International Monetary and Financial Committee
Fifth Meeting, April 20 2002, Washington DC

At the IMFC meeting in Ottawa last November, we agreed that the international community must take strong action, not just to root out terrorism, but to tackle injustice and poverty and make globalisation work for all. We met, following the tragic events of September 11, at a time of widespread pessimism about the global economy, with fears of a global slowdown or even a global recession. There was a danger that each of us would turn inwards and focus on our own country's domestic concerns at the expense of global cooperation. Some said that globalisation was leading to instability and that we should rein back on our programmes of reform—that it was not the time for change.

But the last six months have demonstrated that these fears have not been realised. Independent forecasters now expect the world economy to grow faster in the months ahead. And we have seen globally a forward-looking, coordinated response to the events of September 11^th, with interest rates brought down, cooperation in the fight against terrorist financing and the successful outcome of the Monterrey conference.

So now is the time more than ever to push forward the agenda to improve the stability and prosperity of the global economy. And just as there is growing agreement that as we work together to fight terrorism and to strengthen the international economy, so there is increasing recognition that we must work together to address the causes of poverty—not just because to do so is central to long term national security but because to do so is right—a moral imperative, an economic necessity and a social duty.

The UK Economy

There is a truth increasingly understood across the world: that our shared aims for long-term prosperity and social justice with strong public services depend upon rising productivity, growth and economic reform.

In the UK we are determined to play our part. In 1997 we introduced a wholly new monetary and fiscal framework based on clear policy rules, well established procedures, and an openness and transparency not seen in the past. This new framework makes us far better placed than before to cope with the ups and downs of the economic cycle - one reason why in the last five years while other countries have suffered recessions the British economy has maintained economic growth. At the same time, we are accelerating our productivity improvements that will increase output, jobs and wealth.

While risks remain and we will maintain our cautious, vigilant and forward looking approach, I am more optimistic now than when the IMF last met last autumn and believe that this is a time of real opportunity and challenge for not just the British but the global economy.

Because terrorists intended to bring the world's financial system to a halt, to undermine the very prospect of global prosperity, we must continue to show that we will not succumb or surrender to their threats. In the fight against terrorism the UK has frozen the assets of over 100 organisations and over 200 individuals suspected of terrorist financing. We comply fully with the FATF 8 Special Recommendations on terrorist financing. We have in place domestic legislation to seize terrorist cash anywhere within the UK, freeze funds at the start of an investigation, monitor suspicious accounts, and we have enhanced reporting requirements. We supervise money service businesses to ensure they comply with the money laundering regulations. And in the EU we are working for the fast adoption of the necessary regulation to enforce UNSCR 1390 against Al-Qaeda funding within the Community and to speed-up the workings of the clearing house to identify terrorist organisations and individuals whose accounts should be frozen under UNSCR 1373.

Strengthening the international financial system

Increasingly, in this age of globalisation, our national goals are shared international goals, our responsibilities are shared responsibilities, and our opportunities are shared opportunities.

Our aim must be an international financial system for the 21^st century that captures the full benefits of global markets and capital flows, minimises the risk of disruption, maximises opportunity for all and lifts up the most vulnerable. We need to step up the reforms that will help create a new stability and purpose in the international financial system: first, a new framework for better economic decision-making and crisis prevention, based on greater openness, transparency and increased surveillance; second, effective, speedy and decisive procedures for crisis resolution; and third, helping the poorest countries compete and engage in the global economy by creating the right conditions for trade and investment, improving the frameworks for poverty reduction and putting in place mechanisms for a decisive transfer of additional resources from the richest to the poorest countries.

First, a new framework for maintaining stability and preventing crises

In a world of ever more rapid financial flows, we know that capital is more likely to move to environments which are stable and least likely to stay in environments which are, or become, unstable. And we know that countries who need capital most are, at the same time, the most vulnerable to the judgements and instabilities of global financial markets. So for every country, rich or poor, macroeconomic stability is not an option but an essential pre-condition of economic success.

I have become convinced that it is in the interests of stability—and of preventing crises in developing and emerging market countries—that we seek a new rules-based system, under which each country, rich and poor, has a responsibility to adopt agreed codes and standards for fiscal and monetary policy for the financial sector and for corporate governance. This adoption of clear transparent procedures would improve macroeconomic stability, deter corruption, provide to markets a flow of specific country by country information that will engender greater investor confidence and reduce the problem of contagion.

And where countries do operate transparent and effective systems, fully monitored by the international community, they have the right to expect the support of the international community if hit by financial contagion. These rights and responsibilities are now enshrined in the IMF's contingent credit line: a commitment to countries implementing sound economic policies that the international community will stand by them if the markets turn against them. The CCL should be seen as an attractive tool to help country's prevent crises and the IMF should take a more pro-active approach to encourage countries to benefit from this facility: assessing, through the surveillance process, which countries are in a position to benefit from the CCL; and explaining the benefits of the CCL and encouraging countries to take the steps needed to advance to a position where they can benefit. But I believe we need to go further. The IMF should review the design and operation of the CCL, and consider how it can be enhanced to encourage maximum take-up to ensure it becomes, as intended, a cornerstone of the IMF's crisis resolution capacity.

Effective surveillance is central to crisis prevention. The IMF Article IV surveillance process is already an invaluable international asset, and has a crucial responsibility to identify the policy environments that are likely to prove unsustainable. Over recent years we have seen a strengthening of surveillance and greater openness in publishing Article IV assessments and their press notices; set up the independent evaluation office; and established the Article IV process at the centre of the monitoring of codes and standards.

But there is a case for doing more. Enhancing the IMF's role in Article IV surveillance of the world economy—making it more transparent, more independent, more accountable and, therefore, more authoritative—would contribute to greater stability and ensure it is seen to be providing impartial advice independent of the inter-governmental decision-making process. Whilst governance of the IMF and decisions about financial support for countries are, of course, matters for its board, there is now a case for enhancing the IMF's surveillance and monitoring functions so that surveillance is—and is seen to be—independent of decisions about crisis resolution. I believe we must implement reforms to promote:

• greater independence: ensuring the fund applies objective, rigorous and consistent standards of surveillance to all member countries, and that there is a clear separation between surveillance and lending activities;

• greater transparency: introducing the presumption that all surveillance reports by IMF staff will be published when they are presented to the board; and that concluding statements will be published at the end of each surveillance mission; and

• greater accountability: with the IMFC setting a surveillance remit; IMF management reporting each year on the Fund's performance; and an annual assessment of the effectiveness of Fund surveillance.

Our second challenge is crisis resolution

However successful we aim to be at avoiding crises, we should recognise that, from time to time, crises will happen. So we need to ensure there are effective methods in place for crisis resolution, in a way that will ensure the burden of adjustments is not placed on the poorest and most vulnerable. The IMF is now meeting the call from governments, academics and debt campaigners for a new system to deal with unsustainable private debt in vulnerable countries and the way forward is clear and urgent.

We need radical reform of the contractual arrangements for debt. Debt contracts which specify the arrangements for collective action to re-negotiate terms when it is clear that a restructuring is necessary can help countries reach a speedy resolution with their creditors, protecting against rogue creditors and vulture funds. The UK Government has already agreed to include collective action clauses in our own foreign currency denominated debt. I call on other countries to follow this lead, to agree new standards for international best practice in sovereign debt contracts and a strategy for encouraging their adoption worldwide.

Next—since there will be extreme circumstances in which countries will be unable to meet their obligations even over time, and a voluntary agreement with creditors is not possible, despite best efforts—the international community should be prepared, where other reasonable options have been exhausted, to support a country that must impose temporary capital controls, or a standstill on its debts, as part of an orderly process of crisis resolution.

We also need to be much clearer about the normal limits to IMF financing, and set more transparent and objective criteria for going above the limits. We cannot send a message that bad decision-making by lenders is encouraged by the expectation of an unlimited bail-out by taxpayers, or bad policies by debtor countries will be condoned by more financial support by the international community. We must provide more certainty about the respective roles of the private and official sectors in a crisis situation.

Finally—as the IMF's First Deputy Managing Director has proposed—we need to continue work on a new, more comprehensive, legal framework—an international bankruptcy procedure. While much can, and must, be achieved in the absence of legal changes, we know from our experience of corporate bankruptcy arrangements that an independent process for adjudication is necessary for an orderly and comprehensive resolution to occur.

Our third challenge is to ensure that the poorest countries have the capacity to compete and engage in the global economy so they can earn a fair share of the benefits of global prosperity

Open, transparent and accountable national policies, internationally monitored, are the foundation for macroeconomic stability. But to ensure growth and development, we must also promote trade and investment, develop the right frameworks for poverty reduction and put in place mechanisms for a decisive transfer of resources from the richest to the poorest countries.

We strongly welcome the WTO agreement in Doha to launch a new trade round focused on development. Full trade liberalisation could lift at least three hundred million people out of poverty by 2015 and even diminishing protection by fifty per cent in agriculture, industrial goods and services would benefit developing countries by an estimated $150 billion a year. To tackle their double handicap of low foreign and domestic investment, developing countries must work to establish a more favourable business environment, with investment forums bringing public and private sectors together to examine the current barriers to investment and build consensus on how to secure higher levels.

The IMF, along with the wider international community, bears the responsibility to develop the right frameworks for poverty reduction and development, and to ensure that all countries have the capacity and resources to achieve them. So we welcome the Managing Director's report on the IMF's role in low income countries and the commitment to work proactively with these countries and to intensify efforts to improve development outcomes.

Already we have seen a decisive shift towards a new poverty-focused approach with the introduction of country-drive Poverty Reduction Strategies (PRSPs) and the establishment of the Fund's Poverty Reduction and Growth Facility (PRGF). The task now is to further strengthen the frameworks so they deliver lasting reductions in poverty.

To make aid as effective as possible, the Fund and the Bank must work together to make the conditions attached to their support clear and transparent, and to ensure these are streamlined to support country-owned policies for reducing poverty and promoting growth.

We call on the IMF to improve the flexibility of the PRGF so it can better adapt to specific country circumstances. The length of programmes should reflect the time needed to design, implement and sequence critical structural reforms, and the repayment periods should better reflect the time needed for the reforms to deliver results. The IMF and the World Bank must be prepared to provide additional concessional financing when and where it is needed in a timely way. And the IMF should consider developing a mechanism, within the PRGF framework, to allow for rapid reaction to shocks in low income countries.

We also need better mechanisms for assessing the poverty and social impact of policies, with coordinated support and advice from the Fund and Bank in a timely way to inform the policy-making process. To ensure resources are properly spent on poverty reduction, the Fund and Bank, with donor support, must help countries strengthen their public expenditure management systems.

But the framework alone is not enough. We must agree a new development compact that will ensure no developing country genuinely committed to economic development, poverty reduction and good governance is denied the chance to progress towards the Millennium Development Goals through lack of finance.

Huge progress was made at the UN Financing for Development conference in Monterrey last month. The European Union agreed to increase the proportion of its national income going to development assistance from an average of 0.32 per cent to 0.39 per cent, generating an extra $20 billion in total between now and 2006 and at least an extra $7 billion a year thereafter. And we welcome President Bush's announcement of $10 billion more in aid between 2004 and 2006, and an additional $5 billion a year thereafter - a fifty per cent increase in US aid levels. Together, these pledges mean that, from 2006 onwards, the US and Europe will be contributing an additional $12 billion a year for education, health and anti-poverty programmes in our poorest countries.

But more must be done if we are to reach target set out in the Zedillo Report for meeting the Millennium Development Goals—including halving world poverty, cutting child mortality by two thirds and guaranteeing every child primary education—of $50 billion a year.

First, both developed and developing countries must increase aid effectiveness. Developing countries have an obligation to show that the funds they receive are properly and effectively used. As a condition of aid, they must end corruption, meet their obligations to pursue stability and create the conditions for new investment, and ensure that resources go effectively and efficiently to fighting poverty. And, by insisting on untying aid by developed countries from the award of contracts, more effective in-country use of aid and better collaboration among donors, current aid could be made fifty per cent more efficient, releasing substantial extra funds for anti-poverty programmes in the poorest countries.

Second, we must move forward on debt relief. To ensure a lasting exit from unsustainable debt, we reformed the HIPC initiative to deliver faster, wider and deeper debt relief. So far, 26 countries have started to receive relief, but more must be done. We need more rapid progress to get those countries not yet receiving debt relief into the HIPC process. We call on the IMF and World Bank to show greater flexibility in order to incentivise post-conflict countries, which represent the majority of the remaining cases.

The objective of the HIPC initiative, is a lasting exit from the burden of unsustainable debt. But the global slowdown and decline in commodity prices have hit HIPC countries particularly hard so we need to ensure HIPC delivers sustainability in a systematic way.

The Fund and Bank should base all debt relief on explicitly prudent and realistic assumptions about growth and exports. In addition, the calculation of the topping-up necessary to ensure sustainability should exclude the voluntary provision of additional 100% relief from bilaterals. We must apply maximum pressure on all creditors to ensure full participation and, to prevent problems occuring in the future, continue to monitor debt sustainability on an ongoing basis, supporting countries in enhancing their own debt management capacity.

Third, we need to look at other innovative ways of meeting the $50 billion target. By channeling the extra resources promised at Monterrey internationally - possibly through an International Development Trust Fund, with national governments offering a guarantee—either through callable reserves or appropriate collateral as security—additional aid contributions could be levered up to raise extra funds. For every dollar contributed to the Trust Fund, it would be possible to lever in two or three dollars more.

These proposals are challenging but they are achievable. At these meetings of the International Monetary Fund and World Bank, we must ask each country to accept their responsibilities and go further than they have been prepared to go in the past.

The answer is not to retreat from globalisation but to advance economic reform and social justice on a global scale - and to do so with more global cooperation not less, and with stronger, not weaker, international institutions.