The Prague Meeting: Another Dialogue on Globalization?
An Op-Ed
By Shigemitsu Sugisaki
Deputy Managing Director
International Monetary Fund

Asahi Shimbun
September 30, 2000

Reproduced with permission of Asahi Shimbun

Delegates from our 182 member countries got together at this week's annual meeting of the IMF and the World Bank in Prague, and discussed the world economic outlook. The IMF expects the global economy to grow this year by about 4.7 percent, the best performance in over a decade. This remarkable turnaround from two years ago owes much to the concerted efforts of policymakers to support global activity.

Issues in the World Economy

Discussion in the meeting was focused on a surge of oil prices and a depreciation of the euro as risks to the global economy. It should be noted, however, that risks involved in globalization need also attention and quick response.

The first is that the benefits of globalization have not been spread evenly. Our Managing Director, Horst Köhler, said recently that "there will not be a good future for the rich if there is no prospect of a better future for the poor." The international community recognized the importance of helping poorer countries by providing broader, deeper and faster debt relief. To date, $17 billion in relief has been committed to 12 countries under the Heavily-Indebted Poor Countries initiative (HIPC). The IMF and the World Bank hope to provide debt relief to about 20 countries by end-2000, with Japan contributing 20 percent of the estimated cost of the relief provided by official bilateral creditors.

Nevertheless, some NGOs are likely to express their disappointment with progress on debt relief, and some of them call for outright debt cancellation. But debt cancellation will translate into poverty reduction only through a concerted international effort to maintain aid flows and—on the side of the recipients—by sound policies and good governance. Without such actions, debt cancellation could be offset by reduced official aid flows, or eaten up by wasteful military expenditures, or line the pockets of corrupt politicians. Preventing such undesirable outcomes justifies our more measured approach to debt reduction.

A second risk is that globalization can be accompanied by financial crises, conflicts between winners and losers, and concerns about adapting to ever-changing environments. For example, many in Japan worry about increasing unemployment and possible worsening of working conditions from application of U.S.-style principles of competition in this country. Many countries are concerned about absorbing immigrants while maintaining social cohesion. And the volatility engendered by increasing international capital flows is apparent from the high-profile financial crises of the last decade.

Prevention is Better Than Cure

Proponents of globalization need to explain better its benefits and take steps to counter its risks. The IMF can help, particularly by working harder to prevent and resolve financial crises.

A key lesson from recent financial crises is that prevention is better than cure. The IMF must pay closer attention to—and provide more candid advice about—weaknesses in financial sectors and external vulnerabilities of member countries. Liberalization of capital accounts must move in tandem with the strengthening of the ability of financial institutions to manage risk. Instead of more IMF-supported programs put in place after crises have erupted, it would be better to have fewer crises and programs through early detection of difficulties.

To this end, the IMF—together with other agencies—has focused on developing codes and standards for financial sector soundness, transparency in macroeconomic and financial policies, provision of data, and corporate governance. The Financial Sector Assessment Program, launched jointly by the IMF and the World Bank on a pilot basis last year, provides participating countries with comprehensive assessments of their financial systems. The assessment identifies strengths and vulnerabilities; reports on observance and implementation of international standards, codes and good practices; and helps design policy responses.

Role of Regional Cooperation

Regional initiatives can supplement these efforts. Regional arrangements, such as the Manila Framework Group, can bolster constructive policy dialogue. Moreover, Asian countries supported their crisis-hit neighbors, and Japan—despite its own financial worries at the time—introduced the Miyazawa Initiative to provide valuable support. The 'Chiang Mai Initiative' of swap and repurchase arrangements among ASEAN members, China, Korea and Japan (the "ASEAN + 3") is another example of enhanced regional cooperation that is complementary to the IMF's work.

But regional initiatives bring added responsibilities. Countries, particularly in Asia, have to learn the art of speaking frankly to neighbors when changes in their policies are needed. And countries have to ensure that greater regional integration does not come at the cost of splitting the world into regional blocs.

In debating these issues, dialogue produces benefits, not confrontation. The IMF believes in subjecting its policies to the scrutiny of all and changing policies in response to changing circumstances and constructive criticism. We believe the Prague meeting contributed to this process.