Russian
Restoring Confidence to the Global Economy
By Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C.
The world is in a state of heightened uncertainty. The economic recovery that
started in the major advanced economies has weakened, and while there are still
reasons to see a firmer recovery down the road, that road is far from smooth.
Financial markets have reflected the uncertain prospects in falling equity
prices and sharply higher cost of borrowing for all but the most solid risks.
Many emerging market economies, in particular, are feeling the pain.
The increased integration of world goods and capital markets magnifies
perceived economic weaknesses or political uncertainty resulting in heightened
risk aversion that affects everyone, even countries pursuing fundamentally sound
policies. Faced with these difficulties, we should not be surprised that we are
seeing unease in many quarters about globalization..
What can the international community do to restore the world economy to good
health? Ministers and Governors recently meeting at the IMF supported the notion
that the first critical task of all parties is to restore confidence. A key role
falls to the governments of Europe and Japan; they need to become the
locomotives of the world economy, and pursue policies to promote growth,
including by accelerating long-overdue structural reforms.
For the IMF, the priorities are to strengthen the infrastructure of the
international financial system, to improve crisis prevention, while making the
framework for crisis resolution more predictable. To overcome the current
difficulties we do not need less globalization, we need better globalization,
offering all countries a level playing field to seek their own road to
prosperity. And we need, both in national governments and in multilateral
institutions, to restate our commitment to international solidarity: without
rapid and significant inroads into tackling world poverty there is little chance
for truly sustainable global prosperity.
The global economy at a cross-roads
After a strong start to the year, prospects for the global economy have
clearly weakened in recent months. In the United States, the upturn seems likely
to be considerably slower than earlier expected; recent indicators in Japan
suggest that the economy may be bottoming out, but domestic demand remains very
weak; and the recovery in the euro area is sluggish, at best. The robust pick-up
in emerging Asia is welcome, but the weaknesses in Latin America continue to
cast a pall over emerging markets. And the possibility of armed conflict in the
Middle East adds a further element of uncertainty.
It is in situations of uncertainty that governments have a heightened
responsibility to inject confidence and only confidence in the future will
encourage the private investment needed for a resumption of sustainable economic
growth. What can and should be done? In the short term, macroeconomic policies
in the advanced economies need to remain accommodative and, should the recovery
falter, some further easing in monetary policy, especially in Japan and the euro
area, may prove necessary.
But the key to medium-term sustainable growth lies in structural reforms,
many of which are long overdue. In the United States, corporate and accounting
scandals have illustrated the fragility of financial market sentiment to a
perceived lack of transparency. Rebuilding confidence will require strong
leadership to strengthen corporate governance a process that is already
underway. In Europe, labor markets in some countries remain mired in
inefficiency, with labor force participation in the larger euro area countries,
in particular, at strikingly low levels. Europe must improve the functioning of
its labor markets and utilize its human resources more efficiently. And in
Japan, the burden of non-performing loans on the banks balance sheets, a
ten-year hang-over from the asset price bubble of the 1980s, needs to be tackled
decisively.
The agreement to resume trade negotiations in the Doha Round last year was a
welcome step. Rapid progress in trade liberalization could play a crucial role
in strengthening confidence. Subsidies to the agricultural sector in the OECD
countries alone exceed $300 billion, and high barriers to trade in textile and
clothing products are especially costly to developing countries. Better access
to advanced economy markets would provide a critical boost to developing and
emerging economy exports, supporting investment and growth. And growth, in the
end, is essential for successful integration in the world economy and for
poverty alleviation.
The IMF in a Process of Change
What can the IMF do to support a return to sustainable global growth? Over
the coming six months, I see two overriding priorities:
First, to strengthen our framework for crisis prevention. Much has already
been done, in particular through the development of international standards of
good practice in a variety of economic and financial areas. But we need to
ensure that best practice standards are implemented, thus increasing
transparency, accountability, and good governance. We also need to further
sharpen our policy advice to member countries to make it more useful and more
effective. Key in this area is the development of rigorous debt sustainability
analysis. Crisis prevention would also be enhanced by the creation of a better
safety net for countries pursuing sound policies a strengthening of the
traditional role of the IMF to make its resources available to safeguard the
international financial system by supporting members in times of need. These
steps will benefit all our members, including the poorest, which are often most
vulnerable to financial markets volatility.
Second, to formulate a more predictable approach to crisis resolution. This
approach should consist of at least three mutually-reinforcing components:
clearer and more predictable policies on access to IMF resources; a framework
for dealing with unsustainable sovereign debt burdens in a more orderly manner;
and a commitment by the membership of the IMF that it will ensure that the Fund
has the necessary resources to remain a confidence-building anchor for the
international financial system.
In this time of uncertainty, the debate about globalization reflects
deep-seated unease in some quarters about the rapid pace of change in the world.
It is a debate that we should not shun. The many benefits of growing global
integration have been accompanied by new problems, problems that can sometimes
seem intractable. But we are not powerless. We need to find ways to make
globalization more inclusive, and better balance its risks and opportunities. It
must be a collaborative effort. National governments have the responsibility to
pursue sound domestic economic and social policies, supported by strong
institutions and good governance. But the international community also has a key
role to play in assisting those who are willing to help themselves, in
establishing global equitable rules of the game, and in providing an
international safety net. The IMF stands ready to play its part to make
globalization work for the benefit of all.
Published in:
Logos Press Weekly Economic Magazine, 15-Nov-2002
|
