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Global Imbalances and Global Poverty - Challenges for the IMF
Remarks by Rodrigo de Rato, Managing Director of the IMF
February 23, 2005
Good afternoon. Thank you for inviting me to be here. I am delighted to have the opportunity to address this distinguished and diverse gathering of professionals in economics and development. I look forward very much to a productive dialogue with you.
It is not often that the two elements of today's topic — global imbalances and global poverty — are discussed together. Yet, they are related, and should be considered together more frequently. Addressing today's global macroeconomic imbalances is vital for sustainable growth worldwide. And that growth is a key ingredient in addressing that other great imbalance of our time — global poverty.
Global Imbalances
When we speak of "global imbalances" in the international economic system, we are referring to the large current account deficit of the United States, and the corresponding large surpluses in a few countries, mainly in emerging Asia. Related to this, the lop-sided pattern of economic growth in recent years also springs to mind. Global growth has been, and remains, unduly dependent on the United States and China. The euro area and Japan — which together account for nearly one-quarter of global output — continue to under-perform. If this trend persists, it will widen existing imbalances further, and increase the risks of drastic disruptions to global growth. Although unlikely, currency and capital markets could turn volatile, and interest rates could rise sharply. And, as we know, the burden of such disorderly economic adjustments always falls disproportionately on the world's poor, in both north and south alike. That consideration alone requires that urgent measures be taken to alleviate the risks.
What then must be done? Much focus has been directed at the need to narrow the current account and fiscal deficits in the United States. Others have, on the other hand, called for greater exchange rate flexibility in China and emerging Asia. Still others see more growth in Europe and Japan as the solution. While there is merit in each of these arguments, a multilateral effort by all countries is what is required to resolve the imbalance problem. This was most recently and explicitly recognized by G7 finance ministers at their meeting in London earlier this month.
Above all, the time has come for deliberate action by the major players of the world economy. They should act not only out of a sense of obligation to the world, but also as recognition that it is in fact in their own self interests to take the needed measures. In that regard, the broad strategy to address the imbalance problem is generally agreed:
· First, credible and sustained measures must be taken towards fiscal consolidation in the United States, particularly in the medium-term. This will reinforce the impressive record of monetary management in recent years. The U.S. administration's budget proposals for the next fiscal year contain some signs of fiscal restraint, a necessary step on the path towards sustainability. Implementation of the administration's proposals will be critical; slippage must be avoided.
· Second, for some years now, the world has looked to reforms in the euro area to help boost domestic demand and growth. Important progress has indeed been made, including in pension, healthcare, and labor market reforms. But many of the reforms are incomplete. Others, notably the removal of distortions in the labor market, require a clearer focus. Above all, European policymakers and citizens must unite to remove unrealistic constraints on the freedom to work. Put simply, those who want to work more should not be prohibited from doing so. With productivity growth already relatively strong in Europe, removing these remaining distortions should raise output significantly.
· Likewise, in Japan, accelerated structural reforms are in order. This should include continuing with efforts to revitalize the banks, encourage corporate restructuring, and increase competition in sheltered sectors such as retail. More work to enhance labor market flexibility and reform public enterprises would also help.
· Lastly, in China and emerging Asia, moving towards greater exchange rate flexibility, and strengthening financial sectors, continue to be priorities. Greater exchange rate flexibility would also carry the added benefit of greater monetary control for countries. China's vibrant growth has benefited not only the region, but also other parts of the world. The right policy framework will secure China's place as a key player in stable growth worldwide.
Let me now turn to that other dimension of "global imbalances" that should be at least equally important to policymakers. And that is the divide between the rich and poor, or the problem of global poverty.
Addressing the other "Imbalance" — Global Poverty
Just as with the correction of macroeconomic imbalances, the fight against poverty is a global effort. Here, the challenge for the world is great indeed. After all, no measure of our humanity is as clear, or as direct, as how we help create opportunity for the world's least fortunate.
To achieve lasting poverty reduction, sustained economic growth would be key. Developing countries have made significant progress over the past decade in growth and stability. Sub-Saharan Africa, in particular, has been witnessing good growth performance in recent years, with GDP expansion in 2004 expected to be the highest in a decade. However, important as these advances may be, much more is required in our war on poverty.
It is natural to begin any meaningful discussion of global poverty with the United Nations Millennium Development Goals. When this initiative was launched in 2000, achievement of the Goals by 2015 seemed a distant objective. We are now one-third of the way through the MDG timeline, and 2015 is fast rising over our planning horizon. It is timely for the international community to be reminded of our commitments to the world's poor.
The recently-issued report of the Millennium Project provides a stark account of how much remains to be done. The picture is, to put it mildly, disturbing. Based on current trends, most developing countries will fail to meet the majority of the MDG's by 2015. To be sure, some progress has been made. But the advance has been uneven and its pace too slow. Sub-Saharan Africa, in particular, is seriously falling behind, despite recent economic expansion. If I may quote from the Millennium Project report, this region "is the epicenter of crisis, with continuing food insecurity, a rise of extreme poverty, stunningly high child and maternal mortality, and large numbers of people living in slums."
2005 is a milestone year in the fight against poverty, and has been dubbed "The Year of Development" by many. We are in the midst of a period of debate and discussion on this question that is unprecedented in our generation. As it is, there have already been many proposals and ideas put forward by various world leaders on this subject, and we are only in February! Much attention was also devoted to this issue at the meeting of the World Economic Forum in Davos last month. The momentum that is generated by this international dialogue is to be welcomed. However, the world must move quickly beyond words to take decisive and meaningful steps. If the MDG's are to be achieved, and if the statements of intent contained in the Monterrey Consensus of 2002 are to mean anything, then the international community must move quickly to turn commitments into concrete action. There is much to do, and little time to waste.
The IMF is fully engaged in efforts to help the world's poor. As an international financial institution with near universal membership, we are in a unique position to play a critical role in these efforts. There is much that we can do — and have been doing — to help, be it through financial assistance, providing technical advice, or a combination of both. Our unique position enables us to contribute to building both pillars of the Monterrey Consensus. On one side, we can work with countries to design policies and build institutions that will help them grow out of poverty. On the other, we can be ardent advocates for more and better international support, and help with its coordination. From this vantage point, I would like now to explore a few key issues concerning how we can best go about this monumental endeavor of fighting poverty.
More Aid
The first issue is aid. Developing countries have made welcome strides in improving policies, strengthening institutions, and creating better environments for growth. But, ultimately, these countries still lack adequate resources for social expenditures and investments in infrastructure, both of which are needed for sustained poverty reduction and growth. There is no doubt that developing countries need more aid. Despite increases in recent years, aid levels remain, in real terms, well below those seen in the early 1990's, and also well below the commitments made in Monterrey three years ago.
More also needs to be done by donors to reduce the transaction costs of delivering aid. The international community must simplify the complex procedures for aid disbursements. At best, these procedures impose a significant administrative burden on low-income countries. At worst, they make aid flows unpredictable, and create severe problems of economic management. It would also be important for donors to coordinate with each other, to avoid duplication and wastage.
Closely related to the issue of aid are those of debt relief and new financing mechanisms. You are all aware of the various proposals that have been put forward, including by countries of the G-7 group. We welcome these proposals as an important part of the anti-poverty dialogue this year. In our quest to achieve the MDG's, all avenues must be explored, and no stone left unturned. On our part, the new proposals are being carefully studied by IMF staff, including the issue concerning IMF gold. For the moment, let me just say that debt relief cannot be seen as an end in itself. It has to be considered in the context of debt sustainability, lasting poverty reduction, and sustained growth.
While it is important that we open our minds to new and creative proposals on financing and debt relief, such proposals should be seen as complements of existing instruments and channels for aid. Bilateral development assistance must be continued —and even enhanced — especially because any new aid mechanisms will likely take time to set up, let alone disburse. I therefore urge donors not to take a wait-and-see attitude. We at the IMF, for example, will maintain momentum in our financing programs for low-income countries, including concessional financing through our Poverty Reduction and Growth Facility. Debt relief through the Heavily Indebted Poor Countries (HIPC) process, which has to date significantly reduced the debts of 27 countries, will also continue.
More Trade
Important as aid is, low-income countries will only achieve sustained and rapid growth with more opportunities for trade. Therefore, developed countries have to go beyond providing aid by making determined efforts to open up their markets to exports from developing countries. The protectionism that rich countries still engage in, particularly in their agricultural sectors and in some light manufacturing, has become increasingly indefensible.
Trade is an engine of global growth because it brings about competition. It enables producers to have access to inputs at the lowest possible prices. No modern industry — or country, for that matter — can compete without access to the world market for inputs. The experience of the world economy, particularly in the 60 years since the last world war, shows that no country has been able to achieve the rapid and sustained growth that is needed for poverty reduction without access to open trade and markets. Trade liberalization also contributes to stable growth. According to recent research by IMF staff, more open economies are better able to withstand higher levels of volatility with less adverse effects on growth.
There is one aspect of the trade debate that is often overlooked, and that is the trade barriers that developing countries impose on each other. The costs of these barriers are far higher than those imposed on developing countries by industrial ones. Developing countries must therefore also take steps to remove their own trade barriers. Likewise, although intra-region trade, and associated regional free-trade agreements, can have important benefits, the greatest benefits are brought about through multilateral trade liberalization. For that reason, the IMF is fully supportive of the WTO's work. A successful—and early—completion of the Doha Round will be a significant boost for poverty reduction. The benefits to be reaped are significant. By some estimates, freeing up merchandize trade and removing all agricultural subsidies could generate gains of up to $280 billion by 2015, with a disproportionately high share of these gains going to developing countries.
At the same time, we are mindful of the concerns of which governments and citizens have about the possibly disruptive implications of opening up to free trade. For that reason, the IMF has been providing technical advice to countries to help them take the necessary measures to counter the adverse impact of trade liberalization. Additionally, special financing to address balance of payments problems flowing from trade opening is also available through our new Trade Integration Mechanism.
More Effort in Low-Income Countries
The labors of donors, and the international community at large, will have to be matched by corresponding efforts in low-income countries. At the end of the day, poverty reduction begins at home. Accordingly, low-income countries should pursue sound economic policies and good governance. They must act to create environments which are friendly to investment and business activity. In this connection, eliminating corruption, and establishing predictable legal and regulatory frameworks, would be key.
It would also be critical for aid-receiving countries to build up their capacities to absorb and use increased aid inflows effectively. Care must especially be taken to keep inflation in check despite the large aid inflows. Similarly, countries should guard against a real appreciation of the currency, and the consequent loss of external competitiveness. Vigilance must also be exercised to prevent non-grant financing from increasing debt burdens to unsustainable levels.
Governments will also need to build systems to ensure a sustainable flow of fiscal revenue. Public spending management systems must be reinforced so that other essential spending, including on much-needed public infrastructure, is not crowded out.
Most important of all, low-income countries need to continue to develop their own strategies to reduce poverty and raise growth. By now, it is established thinking that, to be effective, low-income countries need to have full ownership of their poverty reduction efforts. Policies and recommendations that are arbitrarily imposed from the outside are bound to fail. This is why talk about country-owned strategies is not rhetoric; it is at the heart of any engagement with low-income countries.
The past 5 years have witnessed the development by most low-income countries of comprehensive poverty reduction strategies. Going forward, these strategies should be deepened, through collaboration between all parties. There is also a need to tie them more closely to the realities of making difficult policy choices in the face of scarce resources. For its part, the IMF can assist countries by helping to design macroeconomic frameworks that support countries' poverty reduction strategies. Importantly, this being the fifth anniversary of the birth of the poverty reduction strategy process, the IMF will be undertaking a comprehensive review of this initiative. The feedback obtained from developing countries, donors, and other multilateral institutions will provide useful insight into how this process can be carried forward and made more effective.
Conclusion
I think we all agree that more aid is needed in our march towards the Millennium Development Goals. However, be that as it may, the international discussion this year needs to go well beyond the question of how to mobilize more aid. We will need to consider specifically what each development partner will have to do to reach these Goals. Agreement will have to be reached on concrete and monitorable measures for each of us. There is much that aid donors and recipients alike can and must do. Most important of all, these parties should continue to maintain open channels of communication. Greater effort must be placed in listening to and understanding the needs of low-income countries. Full account should be taken of poverty reduction strategies that are truly home-grown.
Let us use this year's discussion wisely so that by September, when the international community gathers across town at the United Nations for the Millennium Summit, we can each state clearly what our contribution to achieving the Millennium Development Goals will be. The IMF will not shy away from this challenge — and I am sure our development partners will not either!
Thank you.
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