STATEMENT BY THE HON. PETER COSTELLO

GOVERNOR OF THE IMF AND THE WORLD BANK FOR AUSTRALIA AT THE

JOINT ANNUAL DISCUSSION

DUBAI

23 SEPTEMBER 2003

Mr Chairman, fellow governors and delegates, on behalf

of Australia, I would like to take this opportunity to thank the Government

of the United Arab Emirates and the people of Dubai, for their gracious

hospitality in hosting these meetings.

The past 12 months have been challenging for the

international community. A number of downside risks have receded and

there are some promising signs that global growth may be strengthening.

However, our economies still face many challenges and a number of

downside risks continue to weigh on the outlook.

Restoring confidence in the world economy will require

continued efforts by member countries to ensure a sustained recovery

in growth.

Of significant concern is the world’s continued over-reliance

on the US economy as the major source of growth, with European growth

remaining weak and on-going Japanese growth uncertain.

The sustainability of a number of large global macroeconomic

imbalances are a concern. The fiscal positions of most advanced industrial

economies have deteriorated, with all G-7 countries except Canada

running large fiscal deficits. In the case of the US, the deterioration

of the fiscal position has put pressure on the current account deficit,

creating the possibility of a rapid and disorderly adjustment when

it unwinds.

Ageing populations will soon, and in some cases are already

beginning to, affect the economic performance of a number of industrialised

economies, placing further pressure on existing fiscal positions.

There is an urgent need now for many countries to adopt credible fiscal

frameworks that embed today’s necessary fiscal stimulus in a medium

term program of fiscal consolidation.

The Australian economy has remained resilient over the

past year despite a weak world economy and the most extensive drought

in Australian meteorological records. Key factors behind this robust

economic performance have been sound macroeconomic management based

on the Government’s medium-term fiscal and monetary policy frameworks,

combined with a sustained commitment to structural reform. Accordingly,

the IMF described the Australian economy `…as one of the strongest

economies of the developed world…’. Looking forward, the Australian

economy is expected to grow solidly in 2003-04, albeit at a little

below trend, underpinned by a gradual recovery in global economic

conditions and recovery from the drought.

Australia is not complacent however and recognises that

it is not immune to the challenges faced by other economies. We will

continue to pursue sound long-term economic policies to avoid fiscal

pressures and maintain living standards in the context of an ageing

population. We are therefore actively pursuing policies to increase

labour force participation and raise productivity – importantly this

includes a continuing commitment to vigorous action to reducing barriers

to trade and investment.

The progress of the Doha round of trade negotiations

is very disappointing given the obvious potential benefits of trade

liberalisation to the international community. We have all lost by

the failure in Cancun, but particularly those in developing countries.

As part of the Monterrey Consensus, developed countries

agreed to deliver lower trade barriers – the deadlock

at Cancun highlights how far we are we are from making tangible progress

on this front.

Agricultural support and protection from OECD countries,

which totalled over $US 300 billion last year, represents a crippling

tax on the agricultural exports of developing countries. To put it

into further perspective, agricultural subsidies are worth over five

times annual aid flows to developing countries. Aid will not compensate

developing countries for the denial of economic opportunities caused

by trade restrictions.

The key developed countries must now exercise leadership

to bring the Round back to life. They, and other WTO participants,

must put aside their individual differences in favour of the overall

benefits of multilateral trade liberalisation, as demonstrated by

the experience of the GATT. As Finance Ministers, we have a critical

role to play in pushing for comprehensive trade liberalisation.

In that regard, Australia welcomes the vocal support

of the IMF and World Bank in promoting successful outcomes for the

Doha round, including through packaging their support to assist countries

in implementing commitments made as part of the Doha round.

This year’s IMF/World Bank Annual Meetings serve as a

timely reminder of the importance of international efforts to ensure

peace, stability and economic prosperity in the Middle East. Since

we met last year, we all face a new challenge in seeking to aid the

Iraqi people to build an open, outward-oriented economy in a free

and democratic Iraq. The task is a formidable one. Australia has committed

significant humanitarian aid and has provided staff for the Coalition

Provisional Authority. The latter have made a substantial contribution

working with free Iraqi colleagues in areas such as agriculture and

the development of the 2004 Iraqi budget.

The IMF and the World Bank have a crucial role to play.

Australians were horrified by the bombing of the UN headquarters in

Baghdad and our sympathy goes out to those who were injured in the

blast and to the families of those who died. We have been heartened

that despite the bombing, the international financial institutions

and the UN family are maintaining their commitment to Iraq. At the

conference in Madrid next month, we hope the international donor community

will demonstrate a strong resolve to help the Iraqi people meet the

significant challenges of reconstruction.

The Pacific region has faced a particular set of challenges

over the past year. Despite the best efforts of many, the Solomon

Islands has gradually slipped into disorder and lawlessness. The people

of the Solomon Islands have been living in fear and the economy has

collapsed, and a humanitarian crisis has been in the making. For those

reasons, regional economies came together to respond to the request

of the Solomon Islands government this year to provide help. Together

with New Zealand, Fiji,.png and other nations of the South Pacific

we have joined a multi-country regional assistance mission, concentrating

on the areas of law and order and economic and budget stabilisation.

The problems of the Solomon Islands cannot be remedied

overnight. Long-term economic reform will be needed to create a viable

future for the Solomons. Australia has been pleased at the willingness

of the international financial institutions to re-engage and bring

their expertise and financial resources to bear on these problems.

IMF

The legacy of the capital account crises of the last

decade continues to raise issues of how to best prevent economic crises,

and manage the fallout when they occur. The IMF has responded to these

challenges and has taken a number of steps to enhance the effectiveness

of its surveillance activities.

The ultimate test, however, of the Fund’s surveillance

strategy is the impact of its advice on member countries. On this

key criterion, further progress could be made.

In the case of developing and program countries, central

to the Fund’s effectiveness is its ability to act as a `confidential

policy adviser’. This involves encouraging country ownership of program

policies and developing strong, candid working relationships between

staff and country authorities to ensure advice reflects political

realities. In this regard, we welcome staff initiatives to bring a

fresh perspective to the surveillance of program countries.

But surveillance is not just about program and developing

countries. At the present time, there is just as much riding on the

quality of economic policies in the major economies as there is on

the policies of developing economies. The IMF must therefore remain

as vigilant in promoting sound policies in the more advanced economies

as it is in developing and emerging markets.

The challenge for the Fund in industrial countries is

to ensure that its advice adds value amongst a number of competing

sources of advice. The key to enhancing the effectiveness of IMF advice

in these countries – indeed in all countries – is its ability to tailor

its advice to addressing the individual policy weaknesses of its members,

bearing in mind the broader implications for the stability of the

international financial system.

While crisis prevention is the preferred means of promoting

financial stability, the international community must be in a position

to deal effectively with the possibility of new crises emerging. The

IMF’s work on the SDRM provided valuable impetus for the wider use

of collective action clauses and the development of ideas on a voluntary

code of conduct for debt restructuring.

The Fund’s new criteria for exceptional access provide

another important element to improving the crisis resolution framework.

The measures adopted by the Fund should help ensure appropriate financial

assistance is provided within the context of a sustainable policy

framework in the recipient country. For the new policy to work, it

will be incumbent on the Board to build up a track record in applying

the new access principles in practice – in doing so it must resist

short term pressures to provide funding when policy settings are not

consistent with a sustainable economic position.

The recent improvements in growth rates in low-income

countries are a welcome development. But further improvements are

needed to ensure adequate progress towards poverty reduction and the

Millennium Development Goals.

While we all recognise the Fund has an important role

to play in these countries, its role needs to complement and not duplicate

that of the World Bank, other multilateral development banks, bilateral

donors and the private sector.

Moreover, the Fund must ensure that it has the appropriate

tools to deal with the challenges of low-income countries in their

various stages of development. The owners of the Fund need to ensure

that what we ask of the institution in low-income countries is within

its capabilities and areas of comparative advantage. Strengthening

the Fund’s surveillance capacity is a necessary condition in this

regard.

These Annual Meetings provide an important forum for

the owners of the Fund to consider the future direction of the institution

in these challenging times and provide sign-off on its agenda.

For such a dialogue to be meaningful, the Fund must represent

all its membership adequately. It is therefore crucial that future

quota increases include a rebalancing of quota shares to reflect the

relative under-representation of certain countries, particularly in

the Asia region, relative to economic weight. It is also important

that all countries have the capacity to express their voice in the

debate. In this light, Australia supports recent initiatives to increase

the capacity of the largest member constituencies at the IMF and World

Bank to contribute more effectively to the operation of the institutions.

World Bank

Australia welcomes the efforts by the World Bank in progressing

the Monterrey consensus and promoting the attainment of the Millennium

Development Goals (MDGs). The international community has made encouraging

progress in identifying the preconditions for sustainable development.

One thing that is striking from the Bank’s research is

that a great deal of the recent reduction in global poverty has occurred

in Asia, despite it receiving relatively low levels of official development

assistance (ODA) per capita.

This is consistent with the G-20’s work on globalisation,

which has highlighted the importance of good policies, good governance,

outward-looking approaches to trade and investment, and market access

in promoting development.

The World Bank can do more in stressing the fundamental

role of trade in promoting development, particularly by emphasising

enhanced trade capacities in Poverty Reduction Strategy Paper (PRSP)

and Country Assistance Strategy work, and including appropriate trade

facilitation measures in Bank assistance.

When used effectively, aid can support countries in developing

sound policies and institutions to mobilise additional resources for

development from a variety of sources, including domestic resources,

international investment and trade.

Accordingly, Australia strongly supports the argument

that the bulk of aid dollars should flow to countries with good policies

and governance to maximise aid effectiveness.

It is still apparent that aid flows do not sufficiently

take into account recipient countries’ capacity to successfully absorb

aid without undermining macroeconomic stability and/or fiscal and

external debt sustainability.

A number of Asian countries have the policies and institutions

in place to successfully absorb additional aid, and yet current relative

aid flows do not reflect the region’s capacity to contribute to the

achievement of the MDGs.

It is also clear that countries with poor policies and

institutions represent a significant challenge for the international

community. Unless this challenge is addressed these countries will

not achieve their MDG targets. It is critical that the international

community remains engaged with these countries and finds new ways

to build local support and capacity, so that over time additional

assistance can be provided through traditional channels.

Australia has supported the Bank’s efforts in engaging

with poorly performing countries in our region, and we look forward

to continuing to work with the Bank on the Low Income Countries Under

Stress (LICUS) initiative. We also note that, among LICUS countries,

those in post-conflict situations often have unique needs, and require

a sustained commitment from the international community in order to

rebuild infrastructure and provide basic social services.

Australia remains a strong supporter of the Heavily Indebted

Poor Country (HIPC) Initiative and we place considerable importance

on efforts to ensure debt sustainability in developing countries.

Debt relief alone, however, is not sufficient to address poverty.

Debt reduction is important, but needs to be accompanied by sustained

improvements in countries growth potential. This again brings us back

to the importance of good policies, good governance, increased access

to world markets and expanding export and investment opportunities.

The role of country policies and institutions, and vulnerability

to shocks in determining debt sustainability is also critical, and

we welcome the forthcoming IMF/World Bank review of debt sustainability

in low-income countries examining these issues.

PRSPs can also play a vital role in promoting good governance,

however, despite recent progress, weak institutional capacity continues

to limit PRSP implementation and poverty reduction efforts. To be

effective PRSPs, must be integrated into policy formulation and budget

planning processes.

Conclusion

Mr Chairman, the world economy continues to strengthen

from some recent turbulent times, however, challenges remain. It is

important that countries continue to implement necessary reforms to

reduce their susceptibility to economic and financial shocks.

Moreover, we need to deliver on our commitment to the

MDGs in order to improve the welfare level of the most impoverished

nations and individuals. While aid has an important role to play in

achieving the MDGs, it can only be a complement to sustained efforts

to mobilise domestic resources through better policies and governance.

But the developed economies have to match this commitment by providing

greater trade and investment opportunities for the developing world.

We continue to support the involvement of the Bretton

Woods institutions in this process. We look forward to the Bretton

Woods institutions improving their sphere of influence and policy

advice, equally with regard to both developing and developed economies.

The well being of our nations is dependent on the development

of sound domestic policies, meaningful trade liberalisation and good

governance which are fundamental if countries are to experience sustainable

economic growth and ongoing poverty reduction.