcome could do much to achieve a turnaround in global consumer and business confidence, and lay the basis for a strong and lasting global recovery.




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