|United Nations global economic outlook
1. The UN’s most recent estimates, to be formally released next week, forecast global growth of 2 per cent for 1999, compared to 1.7 per cent in 1998. The steep decline of output in several countries in South East Asia has been halted and growth in that region is forecast to exceed 3 per cent this year, compared with a decline of over 1 per cent last year. The recession in a number of these economies has moved to a handful in Latin America, notably Argentina, Brazil, Ecuador and Venezuela. As a result, output in Latin America is expected to decline by 0.5 per cent this year but growth of over 3.5 per cent is expected in 2000. Growth in Africa will remain weak this year, but could improve next year, barring a renewed fall in commodity prices. The turnaround in oil prices, if sustained, will help exporting countries, both this year and next.
2. It appears that, at least for the time-being, a global financial meltdown and worldwide economic recession have been avoided. Nevertheless, the short-term prospects for growth in the developing and transition economies remain poor. Moreover, many of the downside risks that were the focus of attention six months ago remain pertinent and could still disrupt the limited recovery. We still do not understand fully the forces behind our earlier financial difficulties and we remain ill-equipped to confront them if they recur, though the past two years of turmoil have provided several lessons on the functioning of the international monetary and financial system, the measures required to strengthen it and the need for complementary measures in other areas. As order returns to financial markets and the afflicted economies begin their recoveries, it is paramount that the impetus for proposals to improve the system be sustained.
Measures to address financial crises
3. It is universally agreed that, in order to be effective in today’s integrated financial markets, national financial institutions (including transparency, supervision and regulation) need to be strengthened in all countries, albeit in different ways and to varying extents. At the international level, consensus is evolving on such cooperative actions as the need for the industrialized countries to pursue supportive policies in times of financial uncertainty elsewhere; the need to enhance the contingency financing available to countries in difficulties; and the need to improve the institutional framework in which financial markets operate. In these areas, it is necessary to build upon the progress that has been made. Differences remain on other questions, such as the means of providing liquidity to crisis-stricken countries and the related issue of conditionality; the principles to be adopted regarding capital account convertibility; and the role of regional institutions in the new architecture.
4. The industrial economies’ policies of lower interest rates have contributed to the improvement in the economic outlook for the crisis countries. This highlights the need for a more systematic and inclusive approach to the solution of financial crises in future. It is not only the most affected, nor even just the potentially vulnerable, countries that need to take action: the industrialized countries have to contribute by taking pre-emptive action to break the chain of contagion and similar processes that characterize globalized financial markets.
5. The management of international liquidity has a special role in preventing contagion and lessening the adverse developmental effects of financial crises. The principle of contingency financing is accepted but there is no clear agreement on how to ensure that adequate funds are available at short notice. Ad hoc, case-by-case approaches involving bilateral financing and IMF credits are unlikely to be sufficient. One of the possible solutions would be to create liquidity when required by allowing the issuance of additional SDRs under critical financial conditions. These funds could be destroyed once normal financial conditions are restored. This procedure would introduce an anti-cyclical element into the management of world liquidity, in addition to giving SDRs an increasing role in world finance. A second-best solution would be to allow the IMF to use the market to mobilize the resources required to enable it to provide adequate contingency financing.
6. Several countries’ recent financial difficulties were exacerbated, and some precipitated, by international contagion. When the source of an imbalance is such an international shock, contingency financing should be subject to low conditionality. This principle has been recognized in the Compensatory and Contingency Financing Facility but should be extended to the case of contagion. There are concerns that the conditionality attached to the financing provided in such cases has been excessive; this is undermining its legitimacy and weakening the IMF. In order to restore full confidence in the principle of conditionality, it is necessary to reach a renewed global agreement on how it should be used.
7. It is now generally agreed that capital account liberalization should be gradual, should be applied primarily to longer-term flows, should be cautious with regard to shorter-term and more volatile funds (such as bank credits and portfolio flows), and should be preceded by the development of sound financial institutions (including regulatory and supervisory arrangements). International agreement in this area should include safeguard mechanisms that would allow developing and transition economies to impose temporary disincentives or controls on inflows, particularly in times of capital surges, and on outflows during severe crises.
8. Most of the burden of the economic upheavals of the past two years has been borne by the peoples of the developing and transition economies. Their voice must be more effectively heard and their circumstances more fully taken into account in the collective effort to improve the management of the world economy. The international financial system needs sound and democratic governance and it should accommodate and reflect the diversity among countries - in their cultures, in their development aspirations and in their levels of development. The role of the developing and transition economies in the relevant international organizations should be increased and the potential of regional and sub-regional organizations involving these countries should be more fully exploited.
9. The common element in all the foregoing suggestions is that the response to financial crises should not be addressed just from a narrow technical point of view but from a broader and longer-term development perspective - one that gives priority to the present and future well-being of all individuals, rather than only to short-term financial concerns.
Revitalizing the HIPC Initiative
10. For many developing countries, but particularly the poorest among them, the sudden adverse effects of the global economic downturn are being superimposed on their unsustainable external debt burden. Thanks to the HIPC Initiative launched by the Bank and the Fund almost three years ago, some progress has been made in addressing the debt difficulties of a number of the poorest countries. Nevertheless, it is now universally recognized that more has to be done. A first improvement would be to broaden the group of those eligible. Secondly, it is necessary to be more flexible in the criteria that are applied in individual cases, notably by reducing the qualifying periods. Thirdly, creditor governments that have not done so should cancel all remaining ODA debt and substantially reduce, even eliminate in certain cases, other bilateral debt. A number of world leaders have made proposals embracing these ideas to varying degrees. We look forward to a positive outcome and rapid implementation of the agreed course of action.
Addressing social needs
11. For far too many people in developing countries (and not only in the immediate crisis-affected countries) have been pushed back into poverty by the global economic slowdown of the past two years. Economic and social improvements that had taken decades to achieve have been destroyed or seriously undermined as a result of the crisis.
12. One of the principal conclusions of the UN World Summit for Social Development held in Copenhagen in March 1995 was that the extensive overlap between social and economic policies should be recognized and embedded in national development strategies. One of the more recent lessons is that the social as well as the economic dimensions need to be addressed in times of economic crisis. Measures to avoid or to cope with the associated social disruptions caused by either the crisis itself or the necessary corrective measures must be built into policy from the outset, not incorporated as an "add-on" as adjustment proceeds. The need for such emergency actions in times of crisis would be reduced if longer-term social programmes were made less vulnerable to financial and economic instability.
13. In the light of the need to address these questions, the Development Committee’s request to the World Bank to prepare a paper on ‘Principles and good practice in social policy’ is most welcome. The UN also welcomes the proposal that further work on principles of social policy be undertaken within the UN system. One possibility would be for this matter to be taken up in the course of the General Assembly’s preparations for its Special Session on follow-up to the Copenhagen Summit. This Special Session is to be held in Geneva from 26 to 30 June 2000, but a Preparatory Committee is to convene next month and this matter could be added to its agenda. The complexity of reaching international agreement on principles of social policy is not to be under-estimated but success would assist both governments and international organizations in addressing critical social issues, including handling financial crises more effectively.
General Assembly’s discussions on financing for development
14. The General Assembly is also preparing for a high-level international event on financing for development, to be held before the end of 2001. The Assembly is currently in the process of deciding on the "form, scope and agenda" of this proposed event. The Bank and the Fund have participated actively and positively in these discussions and Member States have made it clear that they wish both organizations to be fully and actively involved in the preparations for this event, as well as in the event itself. Governments on all sides appear to share the recognition that multilateral decisions on financial matters are largely taken in these and other related institutions. At the same time, Governments also share the view that the United Nations can serve as a forum for developing a political consensus on some broad principles that underlie these decisions taken elsewhere. There is therefore optimism that the event in 2001 will be able to make a positive contribution to enhancing multilateral cooperation in the area of international finance. It is hoped that the Fund and the Bank will continue to participate to the fullest extent throughout this process.