No Half Measures
A Commentary by Rodrigo de Rato
Managing Director of the International Monetary Fund
Published in The Economist
The World in 2005
November 2004

The rapid expansion of trade and cross-border capital flows in the 1990s created unparalleled opportunities for growth and financing. But capital flows to emerging markets introduced vulnerabilities that produced crises and contagion, in some cases taking the world by surprise. Some important lessons have been learnt. The global rebound since 2001 is a tribute to the resilience of the world economy—and a demonstration that the policies and reforms implemented since the 1990s have made a difference. That success should only strengthen our resolve to do more.

One lesson of the past decade is that there is no alternative to strong defences against crisis. This is true for industrial countries facing unprecedented demographic change, emerging markets seeking a secure place in the global economy and developing countries struggling to reduce poverty. Crisis prevention must be built on commitments to policy discipline and actions to address a rapidly changing world.

The IMF has a crucial role to play. It must enhance countries' understanding of the policy issues and it must be a catalyst for vigilance and reform—built on true international co-operation. Many of the Fund's 184 members have addressed their immediate vulnerabilities by strengthening financial sectors, enhancing the transparency of economic policymaking, building up foreign reserves and increasing exchange-rate flexibility. The IMF has made an important contribution to this effort with its policy advice and work on standards and codes.

But many long-term vulnerabilities remain. America must address its excessive budget deficit and some European countries still need to energise their economies, especially by freeing labour markets. Japan needs to build on its progress with financial and corporate reforms. These actions would help reduce global payments imbalances, including America's large external deficit.

Although emerging-market countries have strengthened their defences, much more remains to be done in governance and transparency. A number of countries, including many in Latin America, must strengthen their fiscal positions over the medium term and bring debt-to-GDP ratios back to tolerable levels.

The recent surge in oil prices has brought energy issues back to centre stage. Once again we are confronted with the need to expand production capacity, diversify energy sources and enhance conservation. Countries cannot overlook the need for comprehensive energy strategies. Furthermore, many oil-producing countries need to use their windfall revenues wisely—with debt reduction a priority. And they need to become more transparent with the money they earn, among other things by participating in the Extractive Industries Transparency Initiative, launched by Tony Blair at the Johannesburg summit on sustainable development in 2002.

Another key issue is ageing populations. Most industrial countries are facing the burden of rapidly ageing workforces and falling tax revenues. Although some countries are trying to address the looming fiscal issues, many others are putting off the costly and difficult issues of health-care and pension reform. This problem is acute in some industrialised countries, but many developing countries will also have to face it, in many cases without the cushion of affluence.

In the course of its dialogues with member countries, the IMF is paying increasing attention to the policy implications of demographic change. It also monitors capital-market developments and analyses financial sectors and assesses debt sustainability. These efforts can enhance early warning—but can be effective only if they prompt timely action. Imbalances and vulnerabilities must be corrected before they become problems—for the country itself, its neighbours and the global system. International co-operation through the IMF aims to deal with problems before they erupt into crises.

As with crisis prevention, so with poverty reduction

This same international co-operation—through the IMF and the World Bank—also plays a major role in the fight against poverty in low-income countries. Hundreds of millions of people live on less than $1 a day. Child mortality remains unacceptably high in these countries, and HIV/aids and other diseases hold sway. Real progress has been made in China and India, thanks to their rapid growth, but sub-Saharan Africa has been left behind.

The 2002 Monterrey conference agreed on a way forward: the rich countries will provide aid and trade opportunities; the multilateral institutions will offer policy advice, technical help and financing; and the poor countries themselves are committed to improving their governance and focusing on more effective poverty reduction programmes. Now is the time for rich countries to fulfill their commitments on aid and trade. But both issues are unresolved because of a lack of political leadership. Recent proposals at the UN and at our own annual meetings in October have been encouraging, but decisions must be made. And the trade negotiations in Geneva must build on the July 2004 breakthrough on reducing agricultural subsidies and enhancing trade on a multilateral basis.

It is possible to reduce poverty. Now the challenge is to achieve success worldwide. Five years ago the IMF made poverty reduction the central objective of its involvement with low-income countries. As with crisis prevention, it is an effort that doesn't allow for half measures.