Address to The International Monetary and Financial Committee (IMFC) Meeting

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Address to The International Monetary and Financial Committee (IMFC) Meeting





On behalf of the constituency comprising Australia, Kiribati,

Korea (Republic of), Marshall Islands (Republic of the), Micronesia

(Federated States of), Mongolia, New Zealand, Palau (Republic of),

Papua New Guinea, Philippines, Samoa, Seychelles, Solomon Islands

and Vanuatu.

It has proved timely that this year’s IMF/World Bank

Annual Meetings are being held in the Middle East. It serves as a

reminder of the importance of international efforts to ensure peace,

stability and economic prosperity in this region, particularly in

Iraq and Palestine, as well as in all parts of the world.

Globalisation has brought great benefits, but it has

also brought responsibilities. There is a collective responsibility

on all countries to not only ensure the maintenance of strong and

stable economic growth, but also that the benefits of increased growth

and rising living standards are shared by all. This should be central

to the deliberations of the IMFC, including through the recognition

that, in an increasingly inter-related world, the policies adopted

by a country affect not only itself, but other countries.

We also need to be very mindful that the statements that

are made at this meeting, and the communiqué that is issued,

will be largely worthless unless they are supported by concrete policy

action. Perhaps there is no clearer demonstration of this at present

than the failure to make progress at Cancun, where all the positive

rhetoric in the lead up was not matched by a willingness to deliver


The Global Economic Outlook

The IMFC met last April at a time of particularly heightened

uncertainty. The concern was over the consequences of the conflict

in Iraq and the potential ramifications of the unexpected outbreak

of SARS, coming at a time when the world economy was still showing

no signs of strengthening. Global economic activity in the first half

of 2003 was weak and this has had a significant impact on the members

of this constituency.

The global economic outlook has brightened somewhat in

recent months. Geopolitical tensions have eased, the SARS outbreak

has been brought under control, and there are signs, particularly

in financial markets, of a strengthening in global growth for the

remainder of 2003 and 2004, assisted by very supportive policy settings

in some countries.

We are encouraged that there has been some improvement

in the outlook and that the risks are no longer so significantly on

the downside as they appeared last April. Nevertheless, the signs

of a recovery in the global economy are still tentative and it is

appropriate that we focus on reducing the considerable vulnerabilities

that exist so as to ensure that stronger growth does in fact eventuate

and is sustained. If there is one thing that events in recent years

have demonstrated, it is that a benign environment should not be assumed.

The experience of some countries, including that of a

number of members of this constituency, is that the best defence against

shocks and a weak global economic environment is the existence of

dynamic and competitive internal markets, liberal trade and investment

regimes and a sound macroeconomic framework with a clear medium-term

orientation. Of course, to the extent that the major economies adopt

such a policy framework, this would be the best insurance that strong,

global economic growth will be sustained.

Global growth prospects remain centered on the outlook

for the US economy, where there are some encouraging trends in recent

economic data and stronger forward-looking indicators. Nevertheless,

there remains much uncertainty in the outlook and it is of concern

that the expected recovery in the global economy involves continuing

growing economic imbalances, particularly rising US current account

and budget deficits. Stronger growth in the US economy will benefit

the rest of the world but, unfortunately given the continued uncertain

outlook for the Euro area and Japan, the price of this stronger growth

could be further increases in the already large current account imbalances.

We remain concerned about the risk this poses for disorderly currency

movements and rising protectionist pressures.

The policy messages that should come from this meeting

are familiar. Given the still tentative global outlook, macroeconomic

policies in the major economies need to remain broadly supportive.

However, a credible fiscal framework aimed at restoring public finances

to a sustainable position is essential for all the major economies,

including in the US. Moreover, if the concerns over the continued

reliance on the US economy are to be addressed in any meaningful fashion,

then it is vital that the pace of financial and structural reform

in the Euro area and Japan be reinvigorated.

The outlook for the Asian region is positive and it will

remain the world’s fastest growing region. China in particular has

experienced sustained economic growth and, over the medium to longer

term, should become an increasingly important driver of global growth,

both through intra-regional trade and the development of a large consumer

market. As in other countries, continued growth in the region will

need to be underpinned by macroeconomic discipline and sound institutions

and structural reforms. Consequently, acceleration of the pace of

structural reforms will need to be the centerpiece of Asia’s growth


As noted, these messages are not new and what counts

is action rather than words. We should also not underestimate the

confidence-boosting impact that would come from decisive policy action.

In this respect, we are deeply disappointed with the progress of the

Doha round of trade negotiations. The failure to make progress at

Cancun was a major lost opportunity for all countries. A good outcome

would have been of particular benefit to developing countries. It

is unfortunate that the negotiations were conducted in a corrosive

‘win-lose’ atmosphere, when the reality is that all countries stood

to gain from a successful outcome. We should reflect on the lessons

from Cancun and redouble our efforts to progress the ambitious objectives

of the Doha declaration.

In that regard, we would like to acknowledge the efforts

by the Fund, and in particular the Managing Director and First Deputy

Managing Director, to achieve a positive outcome for the Doha round.

Effectiveness of the Fund

The Role of the Fund

The agenda for the IMFC meeting covers the important

issue of progress in crisis prevention and resolution, as well as

Fund support for low-income countries. There are significant issues

to be discussed under each item, but we should not compartmentalise

these topics or get distracted by the detail. It is important that

this Committee take a holistic view of the overall effectiveness of

the Fund, its role in an ever-changing world, and the future challenges

it may be facing. The IMF must evolve, as it has done so, but it must

not lose sight of its basic mandate and objectives, for to do so will

undermine its effectiveness.

The Fund has responded to the Asian financial crisis

as well as the recent crisis in Latin America, by focusing on its

crisis resolution and prevention activities. This has been appropriate,

but the prime objective of the organisation must not develop, or be

seen, as responding to and reducing the risk of crisis in emerging

markets. The organisation has to be vigilant to addressing all risks

to the stability of the international financial system. As noted previously,

the main source of vulnerability to the world economic outlook at

present stems from imbalances among the major economies.

The activities of the Independent Evaluation Office (IEO)

are proving to be very valuable. The reports to date have been instructive

and many important recommendations have been offered. The work of

the IEO has understandably focused on specific topics, but what is

also required is a high level assessment of the common themes that

have been identified and the inter-relationship between the various

IEO findings-such as the importance of the role of surveillance and

questions over its effectiveness, along with the decision-making process

within the organisation.

Low-Income Countries

The Fund has significantly increased its activities in

supporting the development of low-income countries. In that regard,

the Fund has a comparative advantage in financing short-term stabilisation

and in improving macroeconomic foundations as a necessary support

for sustained growth. Yet for most low-income countries, a sustained

effort is also required in building capacity and institutions that

allow market economies to function effectively. It is important that

the Fund’s role complement the work of other agencies involved that

have the mandate and expertise to address these issues. As such, we

consider the work that is underway in reviewing the role of the Fund

in low-income countries as being particularly important. The forthcoming

IEO evaluation on the PRGF/PRSP process and technical assistance will

make an important contribution. However, as previously noted, the

focus should not stop at assessing the role of the Fund in low-income

countries. There needs to be a regular stock-taking of the role and

effectiveness of the Fund across all its activities to ensure it is

meeting the objectives set by its members.

The implementation of the HIPC Initiative is a significant

achievement to deal with the unsustainable debt burden of the poorest

and most indebted countries. In some cases, it will be necessary to

consider additional debt relief at the completion point. Decisions

on top-ups, however, must be informed by robust debt sustainability

analysis and should only be considered on a case-by-case basis where

there is a fundamental change in the country’s economic conditions

due to exogenous circumstances.


The importance of surveillance, and how critical it is

to fulfilling the Fund’s mandate, was a common theme coming from the

IEO’s evaluations on prolonged use, capital account crises, and fiscal

adjustment in Fund programs. It is also central to the question of

the long-term role of the Fund in low-income countries. We must not

lose sight of the fact that surveillance has an important role to

play for each and every country. Furthermore, the ultimate test of

the effectiveness of surveillance is whether Fund advice makes a positive

contribution to actions taken by those responsible for national economic


If surveillance is to be effective, it has to be realised

that its nature and scope should differ depending on the circumstances

facing the country. In that regard, the Fund must be sensitive to

the social and political context facing each country and, bearing

that in mind, should move beyond simply giving advice on what needs

to be done, to also assisting with the difficult task of implementing

reforms. Central to this role is assisting governments in convincing

the public and legislators that the reforms are necessary.

The Executive Board has a key role to play in assessing

whether surveillance processes are working as effectively as possible

and by suggesting what could be done to improve them. In particular,

the Executive Board has to avoid excessively focusing on the detail

of the country consultations at the expense of a more strategic oversight

of the process. In that context, it would be appropriate to initiate

a review of the role of the Executive Board including, in particular,

its contribution to making surveillance as effective as possible.

Crisis Resolution

The past year has seen a turnaround in the use of collective

action clauses (CACs) in international sovereign bond issues governed

by New York law, including by a member of this constituency, Korea.

The work of the Fund in advancing the Sovereign Debt Restructuring

Mechanism (SDRM) was central to achieving this progress on the use

of CACs, along with initiatives to develop a voluntary Code of Conduct.

While progress to date is encouraging, not all emerging market issuances

since March 2003 contain CACs, and there is a large stock of sovereign

debt without CACs. There is still much to be achieved and it is important

for the Fund to continue to explore the potential contribution that

aggregation provisions can make to the resolution of collective action

and creditor coordination problems.

Representation and Quotas

Much has been made of the importance of ownership when

it comes to Fund programs. Certainly no reform program can be imposed

on a country. It has been recognised that policy development and implementation

will only truly be effective if the country concerned takes ownership

of the reform processes.

However, ownership is a two-way street. If the Fund is

to be effective, all members must have a genuine sense of ownership

in the organisation. Questions of governance and `voice’ are being

raised in the context of developing countries, and a number of practical

steps have been taken to increase the resources of the African constituencies

in the Fund and World Bank. We support these measures.

Nevertheless, concerns over governance and voice extend

beyond those of the African countries. The legitimacy of the Fund

as a representative international financial organisation is regularly

questioned. This stems not only from imbalances in the distribution

of quotas but, as mentioned, from an overly process-driven approach

to surveillance and policy prescription that reflects a `G7′ type

perspective and takes insufficient account of the degree of economic

advancement and the political, social and cultural circumstances of

individual members. Moreover, as identified by the IEO, there have

been shortcomings in the decision-making process in the Fund and the

credibility of the organisation is undermined when individual program

decisions are taken contrary to agreed policies.

Addressing these concerns is a major challenge confronting

the Fund. At its heart is the difficult issue of quota distributions

but, as noted, it also covers the existing decision-making processes

and operational practices within the Fund.

If the IMF is to be a truly representative international

organisation, the distribution of quotas has to be brought into line

with the relative economic position of countries in the world economy.

In particular, the quota shares of Asia have not kept pace with the

rapid growth of economies in this region. Korea is particularly under-represented.

It is essential that work continue on quota-related issues, even if

it is difficult and agreement seems elusive. Progress in addressing

concerns over representation and governance within the Fund cannot

be put on hold until the next general quota increase. Work on quota-related

issues should be advanced in an effort to resolve these concerns.

It is crucial that there be a relatively large increase in the selective

component of the next general quota increase, whenever such an increase

takes place.

Failure to address these issues will continue to erode

the credibility and effectiveness of the Fund in fulfilling its mandate,

including through reducing the receptiveness of countries to its advice.