The theme of this meeting—the role of information technology in a knowledge-based economy—raises the issue of "connectivity." I am referring not just to the fact that some people, or segments of society, are connected to the Internet and the latest in high-tech communications, while others are not. The problem is that some people are connected to the global economy, enjoying the immense opportunities of globalization—higher investment, job creation, and growth—while others are not.
Not surprisingly, the "disconnected" happen to be the world’s poor, who lack access to basic social services, essential infrastructure, and income and employment opportunities, as well as to the web. Being disconnected bears an ever-growing cost of isolation and marginalization, at a time when there is already a growing gap between the rich and the poor within and among nations. What can the UN family—in particular, the IMF–do to help integrate all countries into our increasingly globalized economy? I would like to explore this question in my remarks today.
A brighter world economic outlook
The encouraging news is that the global economy has recovered remarkably quickly from the financial crises of 1997-98. After two years of slowdown, world growth should be around 4½percent this year—the highest since 1988—and continue at close to this pace next year. Most of the emerging market countries that experienced crises are enjoying impressive growth, reflecting in part resolute action by policymakers to stick to adjustment and reform efforts, although much remains to be done. Other developing countries, as well as a number of economies in transition, are also contributing to the pickup.
Even so, we cannot afford to be complacent. Three key concerns come to mind: (1) Are we doing enough to ensure a gradual rebalancing of global growth among the principal currency areas—the United States, where growth remains strong; Japan, where a fragile recovery from recession is under way; and Europe, where recovery from a period of weakness is on track? (2) Are the values of the key currencies in line with their medium-term fundamentals, notably the euro against the dollar? (3) Are we doing enough to ensure that any needed adjustments in financial markets occur in as orderly a manner as possible?
It is more urgent than ever that we secure a smooth transition to a more balanced pattern of global growth. In the United States, this means containing excess demand pressures, being careful not to loosen the fiscal stance unduly. In Japan and Europe, it means tackling structural rigidities, including intelligent deregulation of key sectors. In Latin America, it means continuing to reduce fiscal deficits to build investor confidence and contain the risks associated with high external financing requirements. In Asia, it means persevering with bank and corporate restructuring. In Africa, it means stepping up economic and institutional reforms to broaden the economic base and create a welcoming atmosphere for the private sector.
A safer global economic environment
The world economy is basically in good shape, giving us a much-needed opportunity to step up our efforts to spread the benefits of globalization to the disconnected. Globalization is not a recent phenomenon. But what is different is the enormous impact that new information technologies are having on market integration, efficiency, and industrial organization, as well as on human capital development. These new technologies help boost efficiency and growth by reducing information and transaction costs. Reducing these costs tends to lower barriers to entry, increase competition, and contribute to higher investment. Higher market efficiency, and the structural change in the ways businesses operate, represents a positive supply shock that could lead to a quantum shift in overall productivity. Advances in information processing, financial innovation, and financial liberalization have also unleashed a dramatic expansion in domestic and international financial flows, even after accounting for recent crises. Overall, capital flows have become more important than trade flows in determining the short-term evolution of exchange rates. However, a major drawback is that many of these flows have been highly volatile. Until a few years ago, when crises erupted, they were mainly rooted in macroeconomic disequilibria and associated with current account imbalances. But now crises increasingly originate in the capital account and are associated with weaknesses in the domestic financial sectors. The absence of complete or timely information on the extent of foreign currency exposures—especially short-term debt—made it difficult to detect emerging vulnerabilities and design appropriate policy responses.
So what can be done to create a safer global economic environment? Policymakers in developed and developing countries should tackle the critical structural adjustments that in too many cases have been delayed. The IMF should strengthen its focus on its core activities—macroeconomic stability; monetary, fiscal, and exchange rate policies; and financial sector issues—and step up its work with its development partners in other areas, mainly the social realm. In the past year, the IMF, working closely with the international community, has explored ways to better prevent crises and better manage those that inevitably do occur—what is often referred to as strengthening the international financial architecture. We have also continued to explore ways to make the institution more focused and more effective, seriously weighing the many reform recommendations being made by governments and task forces. We are listening and carefully assessing the possible avenues of reform.
In many areas, progress has been made in promoting transparency and accountability, developing internationally recognized standards and codes, strengthening domestic financial systems, increasing the capacity to assess countries’ external vulnerability, and carrying forward the debate over the choice of exchange rate regimes. Let me elaborate. First, the IMF has been beefing up its surveillance of national economic developments and policies, especially financial system stability issues. One innovative initiative is the Financial Sector Assessment Program, begun last year as a pilot project with the World Bank. Drawing on a large and expanding number of cooperating institutions, it aims to identify strengths and vulnerabilities, assess the observance of financial sector standards, and help countries identify and sequence necessary financial sector reforms.
Second, countries and market participants need guideposts for health checks of financial systems and economies in general, and the international community has been working on establishing international standards and codes of good practice. The IMF now has standards for data dissemination and codes of good practice for the transparency of fiscal, monetary, and financial policies. Other agencies have developed, or are developing, standards for banking supervision and regulation, securities and insurance regulation, payment and settlement systems, accounting and auditing, corporate governance, and insolvency regimes.
Third, the IMF has been releasing more information than ever as part of its commitment to greater transparency and accountability, both for itself and for its member countries. We firmly believe that timely and detailed information can prevent the accumulation of problems by forcing governments to take appropriate measures at the right time. We also firmly believe that better information and standards should benefit the poor countries as well as the rich ones.
Here, the theme of your conference ties in strongly, for the advances in information technology have revolutionized communications. Until about 15 years ago, the IMF was the major, if not the only, source of information on the economies of many countries. It was our job to develop and store information and make it compatible through time and across countries. Increasingly, our activities have shifted toward setting standards and codes for the information that countries themselves gather.
In other areas of reform, the bulk of our work is still ahead–in particular, the role of the private sector in preventing and resolving crises–but some principles are emerging. IMF Managing Director Horst Köhler favors "constructive engagement"—cooperation among the borrowing countries, the private sector, and the official international sector—in good times as well as in crises.
The IMF, working closely with the World Bank, the UN, and other partners, will continue to place a high priority on poverty reduction. We now better understand the complex links between growth and poverty. We have long known that sound macroeconomic policies favor growth and that sound macroeconomic policies and growth-enhancing structural reforms favor the poor, since growth is the single most important source of poverty reduction as well as a key source of sustained financing for social outlays. But there is now greater acceptance that causation also runs in the other direction. Poverty reduction and social equity can help policies, such as investing in primary education and basic health, that boost the potential of the poor to contribute to output, speeding up economic growth itself.
This does not happen overnight. But it can happen in a reasonable period of time. I offer an example from my own country. In about a decade, poverty in Chile has fallen drastically in an environment of strong economic growth and gains in price stability—which led to real wage growth and the rapid expansion of employment. Social outlays were increased and carefully targeted, and protected and inefficient sectors opened up to competition and mobility.
What can we hope to achieve globally? At the UN summit in Copenhagen in 1995, countries pledged to reduce by half the proportion of people living in extreme poverty by 2015. This is an ambitious goal, and important progress has been made. However, while some regions, such as East Asia and the Pacific, are likely to meet these targets, others—including Africa and large segments of Latin America and the Caribbean—are far behind. Our best hope lies with the approach to poverty reduction endorsed by the international community last September. The main innovation is deriving programs from comprehensive strategies for poverty reduction drawn up by individual governments, with the involvement of a broad range of stakeholders, including civil society and the donor community. The emphasis is on ownership, transparency, good governance, and accountability.
This is a collaborative effort, with the countries concerned in the driver’s seat, and each partner playing a vital but specialized role. The World Bank, along with the regional development banks and UN agencies, takes the lead in discussions with authorities on the design of policies aimed at poverty reduction, including social safety nets to protect the poor and vulnerable. The IMF supports economic policies that provide an environment conducive to sustainable, inclusive growth.
Stepped-up debt relief
Another important component of this new approach is an enhanced debt initiative to give the world’s heavily indebted poor countries deeper, faster, and broader debt relief. We are now talking about 36 countries, mostly in Africa, instead of the original 29. It should result in a reduction of their external debt burdens, in aggregate, by nearly two-thirds.
Why isn’t the debt relief process going faster? Are the IMF and World Bank insisting on rigid or unreasonable conditions? In some of the early cases, we are prevented from going faster because of armed conflict, civil unrest, governance issues, and major slippages in economic, social, and structural programs. This initiative can contribute to poverty reduction and growth only if conditions are in place to use the additional resources effectively and to support the country’s development agenda.
The IMF and the World Bank are committed to doing everything possible to speed up the process. We have recently established a Joint Implementation Committee to oversee the timely and effective delivery of these programs. However, more generous debt relief brings with it higher financing requirements—about $14 billion in 1999 net present value terms for multilateral creditors. There is still a financing gap—excluding the IMF and the World Bank—of around $5.5 billion. It is essential that the developed countries fulfill their stated commitments.
Let us seize the immense opportunities afforded to us by the more stable economic environment and current economic calm. We must tackle head-on the more intractable areas of reform that are so critical in an era of globalized markets. Ultimately, our goals are higher living standards, the elimination of poverty, and shared global prosperity. To accomplish these goals, we must ensure that all nations are fully connected to the global economy.