Statement at the World Bank Symposium
on Global Finance and Developmentby Kiichi Miyazawa,
the Minister of Finance, Japan
March 1, 1999
1. Introduction
Mr. President, fellow Governors, distinguished guests, ladies and gentlemen:
May I begin by saying what a pleasure it is for me to address the World Bank Symposium on Global Finance and Development.
Before anything else, I would like to extend our warmest welcome to Mr. Tarrin Nimmanahaeminda, Minister of Finance from the Kingdom of Thailand, Professor Sen of Cambridge University, President Wolfensohn of the World Bank Group, Dr. Fischer, the First Deputy Managing Director of IMF and all other participants from various parts of the world. May I also take this opportunity to thank all those at the World Bank who have taken part in making this symposium possible.
2. New International Financial Architecture
Ladies and gentlemen:
To ensure stable growth of the world economy in the new millennium, it is imperative that we reform the international financial architecture and review developmental strategies. The economic and financial crises we have witnessed in the last two years in Asia, Russia, and Brazil have prompted discussions about these challenges.
The turmoil in Asia is of particular concern to the Japanese as it took place against the backdrop of several decades of exceptional economic growth known as the “East Asian Miracle.” Economic management of these countries had been praised until just before the crisis by international institutions, investors, and rating agencies alike. At the outset, few of us in Japan could imagine that these countries would be forced to adjust their economies in so substantial a scale. Even in these Asian countries themselves, I suspect only a few people could anticipate that the initial turmoil would lead to such dire consequences.
One of the fundamental causes for the escalation of the Asian crisis lies in the fact that modern-day financial crises, like the one in Asia, result from large and abrupt cross-border capital movements. The IMF, which was established in the days of limited capital flows, has not fully attuned itself to addressing this type of crisis. If the IMF continues to advise crisis countries such measures that were appropriate in resolving crises arising from current account deficit, it would not only damage the country’s chances to recover from the crisis, but also the reputation of the IMF itself.
Recently, means for reforming the international architecture, so that it will remain stable in this new world of free capital flows, have already been discussed intensively in various international fora. Japan has been very vocal on these issues. Specifically, we have proposed ways to improve IMF programs and its procedures.
Regarding IMF surveillance, we believe that the monitoring of private capital flows in and out of a member country should be strengthened, so that the IMF can conduct appropriate analysis and give good advice. Regulations which address capital inflows need to be utilized as long as they are designed in a market-friendly way. The IMF should advice, based on its analyses of various data, a member country on exchange rate policy, including exit policy from pegged regimes. Moreover, surveillance should pay more attention to the development of major industries and prospects of demand by component, so that it can better grasp the real economic situation of the country in question.
Its policy advice at the time of crisis should also be reviewed. As for safeguards against capital movements, in order to prevent private capital flight, it might be appropriate to make the IMF programs conditional upon the maintenance of exposure or upon any other means to ensure private sector involvement. Measures such as temporary standstill of foreign liabilities should be legitimized as possible options, depending on the situation. As for the monetary and fiscal policies, caution is needed, because too much tightening for the sake of defending exchange rates could lead to overkill of the economy. The IMF’s involvement in structural policies in the adjustment program should be limited to those directly related to resolution of the crisis.
I also believe that IMF procedures should be re-established so that new ways of thinking in line with the new reality of the international financial system be well reflected in the working of the IMF, and its accountability and involvement of its shareholders be enhanced. Japan’s proposal on the improvement of IMF procedures include: establishing program committees at the Board to discuss central elements of the prospective programs before the staff starts negotiations with the country; inviting the authorities themselves of the country concerned to participate in Board discussions for surveillance and programs for their country; publishing all staff papers for both surveillance and programs; and creating an evaluation unit reporting directly to the Interim Committee.
I believe that review and reform of IMF programs and procedures should be the key elements of the reform of the international financial architecture. In fact I raised this issue at the recent meeting of the G7 Ministers and Governors in Bonn, and Japan will continue to participate in constructive discussions on this issue.
In this speech I focus on what I think is another fundamental issue: an issue as to how we might enhance the IMF’s capacity to provide liquidity to countries facing crisis.
Ever since Charles P. Kindleberger pointed out in his famous study on the Great Depression of the 1930s, it has been widely recognized that “Lender of Last Resort” can play the key role not only in domestic but also international financial stability. In light of this, what is indispensable is our concerted efforts in the international community: inter alia, the IMF should continue to play the central role in preventing and resolving crises, including an enhanced role as the lender of last resort in the international monetary system.
To enhance the IMF’s capacity as the lender of last resort, it is essential, I believe to create a new facility designed specifically to this end. While this might remind you of the G7-led discussions since last year about the establishment of an enhanced IMF Facility which would provide a precautionary line of credit, the new facility I propose goes a step further.
Specifically, my proposal would not require pre-agreed arrangements, but would base itself primarily on a good track record certified through regular IMF surveillance. Should a certified country face a crisis, due, for instance, to the contagion of a currency crisis in the region, or to the attack by speculative funds, the IMF would be able to provide large-scale liquidity by drawing upon this new facility which is precautionary as well as quick in disbursement.
To enhance the IMF’s capacity as the lender of last resort through this new facility, we must also make sure that the IMF can raise sufficient funds. For that, it is conceivable to allow the IMF to borrow in the market, while limiting the use of borrowed funds to the precautionary credit line and this new facility. The IMF is granted, to begin with, the capacity to do so by its Articles. What’s more, such borrowing by the IMF can also be taken as a means to recycle private funds that have taken flight from crisis countries. Thus, I believe that this approach deserves serious deliberations.
Moreover, in order to ensure private-sector involvement in crisis resolution, it is necessary for the IMF to carefully monitor the capital outflows from crisis countries, and, when needed, it should require private-sector creditors to agree with a debt rollover or new provision of funds, as a prerequisite for such public assistance.
Whatever the means, we all must be aware that crises are at times unavoidable and that no system or architecture can eliminate such risks entirely. So, it is equally important for each country to continue to pursue appropriate policy management on both macroeconomic as well as microeconomic levels, without overly depending upon the safety net of the IMF.
3. New Approach to Development Strategy
Ladies and gentlemen:
I would now like to express my views on the assistance for developing countries.
In retrospect, the latter half of the 20th century can perhaps be called the “age of development.” In 1945, the World Bank was established, and by the mid-60s, the IDA and most multilateral development banks were in operation. On the part of industrial countries, including Japan, there has been active promotion of bilateral assistance, in collaboration with these international organizations.
Over the last 50 years, enormous amounts of funds, wisdom, and efforts have been put into assistance for developing countries, and have produced substantial results in Asia, Africa, and Latin America. In this joint effort by the international community, international organizations, the World Bank in particular, have always played a leading role, not only in the amount of funds they provide but also in formulating development strategies of both bilateral and multilateral assistance.
Yet in many developing countries the fight against poverty is far from over. Today, 1.3 billion people around the world still live in poverty, and one third of the children in developing countries are plagued with malnutrition. Moreover, while many developing countries are being left behind the globalization of the world economy, the gap between the haves and the have-nots seems to be increasing even further. Furthermore, the recent economic crises in the emerging markets have undermined the fruits of development they once enjoyed. Fiscal constraints of donors, on the other hand, have started to place limitation to the flow of public assistance. Players in the process of development have also diversified, not to mention the private sector and NGOs.
All these force us to stop and think over the way we approached development assistance in the past 50 years. In this respect, this symposium, I believe, is extremely significant.
By formulating new development strategies for developing countries, we must learn from our past experiences and take the following three points into account.
First, we all need to recognize that each developing country basically should judge, choose, and implement its own way of developing its economy. The economic system in any country is an aggregate of the market and other systems as well as organizations developed and integrated in the historical, cultural, and social context in each country. Thus, it is closely linked to the country’s social structure and the values of its people.
So, no one has the right to force a developing country to adopt a specific economic system or a development plan as something universal, or as the global standard.
Second, market liberalization should proceed in a well-sequenced manner, according to the stages of economic development. In order for the market economy to function, for example, it must be preceded by the establishment of a certain institutional framework that includes the protection of contracts and ownerships, corporate systems, and distribution as well as financial systems.
Therefore, for a developing country where these conditions remain yet to be met, market liberalization should not be considered a priority. The assistance needs to be focused, instead, on institutional reform, which are essential for developing a market economy.
Likewise, when promoting financial liberalization and deregulation of external capital transactions, the sequence and the speed of implementation must fully reflect the state of their financial regulatory framework.
Third, the significance of a well-balanced, comprehensive approach in addressing a range of developmental issues. As we all know, the ultimate goal of development is not simply an increase in per capita GDP. Rather it is the realization of a society in which each one of the people can lead a happy life. To achieve this goal, we need to address a wide range of development issues, such as education, health, social sector issues including provision of social safety net, governance, and environmental protection. As these issues are all interrelated and closely linked with each other, we need to address these issues in a comprehensive and systematic manner.
4. New Development Award
Finally, I would like to take this opportunity to propose that the World Bank establishes “The Development Award”. I suggest that this award will be presented to outstanding academic achievements such as building new development models, or on such development country-related issues as poverty, education, health and the environment. The award will also go to new, experimental practices in the field of development. Through such awards, the fruits will be shared by us all.
I hope that the establishment of this award will encourage all concerned in development whether it is in theory or in practice and I would like to explore the possibility for assisting such initiative.
5. Conclusion
Ladies and gentlemen:
We only have two more years left till the beginning of the 21st century. The society we will continue to pursue in the new century is one that is fair and equitable, with no threat of poverty, and where the dignity of mankind is fully respected. It is to be built around such shared principles as democracy and market economies, yet it is a pluralistic society where different values and cultures, and different socio-economic systems can co-exist. It is also a society where people are willing to join hands in addressing such global issues as the environment.
Reform in the international financial architecture and a review of development strategies are the first step towards achieving this goal. The task is not easy, but is feasible if we collaborate, while fully drawing upon the wisdom the international community has accumulated over the years.
I would like to conclude by wishing for the success of this symposium.
Thank you.
[STATEMENT BY MINISTER OF FINANCE]
Reformatted for mugajava website.
For any comments send e-mail to mugajava@geocities.com
Visit http://geocities.datacellar.net/Eureka/Concourse/8751/
or http://come.to/diskrisek