Statement by the Hon. Otohiko Endo
Temporary Alternate Governor of the Bank and Fund for Japan
at the Joint Annual Discussion
Washington, D.C., October 22, 2007
| I. Introduction |
| Mr. Chairman and fellow Governors: |
| It is my great privilege to have this opportunity today to address the World Bank-IMF Annual Meetings, representing the Government of Japan. |
| At the outset, I would like to express my sincere appreciation to the Managing Director, Mr. Rodrigo de Rato, who will be leaving the IMF at the end of this month, for his services in his office. I would also like to offer a warm welcome to Mr. Robert B. Zoellick, who is here for the first time after assuming the important responsibility of President of the World Bank, and to Mr. Dominique Strauss-Kahn, who has just been elected as the next Managing Director of the IMF. |
| II. Changing Environment Surrounding the IMF and its Implications |
| In the past few years, the world economy has enjoyed a so-called era of âGreat Moderation,â where business cycles appear to have all but disappeared. This phenomenon has been accompanied by a looser market discipline, such as excessive risk-taking lured by abundant liquidity. Governments did not, or could not, take effective counter-measures to address this problem. Indeed, only now have we begun to discuss what can be done to minimize the damage already inflicted, and how to improve the future situation. |
If we are to enhance an ex ante response to the budding problem, it should be the IMF that stands in the forefront, sounding the alarm, and leading global discussions. In this sense, the IMF could have played a more active role in the run-up to this summerâs market turbulence. It is true that the main function of the IMF lies in its expertise in macroeconomic policies, but the IMF has also strengthened its capacity to deal with issues related to financial markets and financial oversight. Thus, I look forward to a more pro-active response from the IMF in future occasions. |
| To be fair, prior to the recent market turbulence, the IMF did make some efforts: the Fund pointed out potential risks and rung the alarm in various reports issued before the summer. However, these reports did not attract much attention in the capitals or in the markets. In reality, nowadays the IMF does not command the same authoritative position that it used to enjoy. Things were different in the past. Close attention was always paid to the analyses or recommendations of the IMF, when balance of payments crises were frequent and the IMF was tasked with ensuring the stability of each economy and of the international financial markets, through its programs with policy conditionality attached. However, now that private capital can easily finance global imbalances, it appears that incentives to revere the IMFâs opinion have declined. Considering that the fundamental goals of the IMF are to ensure the sustainable development of the global economy and to stabilize the international monetary system, one can even argue that the absence of a balance of payments crisis indicates that the IMF has accomplished its mission. |
III. Where should the IMF go? |
| Does this, then, mean that the IMF no longer has a raison dâetre? I do not subscribe to this point of view. |
| First and foremost, the IMF should still deal with financial crises. It is too optimistic to think that, from now on, there will be no financial crisis anywhere in the world. The role of the IMF as a central player in an international effort to supply liquidity at times of financial crisis will remain indispensable. It is expected that future crises will be triggered by the movement of private capital as it flows freely across borders. In response, the IMF should establish a new crisis-resolution strategy built upon the responses to these capital movements. |
| Second, the IMF should continue its efforts to prevent financial crises. It is regrettable that, despite the long time spent on deliberations, the Executive Board still has not agreed to a detailed design of the new crisis-prevention instrument for emerging market economies. The IMF should make further efforts to establish a user-friendly preventive instrument as soon as possible, taking into consideration the views of major emerging market economies. |
| Effective surveillance is the first step toward preventing a financial crisis. Surveillance practices have been enhanced through recent reforms. However, IMF staff and member countries do not necessarily share a unified view about how to implement the new principles. Such confusion will damage the credibility of the IMF. I strongly call for the prompt adoption of clear and detailed guidelines that all members can agree to. |
| As for the method of surveillance, the IMF should shift its emphasis from a static analysis of the current situation toward a dynamic analysis of the risk of financial crises over a medium-term horizon. At the same time, the IMF should pay attention, not only to the specific country in question, but also to conditions surrounding the country, and the region, including the confluence of international capital flows and developments in international financial markets. |
| Third, I would like to stress the importance of thoroughly investigating, from a new angle, issues that the world economy will likely face over the medium- or long-term, and advocating these findings in a most straightforward manner. I would like to list a few examples regarding such issues. - What makes excess liquidity start to shrink? A trigger may be, for instance, a change in the monetary policy stance in advanced countries, a decrease in the large current account surplus in some countries including oil-exporting countries, or a decline in leverage in the credit markets. And, should international liquidity rapidly shrink, how would this affect emerging market economies? - As economic growth in emerging market economies raises their per capita income, how would this affect the prices of commodity goods and manufactured exports? Would central banks in the advanced countries have to adjust their monetary policy framework to this new situation? - How will the rapid ageing of the population, observed in several of the advanced countries, affect their public finance over the long-term? How should these countries prepare for it? In my view, the IMF should offer candid policy recommendations on these and other challenges. In doing so, there may be some room for better communications with the press and the markets. Euphoric markets may not listen to a message that they do not want to hear. Still, the IMF must play the role of âruthless truth tellerâ more effectively, building upon improved dialogue with the authorities of its member countries. |
| It is fortunate that the current turmoil occurred while the fundamentals of the world economy remained stable. According to the World Economic Outlook published recently, the global economy is forecast to expand vigorously in 2007 and 2008, albeit a little lower than the July update thanks to the expected effects of the financial market turbulence. This is partly due to solid economic fundamentals in advanced countries such as the United States, the EU, and Japan; but, more so, to strong domestic demand in emerging market economies. Emerging market economies are expected to continue to support the world economy in the future. Needless to say, there is much uncertainty regarding developments in the financial markets; thus, we need to remain vigilant. |
| As for the Japanese economy, the new Fukuda cabinet continues to promote both structural reforms and stable economic growth. With both stable economic growth and stringent spending cuts, the integrated fiscal reform, addressing both expenditures and revenue, will be vigorously pursued, aimed at achieving, without fail, a surplus in the primary balance of the central and local governments combined in FY 2011. |
| Against such a background, I strongly hope that the IMF will adopt a new way of thinking, in order to further solidify the foundation of the world economy, building upon lessons learned from the recent turmoil. |
| IV. Governance Reform and Sustainable Financing of the IMF |
It is the exchange of diverse values that will foster a new way of thinking. However, since the Bretton Woods Conference held 60 years ago, the IMF has failed to properly reflect the changes observed in the global economy. To enhance the legitimacy of the IMF, it is necessary that the composition of the Executive Board and the staff, including senior staff, reflect the reality of the global economy of 2007, not that of 1944. The operations of the IMF should be based on a flexible philosophy that represents the broader views of its membership. |
| The first step is the reform of the voting shares. Japan has insisted, since its affiliation more than 50 years ago, that all members who are under-represented be allowed to eliminate their under-representation so that the voting shares of the IMF properly reflect membersâ relative positions in the world economy. This is because Japan believes these reforms are indispensable in order to produce international benefits by means of contrasting and amalgamating various values of the time. It is regrettable that, before this Annual Meetings, we could not agree on a concrete package for the second round quota reform, but it is important to overcome our existing differences to advance the discussions in a constructive manner. Based on last yearâs Resolution of the Board of Governors, Japan continues to participate pro-actively in the ongoing discussions to complete the quota and voice reform by the Spring Meetings of 2008, and no later than the next Annual Meetings. |
New ways of thinking give rise to the redefinition of core competencies and priorities. The income of the IMF, which relies on interest generated by lending, is decreasing against the background of the stabilization of the global financial markets and the reduction in the number of countries borrowing from the IMF. As a consequence, the IMF has been in the red since FY?2007, and its deficits are forecast to expand rapidly. |
| In this critical situation, the Fundâs measures to increase income are currently being examined, based on the recommendations by the Crockett committee. However, it is obvious that increasing income alone is not at all sufficient to put the IMFâs finances in order. Japan strongly requests that the IMF initiate significant spending cuts by shedding non-core operations, organization and staff, based on a re-appraisal of its core competencies and priorities. The IMF must realize that its credibility is at stake if it simply aims at an uncritical, supply-driven maintenance of operations and personnel through increased income without any progress on spending cuts. It is indispensable that reforms on both the income side and the expenditure side be pursued simultaneously. |
| I am confident that the new Managing Director, Mr. Strauss-Kahn, is as passionate about the IMF reforms as Mr. de Rato. As the world economy undergoes dramatic transformation at a speed much faster than we expected, I strongly hope that, at the earliest opportunity, Mr. Strauss-Kahn will present his views about what the IMF should look like in the new era, after conducting thorough discussions with the Executive Board and staff. |
| V. Development Issues and the Expected Role of the World Bank |
| Globalization has enabled many developing countries to achieve strong economic growth, contributing to the reduction of world poverty. A number of emerging economies have gained stable access to capital markets. Total aid volume has been increasing. These are encouraging signs. I welcome the long term strategic exercise of the World Bank Group, taking advantage of these favorable developments toward self-sustained growth in developing countries. |
In providing aid to low income countries, we should continue to focus on policies and projects that aim directly at reducing poverty and achieving the Millennium Development Goals. In doing so, we should incorporate growth and private sector development as much as possible into their development strategies. We are encouraged by the fact that South Asia, with the largest population living under poverty, is on the path toward winning the war against poverty through economic growth. The World Bank should strive to extend such trend. |
| A number of middle income countries have gained stable access to capital markets, enabling them to raise capital for economic development on their own. These countries, however, still have a substantial number of people living under poverty. New challenges such as energy and environmental issues have emerged. The World Bank should support these countries address such issues using their own financial resources by providing technical advice in formulating appropriate policies and institutions. To meet these needs, the World Bank must improve the quality of its knowledge services. |
| With the advance of globalization, it has become increasingly important how to deal with global public goods. In particular, climate change issue requires urgent attention and collective action of the international community. The World Bank should play a leading role in providing technical advice, using its expertise in wide-ranging sectors gained through development activities over the years As addressing the challenge of climate change requires substantial amount of financial resources, we urge the World Bank to seriously explore ways to mobilize private capital, including innovative financing mechanisms using insurance and guarantees. |
| I welcome the recent trend of increase in total aid volume as well as the number of aid channels including emerging donors. By taking advantage of these encouraging trends, we need to strengthen our efforts to enhance aid effectiveness. Donor coordination should be improved with IDA serving as the platform. The development support of all doors needs to be aligned with the poverty reduction strategies formulated by recipient countries. We must make sure that all donors take debt sustainability of recipient countries into account in providing loans. These are tough challenges. However, the success of IDA, as well as the success of our effort to achieve the Millennium Development Goals hinges crucially on our ability to coordinate the donorsâ activities, using IDA as a common platform. We urge the World Bank to intensify its work in this area and provide concrete results. |
| VI. Conclusion |
| The structure and environment of the world economy has dramatically changed, as the emerging market economies achieve fast growth. In order to be able to respond to these changes in a timely manner, the World Bank and the IMF need to clarify their respective roles, to reinforce their capability in their core operations and to improve their respective governance structure so as to facilitate such a response. Japan hopes that the two Bretton Woods institutions will avoid a pitfall of inertia and continue to reform themselves with a sense of urgency. The reform efforts of the World Bank and the IMF need to be fully supported, from a long-term perspective, by their respective Executive Board and their member countries. This will not only prepare the groundwork for each countryâs stable and sustained economic growth, but also represent our clear responsibility toward future generations. |