Reflections on Globalization, Spain, and the IMF -- Speech by Eduardo Aninat
IMF News, June 29, 2001
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- Published: June 29, 2001
Benefits and risks of globalization
- Definition: increasing integration of activities—especially economic—among nations driven by improvements in technology, desire for opportunities (trade, migration, investment, acquisition of knowledge), and lowering of barriers to trade and capital flows.
- Distinguishing features of the current episode:
- New information technologies' enormous impact on market integration, efficiency, industrial organization, and human capital development.
- Rapid pace: since World War II, global trade expansion has proceeded at twice the pace of global output growth.
- Greater internationalization of production, expansion in trade of services, emergence of developing countries as producers/exporters of manufactures, explosive growth of international capital flows.
- Documented benefits:
- Globally, real per capita incomes have roughly doubled since the mid-1960s, with those in developing countries growing, on average, just as fast as those in industrial countries.
- Outward-oriented strategies are essential for sustained economic growth and poverty reduction; more open economies grow faster than closed ones.
- Identified risks:
- Overstretching societal and political capacity to adapt.
- Excessively volatile capital markets triggering financial crises that can ricochet across countries.
- Concentration of benefits among the few: at the start of the 21st century, 1.2 billion people worldwide still live on less than $1 per day.
- Severe health challenges: in Africa, one in seven children will die before his or her fifth birthday.
- Rapid global spread of diseases (example: AIDS).
- Internationalization of crime and problems such as money laundering.
- Frustrated expectations: evidence from studies (Peru; Russia) that substantial income gains do not necessarily translate into perceived improvements in well-being for many.
- Policy framing: quote of Amartya Sen—need to use benefits of economic intercourse and technological progress while paying attention to the deprived and the underdog.
What globalization has meant for Spain
- Convergence and growth:
- Spain's per capita GDP jumped from about 75 percent of the EU average in the mid-1970s to nearly 87 percent now.
- The economy has been growing at an average 4 percent annual rate over the last four years, and should grow at around 3 percent this year.
- Structural transformation of exports:
- Export of foodstuffs fell from 53 percent of total goods exports in 1964 to 13 percent by 2000.
- Share of nonfood consumer goods in exports more than doubled [12% to nearly 28%].
- Export of intermediate goods (other than food and energy) doubled [21% to 42%].
- Trade openness:
- Exports (of goods and services) plus imports rose from 27 percent of GDP in 1970 to 62 percent in 2000.
- Financial and corporate internationalization:
- Spanish banks are increasingly prominent in Latin America, controlling nearly 20 percent of Latin America's banking sector.
- Major Spanish firms (Repsol-YPF, Telefonica) investing heavily in Latin America.
- Latibex stock exchange in Madrid enables Latin American firms to be listed in Europe with prices quoted in euros.
- Foreign direct investment:
- Spain's foreign direct investment rose from less than 1 percent of GDP to nearly 10 percent over the last decade.
- Inward FDI rose from just under 3 percent of GDP to nearly 7 percent.
- Spain shifted from being a net importer of investment on the order of 2 percent of GDP annually to being a net exporter on the order of 3 percent.
- Spain is now the sixth largest investor in the world, the twelfth largest donor of official development aid and the eighth largest contributor to the UN.
- Drivers of Spain’s success (four landmarks):
1. Trade liberalization beginning with the 1959 stabilization plan and gradual opening. 2. Integration into the European Union and alignment of tariff and trade regimes with EU requirements. 3. Changes in the legal system in the early 1990s (exchange control liberalization, foreign investment liberalization, securities law overhaul). 4. Monetary policy evolution and central bank status: shift from broad monetary aggregates to focus on interest rates/exchange rates, entry into the European Monetary System in 1989, recognition of central bank independence in 1994, inflation-targeting regime in 1995, founding member of the euro in 1999.
Spain’s macroeconomic and labor outcomes — achievements and challenges
- Achievements:
- Real output growth: annual rate of 4 percent over the last four years; faster growth than the euro area for each of the last six years.
- Real exports grew by an average of 10 percent annually over the same period, about one-third better than for the euro area as a whole.
- Budget deficit declined from 6.6 percent of GDP to just 0.3 percent of GDP over the last five years, with the government hoping to achieve fiscal balance this year.
- Debt ratio: in the mid-1990s stood at 68 percent of GDP and has declined by eight percentage points.
- Labor market:
- Employment has shot up, averaging 3½ percent annually since 1995—three times the euro-area average.
- Unemployment rate stands at a very high 13.4 percent; by contrast, as recently as 1996 the rate of unemployment averaged more than 22 percent.
- Reforms that helped: wage moderation, better labor relations, reductions in dismissal costs and social security contributions for certain classes of workers.
- Further recommended reforms: reduce dismissal costs, enhance labor mobility, decentralize the collective bargaining process, tackle regional disparities.
- Inflation and competitiveness:
- Persistent inflation differential relative to the monetary union average could erode exporters' competitive position.
- Recommended policy actions: dampen inflationary pressures through continued fiscal discipline and product market reforms to enhance competition and efficiency.
Recent world economic trends and implications for Europe
- Global outlook:
- IMF forecasting world growth of around 3 percent this year, lower than foreseen last year.
- World growth was at a 12-year high in 2000 of 4 ¾ percent.
- Near-term supportive factors: timely U.S. interest rate cuts and tax relief expected to help a pickup in the second half of this year, gaining momentum in 2002.
- Risks: high oil prices, substantial current account imbalances among major industrial countries, deteriorating situation in Japan, volatile stock markets.
- Euro area prospects:
- Question whether the euro area can manage growth around its underlying potential of 2.5 percent this year.
- Recent slowdown in industrial production (particularly Germany) and rising headline inflation are concerns.
- ECB scope for rate cuts limited by headline inflation; further weakening of activity or signs of abating underlying inflation would allow scope for additional rate cuts.
- Main policy priority: ambitious reforms to remove structural rigidities in labor markets, pension systems, and product markets.
- Target: Europe should aim at boosting potential growth to well over 3 percent.
What the international community needs to do — policy recommendations
- Trade:
- Industrial countries should open their economies in areas where developing countries have a comparative advantage: agriculture, processed foods, textiles and clothing, light manufactures.
- A global reduction in trade barriers by 50 percent would yield estimated welfare gains of $400 billion annually for the global economy, with developing countries capturing one-third of these gains.
- Support a new global trade round—a "development round"—and duty- and quota-free access to industrial country markets for the poorest countries; the EU initiative is welcomed.
- Critique: OECD countries spend around $360 billion a year on agricultural subsidies—roughly equivalent to the entire GDP of sub-Saharan Africa.
- Aid and debt relief:
- Industrial countries should deliver promised increases in official development aid to the targeted level of 0.7 percent of GDP.
- Follow through on pledges for debt relief to the poorest countries; welcome decisions by some G-7 countries to forgive 100 percent of bilateral debts.
- Emphasis: debt relief is not a panacea but gives countries a leg up; ultimate success depends on "self-help" and "help for self-help."
- Role of IMF and international financial architecture:
- Crisis prevention focus; initiatives described below.
- Position IMF to discourage extended use of IMF credit and respond to sudden loss of market confidence and contagion risks.
- Contingent Credit Line: new IMF loan facility set up in 1999 and overhauled earlier this year, aimed at keeping countries out of trouble; there is a reasonable probability that Mexico will choose to sign up for this facility by year-end.
- Seeking ways to keep the private sector engaged in crisis situations.
IMF initiatives and operational changes
- Monitoring and preventative work:
- Beefing up monitoring of national economies, including joint "health checks" with the World Bank called Financial Stability Assessments.
- Health checks done on 20 countries, with about 30 currently under way.
- Refining early warning systems and indicators of viability to identify crisis symptoms early.
- Transparency:
- Working to dramatically increase the transparency of economic and financial data—timely and detailed information can prevent problems and enhance accountability.
- Acknowledgment that the need for greater transparency applies to the IMF as well.
- Conditionality and ownership:
- Reviewing policy conditions attached to loans to focus on measures essential for achieving macroeconomic goals and to strengthen ownership of reforms.
- Standards and codes:
- Crafting international standards and codes of good practice: data dissemination, fiscal transparency, monetary and financial policy transparency, banking supervision—to guide health checks and integrate poor and rich countries.
- Private sector dialogue:
- Informal but regular dialogue with high-level representatives of private financial institutions, including creation of a Capital Markets Consultative Group and plans for an International Capital Markets Department.
- Poverty reduction and country ownership:
- Supporting poorest and most heavily indebted countries to reduce poverty via Poverty Reduction Strategy Papers that increase country ownership and civil-society consultation.
- Encouraged by "the spirit of Libreville" and high-level commitment from African leaders and the joint IMF–World Bank engagement.
- Crisis lending and private sector engagement:
- Streamlining and updating IMF lending facilities to discourage extended use and to respond to sudden market confidence losses; exploring mechanisms to keep private sector from exiting in crises.
Selected indicators — Spain and the Euro Area: 1995-2000 (as published)
- Euro Area (selected entries)
- Real GDP growth: 2.2; 1.4; 2.3; 2.8; 2.5; 3.4; 2.4 (1995-2000 average)
- Real export growth: 7.8; 4.3; 10.4; 7.0; 4.8; 11.7; 7.7
- Real import growth: 7.5; 3.2; 4.0; 9.5; 6.6; 10.3; 6.9
- Consumer price inflation: -1.6; 1.7; 1.2; 1.1; 2.1; 2.1
- Employment growth: ...; 0.3; 0.5; 1.8; 2.1
- Unemployment rate: 11.3; 11.5; 10.9; 10.0; 9.1
- General gov't. balance/GDP 1/: -5.0; -4.2; -2.5; -2.1; -1.2
- Debt/GDP: 72.3; 74.8; 74.2; 73.5; 72.0; 69.7
- Spain (selected entries)
- Real GDP growth: 3.9; 4.1; 3.6; 9.4; 15.3; 8.3; 10.8; 10.1; 11.1; 8.0; 13.3; 13.4; 11.9; 11.4; 4.6; 1.9; 2.9; 2.7; 3.0; 4.7
- Employment growth: 22.9; 22.2; 20.8; 18.8; 15.9; 14.1
- Unemployment rate: 4.6; 1.9; 2.9; 2.7; 3.0; 4.7
- General gov't. balance/GDP: -6.6; -4.9; -3.2; -2.6; -1.1; -0.3
- Debt/GDP: 63.9; 68.1; 66.7; 64.6; 63.3; 60.6
- Note: Table source cited as WEO. 1/ For 2000, includes proceeds from the auction of UMTS licenses.
Italic: Reflections on Globalization, Spain, and the IMF — Speech by Eduardo Aninat, Deputy Managing Director, International Monetary Fund, General Meeting of ELKARGI, San Sebastian, Spain, June 29, 2001.