HISTORIC PRESS RELEASE : Brown puts Case for Reform to Strengthen Global Economic Co-operation [September 2000]
The press release issued by HM Treasury on 20 September 2000.
Speaking at the Commonwealth Finance Ministers’ Meeting today, the Chancellor of the Exchequer, Gordon Brown said:
“The IMF and World Bank Annual Meetings in Prague this week offer us a crucial opportunity to strengthen the international financial system and to ensure that all countries are able to participate fully in the world economy and share in the benefits of rising global prosperity.
“When the next country is faced by turbulence, and when the next challenge confronts the global financial system, people will not ask who was at which meeting. People will ask whether we have learnt the lessons of Mexico, Korea, Russia and Brazil, and whether we have put in place measures – from early warning procedures to framework for crisis resolution – to create greater stability and economic growth.
“The founders of the Bretton Woods institutions knew that prosperity is indivisible. This is even more the case in today’s world of instantaneous global markets. Today, instability anywhere has repercussions everywhere. The new world economy has brought greater risks of insecurity as well as opportunity. So it is the duty of the international community through economic co-operation to put in place measures to spot potential problems early, to prevent these problems where possible and where problems do occur, to minimise the disruption and real damage they can cause.
“While the path of open trade and open capital markets that we have travelled in the last 30 or 40 years has brought unprecedented growth, greater opportunity and the prospect of better lives for millions across the world, we must not forget there is still massive poverty. Globalisation must work for the poor as well.
“The message from Prague for us all – Governments, Institutions, demonstrators – must be that in the new world of open capital markets the proper course is not to retreat from global co-operation or globalisation. The way forward is to enhance international economic co-operation.
“So we reject those that say the instability of recent years and argue we should turn our back on globalisation, in effect a return to the protectionism of the 1930s and tightly controlled capital markets of the 1940s. Those that look at the expansion of private capital flows and argue there is no longer a need for the IMF and World Bank, that in effect we should return to the discredited laissez-faire of the 1920s. Globalisation has the potential to be the key to greater prosperity. Greater international co-operation is the best hope for eradicating poverty and of delivering growth and opportunity to all.
“The case for global economic co-operation is being made every day. The IMF, under the new leadership of Horst Kohler, and the World Bank, under Jim Wolfensohn, have agreed and are implementing reforms – including greater co-operation between the two institutions. There are four further steps we can and must agree in Prague:
co-operation in surveillance to deliver effective early warning;
co-operation in crisis prevention;
co-operation in crisis resolution;
and above all co-operation to break the vicious circle of debt, poverty and economic decline in which so many countries are still trapped, and create a virtuous circle of debt relief, poverty reduction and economic growth.
Surveillance
“Over the past two years the international community has made great progress in agreeing a framework of codes and standards covering the key areas that all countries need to address if they are to achieve stability and participate in the international financial system – transparency in fiscal and monetary policy, financial supervision and corporate governance.
“And because sound economies depend not simply on robust and transparent economic and financial systems, but on welfare and social systems that build social cohesion and trust, the World Bank and UN are also developing principles of good practice in social policy.
“But the codes of conduct will only work if there is an effective and authoritative surveillance mechanism, to monitor their implementation, so that the public have confidence in the transparency on which stability depends.
“The building block is already present in the IMF’s Article IV process. The new international architecture, however, requires a step change in the IMF’s surveillance under Article IV. It must become broader encompassing not just macro economic policy but the implementation of the codes and standards on which stability depends. It must become inclusive, drawing on the work and expertise of the World Bank and other bodies to deliver broader surveillance under the Article IV umbrella.
“It must become transparent so that the public and the markets get the information they need and have confidence in the process which produces it. Indeed we must ensure the private sector is aware of the codes and standards, and the information they provide. Evidence shows that where the private sector can see that a country has strong economic policies in place, that there is macroeconomic stability and a greater openness to trade, they are more likely to invest in that country. But we still have further to go. Strong foreign investment flows should be linked to strong economic policies.
“Crucially, the surveillance system must be authoritative, independent and of the highest quality. It is important to ensure the IMF has the authority and credibility it needs: we need surveillance of the IMF as well as by the IMF. This is one of the reasons why we welcome Horst Kohler’s agreement to establish an independent evaluation unit at the IMF. This should cover the full range of the IMF’s activities.
Crisis prevention and private sector involvement
“In setting up new mechanisms for surveillance and crisis prevention, we must also ensure that we provide the right incentives. We must ensure that all the main participants, public and private, in the international financial system accept their responsibilities and play their part in maintaining stability.
“All economies need not only to be transparent in their activities: they also need to forge regular contacts and lasting relationships with their private investors.
“Countries which are prepared to make the efforts to implement internationally-agreed codes and standards, and to establish closer and more secure relationships with their private sector creditors – through establishing investor networks, debt monitoring systems, private sector contingent credit lines, and collective action bond clauses – will find that these efforts will help contribute to building less crisis-prone economies.
“It is also important that the private sector works with the IMF on surveillance issues. We welcome the action the fund has taken in this area and its establishment of a capital markets group.
“And countries that adopt the right policies need to be sure that they have support from the official sector as well as the private sector. That is why the UK supported the development of the preventative contingent credit facility (CCL) at the IMF for these countries. We welcome the agreement at the IMF which we will finalise in Prague to develop further the CCL to make it more attractive to countries and to ensure that it offers real protection.
Crisis resolution
“However successful we aim to be at avoiding crises, we should recognise that shocks will occur. We need to ensure there are effective methods in place for crisis resolution – in a way that ensures that the burden of adjustment is not placed on the poor and the most vulnerable people.
“There will continue to be a role for the official sector, particularly the Fund, in resolving them. But we need also to recognise that the way we resolve crises may have significant implications for the behaviour of public and private sectors in the future.
“Following the events of 1997 and 1998, the international community has now developed a new framework for private sector involvement in crisis resolution. The handling of a number of recent cases has demonstrated the ways in which the private sector can be involved.
“But we need to go further in fleshing out this framework with a clear set of presumptions for appropriate private sector involvement concerning the range of potential crises, moving further away from the old ad hoc model, while still retaining the necessary flexibility to deal with the specifics of individual cases.
World Bank and IMF co-operation
“As we build a platform of stability, we must ensure that more countries share the benefits of the global economy.
“This requires close co-operation between the IMF and the world bank and I welcome Horst Kohler and Jim Wolfensohn’s statement earlier this month of an enhanced partnership between the two institutions.
“The focus of the World Bank is poverty reduction, structural reform and social development. Yet this matters not only in the poorest countries. As the crises of the 1990’s have demonstrated, it is important to put in place strong social systems and mechanisms for helping the most vulnerable in all countries participating in the international financial system.
“The IMF’s prime responsibility is stability and surveillance. But stability and surveillance matter in all countries. And the Asian financial crisis has shown that structural problems can lead to financial and macroeconomic instability.
“So in many countries the interests and activities of the IMF and World Bank are interdependent. They both have vital roles to play in surveillance and lending in emerging market and developing countries alike.
“Above all the Bretton Woods institutions have a crucial role to play in forging the new consensus that I believe we need. A consensus that recognises that enhanced international co-operation is the key to prosperity.
Development
“The need to develop a new approach is clearest for the poorest countries.
“To achieve our goal – halving by 2015 the proportion of people living in extreme poverty – we need to move beyond the economic and social assumptions of the past two decades. A new world requires a new understanding of what makes for sustainable economic development – how we break the vicious circle of debt, poverty and economic decline and create a virtuous circle of debt relief, poverty reduction and economic growth.
“So what we need is a new approach that recognises the links that form the virtuous circle:
first we need to deliver the enhanced debt relief;
second, we need to build the link between debt relief and poverty reduction strategies;
third, we need to create the new conditions for economic; development- stability and a recognition of the roles of the public and private sector – that will allow the participation of all poor countries in the global economy.
First, the importance of debt relief.
“The Commonwealth has played a crucial role in the drive for debt relief, starting with the Mauritius Mandate. Last year we were able to go further and secure a commitment to a major reform of the HIPC to deliver wider, deeper, faster debt relief. We are all anxious to see this implemented.
“Some progress has been made. We now have 10 countries through to decision point who will receive $21bn in total debt relief. But we need to go further. We need to make sure that any HIPC country that can make the necessary commitments to poverty reduction qualifies quickly for decision point and the flow of debt relief to achieve our aim of 20 countries qualifying for debt relief by the end of the year.
“I welcome the Fund and Bank’s statements earlier this month outlining new ways to speed up the process:
first, much greater flexibility on track record with the focus on achievement, not on a fixed number of years;
second, a recognition that the development of full PRSPs should not hold up debt relief and that to reach the decision point countries should produce interim PRSPs;
third a streamlining of conditionality so that it focuses on what is essential to achieve poverty reduction and growth; and
fourth, the Fund and Bank working more intensively through the joint implementation committee to drive the process more proactively.
“But just getting 20 countries to decision point by the end of 2000 is not enough. We must also face the next challenge of dealing with countries that are not able to make the commitment to poverty reduction, many of which are affected by conflict. We need to help these countries move to a position where debt relief leads clearly to poverty reduction.
This is an issue we need to address proactively – in following up the g7 declaration in Okinawa, and in the work of the bank’s post conflict unit. We will seek to move this agenda forward in Prague.
Second, poverty relief
“Next we need to build the link between debt relief, development and poverty reduction strategies.
“The last year has seen a major and decisive shift away from the old Washington consensus and towards a new year 2000 consensus where anti-poverty policy and economic policy will in future go hand in hand in recognition that social justice and economic growth are intertwined.
“It is now widely agreed that anti-poverty strategies are be not only be country-driven but community driven – developed transparently with broad participation of civil society, key donors and regional institutions. And that economic and social strategies must be clearly linked to the international development goals of halving world poverty by 2015.
“Poverty Reduction Strategies are not however intended to hold up debt relief. Which is why I am glad the IMF and Bank have re-emphasised that only outline, or interim poverty reduction strategy papers are needed to reach decision point.
“But full PRSPs are vital to achieving our goals. The countries concerned must and the international community must together ensure that PRSPs do reflect the new year 2000 consensus. And the Bank and Fund’s programmes must support the PRSPs designed by the countries.
Securing the benefits of globalisation
“Aid and debt matter but in order to grow out of poverty, the poorest countries need to have access to the global economic system.
“We need to make this opportunity real for all the citizens of the world by ensuring the conditions, the capacity and the means to enable them to participate in the global economy in a manner that can benefit rather than harm them.
“There are several major issues that Clare Short and I will to continue to work on in the next 12 months:
the first is in trade talks to create liberalisation that does not disadvantage the world’s poorest. The EU has been working to persuade other industrialised countries to sign to its pledge of duty-free and quota free access to “essentially all” imports from developing countries. The prime minister, Clare and I have all gone further than this – calling for duty-free and quota-free access for all imports from developing countries.
secondly, we have called for the reform of WTO in a manner that ensures a true voice for developing countries; and
thirdly, we recognise in a new knowledge based global economy we need to ensure that the world’s poorest get access to technology, knowledge and skills that enable them to exploit opportunities rather than be exploited by them.
“A lasting exit from poverty will also need all countries to have access to private investment capital. Now it is true, as we saw in recent years, that short-term capital flows can be destabilising when investors are insufficiently informed and when countries lack open and transparent policy making procedures, strong financial systems, and the necessary institutional capacity.
“But, as I have said, the answer is not for the countries to turn their backs on globalisation but for us to join together to build a solution that meets the needs of developing countries.
“To do this we need to provide countries with road-maps for opening up their capital accounts – with guidance on the speed and desirability liberalisation. On attracting more stable direct investment not just portfolio flows.
“There are many issues to cover, from reforms to strengthen the financial sector, including banking supervision, bankruptcy laws, property rights and an independent judicial system; and on creating infrastructure and conditions to enable investment and using private sector finance and skills.
“We must offer developing countries a practical programme of advice and assistance that will help them on the path, not overloading their capacity, but also not losing sight of the ultimate goal.
“At present only 3 per cent of foreign direct investment goes to low income countries and only 1 per cent goes to the heavily indebted poor countries. We must change this so that developing countries receive stable, productive foreign direct investment. Investment which brings not just capital, but transfers skills.
“All countries, rich and poor, need stable oil prices. When the price trebles in only 20 months, every economy is affected, but the poorest disproportionately. I therefore welcome OPEC’s commitment to increase the supply of crude oil by 800,000 barrels per day from 1 October. But the price remains unsustainably high. So we call upon OPEC to raise supply and to take additional measures to bring down the price of oil as they have promised to do.
Conclusion
“So we should not turn our backs on globalisation. We must continue to build an improved international financial system fit for the twenty first century that will enable all countries to participate in the new world economy and to share in rising prosperity. Enhanced international economic co-operation is the best hope of eradicating poverty and of delivering growth and opportunity to all.”
