Global Markets and the Global Village in the 21st Century: Are International Organizations Prepared for the Challenge? -- Address by Stanley Fischer

IMF News, November 19, 1999

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Global Markets and the Global Village in the 21st Century: Are International Organizations Prepared for the Challenge? -- Address by Stanley Fischer

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• Published: November 19, 1999

The Global Village

• Key observations and context:
  • Marshall McLuhan coined "global village" almost 40 years earlier in The Gutenberg Galaxy.
  • Telephone cables laid across the Atlantic in 1956 carried 36 simultaneous conversations; today's fibre-optic counterparts carry 10 million conversations.
  • Telecommunications, satellites, computers and fibre-optics are "halving the cost of processing, storing and transmitting information every 18 months."
  • The internet is described as the "market square" of the global village.
  • Estimates suggest 250 million people around the world use the internet already (number rising every day).
• Distributional digital access (selected statistics):
  • By 1995, low-income countries averaged 2.6 telephone lines for every 100 inhabitants, compared to 54.6 in high-income countries.
  • By 1995, less than 2 computers for every thousand inhabitants in low-income countries, against almost 200 in high-income ones.
  • At the end of 1997, 85 per cent of internet users were in just 10 industrialized countries.
  • Flows of investment capital: more than 70 per cent of foreign direct investment in developing countries flowed into just 10 economies.
• Implication:
  • Inclusion in the benefits of globalization is uneven; strengthening understanding and stakes in globalization is needed to sustain support for an open world economy.

Global capital markets

• Nature of the problem:
  • Capital flows are inherently volatile; recent volatility has been "excessive," causing larger and more frequent crises.
  • Contagion: Russia's devaluation and unilateral debt restructuring transmitted crisis to Latin America.
• Policy prescriptions for emerging markets:
  • Prudent macroeconomic policy as prerequisite: sound public finances and pursuit of low inflation.
  • Exchange rate experience: countries that experienced major external crises in the last two-and-a-half years—Thailand, Korea, Indonesia, Russia and Brazil—all had fixed or essentially pegged exchange rates; countries with more flexible arrangements (including Mexico in 1998, South Africa and Turkey) suffered less severely.
  • Flexible regimes are now more likely choices; if fixed, consider definitive arrangements such as a currency board (Hong Kong or Argentina cited).
  • Capital flow controls: no good reason to restrain inflows of long-term capital, stronger case for market-based controls to restrain destabilizing short-term inflows (Chile example); controls on outflows (e.g., Malaysia) have adverse longer-term consequences and tend to be inefficient.
  • Strengthen banking and financial systems: good bankers, strong supervision, healthy competition (especially from foreign institutions); strengthen corporate governance, auditing and accounting standards; enforce bankruptcy laws.
• Responsibilities of capital-exporting (industrialized) countries:
  • Pursue sustained growth with low inflation.
  • Support Financial Stability Forum conclusions on highly leveraged institutions and offshore financial centers.
  • Reform the Basle capital adequacy standards (noted past distortions: short-term bank loans more profitable relative to long-term ones).
• Role of international organizations and tools:
  • Development and monitoring of international standards and principles (banking supervision, securities regulation, accounting, auditing, corporate governance, fiscal transparency, statistical dissemination, transparency of monetary and financial policies).
  • IMF responsibilities: development of statistical standards; standards for transparency of fiscal and monetary/financial policies.
  • Monitoring chiefly via IMF surveillance and FSSAs (Financial Sector Stability Assessments) with World Bank collaboration.
  • Financial Stability Forum established in April to improve coordination among G7 finance ministries, central banks, supervisory bodies, BIS, IMF and World Bank.
  • IMF strengthening surveillance: closer attention to capital account and financial sector issues, sustainability of exchange rate regimes, debt and reserve management, vulnerability analyses, international aspects of macro policies, cross-country comparisons and regional developments.
  • Transparency incentives: encourage publication of executive board Article IV assessments and pilot project for countries to publish staff reports (Germany published its Article IV for the first time).
  • Contingent Credit Lines (CCLs) offered to countries threatened by contagion—available only to countries with good policies, meeting relevant international standards, sensible external debt management and pursuing private sector credit lines.
• Private sector involvement:
  • Principle: private sector must share appropriately in financing crisis resolutions to avoid implicit official guarantees.
  • Active issue in IMF programs with Ukraine, Pakistan, Romania and Ecuador; evolving strategy toward cooperative solutions when public sector support is insufficient.
• Reform of the international financial architecture:
  • Focused on the 30 or 40 emerging market economies with access to global capital markets.
  • Core elements: greater transparency, standards and monitoring, strengthening domestic policies and financial institutions, increased private sector involvement.

Trade

• Context and objectives:
  • WTO members (135 countries) to meet in Seattle later this month to begin a fresh round of negotiations to open markets for goods, services and agriculture.
  • Trade has been a main engine of world growth since World War II; rapid exporters have been countries that integrate with the world economy.
• Environmental concerns:
  • Trade liberalization can increase scale of activity and environmental pressures; relationship between income and pollutants is not linear (pollutants often rise then fall as incomes pass a threshold).
  • Trade-induced changes in composition of activity, technological innovation, consumer preferences and government regulations affect environmental outcomes.
  • International challenge: develop rules and incentives to meet environmental objectives without imposing protectionist measures disguised as regulation.
• Labor standards concerns:
  • Core labor standards (ILO Conventions/Recommendations): right to organize and bargain collectively; right to equal pay and treatment for equal work; abolition of forced and child labor.
  • Evidence cited: Dani Rodrik finds no statistically significant relationship between observance of core labor standards and trade performance; weak labor standards do not significantly attract FDI seeking exploitable labor.
  • Argument made that well-treated workers are more productive; strong labor standards should emerge through competition and enlightened self-interest; punitive trade barriers could worsen outcomes.
• Trade and development:
  • Openness to trade and investment linked to faster growth over time; openness facilitates specialization and access to best-practice technologies.
  • For less developed countries to benefit, greater access to markets of richer nations is needed; Seattle negotiations hoped to advance that goal.

Development

• Core IMF stance:
  • Sound macroeconomic policies and market-oriented structural reforms are vital: price stability, fiscal discipline and structural reform promote growth.
  • Growth is the single most important factor contributing to poverty reduction; low inflation helps foster greater equality of incomes.
  • Structural policies that ease factor and product market rigidities increase supply of essential goods and availability to the poor.
• Complementary policies for poverty reduction:
  • Growth alone is insufficient; policies directly targeting poverty are important.
  • Market reforms should be accompanied by adequate social safety nets to protect vulnerable populations during adjustment.
  • In fiscal retrenchment, protect spending on efficient provision of health, education and social services.
  • Growth-oriented policies and investments in human capital are mutually reinforcing.
• Pace of reform:
  • Experience in transition economies suggests rapid and comprehensive reform is more effective than slow piecemeal approaches; price liberalization and small-scale privatizations were especially important.
• Debt relief and highly-indebted poor countries:
  • 1996 IMF and World Bank initiative to reduce external debt burdens of countries with good policies so debts become sustainable through export earnings, aid and capital inflows.
  • Initial sustainability estimates were too conservative; recognition that debt relief should free resources to pay for essential social needs.
  • Initiative expanded: number of countries likely to benefit increased from 29 to 36 and relief at least doubled to a present value of $27b.
  • IMF contribution through ESAF (subsidized loan window) reformed and renamed the Poverty Reduction and Growth Facility (PRGF) — reflecting recognition of complementarity among macroeconomic, structural and social policies and more systematic cooperation with the World Bank.
• Microcredit and inclusion:
  • Access to credit is important for those left behind by globalization; microcredit is a powerful tool.
  • June survey: responses from 925 microcredit practitioners with more than 22 million clients.
  • Example: Grameen Bank in Bangladesh offered women loans of $350 to buy a telephone and pay for connection and training; "wireless women" became local service providers in rural areas.
  • Microcredit focus on women is highlighted: women are good credit risks and their earnings benefit other family members.
  • Example potential: in Ghana many crop yields could be trebled if access to credit allowed smallholders to exploit available technology.

Are international organizations prepared?

• Adaptation and institutional change:
  • Over the last decade, the IMF and World Bank made major adaptations in organization, focus and interaction with member countries and the public; the WTO was established in that decade.
  • Institutions have shown willingness and ability to be flexible in response to capital market volatility and the needs of the poorest nations.
• Ongoing responsibilities:
  • Continue improving coordination, transparency, standards, surveillance and collaboration among IMF, World Bank, WTO and related bodies.
  • Recognize and discharge international responsibilities as the "global village" increases interdependence and the cross-border impact of national actions.

Address prepared for delivery to the Deutsche Gesellschaft fur Auswartige Politik (German Society for Foreign Affairs) in Berlin, November 19, 1999 — Stanley Fischer, First Deputy Managing Director, International Monetary Fund.

References

• Germany and the IMF
• Japan and the IMF
• Malaysia and the IMF
• Mexico and the IMF
• Republic of Korea and the IMF
• Russian Federation and the IMF
• IMF Policy Advice -- A Factsheet
• The IMF and the World Trade Organization -- A Factsheet
• Speeches
• PRESS CENTER
• https://www.imf.org/en/home