Speech

Horst Köhler
Managing Director of the International Monetary Fund
Japan National Press Club
January 12, 2001

I am very pleased to have the opportunity to meet you at the beginning of my first visit to Japan as Managing Director of the IMF. I am on my way to Kobe to join finance ministers from Asia and Europe. Increasingly, in today's world, economic and financial forces transcend national boundaries. Therefore, international consultation on economic policies, such as the Asia-Europe Meeting, is essential to maintain global stability and growth.

At the IMF-World Bank Annual Meetings in Prague last September, Governors discussed the future role of the Fund and endorsed a vision which includes four key elements:

• To promote non-inflationary growth that benefits all people;



• To be a center of competence for the stability of the international financial system;



• To focus on the Fund's core macroeconomic and financial areas of responsibility, while working in cooperation with other international financial institutions;



• And to function as an open institution, learning from experience and dialogue.

As I have traveled through Asia, it is very clear that the region's primary concerns about the future underline the importance of this vision.

In Singapore, I met with key players in Asia's capital markets. And today, in Tokyo, I met leaders from Japan's financial and business communities, as well as the authorities. We discussed the economic outlook globally and in the region, and the major challenges for corporate and financial sector restructuring. I intend to develop systematically our dialogue with the private sector and to continue to reach out to the business and financial community around the world, not least in the Asian region. I want particularly for the Fund to develop further expertise on financial market issues, which will help us to strengthen our work in overseeing the global financial system and in safeguarding its proper functioning.

Yesterday, I opened a new IMF resident representative office in Hong Kong. Opening this new office underscores the importance that the Fund gives to the Asia region. The office will enable us in particular to enhance financial market surveillance, as part of our stepped-up efforts at crisis prevention. The visit took place just shortly after the IMF Executive Board's agreement to recommend an increase in China's quota (i.e., its capital subscription and voting rights) to the Board of Governors.

My discussions with private sector leaders and the authorities this week focused on the near-term global economic prospects. The year 2000 witnessed the strongest economic growth in over a decade, driven by the extraordinary expansion in the United States. The rate of growth observed in the United States in recent years was clearly not sustainable, and a slowdown to a soft landing was necessary. The pace of deceleration in the United States in recent months may have surprised all of us. But, on balance, the signs still point to a soft landing. We should avoid swinging from an excessive optimism a few months ago to an exaggerated pessimism today. The slowdown may be somewhat greater in the first part of 2001 than previously expected, but growth should pick up again during the course of the year. The IMF sees the likely outcome for U. S. growth in 2001 as a whole as around 2½ percent. A timely adjustment in U.S. interest rates has already been made to help ensure a soft landing. And, if necessary, there is quite a lot of further room for maneuver in both monetary and fiscal policy to maintain growth.

Yes, Asia will be affected by the U.S. slowdown. The impact will be greater in those countries with a higher orientation towards exports-especially electronics-to the US. But, overall, I do not expect the Asian recovery to be derailed. This is because the region has substantially improved its macroeconomic fundamentals since the Asian financial crisis. In particular, short-term debt exposure has been reduced markedly, reserves have been rebuilt, and exchange rates have been more flexible. Much has also been done in carrying forward necessary structural reforms, although this process is not yet finished. The continuation of solid growth in China and India is stabilizing economic activity in the region. Overall, therefore, I still expect growth of around 5 percent for Asia outside Japan this year, compared to around 8 percent in 2000. I would consider such a slowdown more as a normalization than a cause for doom and gloom and justifying neither panic nor frantic actions. The slowdown that causes me greater concern is that of progress in structural reforms in many Asian countries. It is now important for these countries to deepen and accelerate the reform efforts-especially on corporate and financial sector restructuring.

For Japan, I expect continued recovery, albeit at a moderate pace. This growth will still provide a stabilizing influence for the region. If necessary, there is still room for maneuver in macroeconomic policy to support the recovery. But, crucially, the priority must be to redouble efforts towards restructuring the economy, with a continued focus on the financial system and corporate sector. The workout of the imbalances inherited from the bubble period is taking longer than expected. But I have no doubt that this great nation is on the road to coming back as a powerful source of growth in Asia and the world.

In Europe, the growth fundamentals have clearly improved, and major tax reforms are taking effect at the right time. Growth in Europe is therefore robust. But unemployment is still high, and the potential for growth through adoption of new technologies and more flexible labor and product markets has not been fully realized. I would like to see Europe embrace a more ambitious reform agenda that would lift trend growth clearly above 3 percent.

There is another major opportunity to strengthen confidence in global economic prospects: to agree expeditiously on a new round of trade liberalization at the WTO, most important to provide better access for developing country exports to the markets of the advanced countries. It is estimated that a 50 percent worldwide reduction in trade barriers could generate welfare gains exceeding $400 billion a year. One-third of those gains could go to the developing countries, and that would be a major contribution to their prospects for growth and poverty reduction. Asia certainly would benefit greatly from such an initiative.

Furthermore, within Asia I see a great opportunity in strengthening efforts at regional cooperation, including by reducing barriers to trade within the region, which remains relatively low. In the present context, I would also like to express the IMF's strong support for the Chiang Mai initiative for expanded financial cooperation. I encourage the ASEAN+3 countries to make it operational. I understand this initiative as a complement to the IMF's own financial assistance for members in the region that undertake adjustment efforts.

Altogether, then, there is much that can be done to strengthen growth prospects in the global economy and in Asia.

Before finishing, I would like to emphasize that one of the lessons we have learned from the Asia crisis is the need to listen more to the people on the ground. In fact, this has been an important purpose of my trip to Asia. But I have also been encouraged that the people that I have met have strongly urged us to stay engaged in the region. And you can be assured that this is our commitment.

Now, I will be happy to take your questions.