Statement by the Honourable Paul Martin
The report prepared by the Managing Director for our meeting, The IMF in the Process of Change, provides a good perspective on the role of the Fund and its place in the global economy. It underscores the fact that the evolution of the world economy, especially the integration of financial markets, has changed the environment in which the Fund operates—changes that have required responses from the Fund and other international institutions. In my view, the report illustrates very well the progress the Fund has made in addressing these challenges. But the title of the report can also be interpreted as alluding to the short-term economic outlook. And, from this perspective, it is clear that the economic and financial environment in which we have to pursue institutional reforms has become much less favourable, increasing the challenge of managing the process of change.
Global Economic Environment
The speed and extent of the global slowdown has surprised many forecasters, and world growth projections have been revised down accordingly. The downturn has become widespread across most economies and regions of the world, and hence policy-makers need to be vigilant to ensure that the downturn does not become self-reinforcing. The policy response has generally been prompt, as interest rates have been reduced in a number of industrial economies. The strong fiscal positions in several economies, meanwhile, have permitted tax cuts as part of long-term fiscal reforms and these measures will support a rebound in global growth.
Developments in the U.S. economy will be a key determinant of the shape of the global recovery, and in this regard the speed and extent of the easing by the Federal Reserve Board is welcome. However, the continuing large U.S. trade deficit remains a concern.
Growth in the Euro area is expected to outpace U.S. growth for the first time in a decade. Absent significant signs of an economic slowdown and with inflation above its target, the European Central Bank has kept short-term interest rates unchanged so far this year. Given the downside risks to the global economy, however, an easing in rates would prove quite helpful in the near term. Moreover, the long lags between interest rate cuts and their impact on activity suggest that waiting too long to ease could prove costly.
The Japanese authorities face a particularly challenging task ahead given the structural weaknesses in their economy. The recent announcements of new policy measures to ease monetary conditions and an economic plan to address weaknesses in the financial and corporate sectors are welcome. However, the government's new economic plan does not provide a lot of detail on the proposals, or a specific timeline. The problems in Japan's financial sector have built up over a prolonged period of time and it will take a sustained effort to deal with them.
The deterioration in the external economic environment, as well as domestic economic weaknesses and political instability, cloud the outlook for many emerging market economies relative to just a few months ago. Many economies are well-positioned to withstand a global slowdown, having moved to more flexible exchange rate arrangements and implemented key structural reform measures. Nonetheless, continuing uncertainties in emerging debt markets have increased borrowing costs for some key emerging market economies. Further progress should thus be made to strengthen domestic financial systems and implement prudent macroeconomic policies.
Economic Performance and Prospects in the Constituency
Although economic uncertainties stemming from the slowing in world economic activity present a number of challenges for Canada, the Canadian economy is better prepared to respond, thanks to the sound economic and fiscal policy framework that has been implemented. The elimination of the deficit, the declining debt-to-GDP ratio, structural reforms and low inflation have underpinned strong economic performances in recent years.
The Canadian economy continued to grow at a robust pace in 2000, building on the strong economic performance in the second half of the 1990s. Although growth slowed in the latter part of 2000, the economy has grown for 22 consecutive quarters, the longest uninterrupted run since the mid-1960s. During this period growth has averaged more than 4 per cent per year.
This outstanding performance has benefited individual Canadians through solid employment and income gains. In 2000, employment grew strongly for the fourth consecutive year, with more than 300,000 jobs created. Indeed, Canada has led the G-7 in job creation over the past four years. The unemployment rate has been brought down from near 10 per cent at the end of 1996 to an average of 6.8 per cent in 2000, its lowest level in 24 years.
As well, business investment spending has surged in recent years, growing an average of 17 per cent per year over the past four years. This surge has been led by investment in information and communications technology goods, which grew almost 30 per cent per year on average during this period.
Canada's current account balance has moved into surplus, buoyed by improved competitiveness, reflecting strengthening productivity growth and low inflation, and an improvement in the terms of trade. This improvement in Canada's current account balance has lowered Canada's net foreign indebtedness position to about 23 per cent of GDP, its lowest level since the 1950s.
Although the economy has been operating near capacity, domestic inflation pressures remain subdued. As in other countries, headline inflation has increased, largely as the result of the strong increase in energy prices. However, underlying inflation (excluding food and energy) has remained stable and close to the mid-point of the 1 to 3 per cent inflation control target band.
Our recent economic performance has thus been very encouraging.
Having said this, it is clear that developments in the external environment have increased the uncertainty about our short-term economic prospects. Canada's openness to trade—Canada' s exports amount to about 40 per cent of GDP, with more than 85 per cent going to the U.S.—and its financial linkages with the rest of the world mean that economic developments in the world economy are increasingly felt in Canada. Reflecting these developments, Canadian economic growth is expected to slow this year, as a result of the slowing in the world economy.
Clearly, we are not immune to developments outside our border. And, while these developments will have an impact, our economic performance is also determined by our policy response. In this respect, Canada's underlying economic and policy fundamentals are stronger today than they have been in more than twenty-five years. Accordingly, most forecasters expect Canada to experience a slowdown in growth but to fare comparatively well.
An important factor underlying these expectations is the fiscal stimulus in 2001 that was introduced in the 2000 Budget. The October 2000 Economic Statement and Budget Update deepened and advanced the announced tax reductions so that the majority would come into effect on January 1, 2001. Provincial governments have also reduced taxes. Together, federal and provincial tax reductions in 2001 amount to 2.3 per cent of GDP, providing timely stimulus to the Canadian economy. These measures will also help to improve Canadian competitiveness and foster innovation and entrepreneurship going forward. When the tax cuts are fully implemented, corporate tax rates in Canada will be below those in the U.S. In addition, the capital gains inclusion rate has been reduced, putting the average tax rate on capital gains in Canada below the U.S. As well, Canada has introduced a more generous treatment of stock options than has the U.S.
Canada is well-positioned to deal with the globalization challenges of the 21st century, reflecting a high quality labour force, strong investment in new economy industries, lower tax burdens, and encouragement for entrepreneurship and innovation. At the same time, Canada recognizes that to sustain the current expansion and to ensure the continued improvement in Canadian living standards, macroeconomic and structural policies must maintain a medium-term to longer-term focus. Canada is committed to continuing to reduce the debt, maintaining low inflation and control over spending, while making investments in priority areas.
The remarkably strong performance of the Irish economy continued in 2000 with real GDP growing by nearly 11 percent. Over the past four years real growth has been close to 10 percent. This growth has brought unemployment to less than 4 percent, while at the same time there has been a sharp rise in the labour force participation rate and substantial inward migration.
While the prospects are for a significant slowing of the economy in 2001, it will continue to grow much faster than virtually all other industrial economies, with real GDP growth in excess of 6 percent. This slowdown will largely reflect the less benign global environment in general and the retrenchment in the global high technology sectors in particular. It will also reflect the growing domestic constraints and represents a movement towards a more sustainable growth path. Employment will, however, continue to rise and unemployment will fall further. The fiscal surplus is expected to contract marginally to 4.3 percent of GDP. The unwinding of some of the factors which boosted inflation in 2000 and the deceleration of growth should contribute to an easing in the inflation rate to about 4.5 percent on average.
Looking forward, the prospects for the economy remain very positive. The economy remains highly competitive; membership of the Euro area should provide monetary stability; the fiscal and debt position are very strong; and, even with a declining dependency ratio, substantial assets are being built up annually in the National Pension Fund.
The Caribbean Countries
Caribbean economies improved during 2000, but risk factors remain which will require vigilance. Real growth was low to moderate, reflecting improved output in tourism and agriculture. Interest rates moderated in some islands and Net International Reserves strengthened. However, unemployment levels, though improving, remained high. There was progress in fiscal consolidation and containment of the high public debt in some islands, but important challenges remain in others still coping with the impact of a series of devastating hurricanes. The smaller economies are adjusting to the imminent loss of preferential markets and are diversifying into the provision of international financial services. This requires strengthened financial sector regulation and supervisory capacity as well as continued vigilance to preserve the integrity and reputation of the region's emerging financial centres.
We are thus heartened by the rapid and concerted effort underway in the Caribbean to strengthen the monitoring and supervision of the region's financial sector. Caribbean economies have also demonstrated their commitment to the fight against money laundering through on-going efforts to introduce and upgrade anti-money laundering legislation. The work of law-enforcement agencies is being strengthened through tougher legislation criminalizing money laundering, new anti-money laundering task forces and financial intelligence units, co-operation with the Caribbean Financial Action Task Force and the Financial Action Task Force, and arrangements with countries with more experience in interdiction. As the Prime Minister of Barbados recently stressed, all countries must be committed to a zero tolerance policy towards money laundering. While different islands are at different starting-points in terms of implementation, this is indeed the prevailing attitude.
The Role of the Fund
The Fund has a key role to play in helping countries weather short-term economic storms. But, as the Managing Director's report thoughtfully suggests, the Fund must also respond to the changes in the economic "climate" brought on by globalization.
This is not the first time that the international community has had to deal with this challenge. Indeed, the Bretton Woods system was created more than 50 years ago to lay the foundations for economic integration in reaction to the trade restrictions, financial instability, and global stagnation of the 1930s. The result was an international consensus on the importance of trade, financial stability, and development that ushered in an unprecedented period of growth and development that was the wellspring of prosperity for so many, and the source of hope for many, many more.
Although the system has worked remarkably well, the architects of the Bretton Woods system could not have foreseen the developments of recent decades—the importance of trade in services and ideas, not just physical goods, and the massive increase in private capital flows. These developments pose difficult challenges that must be addressed if the promise of Bretton Woods is to be fulfilled.
The need to attack poverty and ensure that the benefits of globalization are spread more broadly is a task on which the IMF, World Bank, and all the other institutions of international co-operation must make greater progress. And, it is the responsibility of individual countries. Good governance is a must if countries are to benefit from their participation in the global marketplace. However, many low-income countries are not able to take full advantage of the global trading system.
More open markets must be a cornerstone of development. For this reason, Canada has been an active advocate of a new round of multilateral trade negotiations and remains committed to working with others on this issue. But market access is of limited value when international trade in key products is distorted by massive subsidies against which poorer countries simply cannot compete. The international community can simply no longer tolerate practices that stymie the process of economic development and put claims on scarce tax revenues that should be used in more productive ways.
The Fund can play a facilitating role on these issues. Nevertheless, its primary role must be the promotion of international financial stability; this is the most effective way for the Fund to advance the goal of making globalization work for all. As recent events demonstrate, however, the Fund faces increased challenges in managing the kind of crises that increasingly afflict emerging market economies.
Strengthening Financial Sector Work and Surveillance
These crises have taught us valuable lessons about the risk of financial vulnerabilities associated with fixed exchange rate regimes, weak financial sectors, open capital markets, and poor governance. Arguably, the most important lesson is the recognition that financial sector surveillance must be a priority for the Fund's new capital markets department and a crucial element in our framework to prevent financial crises.
Enhanced financial sector surveillance is useful in identifying risks. But, to reduce the risk of financial crisis, countries must be prepared to strengthen their financial sector supervision and regulation. The work of the Fund and other standard-setting agencies on the development and dissemination of standards and codes of "best practices" covering a number of areas is an important step in this direction. Much has already been achieved in terms of the identification of key standards and codes.
The challenge now is to promote their adoption. The Fund has a key role in assessing observance through its Reports on the Observance of Standards (ROSCs), as well as through the joint IMF-World Bank Financial Sector Assessment programs (FSAPs). Many countries have undergone assessments, but much more remains to be done. Technical assistance from the IFIs can support these efforts. So too can the ongoing dialogue in the G-20 and other fora. Standards and codes that are not implemented are of little use; and countries will be reluctant to implement them if they have not had a voice in their development.
Private Sector Involvement in Crisis Prevention and Resolution
As important as standards and codes and financial sector surveillance are for crisis prevention, we should not allow ourselves to be lulled into a false sense of security—measures to reduce the risk of future financial crises won't eliminate the risk. The key question is whether we have the means to deal with these crises effectively in a way that is consistent with the mandate of the Fund and the overarching need to ensure that we do not distort market incentives. Canada supports the efforts of the Fund to develop a transparent framework for involving the private sector in crisis prevention and resolution.
Significant progress has already been made in this area. The IMF's operational framework, agreed to in April 2000, acknowledges that Fund resources are limited and that extraordinary access should be exceptional, that clarity is required to guide market expectations, and that, wherever possible, the official sector should rely upon market-oriented solutions and voluntary approaches.
However, as agreed in Prague, further work is required on a number of operational aspects of the framework. In this respect, I encourage the Fund to accelerate work on improving its capacity to assess a country's prospects for regaining market access in the midst of crisis and the relative treatment of Paris Club and private-sector creditors.
Another important element of the framework acknowledged in the September 2000 IMFC communiqué is the possibility that a temporary suspension of payments or debt standstill may be unavoidable in certain extreme cases. Further work on the operational issues associated with this critical component of the crisis resolution toolkit should also be initiated. Indeed, standstills are complementary to other initiatives to promote the timely restructuring of private claims, such as collective action clauses and the creation of creditor councils.
In the absence of an effective framework for private sector involvement, pressure will continue to be brought to bear on the IMF to provide extraordinary access to its resources to avoid the financial, economic and social disruption that would result from a default or an unacceptable degree of adjustment. The problem is that, as the Managing Director has recently argued, in contrast to central banks, the Fund is not a lender of last resort—it neither has the resources to take on this role, nor can it provide liquidity "on good collateral" to contain moral hazard. What the Fund can do is make its limited resources available conditional on a range of policy measures.
In theory, these conditions are intended to ensure that the Fund's resources are used effectively to support economic growth and promote a rapid return of market confidence. However, the implementation of "conditionality" in recent years has been criticized for being too extensive, i.e., that Fund programs have broadened beyond traditional macroeconomic management to include structural or efficiency issues and ventured into areas outside the traditional expertise of the Fund.
The evolution of conditionality was in many cases appropriate, reflecting changes in the world economy and the adjustment needs of the IMF's members. More detailed and structural measures were viewed as necessary to deal with the varied economic situations of members, including the low-income and transition countries, and weaknesses in governance and the financial sector. Nevertheless, it has been argued that the broadened scope of conditionality has undermined program ownership and weakened the Fund's credibility and effectiveness at a critical time.
The Managing Director has placed a high priority on streamlining and focusing conditionality and strengthening national ownership. We support the progress that has been made in this review. The objective should be to improve the effectiveness and efficiency of the Fund in fulfilling its mandate. The Fund's comparative advantage lies in promoting international financial stability. Consistent with this mandate, the Fund should develop more effective conditionality through a sharper focus on factors relevant to a country's macroeconomic and financial stability.
Where structural reforms that are critical for a program's success lie outside the Fund's core areas, the Fund should work closely with the World Bank and other IFIs that have a comparative advantage in the design and monitoring of these measures. A co-operative approach with other institutions also applies to problems of governance, the correction of which is a critical element to the success of Fund programs. For it's part, the Fund's involvement is focussed on the economic aspects of governance that could have a significant macroeconomic impact. Its approach should be guided through initiatives that promote good governance across the membership and specific measures to address particular instances of poor governance and corruption.
The overriding goal of all this must be to increase the sense of ownership that is required for the Fund to be as effective as it can be, as effective as it must be, if it is promote the international financial stability that is needed if all countries are to reap the benefits of globalization.
Combating Financial Abuse and Money Laundering
The risk of financial crises is not the only problem created by the globalization of capital markets. As financial markets have become more integrated and financial instruments and players more diverse, the scope for abuse of the international financial system has increased. The IMF has a role in addressing these problems, such as money laundering, where they poses a threat to members' financial systems and the integrity of the international financial system more broadly.
I therefore welcome the IMF Board's recent recognition of the FATF's 40 Recommendations as the appropriate standard for combating money laundering and agreement to operationalize relevant FATF Recommendations into the Fund's work. The Board's call for increased co-operation with the FATF and regional anti-money laundering task forces is an important step in this process. I also endorse the Board's call on all governments, especially those with responsibilities for major financial markets, to put in place the necessary measures to counter money laundering.
In working together to fight financial abuses, we must recognize that smaller countries with limited resources and administrative capacity need assistance to meet international standards. The IFIs have an important role to play in this respect. So too do other countries. Indeed, Canada, for its part, recently announced that it would contribute $8 million toward the creation of the Caribbean Regional Technical Assistance Centre (CARTC), and a further $5 million annually for a program to strengthen financial sectors in the Caribbean and elsewhere.
Role of the G-20
Over the past fifty years, the IMF has been at the heart of international economic and financial issues. It has clearly demonstrated its importance; the changes underway will help to ensure that it can assist its members successfully tackle the challenges of globalization. But these challenges are so pervasive that national governments must also be actively engaged in the search for solutions.
Our experience with the G-20 has shown the power of networks of governments, working together directly, to achieve a consensus on policy directions that can be taken forward in the international institutions. This helps to ensure that the international agenda is set by governments and promotes accountability. Going forward, the work plan of the group is designed to complement the Bretton Woods institutions. It is based on the straightforward notion that the actual experiences of its members can be used to better assess policy proposals. The goal is to draw out the lessons learned in dealing with the various challenges posed by greater economic integration and build a consensus on how to ensure the benefits of globalization are made available to all. This is a goal that all international institutions of co-operation must share.
Globalization presents challenges but also opportunities. Ensuring that all countries meet these challenges and exploit these opportunities requires finding common solutions to shared problems. Individual countries, regardless of size, cannot achieve this alone. International co-operation is required. Strong, effective international institutions are needed to provide an institutional framework for this co-operation.
This is why it is critically important for institutions to respond to the challenges in the environment in which they operate. For the Fund, this means drawing on the lessons of the crises that have affected emerging markets to strengthen financial sector supervision and surveillance.
These efforts will reduce the risk of crises. But, make no mistake, crises will occur. We must therefore also ensure that the Fund is capable of resolving the crises that do occur in a manner that is consistent with its original mandate and the efficient allocation of capital. This is why it is important that the Fund's conditionality supports the overarching goal of financial stability and builds country ownership. This also underscores the importance of adding an effective framework to promote the timely, orderly restructuring of private sector claims to the IMF's crisis resolution toolkit.
Clearly, no single institution can ensure that all countries reap the benefits that globalization offers. That is why it is equally important for our institutions to remain focussed on what they can achieve. And that is why the IMF, World Bank, WTO and other international organizations must avoid duplication and co-operate effectively.