November 2001 IMFC Statements
IMFC Ottawa Meeting
Austria and the IMF
Belgium and the IMF
Republic of Belarus and the IMF
Czech Republic and the IMF
Hungary and the IMF
Republic of Kazakhstan and the IMF
Luxembourg and the IMF
Slovak Republic and the IMF
Republic of Slovenia and the IMF
Turkey and the IMF
Statement by H.E. Didier Reynders |
Minister of Finance of Belgium,
International Monetary and Financial Committee
November 17, 2001
I wish to begin by thanking our Canadian friends for organizing this meeting of the International Monetary and Financial Committee at a difficult and challenging moment. Since the tragic events of September 11, the rapid plunge of consumer and business confidence has caused a sharp deterioration of economic activity in both the United States and other countries and regions. The most important task of policymakers around the world is to keep this loss of confidence as brief and limited as possible. The present meeting of the International Monetary and Financial Committee gives us an excellent opportunity to discuss how to deal with this difficult situation.
The Global Economy - Outlook and Policy Responses
Central banks and governments all over the world have already taken vigorous action to restore confidence and support economic activity by providing ample liquidity, cutting interest rates, and using fiscal stimulus where appropriate. But our vivid memories of the September 11 tragedies must not make us forget that the world economy was already in a severe downturn before the attack, and that this downturn was already synchronous. The simultaneous weakening of growth in most countries of the world presents a special challenge. Why is this weakening of activity so widespread? Is it just unfortunate coincidence? Or is it a result of the economic integration and closer trade and financial ties which have resulted from the globalization of the world economy? These important questions require us to reflect further.
But right now we must find a decisive response to this synchronized slowdown. The present circumstances make it more than ever necessary to remember that global problems require a coordinated response. On this coordination, I would like to make three points.
First, the simultaneous weakness of the world's economies may require a more aggressive policy response than would be needed to counter economic weakness in a single country. When growth is faltering everywhere, no country can look to its exports to help it overcome its domestic weakness. Here the experience of the Asian crisis is instructive. At that time, domestic demand and growth had weakened significantly in the crisis countries. But while severe, this slowdown was also brief, and the following recovery strong. Why? Because these countries benefited from the depreciation of their own currencies and the strong import demand of the United States, which enabled them to sharply increase their exports. But this year the growth of world trade has virtually halted, and is expected to grow only marginally next year. This time countries cannot recover by virtue of increased exports to other countries. The onus is more than ever on policies that will support domestic demand.
Second, as we think about appropriate policy responses to the present slowdown, we must keep in mind that globally, the nature of the risk has shifted decisively: the greatest risk is no longer inflation, but low growth. The investment boom at the end of the 1990s and the present sharp decline in demand and economic activity have left the world economy with a meaningful unused production capacity. This excess capacity, accompanied by falling commodity prices and increased competition resulting from liberalization and deregulation, give companies little room to increase prices. Inflation is likely to continue declining. At the same time, most countries are experiencing lower real growth that will result in a sharp slowing of nominal GDP growth as well. Should this continue, the risk of deflation would increase. Japan shows us that in such circumstances, it becomes extremely difficult to stimulate demand through macroeconomic policies. At present the chances of this happening on a global scale are limited, but the potential consequences are sufficiently serious to require constant vigilance and attention to this risk.
Third, the global nature of the present slowdown means that individual countries can no longer use certain policy instruments to good effect. The Managing Director highlighted this important insight in his statement of October 5. It applies mainly to the emerging market countries and how they must now adjust to the global adversity and the loss of their access to external financing. If only a few countries were affected by adverse external shocks, an exchange rate depreciation and domestic demand constraint would be the appropriate responses. But simultaneous attempts by a large number of countries to counter external shocks in this way are likely to produce aggregate effects that are highly undesirable. Here, again, there are some difficult questions. What other policies could countries use to adjust to external shocks? And what does this global situation imply for the role of external financing, both official and private?
Let us try to find the answers to these questions by discussing the situations and policy issues confronting individual regions and country groups.
In the United States, the terrorist attack hit an economy that was already weakened by adjusting to the excess capacity and heightened imbalances produced by a period of rapid growth. The Federal Reserve responded appropriately to September 11 by rapidly cutting interest rates. But realistically we must bear in mind the limitations of monetary policy in the present circumstances. Although sharply lower interest rates will help stimulate the economy, they will not help companies reduce their excess capacity to match lower demand. The longer this adjustment takes, the longer the capacity overhang will impede investment and economic growth. Given the strong fiscal position and exceptional circumstances of the U.S. economy, there is a strong case for using fiscal policy, including discretionary fiscal stimuli, to support economic activity. But in deciding the appropriate mix of fiscal measures, it must be kept in mind that the main purpose of such discretionary measures is to stimulate demand in the short term without compromising the soundness of the public finances in the long term.
In the European Union, initially it seemed that European growth would be reasonably immune to the slowdown in the United States, but it turns out that the economic links between Europe and the United States are stronger than suggested by data on European exports to that country. Many European firms now operating in the United States are directly affected by weaker U.S. growth. This represents an important additional channel transmitting shocks between the two regions. But European policymakers have also responded quickly to deteriorating growth prospects.
The European Central Bank has significantly cut interest rates, because medium-term inflationary pressures are decreasing due to subdued domestic demand, responsible wage behavior, and lower energy prices. Fiscal policies are providing needed support to domestic demand by allowing fiscal stabilizers to operate. In this connection, let me emphasize that fiscal support to economic growth is most effective if automatic stabilizers are allowed to operate within the limits of the Stability and Growth Pact, thus preserving credibility and fiscal health. It should also be noted that Europe's automatic stabilizers are more powerful than those in the United States, because its public sector is larger. Europe's present slowdown and persistent high unemployment also underline the need to continue implementing the structural reforms agreed on at the Lisbon summit. Progress with structural reforms, particularly labor market reforms, will not only make room for further reductions of unemployment, but will also make the European economies more resistant to external shocks, a benefit that is especially important in a highly integrated global economy where shocks are transmitted faster and more easily between individual countries.
Japan's situation remains extremely worrisome. Japan is again in recession. Next year's growth is projected to be negative again, and deflationary pressures seem to be strengthening. This is very unfortunate, both for Japan and globally. Japan's policy options for stimulating the economy are now very limited. With conventional monetary easing having reached its limits, the Bank of Japan should now use quantitative monetary easing more aggressively in order to reverse deflation. Fiscal policy has practically exhausted the room for stimulating domestic demand by means of increased public spending. Any additional fiscal spending should now go to facilitate structural reforms, inter alia by providing sufficient support to the unemployed and maintaining adequate capitalization of banks as the process of identifying and eliminating bad loans continues.
The emerging market countries are especially hard hit by the weakening of global activity and the increasing risk aversion of investors. Sharp declines in exports, coupled with reduced access to private external financing, pose difficult policy challenges. But there is also a positive development. Despite the general risk aversion and decline in capital flows to emerging market countries, investors have begun to differentiate among individual countries. Countries who are implementing sound policies and are not in a vulnerable external situation can still borrow on the international capital markets. A good example is the EU accession candidates in Central and Eastern Europe, which have seen little contagion from the adverse conditions in the international financial market. This is mostly the result of their implementation of sound macroeconomic policies and their progress with structural reforms, and of the markets' expectation that the prospect of EU accession guarantees their future pursuit of these policies. Another example is Turkey. Its firm implementation of policies agreed under its IMF-supported program was already paying off before September 11. And though Turkey is being hit hard by the economic fallout of the terrorist attack, it recently accessed the eurobond market. And the spread on its external debt has remained broadly unchanged, unaffected by the sometimes sharp increase in risk premiums within the group of emerging market economies. Emerging market countries that are adjusting to the present adversities and further improving their policies should receive the official financial support needed to catalyze private financing.
The poorest developing countries have been especially hard hit by recent developments. They must contend not only with declining exports to the developed countries but, as large exporters of primary non-fuel commodities, they have also seen their terms of trade deteriorate. Declining tourism only adds to their problems. Because these countries generally have no access to private external financing, it is up to the official international community to help them adjust to these and other adverse shocks. And while we need to consider increased official financial assistance to these poorest countries, there is also a renewed urgency to giving them a more fundamental kind of assistance by improving the access of their exports to the markets of the advanced countries. In today's circumstances, progress with trade liberalization could be an important complement to the provision of debt relief. Combined, these two initiatives, supported by sound economic policies, could provide important and lasting benefits to the poorest countries and to the world.
Sustaining Poverty Reduction in the Low-Income Countries
The present global slowdown once again highlights the fragile economic foundation of the poorest countries. Often—too often—their economic performance remains utterly dependent on export receipts from a few commodities. The IMF must support the low-income countries' adjustment to the present slowdown with concessional PRGF resources. To go further and strengthen their shallow productive base and correct their other structural weaknesses, the developing countries and the whole international community must continue implementing the following strategy:
First, the low-income countries must continue improving their business environments. Some must begin by ending their civil wars. This year has seen important progress toward the restoration of peace in the Democratic Republic of Congo. Full success of this peace effort is indispensable for restoring growth and reducing poverty in the Great Lakes Region. To improve the business climate, enhance growth, and reduce poverty, all poor countries must pursue macroeconomic and financial stability, open trade, market-oriented structural reforms, establish the rule of law, and support their people with effective health care and good education. These goals must be the backbone of any homegrown Poverty Reduction Strategy Papers.
Second, the poor countries must increase their share in world trade. In developing countries that have diversified their output away from exportable commodities to exportable manufacturing goods, the growth of output has outpaced that of population, and poverty has substantially receded. The advanced and middle-income countries should play, as far as possible, their part by fully opening their markets to the exports of the poorest, after the example of the European Union's "Everything But Arms" Initiative. The new trade round begun in Doha should create further opportunities for low-income countries to increase their share in world trade. But the poorest countries must also act. They must liberalize their still restrictive trade regimes, harmonize sub-regional arrangements in Africa, and reduce the high transaction costs caused by their primitive or damaged transport, communications, and financial infrastructures.
Third, that part of the Heavily Indebted Poor Countries' external debt that is unsustainable must be cancelled. All creditors must deliver on their commitments under the HIPC Initiative, which was launched a whole five years ago. Additional debt relief at the completion point may be provided to cope with exogenous shocks to poor countries that have delivered on their promises to improve their policies.
And finally, the industrial countries must increase their Official Development Assistance (ODA) so that there is enough to maintain the sustainability of the poorest countries' external debt after HIPC debt relief, and to meet the Millennium Development Goals. The World Bank and the IMF must also continue to support the United Nations' Financing for Development process with their technical expertise. The Monterrey Conference in March 2002 will provide a unique opportunity to agree on methods for monitoring progress towards the Millennium Development Goals. Increasing ODA from its present level will be a major challenge for many industrial countries, given the mixed results of past aid. The best way for poor country authorities to convince governments and parliaments in donor countries to be more generous is to show that the aid they receive is truly effective in helping their people.
The IMF is well placed to monitor, in the course of its Article IV consultations, every country's contribution to the success of this strategy for sustaining poverty reduction in the low-income countries.
Combating Money Laundering and the Financing of Terrorism
Investigation into the terrorist attacks on the United States shows that globalization has not only produced unprecedented economic and social benefits by increasing capital's freedom to find the most productive uses, but has also made it easier to conceal the origin of illegal profits and finance illegal activities, including terrorism.
As the machinery for consultation and collaboration on international monetary problems, the Fund has an essential role to play in the international campaign against money laundering and terrorist financing. The international community is moving quickly to prevent money launderers and terrorists from using the international monetary and financial system to promote their schemes. The Fund's history of consulting and collaborating on international monetary problems, its nearly universal membership, its surveillance over countries' monetary and financial policies, and its present efforts to improve its surveillance of systemic stability and devise policies to combat money laundering make it an indispensable tool for purging money laundering and the financing of terrorism from the international monetary and financial system.
During its Article IV consultations and Financial Sector Assessment Programs (FSAP), the Fund must check every country's efforts to combat money laundering and the financing of terrorism. The Fund's evaluations should not be limited to the country's prudential policies concerning anti-money laundering and anti-terrorist measures. They must also include other legal and institutional issues important to this struggle. For example, it is not enough simply to verify that a country's financial institutions are being required to report suspicious transactions or "know their customers." Countries should have well functioning agencies to investigate suspect transactions, and legislation allowing the seizure of suspect funds and accounts held by money launderers and terrorists.
The Fund and the World Bank, in collaboration within the Financial Action Task Force (FATF), should continue to elaborate the ROSC module to assess compliance with the task force's 48 recommendations against money laundering and the financing of terrorism.
The countries in our group strongly support the multilateral cooperation within the Fund and the World Bank. These institutions are indispensable to our common process of making the international financial system more stable and globalization more just. They are important aids to solidarity in global development and the promotion of good global governance. We encourage them as they continuously readapt themselves to new challenges, as outlined for the Fund in the Managing Director's reports on the IMF's reform agenda.