The world is a study in contrasts nowadays. We
are haunted by images of terror and warfare. Yet every region of the globe has
experienced some of the strongest economic growth seen in years, inflation
remains subdued despite surging oil prices, and financial markets are doing
well. Several economies that recently faced financial crises are rebounding
strongly. At the same time, much more needs to be done to help prevent future
crises and reduce poverty.
What do these contrasts mean for the future? The
answer depends crucially on how each country and the international community
respond to key policy challenges: addressing global imbalances through
macroeconomic policies and long-overdue reform; meeting the costs of aging
populations; strengthening defenses against economic and financial crises; and
delivering on the pressing imperatives of poverty reduction.
Recently, financial leaders from 184 countries
met in Washington at the Annual Meetings of the IMF and World Bank. This year
marks the sixtieth anniversary of the Bretton Woods Conference that established
those two organizations as pillars of international economic cooperation. As IMF
Managing Director, my message was one of vigilance and action. Simply put, the
international community must take advantage of the current recovery to broaden
efforts to ensure financial and economic stability, and help those countries
with limited prospects.
Periods of strong economic growth allow countries
to put in place defenses to reduce the likelihood and severity of future
downturns. But such opportunities are all too easy to squander. In an era of
globalized financial markets, when countries can find it hard to cope with rapid
cross-border capital flows, there is no time for complacency. A lesson of the
1990's is that vulnerabilities must be dealt with before they become crises.
The world's rapid economic growth in 2004 shows
that the efforts to shore up our defenses since the 1990's has paid off. But
growth has been unbalanced: Europe and Japan - despite some recent gains - are
far from reaching their potential, and the United States and China have
continued largely to drive the world economy.
One priority is to reduce global payments
imbalances. The US must move to reduce its budget deficit in the medium-term.
Europe and Japan can increase their growth by stepping up the pace of structural
Moves toward increased exchange rate flexibility
in China and other Asian countries, supported by financial sector reform, will
have domestic and global benefits. Emerging market countries elsewhere have made
considerable reform progress of late, but they must sustain the momentum to
guard against potential shocks.
Other challenges loom. Issues that we once
regarded as "medium-term" are becoming more urgent. Aging populations are
forcing many countries to address pressures on their budgets and social security
systems. The problem is imminent in North America, the Euro Area, and Japan.
But, before long, many developing countries will also have to face up to it, and
in many cases without a cushion of affluence.
Then there is the energy issue. High oil prices
have resurrected an old vulnerability. Countries need to reformulate their
energy policies - including by boosting production and refining capacity,
diversifying energy sources, and giving new impetus to conservation. A better
balance between production and consumption would avoid large swings in oil
The IMF focuses on crisis prevention, and in the
past decade encouraged greater transparency and stronger financial systems. The
Fund also actively monitors capital market developments, and is implementing a
more systematic assessment of debt sustainability.
There will always be ways to strengthen our work
so that we provide well-articulated advice based on a clear understanding and
the best analysis of each country. We need to communicate our positions clearly
to policymakers and reinforce incentives for countries to take appropriate
corrective actions. But in the end, the effectiveness of our advice hinges on
countries' willingness to act on our recommendations.
Poverty also threatens economic stability. For
all the successes of recent decades, the fact remains that 20% of the world's
population still lives on less than $1 a day, while HIV/AIDS and other
communicable diseases are ravaging many societies. Other social indicators offer
a bleak picture. Indeed, most developing countries are likely to fall short of
the international community's target of halving poverty by 2015.
In 2002, at the Monterrey Conference, the
international community agreed on a framework for reaching that goal. Developing
countries would implement sound economic policies accompanied by good
governance. Industrial countries would increase aid levels and lower trade
barriers. The IMF and World Bank would offer advice, expertise, and financing,
with the Fund concentrating on the macroeconomic and financial stability that is
crucial to fostering durable growth and poverty reduction.
Some progress has been made on this "Monterrey
Consensus." But international support is falling far below promised levels.
Strong political commitments are needed to provide the aid that is needed to
accelerate progress, and to secure success for the Doha trade round that is so
crucial for developing countries' longer-term prospects.
The resilience of the global economy in the face
of political and economic shocks demonstrates the central relevance of the
reform process - and underlines the importance of continuing along this path.
Governments and institutions like the IMF must keep this in mind as they seek to
ensure a durable economic recovery that will benefit all of the world's people.