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The economic outlook and policy prospects to meet emerging global challenges appear to be more positive with time. World economic growth is expected to peak to its highest level in thirty years. Nevertheless, some risks and challenges remain. The role of International Monetary Fund (IMF) is, indeed, laudable in promoting international financial stability and supporting growth and poverty reduction in the low income countries.In fact, there are stronger signs of a global recovery in the present scenario.
A heartening feature of the recovery is its broad base across the membership. In an increasingly integrated global economy, such broadbased expansion enables each region to strengthen the prospects of the other.
Risks to the expansion from geo-political and oil market uncertainties have increased in recent months. An enduring solution to these problems calls for strengthening the cooperation between the oil importing and exporting countries to stabilize the oil market. Besides, international financial institutions should stand ready to support countries vulnerable to potential shocks. Measures to contain demand include an enhanced investment in exploration of oil reserves.
The international community needs to recognise and accept the increasing role of the Emerging Market Economies in sustaining the present phase of recovery. Sustaining the global recovery process and bringing about an orderly correction of the global imbalances require a coordinated and cooperative approach with an equitable sharing of the burden of adjustment.
The efforts of India, Bhutan, Bangladesh and Sri Lanka, have been recognised for working together for greater regional cooperation to promote economic development and to address the common problem of poverty reduction.
IMF Surveillance
In an increasingly integrating global economy, combined with regional integration through common trade and currency and economic unions, the impacts of policies as also of macroeconomic performances are felt across national boundaries. Therefore, the current multilateral surveillance process and regional surveillance of currency and economic unions by the Fund need to be strengthened further.
The Fund’s effort to streamline and evaluate the process of surveillance are welcomed in its Biennial Review of the Implementation of Fund’s Surveillance 2004.
But much remains to be done in improving the effectiveness and even-handedness of Fund’s bilateral surveillance across membership. It is also felt that on occasions the Fund tends to be intrusive in its approach and some times uses surveillance as an instrument to rate country performance thus subordinating its primary role of a confidential advisor. The surveillance reports in the case of advanced economies need to be more forthright, in terms of candour and the strength of their message, since distortions in the macro-economic policies of these countries have the potential of larger global impact. It is necessary to bridge this confidence gap to make bilateral surveillance really effective.
Apart from assessing risks and potential vulnerabilities, successful home-grown policy experiences in many countries should be identified. The role of Fund surveillance in program countries is curative, in non-program countries it is preventive and this distinction needs to be appreciated. Extending principles of program reviews and monitoring to policy assessments and reviews in non-program countries for ‘signalling’ assessments is counter-productive.
The announcement of Trade Integrating Mechanism to support multilateral trade liberalization is a positive sign. There is need for a similar constructive approach to a precautionary arrangement. The ‘moral hazard’ issue of such a facility seems to be exaggerated, without any adequate empirical support. The Fund’s resources and liquidity have been shrinking compared to the global capital flows and the inadequacy of ‘collective’ insurance prompt the emerging markets to either build up their own ‘self insurance’ or attempt alternative funding avenues at regional levels to insulate themselves against external shocks.
The progress towards establishing voluntary institutional mechanisms for orderly and cost efficient resolution of financial crisis is, indeed, encouraging. Besides, inclusion of Collective Action Clauses (CACs) in bond issues has gained greater acceptance and this has not impacted pricing adversely. It is commendable to note further progress in developing a voluntary Code of Conduct by debtors and creditors and the work being carried forward by G-20 and the international finance community. In fact, the Fund could facilitate formulation of the code without being seen as an "interested party".
Initiatives
The recent initiatives undertaken by the Fund to support the low-income countries as a part of the global initiative to meet the millennium developmental goals (MDGs) is creditable. The Fund must continue the support towards poverty reduction and meeting the MDGs through policy advice, capacity building, and financing, including debt relief. However, it is important to clearly define the Fund’s role in low income countries, consistent with its mandate, and clearly delineate the division of labour between the Fund and other multilateral institutions, especially the World Bank
While focussing on its core expertise of helping members establish and maintain macroeconomic and financial stability to foster durable growth and poverty reduction, the Fund can improve its interventions in low income countries by incorporating relevant Poverty and Social Impact Analysis into its advice. The Fund should also step up technical assistance to help the low-income countries in capacity and institution building. It can optimize its efforts by coordinating more effectively with other multilateral institutions, bilateral donors, and with the member countries themselves, under the umbrella of the poverty reduction strategy process. It should play a stronger role in encouraging policy reform in industrial countries in trade, removal of agricultural subsidies, and channelizing official development assistance and adequate debt relief in the context of the MDGs.
It is commendable to watch the overall progress in implementation of the heavily indebted poor country (HIPC) initiative and the reduction of the overall debt stock and the debt service ratios. There is stronger need to facilitate a fruitful completion of the forthcoming HIPC Technical Meeting and the IDA-14 replenishment meeting.
The IMF approach crucially hinges on strengthening the poverty reduction strategy (PRS) approach as an instrument for achieving of MDGs. In the context of the significant shortfall in the provision of overseas development assistance (ODA) to developing countries in comparison to the committed target under MDG, there is need to re-examine the role of the Bretton Wood Institutions.
A number of proposals have been mooted in recent years to strengthen the voice and representation of developing countries. But, it is unfortunate that there has been very little progress. The current state of impasse reflects the reluctance of the major shareholders to give up their present disproportionate strength. The real issue, therefore, is of political will. While the Executive Board discussions can be useful in fine-tuning the detailed aspects of alternative formulations, the real momentum for change has to come from the capitals, particularly the large shareholders, who hold the key to any fundamental reform.
*Based on the Statement by the Finance Minister, Shri P. Chidambaram, Leader of the Indian Delegation
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