Many millions of people in the world look to the IMF and the World Bank for wisdom in matters of finance and development. Against this background, Mahesh Acharya spotlighted two major challenges facing the two institutions at the dawn of the new millennium. The first is to distill lessons from the recent financial crises. The second is to address the pressing needs of the institutions’ most disadvantaged members.
It has been two years since the financial crisis of the late 1990s started in East Asia. Acharya commended the effective response of the Bank and the IMF in supporting reform in the affected countries, a number of which have begun to recover. However, aftershocks continue to affect several countries, exposing weaknesses in the public, financial, and corporate sectors and underscoring the need to protect the poor and the vulnerable. Net long-term flows to developing countries, from private and official sources, are declining, and Acharya stressed that the transfer of resources to developing countries should continue to be a major concern of the international community.
Since last year’s Annual Meetings, the outlook for the world economy has improved, although Acharya cautioned against complacency. Not all countries have attained sufficient economic growth to address poverty, and many have been unable to improve income distribution. “We must,” he said, “ensure that all countries can benefit from globalization through an orderly and well-sequenced integration into the world economy.” In this context, developing countries must participate fully in any new round of multilateral trade negotiations.
The growth of world output is expected to increase moderately next year, although the pattern of growth among the major industrial countries is uneven. Ensuring the continuation of the global expansion will require a significant rebalancing of growth and addressing the existing large external imbalances. Sustaining the recovery in the crisis-hit economies and reducing the vulnerability of all developing countries to external shocks will require the continued vigorous pursuit of structural reforms. This highlights the need to focus on high-quality, broad-based growth to ensure that all levels of society benefit from reform programs.
Strengthening the architecture
The ultimate aim of efforts to strengthen the international financial system, Acharya emphasized, must be to protect living standards worldwide by preventing future crises. He noted two positive developments in this area: the IMF’s recent creation of the Contingent Credit Lines as a crisis-prevention mechanism and of a temporary facility to help members with Y2K-related balance of payments difficulties. Progress has been made in improving transparency and in developing, disseminating, and adopting internationally accepted standards for economic, financial, and business activities. Work has also progressed on financial sector strengthening and on involving the private sector in forestalling and resolving crises.
Poverty reduction and challenges
Global progress in reducing poverty has not been satisfactory, Acharya said, despite improvements in social indicators. The number of poor people in South Asia, sub-Saharan Africa, Europe, and Central Asia is rising, particularly in the regions most affected by crisis and conflict. He exhorted policymakers to shape their strategies to avoid inadvertently inflicting long-term hardships on the poor by triggering lower investment in education and health.
Financial assistance to developing countries
Hundreds of millions of the world’s poor live in countries where crushing debt stands in the way of lasting poverty reduction. Although the Heavily Indebted Poor Countries Initiative has yielded some positive results, Acharya observed that recent developments and experiences have highlighted the vulnerability of many HIPCs to exogenous shocks. It is our duty, he said, to reinforce and enhance this program to provide faster, deeper, and broader debt relief. He stressed that debt relief under this initiative should complement, not replace, development assistance and that debt relief must become an integral part of efforts to help countries grow and reduce poverty. It is also important that the resources freed from debt service be used for the development of the social sector. Acharya urged that consideration also be given to alleviating the debt burdens of poor countries that are not eligible for the HIPC Initiative.
Our two institutions, concluded Acharya, face a mammoth agenda, but our common resolve will take us to the height of success. He expressed confidence that the IMF and the World Bank would be able to meet the formidable challenges of the next century.