Statement by Japan, at the 60th WB/IMF Development Committee (Washington, D.C. / Sep. 27, 1999)

Statement by Mr. Haruhiko Kuroda
Vice Minister of Finance for International Affairs
Japan
At the 60^th Meeting of the World Bank/IMF
Joint Development Committee
September 27, 1999

At the last Development Committee meeting in April, a policy of providing“broader, deeper and faster” debt relief to the Heavily Indebted poor Countries(HIPCs) was presented. A more concrete framework was proposed at the Cologne summitmeeting in June. I welcome that the Boards of the World Bank and the IMF have recentlyendorsed an enhanced framework of the HIPC Initiative.

In implementing the enhanced Initiative, there remain two key challenges:

(1) financing the enhanced HIPC framework for the Bank and other MultilateralDevelopment Banks (MDBs), and

(2) linking the HIPC Initiative with poverty reduction.

A consensus on these issues needs to be swiftly formed at the Bank and the IMF.

1. MDBs Financing

In implementing the enhanced Initiative, the MDBs should first make efforts to maximizethe use of their internal resources to finance their incremental costs. Among the MDBs,the Bank is expected, given the size and the prospects of its net income, to finance theneeded fund basically through IBRD net income transfers.

It has been pointed out that other MDBs, particularly the African Development Bank(AfDB) and the Inter-American Development Bank (IDB), would not have sufficient resourcesto cover their costs. After all possible efforts are made by the MDBs, bilateralcontributions would be required to cover the shortage. It will be crucial to ensure fairburden sharing among countries in financing overall cost of the enhanced Initiativeincluding bilateral debt relief.

With the successful progress of the enhanced Initiative, Japan would provide some $4billion bilateral ODA debt relief in the near term, which is the largest-scalecontribution among creditors. At the same time, Japan is one of the few countries thathave pledged and have actually contributed to the ESAF-HIPC Trust Fund in the IMF as wellas HIPC Trust Fund in IDA. We expect other countries to contribute towards securing thenecessary funds based upon the principle of fair-burden sharing, taking into account bothbilateral and multilateral debt relief.

2. Linking Debt Relief and Poverty Reduction

Japan expects, by using resources made available by debt relief for developmentpurposes such as education, health, and other social investments and job-creation, theenhanced Initiative would be identified as an integral part of broader efforts toimplement poverty reduction strategies and a robust link between debt relief and povertyreduction would be ensured. To these ends, Japan supports the proposal that, in accordancewith differing poverty and debt conditions, each of the HIPCs will prepare PovertyReduction Strategy Papers (PRSPs) in cooperation with the Bank and the IMF by decisionpoint, and that these will be reflected in the Country Assistance Strategies (CAS) and theIDA lending policies.

The Bank and several regional development banks have provided a wide range ofassistance by responding to the development of the recent crises in the emerging marketeconomies. While such activities were beyond the traditional functions of MDBs, Japan hasconsistently supported their active response to the crises. This is because:

• MDBs’ assistance would protect the fruits from their previous efforts towards poverty reduction.
• MDBs’ function of fundraising from the markets was necessary to respond to the crises caused by the private outflow, particularly when IMF’s fund availability was limited.

The Bank supported the crisis hit countries by mobilizing various facilities, such asthe Special Structural Adjustment Loan (SSAL) and the Policy Based Guarantee (PBG).Consequently, while the Bank’s capital structure is currently sound, the Bank’sportfolio is deteriorating, and the Bank may be approaching the limits of its risk-bearingcapacity.

Discussions over the options for enhancing the Bank’s financial capacity have beendiscussed since the last Development Committee in the spring. While calling on the Bank tocontinue to make efforts for poverty reduction in various fields, we bear theresponsibility as shareholders to maintain the Bank’s capacity to carry out suchactivities. Hence, while asking improvements in selectivity and quality, we cannot supportthe option of limiting the amount of lending because of financial restraints. To deal withthe Bank’s increasing exposure to several borrowing countries as a result of theeconomic crises, and with the increasing risk of economic crises contagion within aregion, we believe that deeper examinations of the various options for increasing theBank’s paid-in capital, which is essentially the Bank’s capital base, should bepursued, including a general capital increase.

Amid the rapid progress in the globalization of economic relations, it is expected thatefforts will be made to ensure that the developing countries will not be left far behind,but will enjoy the benefits derived from international trade and achieve economic growthand poverty reduction. To date, the international community has endeavored to setinternational trade rules and achieved steady results, and the efforts toward setting newrules for the coming century are underway towards the upcoming round of WTO negotiations.While it goes without saying that the developing countries must actively participate insetting the new rules, the important challenges are how to implement the rules smoothly,and how to establish the foundation for its implementation. In other words, in order foreach country to implement the rules, strengthening the implementation capacity inaccordance with the conditions of each country will be indispensable, and internationalsupport for this purpose will be needed.

To date, in cooperation with the WTO and many other international organizations, theBank has identified issues such as what are the barriers to implement the trade rules indeveloping countries and how can these barriers be removed, and has provided various formsof assistance such as capacity building. Based on this experience, the Bank shouldmainstream the trade issues into the Country Assistance Strategies (CAS), which set thedevelopment strategies for each country, place a high priority on trade issues, and carryout various types of assistance. In doing so, it is important that the Bank identifycomparative advantage in this field, and implement assistance in coordination with otherinternational organizations, while strengthening partnership with the civil society.

1. Managing the Social Dimension of Economic Crises

The economic crises in the emerging market economies in Asia and elsewhere induced arise in unemployment and corporate bankruptcies, as well as price increases whichparticularly placed severe damage on the poor. In these economies which suffered from thecrises, signs of recovery from the economic crises are now discernible. However, when weturn to the social dimension, the situation remains serious. One of the lessons to belearned from the Asian crises is the extreme importance of managing the social dimensionsof crises in addition to the economic aspects. It will be crucial to study from thestandpoint of social policy the effects of crises on the poor and vulnerable and the typesof assistance which are needed.

When the crisis occurred, the Bank did not only provide assistance to secure liquidityand financial sector soundness, but also to address the newly generated poverty in thesocial sector. We appreciate the Bank’s efforts to organize the knowledge and itsexperience - lessons learned from its operations regarding short-term crisis response andthe long-term prevention of crisis -and share this with other donors, internationalorganizations and civil society.

In response to the new poverty generated by the crises, Japan will identify its supportin coordination with MDBs, by making new contributions to the Bank and the AsianDevelopment Bank.

2. Corporate Governance

For sound economic growth of developing countries, the development of the privatesector as well as the public sector is important. The establishment of a fair andtransparent corporate governance system is a necessary measure to promote autonomouseconomic activities of private sector in developing countries.

As corporate governance systems are complex with organic linkages among varioussystems, the appropriate implementation of reforms needs to go through a time-consumingprocess. For the developing countries, one of the most urgent issues at present is toactively implement the reforms of the various systems including financial, legal, andaccounting system that comprise the foundations of their economies. The Bank is encouragedto continue its effort for capacity building in developing countries based on itsexperience to date while referring to the “corporate governance principles”formulated by the OECD. Needless to say, the Bank must take a flexible rather than auniform approach, reflecting the wide diversity of the social and economic systems in thedeveloping countries.