Deputy Managing Director Min Zhu’s Opening Remarks at the Pacific SeminarMin Zhu, Deputy Managing Director, International Monetary Fund
Tokyo, October 14, 2012
1. I am delighted to be here this morning to open this joint IMF/WB Pacific seminar during these annual meetings. I want to extend a warm welcome to the governors and ministers, senior officials, and development partners, including the Asian Development Bank, to this Pacific seminar roundtable. Thank you for being here.
2. The last time we saw each other was at the Pacific islands conference in March—we were in the beautiful country of Samoa. That event was hosted by the IMF and the government of Samoa. Since then, Anoop Singh, IMF Director of the Asia and Pacific Department, and Pamela Cox, World Bank Vice President for East Asia and Pacific, have begun a deep dialogue on how best to leverage IMF and Bank collaboration to better serve our member countries in this region.
3. As you are aware, in the past there have been two separate events focusing on the Pacific Islands during the annual meetings: one organized by the World Bank and one by the IMF. We thought that having a joint event this time would be more beneficial, both for our members and also for us in deepening our understanding of the region and increasing synergies in exploiting our own comparative advantages. The IMF goal is to focus on strengthening the macro-framework in our member countries to ensure macroeconomic and financial stability and increase resilience to shocks. But this analysis must be based on a deep and grass-roots knowledge of the different sectors that could support growth, which is the World Bank’s specialty. So you see the IMF and WB roles need to complement each other.
4. While much attention is currently focused on Europe and on other advanced economies, I welcome this opportunity to redirect our attention to the challenges faced by small states. This seminar is thus a great opportunity to exchange views on how the Pacific island countries are navigating the current global economic environment, and how regional policymakers can increase their countries’ resilience to shocks and promote economic growth in the region.
5. I understand that you had productive discussions yesterday at the small state forum, chaired by the Samoan finance minister and co-hosted by the World Bank. The IMF is also giving more prominence to the challenges facing small states. We have been generating analytical notes that will lead to a more formal policy paper on how small states can better address their challenges. We have created an interdepartmental working group that focuses on small islands—the “small islands club.” And since last March, we have organized two high-profile conferences on small states. The first was held in Samoa and the second in Trinidad and Tobago. At this last event, we listened carefully to the challenges faced by Caribbean countries and we shared our understanding of how the islands in the Pacific region were coping with theirs.
6. This morning we will discuss two important topics: the global shocks and the near-term challenges affecting the Pacific region will be discussed in session one; and how to promote sustainable growth in the Pacific Islands will be discussed in the second session.
Let me begin with a few words about the global and regional outlook and near-term challenges. We look forward to hearing your views on this topic in the first session.
7. The recovery has been bumpy and the global economic prospects are still uncertain. Global growth, projected at 3.3 percent in 2012 and 3.6 percent in 2013, is somewhat weaker than in our July 2012 WEO Update, which was already lower than the projections in the April 2012 WEO. Downside risks have increased. In many advanced economies, injections of liquidity are having a positive impact on financial stability, output, and employment. Many governments have begun to reduce unsustainable deficits, but because uncertainty is high, confidence remains weak and significant fiscal achievements have been accompanied by disappointing growth. Supporting growth and reining in fiscal deficits is a major near-term challenge facing many advanced economies.
8. Of course, in an interconnected world, Asia has also been affected by the global weakening. But we still expect Asian growth of almost 6 percent in 2013, and emerging Asian growth of almost 7 percent. This is good news for the Pacific islands, which our research on spillovers shows, are more integrated than in the past with Asia, the global growth leader.
9. Another near-term challenge is how to cope with the recent surge in food prices. The IMF’s food price index is up some 20 percent since June, fueled mainly by prices of some key crops affected by weather-related supply disruptions (in South America and the United States) and lower production in the Black Sea region of Russia, Kazakhstan, and Ukraine. The IMF is greatly concerned about this and is monitoring the situation closely. Such food price rises affect low-income countries disproportionately, compounding problems related to their vulnerability to shocks.
10. And the food price surge is occurring just when inventories are low or falling. Nevertheless, stocks are more comfortable than during the 2007–08 crises. Rice prices have risen only modestly as markets are still well supplied. The current shock is also less severe than in 2007-08 because it has not affected all key crops uniformly and has not been aggravated by trade restrictions. Negative spillover effects from energy markets are much more limited now than in 2007–08. Still, rising food prices can have several negative macroeconomic effects for which countries should be prepared. We want to hear from you how this shock is affecting your country.
Against this backdrop, what is the near-term outlook for the Pacific islands?
11. Let me say first that if we look at the 2009 crisis and the recent business cycle, the Pacific islands have been doing better than other islands outside the region. They weathered the crisis better than comparator countries, in particular the Eastern Caribbean Currency Union. And the recovery has been somewhat stronger. True, the integration with Australia, New Zealand, and emerging Asia has helped, but policy improvements over the last decade in some islands have raised their resilience to shocks in the wake of the global crisis. Their prudent policies in the years preceding the crisis have been instrumental, enabling them to enter the crisis in a healthier position. Since then, several islands have rebuilt policy buffers, especially foreign reserves, and have kept inflation still relatively low. Solomon Islands’ experience demonstrates how a virtuous cycle of strong commitment to reforms, rebuilding of policy buffers, and strengthening the macro framework can quickly boost business confidence and spur growth.
12. However, because of the global landscape, the outlook for PIC commodity importers for 2013 is for slow growth (2 percent). Prospects for PIC commodity exporters—such as Papua New Guinea, Solomon Islands, and Timor Leste—look more favorable owing to strong commodity prices. Growth in these countries is expected to average 5 percent in 2013, with limited spillovers from commodity sectors to the rest of the economy.
What lessons can we draw from previous crises?
13. Countries’ first insurance against shocks is to build policy space and buffers and implement structural reforms during good times. Thus, it is important that the Pacific islands continue rebuilding policy buffers. This enhances resilience to shocks by allowing a country to expand policy space and create a cushion against bad times—especially to protect the most vulnerable. This means achieving a comfortable level of foreign reserves and maintaining low debt. The danger of excessive debt accumulation is a lesson learned from the Caribbean countries’ experience and, of course, from the experience of some European countries.
Of course, economic growth is the best source of resilience. This is the topic of the second session.
14. How to sustain economic growth in the Pacific? The Pacific island countries have been growing at an annual rate of less than 2 percent over the last decade—much more slowly than the Asian low-income countries (6 percent) and the small states around the world (4½ percent). This growth performance suggests that these countries are stuck in a low-growth trap.
15. The Pacific islands are geographically remote and scattered, and thus face high transportation costs; they are also greatly affected by natural disasters and climate change. These characteristics pose added constraints relative to other small states affected by a narrow export base and lack of economic diversification. For example, the fiscal costs of climate change cannot be internalized by the Pacific island countries.
Despite all the constraints the Pacific Islands face, policy does matter as you will discuss further.
16. More decisive policy measures by the Pacific island governments can go a long way toward addressing the challenges they face. Lack of infrastructure is another constraint but it can be overcome. Climate-change-proof infrastructure is, however, generally much more costly. Public investment in infrastructure could help crowd-in private investment, thereby promoting more broad-based growth. In this connection, the respective roles of the public and private sector will be also be discussed in session two.
17. Sound structural policies can enhance long-term resilience to shocks and boost growth potential. Implementing growth-oriented structural reforms that enhance the business environment would help boost investor confidence and private-sector growth. And focusing on the quality of public spending—for example, on education, health, and infrastructure, as in Solomon Islands—will widen the scope for more rapid and equitable long-term growth. Regional solutions to common problems should also continue to be pursued as in the case of fisheries
What are the next steps and how can the international community help?
18. In the concluding session we would like you to set the agenda and the priorities for us. Which areas should our analysis and policy advice focus? That would be up to you.
19. First of all, we are here today, together with the World Bank, to listen to and learn from you so that we can better serve you and our other member countries. And I am personally committed to a deeper, more fruitful dialogue with the Pacific islands and other small states.
20. As you know, the IMF supports the Pacific islands through its bilateral country engagement, including through technical assistance, and program support as in the case of Solomon Islands. I will leave to Anoop Singh, head of the IMF’s Asia and Pacific Department, to further elaborate on the different modalities of IMF support.
21. I would also like to emphasize that we have increased synergies with other international institutions—namely, the World Bank, our sister institution, and the Asia Development Bank. This is why we are here together today. The staff of our institutions has worked together very closely on the Pacific islands over the last few months. And WB and ADB colleagues are regular participants in IMF missions in this part of the world.
22. Dealing with global spillovers and sustaining economic growth—the themes that will underlie the discussions this morning—are two key challenges for this region. My colleagues Anoop Singh and the Vice President of the World Bank for East Asia and Pacific, Pamela Cox are leading the efforts of the Fund and Bank to find ways to be more helpful to you. I trust that we will come away from this seminar suitably enlightened and better able to address the unique challenges of the Pacific islands.