Information Technology,Globalization, and International Financial Architecture
Japan's Views on the MainTopics of the Fukuoka Finance Ministers' Meeting
Speech by Mr. Haruhiko Kuroda, Vice Minister of Finance
at the Foreign Correspondents Club of Japan
June 15, 2000
Ladies and gentlemen, I am very honored to be invited to this splendidgathering and to have this opportunity to speak to you all.
As you know, Japan is hosting the upcomingKyushu-Okinawa Summit. The meetings will begin with the Finance Ministers'Meeting in Fukuoka on July 8, move on to the Foreign Ministers' Meeting inMiyazaki on July 12 and 13, and culminate in the Summit in Okinawa from July 21to 23.
The general themes of this year's Summitare "greater prosperity", "peace of mind", and "worldstability" in the 21st century. More specifically, the Heads of State andGovernment will take up the following four agenda items among others, inaddition to their evaluation of the current condition of the world economy: Thefirst item on the agenda is Information Technology (IT), which is key to greaterdynamism in the socio-economy as a whole in the 21st century. The G8 leaderswill discuss the impact of IT in terms of both digital opportunity and thedigital divide. The second item on the agenda is food safety, with the focus ongenetically modified crops. The third item is measures to cope with infectiousdiseases, including AIDS, tuberculosis, and malaria. The fourth is developmentissues, including the progress of debt reduction for the heavily indebted poorcountries (HIPCs).
The Finance Ministers' Meeting in Fukuokawill take up the following four related issues and is expected to report on themto the Heads of State and Government: The first issue is the impact and policyimplications of IT on areas for which the Finance Ministers are responsible,such as the macroeconomy, the financial system, and the tax system. The secondis the strengthening of the international financial architecture. The Ministerswill discuss how to follow through on the broad recommendations in their reportat the Cologne Summit last year, and how to further reform the architecture. Thethird issue is the question of how to respond to abuses of the internationalfinancial system, which are growing increasingly serious as globalizationproceeds. The Ministers will discuss the problems of offshore financial centers,which are breeding grounds for money laundering and other evasions ofsupervision and regulation by financial institutions, as well as the problems oftax evasion and avoidance utilizing tax havens. Finally, how to help developingcountries that have been left behind in reaping the benefits of globalizationremains an important challenge. This issue includes the follow up of theEnhanced HIPC Initiative, initiated in Cologne last year.
The Ministers are also expected to discussthe current condition of the world economy, although they will not issue aseparate report for the Summit on this matter. The currency crisis that began inJuly 1997 with the fall of the Thai baht went on to ravage most of Asia, and bythe following year had spread to Russia and Brazil. The collapse of a largehedge fund caused a deterioration of confidence in global financial markets inthe fall 1998. Subsequent policy efforts in the crisis-hit countries and by theworld community at large brought recovery in most countries by 1999, and theworld economy as a whole began to regain its stability. This was the backgroundagainst which the Cologne Summit took place in June last year. This year theworld economy has been showing much stronger recovery and growth, as indicatedby the OECD's forecast of 4% growth in 2000. It is against this much moreencouraging environment that the Kyushu-Okinawa Summit will be held.
Today, with the Fukuoka Finance Ministers'Meeting some three weeks away, I would like to take advantage of the opportunityto express my views on IT, globalization, and international financialarchitecture.
I. The IT Revolution andGlobalization
One of the major topics at the upcomingSummit will be the impact of the IT revolution and its implications for ourpolicies. Until just a few years ago, very few people could have imagined thatIT would have such an enormous influence on the societies and economies ofcountries all over the world. Among other things, IT, and particularly theemergence of the Internet with its openness and global reach, is having adrastic influence on methods of business and communication.
First of all, IT both speeds up thedissemination of information and reduces its cost. This is bringing aboutsignificant changes in the ways business is conducted within and betweencorporations, and in the relationships between corporations and consumers. Moreconcretely, IT has brought greater information sharing within corporations,reducing the need to maintain hierarchical corporate structures and dramaticallyincreasing the efficiency of business operations. Using the globally networkedbusiness-to-business (B-to-B) market, companies can purchase from the supplierthat offers them the lowest price, or conduct outsourcing in places they neverwould have thought of before, in order to save on costs and raise productivity.For example, small- and medium-sized enterprises (SMEs) in Japan thatparticipate in the B-to-B market on the Internet now find trading partners, SMEsin Asia, for the intermediate goods they need.
The streamlining of intermediarybusinesses is another significant change. In the past, various intermediarybusinesses functioned mainly as go-betweens for information about the supply anddemand of goods in a particular region. However, with the speed of IT the needfor such services has greatly diminished. IT is also making firms' inventorymanagement more efficient and reducing fluctuations in the capacity utilizationrate.
Such improvements in efficiency andproductivity are not just limited to IT-related industries, but extend to theoverall economy. IT stimulates organizational change and industrialrestructuring, as well as technological innovation, throughout the economyresulting in greater competition and further increases in productivity. Seekingimproved productivity, IT-related investment increases, and this in turnincreases the rate of growth of capital stock and boosts economic potentialgrowth.
The IT revolution is taking place all overthe world and Japan is no exception. According to provisional calculations bythe Economic Planning Agency, the advancing IT revolution will boost Japan'sreal GDP by 6% over the next five years, an average of more than 1% a year.Although Japan's aging population with lower birthrate is inevitable, IT isexpected to offset the negative impact of the expected decrease in population,according to the same provisional calculations.
The fact that the IT revolution isdrastically altering the state of the Japanese economy is also evident from theemergence of various kinds of new services. For example, we find businesses thatcan meet more highly differentiated consumer needs, as well as businesses thatcan bring a variety of products together in virtual malls on the Internet. InJapan, IT is leading to the establishment of new forms of banking and financialservices, such as those provided by networks of convenience stores and gasolinestations. Further more, financial services that are provided only on theInternet are growing fast. These are simple examples of how IT is directlymaking people's lives more convenient. Such new businesses can be conducted onthe global Internet, increases cross border transactions, and thus develops amarket that is, literally, a single world market. Needless to say, all this willlead to the expansion of new demand.
As said earlier, the IT revolution ishaving a positive effect on potential production as well as on expanded demand.Therefore, by making the best use of IT, countries will be able to achievestronger, more balanced growth. Although IT may bring labor saving in certainareas, it increases the demand for systems engineers and workers incomputer-related manufacturing. The new types of businesses that I describedearlier will also generate new jobs. I believe, on balance, IT will have a netpositive impact on employment because of the higher economic growth it willbring.
All in all, the IT revolution is having apositive impact in terms of growth, employment, and the enrichment of people'slives. The challenge for government will be to maximize those benefits. The mostimportant tasks of government will be to put in place a competitive environmentby means of deregulation; to maintain an open international trade system; to setrules to assure the security of transactions and protect consumers in ways thatare compatible with the new environment brought about by IT; to promoteflexibility in labor markets to facilitate a smooth transition from occupationsthat are cut back by IT to those that are needed by IT; and to develop financialand capital markets that can deal appropriately with the funding needs of newbusinesses. In any case, the most important task for government is to develop anenvironment that is conducive to maximizing private-sector initiative andentrepreneurship toward innovation. Setting appropriate international rulesadapted to the new environment is also important. I expect that these issueswill be major subjects of discussion by the Heads of State and Government,together with the issue of the digital divide.
Regarding macroeconomic policy, which isthe main task of the Finance Ministers, it is crucial that we carry on soundfiscal and monetary policies in order to take maximum advantage of theopportunities presented by IT. A macroeconomic environment that is stable andfree of inflation is a prerequisite for the proper conduct of corporatedecision-making, including on IT-related investment.
There are those who argue that the neweconomy may eliminate business cycles by making inventory management moreefficient and smooth. However, business cycles have a variety of causes,including changes in psychology of people and external shocks, and it is hard toimagine that business cycles will simply disappear. Moreover, the IT revolutionis a process that is under way, and it is extremely difficult to evaluate itsfull effects. While the prospects for individual businesses and the futuredevelopment of national economies seem bright, at the same time, there are someuncertainties. Governments must keep these uncertainties in mind whilecontinuing to implement appropriate policies to promote balanced, sustainablegrowth.
Although I will not go into detail today,IT has enormous implications for areas of finance and tax in which the FinanceMinisters are involved. For example, financial products and so-called digitalgoods are provided on the Internet; the speed at which transactions can be madehas risen dramatically; and there are an increasing number of cross-bordertransactions by businesses without any domestic base. Such transactions involvesignificant issues in terms of our financial and tax systems. In addressingthese issues, it is vital that we maintain consistency between our handling ofthe new environment and our handling of conventional transactions, andneutrality toward different patterns of transactions. At the same time, we mustbe careful not to miss the full opportunities and advantages presented by thenew methods of doing business. I expect these financial and tax issues will bealso discussed at the Fukuoka Finance Ministers' Meeting.
II. The InternationalFinancial Architecture in the Globalized World
Since the Asian currency crisis in 1997,the world economy has regained its stability, and there are increasingly strongprospects for increased growth. At the same time, economic globalizationfacilitates even more rapid and large-scale international capital flow, and therisk still remains that an abrupt reversal of capital flows could result inanother crisis. Now, with stability returning, is precisely when it is mostimportant for us to explore policies and measures for preventing future crisesas well as for resolving crises when they do occur. From this standpoint, theupcoming Summit is the best opportunity to strengthen the momentum for reform ofthe international financial architecture.
Needless to say, there is no single majorreform that can act as a panacea to strengthen the international financialarchitecture. Rather, what is essential is the accumulation of solid, sustainedefforts by developed countries, emerging market economies, and internationalfinancial institutions. The G-7 Finance Ministers' Report on Strengthening theInternational Financial Architecture issued at the Cologne Summit last yearcalled for a comprehensive review of financial architecture that included: (1)reforming the international financial institutions and arrangements; (2)strengthening supervision over lender-side institutions such as hedge funds; (3)on the borrowing economy-side, strengthening the financial sector, adoptingappropriate exchange rate regime, and well-sequencing of capital accountliberalization; (4) strengthening private sector involvement in crisisprevention and resolution; and (5) promoting internationally agreed codes andstandards. The international community has engaged in serious examination andcooperative efforts to bring about improvement in these areas during the pasttwelve months.
In terms of strengthening internationalarrangements, for example, the IMF's Interim Committee was transformed into apermanent body, the International Monetary and Financial Committee (IMFC), lastautumn. The G-20, an informal mechanism for dialogue among systemicallyimportant countries in the international financial system, held its firstmeeting last December. The Financial Stability Forum (FSF), which wasestablished last year through the initiative of the G-7 Finance Ministries,central banks, and financial supervisory bodies, published reports this springon highly-leveraged institutions (HLIs), capital flows, offshore financialcenters, and the implementation of international standards. With regard tostrengthening private sector involvement in resolving crises, the IMF'sExecutive Board and the G-7 countries have reached a consensus on the basicprinciples, including ensuring comparable treatment among creditors when debtrestructuring takes place. The notion of private sector involvement has startedto be put into practice, as evidenced by the large financial contributions madeby private creditors, including bondholders, to the recent IMF programs inUkraine and Romania.
The Fukuoka Finance Ministers' Meetingthis year will follow up the progress and deepen the discussion on strengtheningthe international financial architecture. Reforming the IMF, which is central tothe international financial system, will be a main focus of the meeting.
Reform of the IMF is essential if the IMFis to continue to play a central role in ensuring the stability and developmentof the international financial system and in coping with new internationalfinancial challenges in the 21st century. Japan has already offered a number ofproposals on IMF reform, including (1) paying greater attention to large-scaleand abrupt international capital movements when conducting IMF surveillance andformulating lending programs; (2) limiting the IMF's involvement in structuralpolicies to these that are directly linked to solving crises; and (3) enhancingthe IMF's transparency and improving its decision-making procedures. I wouldlike to express my appreciation for the progress that has been made in many ofthese areas so far.
One of the central issues concerning IMFreform at the Fukuoka meeting is the review of IMF facilities. There are somewho are proposing raising the rate of charge of the core facilities of the IMF,such as the Stand-By Arrangement (SBA), which usually covers a one-year lendingprogram period with several disbursements, with repayment scheduled in three tofive years, and the Extended Fund Facility (EFF), which usually covers athree-year program period, with repayment due in five to ten years. This idea ofraising the rates has been proposed to avoid excessive dependency on IMFfinancing among member countries. Considering the increasingly important rolethat private capital markets have played in providing financing to countries,Japan basically shares the view that countries should be encouraged to makegreater efforts to improve their access to private markets. As to raising thecost of using IMF financing, however, we should recall that member countries aresubject to strict conditionality on macroeconomic policies when they borrow fromthe IMF, and that they pay commensurate political and social costs. Moreover, itcontinues to be important that the IMF, which supports its members on conditionthat they adopt and implement appropriate policies, performs functions likethose of a "credit cooperative". I expect that the upcoming FinanceMinisters' Meeting will seek a proper balance between these two viewpoints onIMF reform, continuing to provide appropriate financing when necessary whileavoiding the moral hazard for member countries of chronic dependence on IMFfinancing.
We do need an international safety net inorder to be able to respond effectively to currency crises. Therefore, it isnecessary for the IMF to maintain or even strengthen its function as a kind ofinternational lender of last resort in crises caused by a temporary shortage ofliquidity. From this standpoint, there is a need to enhance the effectiveness ofthe Contingent Credit Line (CCL), which was established last year in the wake ofthe Brazilian crisis in 1998 to prevent the occurrence of future crises. So far,there has not been a single case where the CCL has been applied, and there isongoing debate over what can be done to make it a more attractive facility.Japan has proposed lowering the rate of charge and eliminating the commitmentfee. Considering that the CCL was designed to prevent contagion, I think itsactivation should be more automatic, on condition that the eligibility criteriaare reviewed periodically. I expect that the Fukuoka meeting will also bringprogress toward a concrete proposal for CCL reform.
Improving IMF governance andaccountability is also one of the main issues before the Finance Ministers. TheIMF should continue to move forward with disclosure of its documents, and shouldput the idea of establishing a permanent independent evaluation office intopractice as soon as possible. Japan will continue to propose that IMF staffshould consult with the Executive Board about the important framework of theprogram before missions are dispatched to negotiate with authorities.
In addition, Japan considers that a reviewof IMF quota shares and the composition of its Board of Directors are crucialfor the improved governance and accountability of the IMF. For the IMF tocontinue to perform its central role as a truly global institution in theinternational financial system, it is essential that the quotas, which determinevoting shares, the amount of members' contributions, and limits on access to IMFresources reflect the reality of the world economy. Over half a century haspassed since the establishment of the IMF. Despite the fact that many emergingeconomies, including in Asia, have become important economic powers, theirinternational trade has increased dramatically and their weight in theinternational financial market is growing, the allocation of quota shares,voting shares, and Board representation of the Asian countries are limited. Ibelieve that an immediate review of quota allocation, reflecting changes in theworld economy, is essential.
The upcoming Fukuoka Meeting will also discussreform of the World Bank and other multilateral development banks (MDBs). Thisincludes how the World Bank and other MDBs can avoid competition with privatefinancial flows by sharpening their focus on poverty alleviation, and how toimprove the efficiency of assistance by improving cooperation among the MDBs.
III. Final Remarks
Finally, I would like to say a few wordsabout the city of Fukuoka, site of the Finance Ministers' Meeting on July 8.
Fukuoka is the largest city on KyushuIsland, with a population of 1.3 million. It is Kyushu's main city and one ofthe major Japanese gateways to the rest of Asia. Fukuoka is a vigorous city inwhich modern Japan and traditional Japan exist side by side. It was chosen bythe Hong Kong weekly magazine "ASIA WEEK" as the best city in Asia inwhich to live and work.
The Finance Ministers' meeting will beheld at the Fukuoka City Museum, a modern and beautiful museum which presentsexhibitions portraying two thousands years of exchange between Fukuoka and therest of Asia
On the eve of the meeting, July 7, Fukuokawill be host to the World Economic Symposium, "Asia in the Global Economyof the 21st Century". The symposium will be attended by Mr. Kwik,Coordinating Minister for Economy of Indonesia, Mr. Lee, Minister of Finance andEconomy of Korea, and Mr. Tarin, Minister of Finance of Thailand, as well as Mr.Chino, President of the Asian Development Bank. I look forward to a fruitfuldebate on economic globalization and prospects for the Asia economy in the 21stcentury.
In the middle of July, just after theFukuoka Finance Ministers' meeting, the famous and lively Japanese festival,Hakata Gion Yamakasa will take place. I hope that many people will come toFukuoka in connection with the Finance Minsters' meeting and will be able toenjoy some of the many interesting things the city has to offer.