2002 Annual Meetings of the IMF and the World Bank Group
September 28, 2002
Documents Related to September 28, 2002 IMFC Meeting
Statement by His Excellency
The Global Economy
The increasing uncertainties surrounding prospects for the world economy since the IMFC met last spring point to the need for coordinated and cooperative economic policies on the part of the world community. The recovery of the U.S. and most of the European economies, particularly the major ones, appears to be stalling, the situation in Japan remains difficult, and emerging market and developing countries have in turn been buffeted by global uncertainties reflected in weakened demand, a sharp drop in private capital inflows, and a continuing decline in commodity prices. Furthermore, what appears to be a sense of unease regarding the basic underpinning of the global financial framework may be growing, imparting a sense of malaise on the part of consumers and investors worldwide.
In the United States, following the excesses of the 1990s which were reflected in a continuously rising current account deficit and an unprecedented asset price boom, particularly in the stock market, economic growth began to slow down in early 2000 as a process of correcting the excesses set in. The unfortunate events of September 2001 aggravated the slowdown and heightened the uncertainties. More recently, the economy has been buffeted by at least two major developments that are clouding the outlook. The first is the crisis of confidence associated with the high-profile corporate ethics transgressions, which appears to have accelerated the sharp fall in equity markets and to have affected private domestic demand and corporate investments. The second concern relates to the recent fiscal expansionary policy which has yet to be accompanied by the adoption of a medium-term framework for fiscal consolidation. While supportive macroeconomic policies have, no doubt, helped sustain the economy's still incipient recovery, the questions surrounding the course of fiscal policy over the medium term are adding to uncertainties with regard to future macro stability and to the increasingly cautious attitude of economic agents. The recently heightened risk of the outbreak of military action has compounded economic uncertainties in the United States and, indeed, in many other parts of the world.
Regrettably, the economic outlook has also become more cloudy in the other two major currency areas, namely Japan and Europe where it had been hoped that a strengthening of growth would, at least partially, compensate for a slowing of the U.S. economy in the period ahead. In Japan, the pursuit of expansionary macro policies alone has not been successful at reviving economic activity or preventing successive recessions. While a modest pickup in activity is projected, there are also serious downside risks to the outlook. In Europe, fragile global conditions and weak domestic demand combined with the persistence of structural rigidities, particularly in major countries, are hampering the anticipated overall recovery. Notwithstanding the strengthening of the euro vis-à-vis the dollar, large global imbalances persist. The risk of a sudden unwinding of these imbalances, which are not likely to be sustainable for long, and of a disruptive adjustment of major exchange rates, presents a serious risk to the global economy. Assuring an orderly and gradual unwinding of these imbalances is the responsibility of both the major deficit and surplus countries and both need to pursue policies that would promote an orderly adjustment. We, therefore, concur with the view that macroeconomic policies in most industrial countries will need to remain accommodative for longer than had been expected earlier in the year, with special emphasis on the surplus countries. A more vigorous and sustained implementation of structural reforms, be they in labor and product markets in Europe or banking and financial sector reform in Japan, as well as a significant strengthening of corporate accounting regulation in the United States, is also needed to raise these countries' medium-term growth potential. Given their pivotal roles in the global economy, the major industrial countries are also called upon to do considerably more to promote stronger growth in other parts of the world, most notably by accelerating the implementation of their commitments with regard to opening their markets to developing country exports. Decisive and timely action in this area is urgently needed.
While important progress has been made in many developing countries in strengthening their macroeconomic frameworks and in structural reforms, prevailing global demand conditions have, nonetheless, had a generally negative impact on growth in the developing world. Growth in Africa weakened over the past year largely as a result of the decline in commodity prices, as well as severe drought conditions. In Latin America, adverse developments in international financial markets, compounded by political uncertainties, resulted in a deterioration of economic conditions in a number of countries.
Our region of the Middle East has also, to varying degrees, experienced a rather tumultuous year associated with both the deteriorating regional situation as well as the sharp drop in global economic activity, which contributed to weak oil demand and sharply reduced tourism receipts. Apart from the heavy toll on human life and suffering, it is well to note that the rebuilding of the Palestinian economy, which has been totally devastated, will take many years and much assistance from the international community. Furthermore, all over the region, policy formulation has clearly been encumbered and shaped by the security situation and the associated political atmosphere prevailing in the region. As a result, in many countries, growth slowed down from the high levels of the previous year. However, average growth was 4.2 percent of GDP in 2001, above the average rates recorded for the vast majority of developing countries.
The Fund and the International Financial System in the Process of Reform
Surveillance and Crisis Prevention
The sharp decline in private capital flows to developing countries over the past year has focused attention on the risks inherent in increased global financial market integration, notwithstanding some improvement in investor differentiation among recipient countries. Given the increased frequency and the severity of financial market crises over the past decade, it is incumbent on the Fund to review its policy advice to developing countries on capital account liberalization. For one thing, a serious evaluation of the costs and benefits of short-term flows to the economies of developing countries is called for. Furthermore, a careful study of the appropriate sequencing of capital account liberalization with, not only a strengthening of the domestic financial sector, but also with trade liberalization, is needed. Here, I refer to trade liberalization in both the country concerned as well as in major industrial country markets. It cannot be ignored that too many of the countries that suffer a severe debt crisis when capital inflows dry up for one reason or another, are faced with the monumental task of trying to meaningfully increase their exports to deal with their BOP problem, only to find that the largest markets remain virtually closed to the products in which they are competitive. Until developing country access to industrial markets is significantly enhanced, the Fund's policy advice should realistically reflect the current state of affairs that developing countries continue to face today. It is not helpful for the Fund to repeat the mantra that global financial integration would increase international trade flows significantly and that trade and financial integration tend to reinforce each other. Experience has shown that financial market liberalization, particularly with regard to short-term capital, has become a very risky proposition for developing countries, especially when they are not already strong exporters. We had repeatedly expressed our serious concern on this aspect prior to the outbreak of the Asian crisis in 1997.
It follows from the above, that trade issues should be given much more prominence in Fund surveillance of industrial countries. The Fund already plays a prominent role in promoting trade liberalization in developing countries through its policy advice in the context of Fund-supported programs and bilateral surveillance. However, the incorporation of policy advice and analysis on barriers to trade in Article IV consultations with the industrial countries, remains perfunctory. We are, therefore, pleased to note that the Fund is in the process of refocusing its surveillance to provide more detailed and critical analyses of trade policies in industrial countries. Explicit coverage of the costs both to the domestic economy and globally of trade restrictions and subsidies should be included. We hope that an increased awareness of the magnitude and distribution of the domestic costs of trade barriers in advanced countries, will lead to faster progress in their removal. We fully support the Managing Director's strong advocacy of trade liberalization that would meaningfully benefit developing country exports.
We strongly support the Fund's efforts to temporarily provide members in crisis with adequate financial resources in support of strong adjustment and reform programs, based on rigorous sustainability analysis. We support the strengthened policy framework for exceptional access to the Fund's resources agreed to by the Executive Board. Nevertheless, it is well to note that experience has clearly shown that the terms and maturities of the Supplemental Reserve Facility (SRF) may at times exacerbate the difficulties of countries in severe crisis, pointing to the need for an expeditious review of the SRF framework to make it more responsive to the needs of countries.
We support Fund efforts aimed at establishing a sovereign debt restructuring mechanism (SDRM) that, in cases of unsustainable sovereign debt, would provide the legal basis for a more rapid, orderly, and predictable restructuring of a sovereign's debt to private external creditors. In moving this process forward, it will be crucial to balance carefully the views of sovereign borrowers and the private sector and to consult extensively with all parties concerned. While we hope that, at the same time, greater use will also be made of collective action clauses in sovereign bonds, we would stress that the most effective way to promote their greater use would be by regulatory action in major financial centers.
The Low-Income Countries -HIPC Initiative, PRGF, and PRSP Approach
The international community has reaffirmed its commitment to cooperative and collective action to eradicate poverty and promote higher standards of living in developing countries, particularly the low-income countries, in the Financing for Development Conference in Monterrey. The onus is now on all countries, particularly the major industrial countries, international financial institutions, and the developing countries themselves, to proceed with a sense of urgency in the implementation of those commitments. Appropriate domestic policies focused on poverty alleviation and the acceleration of growth must be the focus of the countries concerned. In turn, the international community should be forthcoming in translating into action its commitments to increase concessional aid, enhance market access for developing country exports, and provide adequate technical assistance.
We welcome the continued progress being made under the enhanced HIPC Initiative in providing debt relief to the world's poorest countries. On the issue of debt sustainability, we note that debt indicators for many HIPC countries have worsened relative to decision-point projections, mainly as a result of the downturn in global economic conditions and depressed commodity prices. We hope that the flexibility provided in the Initiative will be utilized to provide additional debt relief at the completion points, as needed, based on a case-by-case review. It is also well to note here that debt relief is only one of many elements required to ensure a lasting exit from unsustainable debt. In addition to implementing prudent macroeconomic and borrowing policies, expanding the export base of these countries is essential to reduce their vulnerability to external shocks. In this regard, continued efforts by the industrial countries to open their markets to the exports of poor countries are welcome. This should, of course, be complemented by the provision of the necessary technical and marketing support to enhance their capacity to export. The donor community also has a key role to play by ensuring that timely and adequate financial assistance is channeled to poor countries.