2001 IMFC Statements
2001 Spring Meetings Home

1. First, let me address the World Economic Outlook. There is a growing risk that the baseline scenario that defines the policy stance of the present report may be on the optimistic side. As the report itself admits, the past record in forecasting economic downturns has demonstrated a consistent optimistic bias. Moreover, the report is itself unable to find any convincing reasons why the strength of the US dollar should be sustained. Should the 'hard landing' in the US and disorderly adjustment scenario materialise, the consequences for the rest of the world will be greater than in the past because of the increasing globalization of product and financial markets. Apart from increased trade interdependence, increasing integration of financial markets has strengthened the mechanisms for transmitting a recession from the US to the rest of the world through what the report calls 'financial and confidence effects.' The report itself provides further elaboration of this in its interesting analysis of the Impact of the Global Technology Correction on the Real Economy which concludes that 'the TMT sector is capable of providing significant generalized disturbances to global activity.' The consequences of a 'hard landing' in the US for the developing world is thus of grave concern. Commodity exporters, in particular, will be hit by a further aggravation of the significant fall in non-fuel commodity prices that has already occurred while developing country exports in general would decline. In the case of emerging markets, the problem will be compounded by 'financial and confidence effects'. It is important to note in this connection that the projections based on the 'hard landing' scenario explicitly underestimates these effects since it notes that 'the decline in output, however, could be significantly greater if the hard landing in the United states was accompanied by a substantial deterioration in financial conditions for emerging markets.' Recent experience, including the ongoing crises in Turkey and Argentina, would suggest that the latter is likely to occur.

2. In sum, it is imperative that the utmost be done to avert a hard landing, not least because of what this would imply for the prospects for the reduction of poverty and providing decent work for all through globalization. From this perspective, it would have been more reassuring to see a greater sense of urgency in the discussion of the 'policy challenges'. A fuller discussion of the contingency measures that could be activated in the face of a further deterioration in the world economic outlook would be helpful. The very brief discussion of this contained in the report correctly stresses the need for a pro-active approach to macroeconomic policy in the US, Japan, and Europe. However, there is no mention of the crucial issue of how to forge greater policy coordination among the major economic powers as a means of averting a hard landing. This is an important issue not only for the present conjuncture but also for ensuring the greater stability in the global economy that is essential if globalization is to truly work for all. Similarly, the reference to how emerging markets would fare in the hard landing scenario merely reiterates the need for prudent macroeconomic policies and for sustaining structural reforms. A cross-reference to the state of progress in the reform of the international financial architecture and how this affects the prospects of emerging markets in the present conjuncture would have been of considerable interest.

3. An important dimension of the international financial architecture is the question of the monetary regimes that developing countries should adopt. There is an interesting and useful discussion of this issue from the perspective of inflation performance in Chapter IV. It should be noted that this question of monetary arrangements is of wider significance than just inflation performance. It is an important determinant of these countries' vulnerability to, and ability to cope with, financial crises. For this reason, as well as for their implications for general macroeconomic management, they are also an important determinant of the level of employment and poverty. The review of experience with alternative monetary arrangements in the report is inconclusive. There appear to be problems with both the adoption of either 'hard pegs' or floating exchange rates supplemented by inflation targeting. In these circumstances it would be prudent to withhold any firm views on what monetary arrangements should be adopted. The decision should depend on country circumstances of which we would highlight two points. The first is the extent of capital account liberalization that has occurred and the soundness of this for a particular country. Here issues of the pace and sequencing of capital account liberalization and question of retaining controls over short-term capital flows are germane. The report makes no reference to these issues. Secondly, the impact of alternative monetary arrangements on the level of employment and wages is of paramount importance. Minimising the 'sacrifice ratio' should be the overriding policy objective. It should be noted in this context that labour market institutions have a vital role to play since the state of arrangements for collective bargaining and social dialogue exert a strong influence on the prospects for achieving adjustment that is both equitable and involves the least social sacrifice. Indeed the question of the impact of alternative monetary arrangements on employment and wages and that of the institutional arrangements for achieving equitable and employment-friendly adjustment would be an important topic for future research.

4. The discussion of the decline in inflation in emerging markets mentions social conflicts as a cause for inflation. It should be noted in this connection that respect for fundamental rights at work, including freedom of association and collective bargaining, are important for avoiding social conflicts and that economic reform programmes should emphasise the importance of respecting these rights and of creating the necessary institutions for social groups to exercise these rights in a democratic manner.

5. Turning more specifically to the agenda items for the Joint Meeting of the IMFC and the Development Committee, we are pleased to note the significant progress that has been made on the HIPC process since the last report. We equally share the concern that further progress in terms of the number of countries to be brought into the process will be increasingly difficult in view of the fact that most of the remaining eligible countries are in conflict or post conflict situations. This will also affect the PRSP process. Restoring peace and the institutions for democratic governance in such countries has thus been correctly identified as an important priority for the international community. The ILO has taken steps to be an active partner in this effort, especially through its special programme on Crisis Response and Reconstruction. Under this programme we are engaged in the challenging task of providing assistance in fostering dialogue, building social and labour market institutions and in generating decent work in post-conflict situations. This is an important aspect of sound political and economic governance and poverty reduction. More generally, such efforts are also crucial for maintaining long-term external debt sustainability. As noted in the Joint Memorandum of the President of the World Bank and the Managing director of the IMF, it is essential 'to strengthen the economic reform agenda and to forge greater social cohesion which together constitute a potential source of growth that could be unlocked by the PRSP process.'

6. We warmly endorse the statement in the Joint Memorandum that efforts of the World Bank and the IMF in fighting poverty is based on the vision adopted by the Millennium Summit. We also agree that the points enumerated in the second paragraph of the Joint Memorandum are important areas for 'concerted efforts of both developed and developing countries' in order to realise that vision. We feel, however, that the need to create an environment conducive to employment and job creation is also essential, and that another significant omission from this list of priorities is the issue of human rights, including fundamental labour rights, since this is an essential component of the fight against poverty and underdevelopment. This is especially so in view of the importance that is correctly attached to good governance and democratic participation in the PRSP process.

7. We also agree with the thrust of the steps outlined in the Joint Memorandum for facilitating the PRSP process. These measures are of considerable significance for the entire multilateral system in view of the central role the PRSP process is assuming in shaping international efforts to fight poverty and country development strategies. In view of this, greater policy coherence and coordination of action across the multilateral system is more important than ever. In this connection it would be highly desirable to strengthen mechanisms that will allow the Bank and the Fund to draw upon the expertise of other agencies in specialised fields and to take into account their views in the further development and implementation of the PRSP process. The description of the process of implementation set out in the Joint Memorandum and in the supporting papers rightly emphasises steps to achieve a clearer division of labour and coherence between the Bank and the Fund. But it appears that insufficient attention is being paid to the equally germane issue of wider coherence across the multilateral system. For example, in paragraph 47 of the paper on Progress in Implementation of PRSPs it is noted that there is 'broad agreement that Fund and Bank conditionality under the PRSP should be selective, focussing on a few key measures that are central to the success of the country's strategy'. The following paragraph then states that the division of responsibility between the two agencies would be such that 'the PRGF would not normally extend conditionality into areas of structural and social policy outside the Fund's domain of expertise and responsibility, ....... Where possible, conditionality on these aspects of policy would be covered instead under IDA lending operations, especially PRSCs.' While this is a positive development insofar as intra-Bretton Woods collaboration is concerned it needs to be recognized that the shift to a comprehensive and holistic approach to poverty reduction and development gives rise to wider issues of coordination and collaboration within the multilateral system as a whole. The more comprehensive the approach to development becomes the greater is this need for wider collaboration across the multilateral system. The PRSP and related processes already involves areas of 'structural and social policy' that extends beyond the expertise and responsibilities of even the Bank. As such, the issue of mechanisms through which the Fund and especially the Bank can draw upon the expertise and to take into account the views of other agencies is one that now deserves serious consideration.

8. An illustration of the relevance of this issue is provided by the guidelines prepared for Joint Staff Assessments of full PRSPs. It is evident that the guidelines set out in Annex 2 of the paper on Progress in Implementation of PRSPs are very wide in scope. For instance, under the rubric of 'Building Country Ownership through Participation' normative issues are clearly unavoidable in the assessment of country performance. There should thus be an effort to refer to universally agreed standards on issues such as Freedom of Association and to draw on the expertise of relevant organisations in this area. This is particularly important in view of the findings in the first JSAs that there is scope for a further strengthening of the participatory processes in the PRSPs and the large challenge that still remains in terms of institutionalising participation on a permanent basis. Similarly, with respect to the section on 'policies for social inclusion and equity' there will obviously be large potential benefits to be derived from consulting and collaborating with agencies with the expertise and primary mandate on issues such as 'fair and equal treatment of poor men and women under the law' and on 'social protection and labour policies.'

9. In relation to other aspects of facilitating the PRSP process we strongly support the proposal to strengthen support for social impact analysis. The ILO attaches great importance to the increased use of both ex ante and ex post social impact analysis in the formulation and implementation of policies at both the international and national level. We believe that this is essential for achieving the greater integration between economic and social policies that is increasingly required to achieve widely shared economic and social progress in a globalizing world. (I have set out my views on this issue in a recent paper I presented to the ACC). The ILO is engaged in work on this issue and would be happy to collaborate with the Bank in its efforts to develop improved methods for social impact assessments.