Senator Ian Campbell visited Washington between April 18 and 21 to attend meetings of the International Monetary Fund, meet with World Bank officials and hold discussions with Congressional and regulatory leaders about reforms to the financial services sector in the wake of the Enron collapse.
Discussions were held with the following:
- Australia's Ambassador to the United States, Mr Michael Thawley.
- Former Speaker of the US House of Representatives, Mr Newt Gingrich.(see photograph).
- The Under Secretary, Domestic Finance, US Treasury, Mr Peter Fisher.
- Chairman of the House Committee on Financial Services, Congressman Michael Oxley (see photograph).
- President of the National Association Securities Dealers Inc, Ms Mary Schapiro.
- Member of the US Securities and Exchange Commission, Dr Cynthia Glassman
- Executive Director, IMF, Mr Mike Callaghan.
- Director of the Asia Pacific Department of the IMF, Mr Yusuke Horiguchi.
- Executive Director, World Bank, Mr Neil Hyden.
- Vice-President,World Bank's East Asia and Pacific region, Mr Jemal-ud-din Kassum.
The following is a statement made by Senator Campbell, representing the Treasurer, to a meeting of the International Monetary and Financial Committee on April 20.
The Global Economic Outlook
The increasing signs that a recovery in the world economy is underway are clearly welcome. The outlook is certainly more positive than that which prevailed when the IMFC met last November, when concern was focused on whether the events of September 11 may provoke a more pronounced and longer lasting contraction in global economic activity.
Attention is now being directed to the likely speed, strength and sustainability of the global economic recovery currently underway. But the tragic events of September 11, and more recently developments in the Middle East, are reminders that nothing can be taken for granted. In particular, we cannot assume that following the slowdown in the world economy in 2001, we are poised to resume a further long period of economic expansion. This clearly is our objective, but a number of risks, uncertainties and vulnerabilities remain.
Sound policy frameworks and judgement are essential to achieving a prolonged global expansion. The recovery underway is in large part due to a number of countries having had the policy flexibility to respond decisively to the rising uncertainty and weakening activity in 2001. This is certainly the experience of members of this constituency. In contrast, countries without the same degree of flexibility were forced to adopt policies that deepened the downturn and will likely slow the ensuing recovery.
Attention is currently focused on developments in the Middle East. A clear risk to the world economy from these developments is the rise in oil prices. Higher oil prices in 2000 contributed to the subsequent slowdown in the world economy, while lower oil prices have supported the recent strengthening in global economic activity. A sustained rise in oil prices would be a major constraint on world economic growth.
Another near-term risk to the outlook is the possibility of a further correction in equity prices, particularly in the United States. Investor confidence is currently strong and equity prices reflect a very optimistic outlook for corporate earnings. Should this optimism prove misplaced, there could be a sharp correction in equity prices dampening consumer spending and business investment.
A key policy challenge in the upswing is appropriately timing and calibrating the monetary policy response. The balance to be struck is making sure that the current stimulus is not withdrawn too early so as to mute the recovery, nor too late such that low inflation is compromised. The degree of uncertainty regarding the sustainability of the current recovery must have a major bearing on the decision as to when to withdraw the accommodative monetary policy stance.
In the medium term, we must be attuned to the risks arising from the persistence of global imbalances. One of the issues that occupied policy makers towards the latter part of the expansion phase of the 1990s was the sustainability of rising current account imbalances. A worrying aspect about the current recovery, led primarily by the pick up in the United States, is the widening of these imbalances as capital continues to flow into the United States.
Minimising the risk of a disorderly resolution of global imbalances will require growth in the rest of the world outpacing that in the United States. This requires all countries to maintain sound macroeconomic policies and pursue structural reform. In particular, there is a pressing need for stronger growth in Europe and Japan.
While there are some welcome signs of an increase in economic activity in Japan, the overall outlook remains bleak. This is of particular concern to other countries in the Asian region, given the importance of regional trade and investment flows. It is important that recent improvements in some indicators do not lead to policy complacency. Aggressive monetary policy action is needed to combat deflation, but pursuing structural reform is the only way of lifting Japan out of the recession. This requires measures which tackle the root of Japan's problems in the corporate and banking sectors. There has been concern in the region about the monetary easing leading to a weaker yen. Regional implications of a weaker yen would be manageable as long as it was part of a comprehensive reform package.
The benefit of pursing sound macroeconomic policies and structural reform is demonstrated by the performance of the Australian and New Zealand economies during the global slowdown. Both economies have proved resilient and growth held up remarkably well despite the slowing in global growth. In Australia, consumer and business confidence has recovered quickly and strongly, with prospects for continued robust growth in 2002 strengthening in 2003 as exports pick up and investment rebounds. Growth in New Zealand is expected to strengthen to around 3 per cent in 2002, with domestic activity underpinned by a rebound in consumer and business confidence, supportive macroeconomic policies and higher net migration.
Supported by robust domestic demand, and an improving international environment, the Korean economy is expected to grow at potential (5.5 per cent) in 2002. Nevertheless, the authorities are aware that it remains vulnerable to changes in external conditions, especially those stemming from neighbouring countries. The Korean authorities are therefore determined to carry out further structural reform this year, particularly in the corporate sector, notwithstanding a tight political calendar.
Growth in the Philippine economy was amongst the strongest in the region in 2001 and inflation sustained a downward trend. The overall fiscal targets for 2001 were achieved, which was an important factor in the restoration of market confidence. The economy is expected to grow by around 4-4.5 per cent in 2002, with inflation declining further. Macroeconomic stability will be enhanced with further advances in structural reforms, with a particular focus on financial issues.
For many of the smaller members of this constituency, developments in commodity markets, including oil, will continue to have a major bearing on their economic prospects. They also remain highly exposed to developments in the tourism sector and official financing flows.
Strengthening Crisis Prevention and Resolution
In recent years, the Fund has implemented and refined its tools aimed at strengthening crisis prevention including through enhancing financial sector surveillance, promoting greater transparency, the assessment of standards and codes, deepening its understanding and surveillance of capital markets, and strengthening external vulnerability assessments of emerging market economies.
It is encouraging that these efforts are starting to bear fruit, as evidenced by the resilience of the world economy to the recent series of shocks. Even with the crisis in Argentina and the heightened uncertainty in the global economy late last year, spillovers to other regional economies appear to be limited and markets have rewarded those economies with stronger policy frameworks.
There is, however, still more to be done, as recognised in the recent review of surveillance activities. The challenge is to refine and improve the Fund's surveillance activities to ensure they are effective in promoting a stable global economy and preventing crises. With the changing global economic environment, the coverage of surveillance has expanded. It is essential that with greater breadth, the Fund does not lose focus in its surveillance activities nor spread itself too thinly.
Surveillance should be adapted to a country's needs rather than following a rigid template or `one size fits all' model. It must continue to focus on the areas at the heart of the Fund's responsibilities - external sustainability, policies to promote sustainable growth, and vulnerability to balance of payments and currency crises - and be more selective in other areas according to whether the issue is relevant to a country's economic performance.
There is scope for greater integration of multilateral and bilateral surveillance and more use of cross-country comparisons, as well as greater use of regional surveillance. The comparative strength of the Fund, with its near universal membership, should be in drawing on the policies and experiences in other countries facing similar policy challenges. In addition, there is scope to enhance surveillance by making better use of the expertise of, and collaborating with, other institutions.
Enhancing surveillance in program countries raises some additional issues. It is important that the Article IV process in these countries is not limited by the program framework. The Article IV process should provide an assessment of developments from a broader perspective. To ensure that this occurs, in some cases there may be a need for more active oversight by management of programs and a greater preparedness to introduce a `fresh pair of eyes' to the surveillance/program review process. Depending on the circumstances, and with due regard to resource implications, this may involve introducing a new mission leader for a joint surveillance/program review or a senior Fund officer, who has not been directly involved in the development of the program, joining a mission in order to provide a more objective perspective.
Surveillance is directed towards identifying needed policy responses. Ultimately, the key issue is whether the Fund's policy advice translates into policy actions across the membership. This will depend on the quality, persuasiveness and timeliness of the Fund's advice. The Fund's advice must also be heard to have an impact. In this regard, an effective dialogue between staff and country authorities is crucial. Fund staff should be attentive to the social and political context in discussing possible policy options with authorities. Surveillance could be more effective if it pays greater attention to how policy can be implemented within this context. Candour is another important factor, particularly in assessments of exchange rate arrangements, and whether other economic policy settings are consistent with the exchange rate regime. Of course, there is a fine balance to strike between confidentiality and transparency.
The Fund's crisis prevention efforts rightly focus on country authorities and market participants basing their policies and investment strategies on appropriate risk assessments. Within this framework, the aim is to encourage and assist authorities to strengthen their economies to respond to shocks should they arise. But crises will continue to occur and it is thus necessary to continue to improve approaches towards crisis resolution - including developing more orderly approaches for sovereign debt restructuring.
Regardless of the specific approach taken in particular countries, strengthening the basis on which key judgments and decisions are made is central to improving the Fund's role in crisis resolution. Efforts to enhance the Fund's capacity to make judgments on debt sustainability and the likely prospects of a country regaining market access through a Fund-supported program should be given top priority. Also needed is greater clarity in the process, and a more explicit justification, for deciding on the level of IMF resources in capital account crises.
There has been a renewed focus on how to address circumstances involving large financing requirements and little prospect for an early return of market access. Improving the framework for sovereign debt restructurings in such circumstances is a topic with a long history but limited progress. We must ensure that the renewed interest results in some concrete steps that will provide for more orderly and timely restructuring of unsustainable sovereign debts.
Two approaches for improving the framework for sovereign debt restructuring have been presented - the `contractual' approach (relying on the use of collective action and other clauses in debt instruments) and the `statutory' approach (developing a statutory framework to facilitate agreement between a sovereign debtor and a super-majority of creditors binding on all creditors).
These contractual and statutory approaches should not be seen as alternatives but as complements. Facilitating the ability of sovereigns to restructure their debts, if necessary, in an orderly manner through the inclusion of collective action clauses in individual bond contracts may well limit the need for a sovereign having to resort to the statutory approach. Debate and work should continue on both of these approaches.
There are many issues that need to be resolved in advancing a statutory framework to handle sovereign debt restructuring, but the growing consensus, among both the official and private sectors, to advance the inclusion of collective action clauses in sovereign issues holds the promise that this is an area where significant early progress could be made. We should not lose this opportunity. One way to make progress would be for the main financial centres to promote the use of collective action clauses in all sovereign borrowings within their jurisdiction.
Streamlining Conditionality and Enhancing Ownership
Effective Fund programs are an important part of crisis prevention and resolution efforts. In this regard, work has continued on refocusing conditionality and enhancing country ownership of Fund programs. The objective of these efforts is to focus on the right conditions and, importantly, structure and pace the required policy reforms appropriately to enhance the prospects of the program succeeding.
The appropriate balance and sequencing of conditions will always depend on the circumstances facing a particular country. In this regard, the Fund must be attuned to the realities of affecting policy change. In particular, consideration must be given to the level of administrative capacity, and the political and social context in program countries. In many countries, capacity building is essential if authorities are to have the ability to undertake needed policy changes.
Appropriate program design, including the treatment of conditionality, does not in itself guarantee successful programs. It is also necessary that authorities and the broader domestic constituency are committed to the program. This commitment is something that the Fund cannot directly control but it can have an influence, and this is the focus of efforts to enhance country ownership of Fund-supported programs.
It is too soon to assess the effectiveness of efforts at refocusing conditionality. Moreover, it is a task which will require ongoing evaluation and improvement. The ultimate test is whether each program is successful and achieves its objectives. We can say, however, that there has been good progress so far and we are heading in the right direction.
An area in which we look for further improvement is collaboration with the World Bank. It is also essential that there is comprehensive explanation and justification for conditions in program documentation, particularly in cases where conditions are being implemented with the aim of restoring market confidence. This is important to ensure that the Executive Board arrives at the right judgments about the scope and sequencing of conditionality, and to enhance domestic understanding of the need for policy change. Perhaps most importantly, to maintain the appropriate focus of conditions going forward, practice should be reviewed on an ongoing basis.
Combating Money Laundering and the Financing of Terrorism
The Fund has made substantial progress in responding to the specific measures agreed by the IMFC in November 2001.
A comprehensive methodology for assessing all aspects of combating money laundering and terrorist financing is nearly complete. It is essential to foster consensus regarding the Fund's role in assessing this methodology. This can be achieved by the Fund concentrating its resources on key weaknesses in the international financial system consistent with its mandate and existing policies; using its own expertise; and avoiding overlap or duplication of effort so that the different international bodies focus on areas where they can contribute most effectively. Achieving ownership by member countries will ensure our efforts to combat money laundering and terrorist financing are successful.
Members of this constituency are committed to ensuring their financial systems are not used inappropriately. Many members of the constituency are currently actively participating in an assessment of the Fund/Bank draft methodology for anti-money laundering and combating terrorist financing as part of the Fund's financial sector assessment initiatives. Assessments will be completed in 2002 for Korea, the Marshall Islands, Palau, the Philippines, the Seychelles, Samoa and Vanuatu. At the same time, many of our small Pacific Island States are participating in a regional technical assistance project to develop the legal and institutional framework needed to successfully combat money laundering.
In addition, all members of the constituency are strengthening their defenses against financial systems being abused by terrorists. In many cases full implementation of the measures advocated in the November IMFC communiqué requires legislative change. Despite this, substantial progress has already been made by our members towards signature and ratification of the International Convention of Terrorist Financing and the implementation of Security Council Resolution 1373.
The Fund's Role in Low-Income Countries
The Monterrey Conference on Financing for Development provided a valuable opportunity for dialogue on the role and responsibilities of national governments and the international community in mobilising and using effectively the financial resources for development. The primary factor in low-income countries reducing poverty and achieving growth is `self help' -countries themselves must implement sound macroeconomic policies and structural reforms. Such efforts should be supported by the international community through reducing barriers to trade, enhancing the flow and effectiveness of aid, assisting with capacity building and providing technical assistance. In particular, trade liberalisation is critical to enhancing the prospects of low-income countries. If the developed countries did nothing else, they could substantially improve prospects for low-income countries escaping poverty by opening their markets and removing trade-distorting subsidies in the context of comprehensive trade liberalisation.
It is still early days, but the reviews of the Poverty Reduction Strategy Paper (PRSP) approach and the Poverty Reduction and Growth Facility show that the Fund has made progress in aligning the design of these instruments with poverty reduction objectives. The reviews identified areas where enhancements would be beneficial, including donors better aligning their programs with PRSPs, upgrading public expenditure management systems, improving tax administration and broadening tax bases, and paying greater attention to sources of growth. It is essential that we press ahead and implement the findings from these reviews.
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| Senator Campbell (above left) with Newt Gingrich, former Speaker of the US House of Representatives, and (above right) with Congressman Michael Oxley, chairman of the new House Committee on Financial Services. As a symbolic gesture of Australia's push for free trade, Senator Campbell presented them with gift packs of one of Western Australia's most prized gourmet products, New Norcia Bakery nut cake, baked in the original ovens of the Benedictine monastry at New Norcia, 130km north of Perth. |