International Monetary and Financial Committee
Welcome Remarks By Mr. Sha Zukang, Under-Secretary-General for Economic and Social Affairs to the International Monetary and Financial Committee Washington, DC, 12 April 2008
12 April 2008, Washington, DC
World economic situation and prospects
The current outlook for the world economy is grim, probably
closer to the pessimistic scenario outlined in the United
Nations’ World Economic Situation and Prospects 2008: growth
of the world economy is expected to drop significantly from the 3.7 per
cent of 2007 to below 2 per cent in 2008.
The U.S. housing slump has spread to the U.S. economy at
large, leading to declines in employment, industrial production, retail
sales, and consumer sentiment. While an outright contraction of U.S.
GDP in 2008 is likely, there is also concern that the slowdown will
extend into 2009. While slowdowns in the developed economies of Western
Europe and Japan are already evident, more spill-over effects from the
U.S. slowdown are expected to become manifest in other economies
worldwide via international linkages of trade and finance. While the
nature of the world economy and the sources of economic growth have
changed significantly in recent years, the optimistic case, based on
the ‘decoupling’ thesis, remains unpersuasive.
Nevertheless, there are grounds for confidence in the underlying
economic strength of the real economy, which could provide the bases
for recovery if other conditions become more conducive.
The fastest growing developing countries and economies in
transition will not be immune to the US slowdown, even though they are
more capable of absorbing external shocks, thanks to their improved
economic conditions and considerable accumulation of foreign exchange
reserves. The simultaneous sell-off in the equity markets of emerging
economies in early 2008 may signal a reversal of the capital inflows to
these markets; such a trend may intensify if the financial strains in
developed markets get worse. The sharp decline of commodity prices by
nearly ten per cent over a few days in mid-March 2008 – the
largest percentage decline in two decades – serves as an
alarming reminder of the vulnerability of many developing countries
whose growth rates largely depend on the exports of commodities.
International Cooperation to Sustain Global Growth and to
Regulate Finance
Policymakers in developed and developing countries face the
challenge of attempting to moderate the depth of the global slowdown
and to safeguard economic development efforts amidst an economic slump
and continued financial turmoil in the developed economies. As noted in
previous UNDESA statements, while a global slowdown cannot be avoided
because of the weight of the US economy, early resolution of the
financial crisis and rebalancing of global demand will reduce its
negative impacts. Emerging economies with large export surpluses can
boost domestic demand while allowing a measured appreciation of their
exchange rates and without jeopardizing the sources of their growth.
Central banks of major developed economies have adopted
significant measures to contain the financial turmoil, including a
combination of substantial reductions of policy interest rates and full
use of monetary resources, as in the case of the US Federal
Reserve’s recent intervention to arrange for a rescue of a
major investment bank. With banks increasingly unwilling to lend or
pass on lower interest rates, it appears that monetary policy options
are constrained. Fiscal policies, to sustain output and employment, are
already beginning to be deployed.
International cooperation should also be extended to ensure
that the economic slowdown does not slow progress towards achieving the
internationally agreed development goals, including the Millennium
Development Goals (MDGs). Sustaining growth in the developing countries
is a clear priority and is also consistent with rebalancing global
demand.
Protecting low-income countries from external economic shocks,
including the recent increases in food prices – such as
through improved compensatory financing mechanisms that can provide
resources quickly or new ones where gaps exist – is an urgent
priority. Existing compensatory facilities do not provide sufficient
resources relative to the shock and have high conditionality, which
limits their effectiveness for events beyond the control of the
affected country. Because of high conditionality, countries have
responded to shocks by tightening fiscal and monetary policy, thereby
undermining their own reform processes, instead of attempting to access
these official facilities.
The transformation of the mortgage market collapse in one
country into a multi-country financial crisis highlights the
inter-related nature of national financial systems, including
regulatory policies and standards. International cooperation is
required in setting standards and improving regulation. More intrusive
and stricter regulation and standards in one national jurisdiction
would give undue advantages to competitors based in other
jurisdictions. However, with globalized financial markets, the
activities of less regulated competitors are no longer confined to
their home markets and threaten to undermine stability elsewhere.
Many regulatory standards, such as Basle II on capital
adequacy of banking institutions, have been designed with little
participation by developing countries; they are not adequately suited
to the institutional realities of these countries and rarely designed
to promote development financing. These standards determine the access
that developing countries have to international finance. Developing
countries need to become full participants in the regulatory policy
setting, if only to protect themselves from the harmful effects of
external financial developments, as in the current situation.
Voice and Representation in the Bretton Woods Institutions
The IMF Executive Board has recommended to the Board of
Governors the adoption of the staff proposal on a second-round of ad
hoc quota increases of close to ten per cent. Basic votes will be
tripled, partly offsetting their decline in total voting power. The
realignment of quota and voting shares will lead to a net increase of
2.7 percentage points in the voting share of emerging markets and other
developing countries as a whole. This is a very modest change achieved
due to the use of a compression factor; the willingness of several
advanced countries to forego part of the quota increases for which they
are eligible; and the application, to several emerging market and
developing countries, of a greater weight to the PPP GDP measure than
for other countries.
These ad hoc adjustments suggest that the new formula per se
has not achieved the stated goal of providing a simpler and more
transparent means of reflecting members’ relative positions
in the global economy. At this critical time of global financial
crises, and with the legitimacy and relevance of the Fund at stake, the
proposed reform is too modest to provide real impetus to the ability of
the Fund to play a significant role in international monetary and
financial matters.
The World Bank has also launched its own process of voice and
participation reform. The outcome of the Fund’s quota and
voice reform is likely to exert a strong influence on the direction of
the Bank’s actions. It should be recognized, however, that
the Bank has a manifestly different mandate so that, following
precedents set in other development financing institutions, it can
consider voting weights of at least fifty per cent for the main users
of its funds, that is, for its developing country members.
Doha Conference to Review the Monterrey Consensus
The international discussions in anticipation of the Monterrey
review conference scheduled to be held in Doha, Qatar from 29 November
to 2 December 2008 have attracted strong participation by Member States
of the United Nations. The ongoing global financial crisis and the list
of unresolved questions in external debt, private capital flows,
domestic resource mobilization, and systemic issues have mobilized
numerous experts and elicited a variety of suggestions from member
governments. We are grateful for the strong participation of the
international financial institutions in these discussions and look
forward to a successful outcome in Doha.
The Doha review of implementation of the Monterrey Consensus
provides an opportunity to update the parameters of the Consensus in
the context of both obstacles encountered thus far and profound
structural changes in the world situation. Since 2002, many developing
countries have improved their macroeconomic management and fiscal
balances, and have developed their financial sectors. The current
financial crisis suggests that, while developing countries have shown
significant progress in meeting their commitments, instabilities and
weaknesses in the international financial system have not been
addressed adequately. Inadequate regulatory approaches in the developed
countries continue to threaten sudden stoppages to development
financing. If the international financial system is unable to provide
stable financing, it should at least “do no harm”
to the efforts of developing countries to develop their own financial
capabilities. In another part of the Monterrey Consensus, developed
countries are not on track in meeting their promises on increasing
official development aid. In the case of trade, the Doha round of
negotiations is behind schedule and mired in disagreement over whether
what is stake is truly developmental.