People's Republic of China and the IMF
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As Prepared for DeliveryAsia's Emerging Markets: a Growing Force in the World Economy
Managing Director of the International Monetary Fund
Kuala Lumpur, Malaysia
September 3, 2003
1. I am very pleased to be here today and to have the opportunity to address such a distinguished audience. I want to talk about the growing presence, and future role, of the Asian emerging market economies in the world economy—and Kuala Lumpur is the perfect place to do so. Here, as elsewhere in the region, outward-looking policies are proving key to a strong economic performance, even in the current difficult international environment. I am pleased to have the opportunity on this trip to listen to the Asian leaders and businessmen and discuss how they see the economic challenges facing the region, as well as the role of the IMF in assisting them addressing these challenges.
2. While uncertainties remain, prospects for a recovery of the global economy have improved. In the United States, there are increasing signs of an economic rebound, with significant economic policy stimulus in the pipeline. While clear indications of a pick-up in activity in Europe are not yet evident, expectations have improved. And in Japan, although deflation and weaknesses in the financial and corporate sectors still represent headwinds to growth, a tentative recovery seems to be taking hold. Among the emerging and developing countries, the situation has also strengthened. Moreover, global financial markets continue to be supportive of the recovery. Overall, the IMF expects global growth to gather strength in coming months and to reach about 4 percent in 2004.
3. The emerging market economies of Asia remain a bright spot in the global picture. With the SARS outbreak brought under control, we expect economic growth to remain close to 6 percent in 2003, and strengthen somewhat in 2004. Timely macroeconomic stimulus and decisive policy action by governments across the region have helped sustain the pace of economic activity. By the way, I see the Joint Declaration on SARS by Asian Heads of State as a good example of a growing spirit of regional cooperation. In sum, Asia is poised once again to grow faster than any other region in the world.
4. In Malaysia, growth is showing an increased momentum, supported by fiscal stimulus. The economy's growth prospects are also underpinned by the progress that has been made in the areas of financial and corporate sector reforms, where Malaysia has moved more rapidly since the Asian crisis than many other countries. We now expect Malaysia's growth to rebound to over 5 percent next year and I believe that prospects are good for sustaining high growth in the years beyond.
5. However, a key risk for the world economy remains its heavy dependence on growth in the United States, and the related large global current account imbalances. These imbalances are unsustainable over the medium-term, creating a danger of a disorderly adjustment that would be disruptive to world economic growth. Ensuring a gradual and orderly correction requires the participation of all regions, involving more attention to domestic sources of growth in some countries, and further adjustments in exchange rates. As part of this cooperative effort, the advanced countries need to tackle their deep-seated structural problems, especially labor market inflexibility and the unsustainability of pension and health systems. And in the United States, a credible medium-term framework to restore budget balance is urgently needed. In the Asian region, domestic demand is becoming more important in driving economic growth, but it could play an even larger role. Further progress with structural reforms, especially to strengthen financial and corporate sectors, can help bring this about. The recent rapid accumulation of foreign exchange reserves in many countries in Asia suggests that greater flexibility in exchange rate management would also be helpful in reducing the global imbalances.
6. In recent decades, Asia has become an increasingly important force in the global economy. Its contribution to world output has doubled since 1950, it now accounts for over one-fifth of world exports, and currently attracts a third of the foreign direct investment to all emerging markets. Economic success has led to impressive social advances as well: poverty rates have fallen, life expectancy has risen, and the quality of life (as measured by the UNDP's Human Development Indicators) has improved dramatically over the past half century. This success story was once dubbed the "Asian Miracle". I would not call it a miracle: it was the result of hard work, economic policies that encouraged business investment, and—not least—a strategy to participate and compete in the global economy.
7. Emerging market countries in Asia have clearly benefited enormously from economic globalization. I have no doubt that continued full participation in the development of global markets remains the best way to ensure future economic prosperity for Asia, and for the world. There is tremendous potential for further long-term growth in the global economy. Technological progress continues at a rapid pace. And ever stronger trade and financial linkages are promoting further international division of labor and expanding markets—holding out the promise of gains in productivity and standards of living everywhere. The emerging markets of Asia, with their dynamic and increasingly skilled work force, are well-placed to take advantage of new technologies and seize opportunities in the international market place to become a major engine of growth in the global economy.
8. But globalization is not without risks. As we all know from experience, openness and economic interdependence can exacerbate the spillovers of economic shocks across countries, and amplify domestic economic problems. So the challenge is to contain these risks and ensure that globalization works for all and is an effective tool to alleviate poverty. This requires efforts at both the national and the international level.
9. I see three key priorities in the domestic economic agenda for Asia's emerging market countries in the period ahead:
· First, maintaining a stable macroeconomic climate, with low inflation and low interest rates, will encourage investment and stimulate growth. Achievements in this area over the past five years have been impressive. A number of Asian countries have accumulated significant levels of foreign exchange reserves, while sharply reducing short-term external debt. However, fiscal deficits and public debt remain quite high in several countries, and a further strengthening of the public finances is needed to eliminate this source of vulnerability. Prudent fiscal management will also create greater room for maneuver to support demand, if growth weakens—and provide resources for much needed improvements in social safety nets, education, and healthcare.
· Second, completing the reforms of the financial and corporate sectors will strengthen medium-term growth prospects. Notwithstanding substantial progress, in most countries the reform agenda remains unfinished. As a result, bank lending is still hampered by weak balance sheets, and profitable corporate investment is being held back. Harnessing the potential of the financial and corporate sectors to support sustained growth requires improved prudential oversight and renewed efforts to clean up balance sheets. It also needs stronger corporate governance and a predictable regime for debt restructurings that strikes an appropriate balance between the interests of debtors and those of creditors.
· Finally, fostering a healthy investment climate will support sustained growth and financial stability. A recent IMF survey of companies with significant exposure to emerging markets confirms that, on the whole, Asia now has an edge world-wide as a destination for foreign direct investment. But maintaining this edge and boosting domestic private sector activity will require strengthening further the investment climate. This includes deeper local capital markets, transparent regulatory frameworks that meet international standards, education and training that foster the versatility of the work force, and well-enforced legal systems that guarantee property rights. Here lies a key responsibility of governments, by providing a solid and predictable framework within which markets can flourish.
In identifying these key challenges facing the region today, I hasten to emphasize that there are no "one-size-fits-all" solutions. While the challenges facing countries may be similar, and indeed inter-connected, the diversity of economic and cultural systems does not allow a uniform, off-the-shelf, approach. The IMF looks forward to continuing to work closely with countries in the region, recognizing that both circumstances and solutions must be diverse. And I believe that we should welcome this: the diversity of human experience and cultures is part of the wealth of this planet.
10. Strong economic fundamentals will not only establish a solid foundation for future growth, but also help other Asian countries capitalize on the dynamic development of China's economy. China's growing integration in the world economy has raised concerns in the region and beyond about heightened competition in export markets and for foreign investment. These concerns clearly identify a challenge, but this should not obscure the huge opportunities that China's development also represents for the rest of Emerging Asia. Intra-regional Asian trade has been expanding rapidly in recent years, reflecting the growing integration of production processes in Asia. With a growing appetite for imports from regional partners—import growth from Asian countries was 60 percent in the first half of this year—China represents a vast and growing market to be tapped, and a vibrant investment destination for companies in the region. But taking full advantage of these opportunities—or meeting the challenges of more intense competition—means that neighbors must "move on" in their skills, productivity, and flexibility.
11. Closer regional and multilateral cooperation must complement national policies to make the international financial system more robust and ensure that globalization works for all. I welcome very much recent initiatives to strengthen economic and monetary cooperation in Asia, including the Chiang Mai network of bilateral swaps between Asian central banks, the ASEAN Free Trade Area, and the Asian Bond Fund initiative, to name just a few. These and other regional initiatives are playing an important part in making Asia more resilient and more interconnected. I encourage Asian leaders to go further in this direction. However, my advice is also to ensure that regional initiatives remain consistent with broad participation in the global economy. A regional focus that remains open to the rest of the world holds the greatest promise for Asia's long-term growth prospects.
12. Trade remains the most important pillar of a strategy to promote global growth and poverty reduction. It is well worth reminding ourselves that the tremendous expansion in global prosperity in the second half of the 20th century was only possible in the context of broad-based, multilateral trade liberalization, within a framework of reciprocity and rules. And Asia has been — and will continue to be — a primary beneficiary of multilateral trade liberalization. A successful conclusion of the Doha Round within its allotted timeframe by end-2004 will also provide a much-needed boost to confidence in the global economy. At the same time, adjusting to a more liberal trade environment may impose temporary costs on some countries. The IMF and the World Bank are working on ways to provide financial support to such countries to help them implement their commitments under the Doha round.
13. Much has been done since the Asian crisis to strengthen the international financial system, and its remarkable resilience during the current global economic downturn suggests that these efforts are beginning to bear fruit. But it remains a work in progress, and we must not slacken our efforts. Progress has so far been made mainly in the following areas.
· First, international dialogue has been broadened and made more inclusive. The founding of the Group of 20, which includes several Asian countries, aims explicitly at reaching out beyond the G-7 club by drawing more widely on emerging market experiences in discussing ways to strengthen the international financial system. And the presence of key emerging market leaders, including Prime Minister Mahathir, at the recent G-8 summit in Evian also reflects a welcome widening of the international economic policy dialogue at the highest level.
· Second, an important innovation was the establishment of the Financial Stability Forum (FSF) in 1999. The FSF brings together national policy makers, central bank officials and financial regulators in significant financial centers, as well as international bodies and standard setters. Its mandate is specifically to identify and address gaps in the regulation and supervision of the international financial system. The work of the FSF to date has included examining the activities of hedge funds and off-shore financial centers, as well as the transparency and disclosure practices of financial institutions with regard to credit derivatives. I welcome the attention paid to these issues, and I encourage the FSF to be even more ambitious in identifying soft spots in the fabric of international financial markets.
· And third, the IMF, as a truly multilateral institution, has initiated a series of reforms. Allow me to touch on some of them.
14. We are engaged in an ambitious process to enhance IMF surveillance and strengthen crisis prevention. In this effort, I insist on evenhandedness because crises can originate in mature markets as well as in emerging markets. Our surveillance is paying much more attention to the early identification of vulnerabilities, the risks associated with high debt levels, and the importance of adequate shock absorbers in economic policy. And learning from the experience in Asia and elsewhere, we are focusing far more on financial sector issues, including the risks posed by weak banking systems. Our Financial Sector Assessment Program, undertaken jointly with the World Bank, has so far covered over 50 countries drawn from all regions. It has become a core element in our work to strengthen domestic financial systems world-wide. Today, we are also emphasizing a more carefully-sequenced approach to capital account liberalization. And I have no hesitation to recognize that the use of capital controls in exceptional circumstances should not be a taboo. But I also note with interest that their application in Malaysia during the Asian crisis was only temporary.
15. The IMF's multilateral surveillance is increasingly looking at the regional and global impact that economic and financial policies in the key financial centers have on the rest of the world. The World Economic Outlook (WEO) and our new semi-annual Global Financial Stability Report (GFSR) are part of an ongoing effort to identify possible systemic risks to the international financial system at an early stage. This included recently an assessment of the risks of global deflation, the dangers posed by a potential housing bubble in several mature markets, and the risks facing insurance sectors globally. Looking ahead, the forthcoming GFSR discusses ways to prevent market volatility leading to financial instability, including by avoiding excessive leverage and risk exposure, and enhancing transparency.
16. But I believe it would be unrealistic to think that a dynamic market economy can be fully sheltered from periods of turbulence and adjustment. Not all crises can be prevented. Therefore we must also improve our ability to manage and resolve crises should they occur. Providing more predictability about the IMF's lending in crisis situations is one way to encourage market-based solutions, and to this end we have clarified the criteria for exceptional access to IMF resources. We must also strive to find ways to assure members with sound policy frameworks that they can rely on proactive support from the IMF to help them resist contagion from crises elsewhere.
17. We have also initiated a debate on how to handle cases of unsustainable sovereign debt, which are among the most difficult issues that our members—and financial markets—have to deal with. This debate continues, but I am personally encouraged by the recent increase in the use of collective action clauses in sovereign bond contracts, which will ensure better coordination of diffuse and diverse groups of creditors should a debt restructuring become inevitable.
18. Over the medium-term, building strong institutions and improving governance are key elements in promoting international financial stability and achieving sound and sustained global growth. In the economic and financial area, this means promoting a transparent and predictable framework of international rules of best practice for the world economy. There has been a sea-change in the availability of information over the past five years, both provided by member countries and by the IMF itself, although there remains scope for further improvement. The IMF has also been closely involved in the development and dissemination of global standards of best practice, in areas ranging from the publication of statistical data to the transparency of public finances. Overall, we are making progress, and adherence to international standards is being increasingly recognized as important by financial markets. But much work remains, including on standards relevant for the corporate and financial sectors, such as those related to corporate governance and accounting and auditing. Recent corporate scandals show how important these are in advanced economies, as much as in emerging markets. Looking ahead, we also need to ensure that the views of emerging market and developing countries are adequately reflected in the development and application of international standards and codes.
19. In my vision, the IMF is a listening and learning institution. The establishment of the Independent Evaluation Office (IEO) at the IMF is an important building block in this process. The IEO has already made valuable suggestions, which are being put into practice. In particular, the IEO has confirmed the importance of ownership and a better understanding of countries' differing capacity to implement economic policies, which have led to changes in our lending practices, including a streamlining of conditionality. And in its evaluation of recent capital account crises, including in Korea and Indonesia, the IEO stressed the importance of transparency and careful sequencing of reforms, especially in the case of capital account liberalization. I look forward to future reports of the IEO and its public scrutiny of the IMF's operations.
20. Amidst these changes, the role of the IMF in Asia is evolving. Six years ago, the capital account crises in Thailand, Indonesia, and Korea led to some of the largest IMF financing packages in its history. Today, Korea and Thailand have fully repaid those loans ahead of schedule, and Indonesia has announced that it no longer needs IMF financial support. I welcome this evolution, which is testimony to these countries' success in implementing strong economic policies. This is, of course, as it should be: the IMF was conceived to provide temporary financial support to members in need, not as a permanent source of financing. I look forward to a continued fruitful dialogue with our members in this region, who have much to contribute to our evolving work on promoting global economic and financial stability. The experiences of our Asian members bear important lessons, and I encourage the public and private sectors in Asia alike to share these lessons with our global membership. In my personal view, Asia's growing role will also need to be reflected eventually in a sizeable increase in the quotas of members in this region at the IMF—and, as a result, in their stronger voice in the IMF's decision-making process. This is a difficult debate, which touches on the interests of many members, and I do not expect a resolution overnight. But I believe it is the right thing to do, and I support a quota increase for Asian members.
Ladies and gentlemen,
21. Emerging Asia's economic dynamism is a valuable asset for the world economy. I am confident that the region will continue to benefit from international economic integration and is destined to become a progressively stronger driving force for global growth. We have much to learn from its success, and the IMF looks forward to working together with Emerging Asia in finding solutions to the challenges facing the global economy.
IMF EXTERNAL RELATIONS DEPARTMENT