Korea, Hong Kong, Thailand, Taiwan Province of China and, of course, Japan, are all important sources of foreign investment within the region, and remain so despite having been at the heart of the crisis. I lack the time today to go into greater detail, but it is clear that the multifaceted factors behind today's national economic crises have been evident -- mutatis mutandis -- in a good many other cases, particularly in Russia, of course, on a grand scale. As we well know from our annual analyses of each of our member countries, these symptoms exist in differing degrees almost everywhere and they were no stranger to the Japanese protracted crises of the s.
So here comes the basic question: what, then, are the lessons we can learn from this new breed of crisis to make the next millennium safer? Whether a country is large or small, any crisis can become systemic through contagion on the globalized markets. Domestic economic policy therefore must, now more than ever, take into account its potential worldwide impact; a duty of universal responsibility is incumbent upon all.
Every country, large or small, is responsible for the stability and quality of the entire world growth. This adds a new dimension to the duty of excellence that is required of every government in the management of its economy. I use the word "excellence"; I could also say "absolute rectitude.
No country can escape, and all are fully aware of this. There is a unanimous consensus within the Executive Board of the International Monetary Fund, where the entire world is represented, that we must, in the exacting dialogue that we hold with each of our member countries, from the largest to the smallest, place our emphasis -- in this context of globalization -- on four points:. The aim of an international financial organization in making such suggestions is not so much to seek balanced books at all costs, but rather to encourage countries to discover and realize what the consequences are of the circular relationship between integrity of monetary and financial management, high-quality growth, and poverty reduction.
Without the last, the first two have little chance of enduring, and without the first two, any efforts to reduce poverty will be protracted. Understanding all the consequences means being more flexible and adapting with a view to achieving an additional measure of growth and, especially, the human development that will result from such growth and that will in the end allow each country to play a greater positive role in the world economy.
I call your attention to this circular relation: it was not seen that way some time ago. The recognition of this fact by the world policymakers is a major silent breakthrough.
Building Development Studies for the New Millennium
It goes without saying that while crises are different from what they used to be, we have to look beyond their national components alone in order to explain everything. Countries have not only been actors in crises; they have also been victims. Systemic cracks have also come to light. To repair them, it is necessary to analyze the weaknesses of the global financial system and not only of national economies.
Considerable thought has been given worldwide to the ambitious project of designing a new financial architecture. The defects of the current architecture are well known. Here are seven of them, to use a nice biblical figure:. The inadequacy of financial information and the failure to respect the rules of transparency, which undermine policy credibility, market stability, and, obviously, the effectiveness of IMF surveillance; this more or less explains the "denial" syndrome on the part of governments, and the herd behavior in response to fads and downturns that are part of the world financial system; this denial syndrome prevented the governments of Thailand and Korea from recognizing the enormous magnitude of their problem a few weeks before the peak of the crisis.
The poorly managed liberalization of the capital markets, which facilitated the flows of potentially unstable short-term capital even as direct investment was shackled by legal restrictions or administrative red tape -- the opposite, in other words, of what would have been appropriate;.
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The reluctance to define the terms and conditions for involvement of the private sector, which nonetheless is responsible for a growing part of world financing, and of crisis prevention and resolution;. In the face of a proliferation of increasingly sophisticated forms of international financial intermediation, the delay in establishing the required discipline on international markets, which are at the anarchic stage that the domestic markets of the industrial countries were at a century ago;. A global system that allows extreme poverty and growing inequality to persist -- an issue I will come back to; and, finally.
A system that makes people wonder whether anyone is in the driver's seat: the problem of global governance. Building a stable, open global financial system clearly implies starting by correcting these major flaws, focussing especially on crisis prevention, but -- bearing in mind human frailties -- also being prepared to work effectively with private sector support to deal with such crises when they occur.
The financial foundations of the new structure must be based on five basic principles: transparency, sound financial systems, private sector participation, the orderly liberalization of capital flows, and modernization of the international markets on the basis of universally accepted standards with the necessary means to ensure that they are respected.
This then is the beginning. To build a more durable, integrated international financial system, we need to foster a mature market, which is based on stable relationships among players that rely on enlightened self-interest, and in which official involvement can be limited to establishing strong legal, regulatory and supervisory frameworks.
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How far advanced are we in this work? First, what has been achieved? Consensus has been reached on a number of areas that are designed to prevent crises. The work may not yet be complete, but in most areas we see broad agreement on objectives. The IMF itself has been responsible for developing standards or codes in data dissemination, transparency in fiscal policy, transparency in monetary and financial policies, and jointly with the Basle Committee banking supervision. And to round off the tools for crisis prevention the IMF has introduced a new lending window -- Contingent Credit Lines CCL -- to provide financial support to countries that are otherwise in sound economic condition but find themselves threatened by contagion from turbulence elsewhere in the global economy.
Second, what remains on the agenda? A number of issues remain under active debate that have direct implications for the Fund. Time does not permit me to elaborate, but let me hint at some of the questions that arise. There are three issues that arise from the debate on strengthening the architecture. For the Fund, the codes for which we have direct or shared responsibility are operational and with help from our members, they can be implemented. But in other areas much remains to be done, and some of the responsible agencies tell us that they do not have the capacity to monitor implementation on their own.
The international community, and the Fund itself with its limited resources, must consider the extent to which our surveillance should be used. This work is in progress. This is a tremendously complex subject, which is going through multiple rounds of debate. I cannot pretend to convey a full picture, so will just mention one of the "bottom line" issues that could have direct effects for the Fund.
All our efforts should be devoted to preventing crises. When difficulties occur, the expectation should be that voluntary, market-based solutions will be found to keep the private sector engaged. Yet we can envisage extreme situations, in which some international intervention is needed to ensure that debtors have time to reach orderly resolution with their creditors. One possible mechanism, a controversial one indeed, is to design a mechanism under which the international community could sanction a temporary stay of litigation by creditors.
The central question is how to achieve that goal, and what role the IMF will play.
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In the coming months, the IMF will be considering proposals for a gradual, country-specific approach to the liberalization of capital movements that explicitly recognizes the great variety of country situations. Clearly, the Fund will have a key role to play in assisting countries to ensure that the right conditions -- in particular sound macroeconomic framework and a strong financial system -- are in place.
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Indeed, that role could be strengthened by an appropriate amendment to the Articles of Agreement, which is being negotiated now. But when we see the many years that were needed to bring countries to current account convertibility, we suspect that this task -- of liberalizing capital movements -- will not be completed by But anyway will all this be enough? Some will no doubt say that these proposals are not bold enough, that the dissemination of the standards and codes of good conduct will depend too much on consensus, on mutual confidence between countries, and on an exceptional sense of responsibility on the part of all those involved.
And they will advocate the application of mandatory rules or global taxes. But the fact is that there is not much consensus for that in the world at the moment.
It would therefore be wiser to use as a building block the agreement that now appears to exist on the five principles I have outlined, and to endeavor to expand upon and apply it vigorously without delay. This is in itself a monumental task, and one that will take time.
The authorities must also become accustomed to acting in a spirit of "subsidiarity," intervening at the world level only if national or regional action is not sufficient. Above all, they must, at their own level, adopt the measures needed to strengthen their own financial systems.
They will also have to energetically tackle the serious problem of lack of transparency and control over the hedge funds and the transactions that transit through the many off-shore centers. The world can no longer tolerate such "black holes" in its financial system.
I am pleased to say that my country has joined in with this effort. I am sure that some will shrug their shoulders and say to me: "All that's just finance! When we measure the human cost of all this financial upheaval, when we remember that many banking crisis in the past 20 years have cost the countries in question 20 percent of GDP or more, we must realize that finance cannot be separated from economics. Crisis prevention and market stabilization are safeguards that we owe to the most vulnerable segments of our societies.
A sound financial architecture is also a factor of social protection, but any financial architecture will be unstable so long as the world does not rally its forces to face up to the "ultimate systemic threat": 2 poverty.
The slow progress on poverty around the world and the fact that in many places poverty reduction seems to be losing ground are clearly the most serious crisis factors at the end of this century. Here more than anywhere else, we must reflect on our collective capacity to place the human being at the center of our policies -- to humanize globalization. I hardly need dwell on the global dimension of the problem, and on the risks that it will grow worse.
I'm sure that each of you knows the key statistics. I am far too familiar with the constraints and inertia we face as we wage this battle to suggest that there is an easy solution of some kind, but I would like to bring you up-to-date on a campaign and two initiatives that could lead to some progress. The campaign is aimed at ensuring that giving one's word means just that. Over the past decade, we have witnessed two rather paradoxical phenomena. On the one hand, while the major industrial countries have happily been collecting their peace dividends, they have steadily reduced their official development assistance, falling further and further short of the target of 0.
At the same time, they have made pledges, alongside the developing countries and transition economies, at one world conference after another, to promote measurable and achievable human development objectives. Do you remember the Copenhagen Declaration, in which we promised to reduce by half the number of people on this planet living in abject poverty by ?
Do you remember Rio, Jomtien, Cairo and Beijing, where we promised to achieve at least six other objectives in the next fifteen years: universal primary education, reduction of infant and child mortality by two-thirds and maternal mortality by three-quarters, universal access to reproductive health services, reversal of the current rate of destruction of the environment, and elimination of the disparity in access to primary and secondary education for girls and boys by ?
Imagine for a moment that these pledges were to be actually fulfilled: what a giant step this would be toward a better world, what a giant step it would be toward improving the lot of the most disadvantaged among the poor -- women and children! But many of the world's top leaders are losing sight of these pledges, as I myself have had occasion to discover. I am therefore very pleased that they have agreed that each year, at the G7-G8 meeting, they will look at a detailed report by the main institutions concerned evaluating their progress toward these goals and, if there are delays, they will reflect on the measures to be taken to define a new path to achieve them.
This is only a small step, but it shows us, above all, how fragile our collective commitments are, and how small the chances are that they will be fulfilled without a universal mobilization of public opinion, as has been the case with the Jubilee campaign. This makes me wonder what churches, what Christian and other movements, could do together to promote the humanization of our world. I will come right out and say it: we must undertake to ensure that the pledges made in our name are fulfilled. I have asked the heads of state of the G7-G8 to make the first decade of the new century the decade of fulfillment of existing pledges.
The key is clearly our solidarity. With 1. If we allow cynicism to prevail in this area, we may as well give up the dream of progressing to a more fraternal global society. It is a matter of great urgency, my dear friends. I see the time soon coming when we will say that, considering the amount of time we have lost since these pledges were made, the targets are no longer attainable.
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