Minister of Economy and Public Works and Services of Argentina
Fifty-third Meeting of the Interim Committee
September 26, 1999
| The Interim Committee member for the constituency consisting of Argentina, Bolivia, Chile, Paraguay, Peru and Uruguay. |
1. Developments in the World Economy
1.1 Introduction
After having successfully overcome many challenges, the world economy is facing now improved prospects. A renewed market confidence has emerged in the wake of output gains in Japan, the upturn in Europe, clear signs of recovery in many of the countries struck by recent crises and, as importantly, the continuous strength of the US economy without manifestations of inflationary pressures. We are now in the much more comfortable position of having to upgrade our growth projections. There is no room for complacency, however, since a number of the desirable structural reforms needed to ensure long-term sustainable growth in globalized markets are still pending. Before presenting some comments on this aspect in the conclusion of this section, let me focus on developments in the major economies, as well as in emerging countries.
1.2 Developments in the major economies and emerging markets
The US economy has played a critical role in rescuing the world from the threat of global recession and it remains a fundamental factor in assessing the outlook for overall growth. Near to reaching its longest expansion ever, the US economy does not show signs of either overheating or of significantly slowing down. The resurgence of growth in the rest of the world heightens the concern of those that call for an early tightening of monetary policy to spare a sharper adjustment in the future to tame inflationary pressures. It is noteworthy, however, that neither the recuperation already observed in some commodity prices, in particular oil, nor the weakening of the dollar have, as yet, negatively impacted on the level of domestic inflation in the US. Moreover, there is no evidence that the deflationary pressures experienced by the world economy since or even before the Asian crisis have dissipated. A set of factors seems to be at work, although with different intensity across countries, helping contain inflationary pressures and promoting productivity gains. The extensive deregulation of many industries; the increased competition of world markets brought about by trade liberalization, including in the context of regional integration initiatives; and the new information technology, coupled with the strengthening of fiscal discipline, have all been contributing to a subdued level of inflation in product markets. In addition, with the exception of the US, there is not as yet a sustained rebound in domestic demand in the other major economies of the world, some of which are still mired by overcapacity and a substantial debt-overhang in the private sector, which dampens demand and curtails prospects for self-sustained growth. We therefore do not expect the Federal Reserve will have to face severe inflationary pressures any time soon.
Other concerns are linked to the large external imbalance and the increasing rate of external indebtedness, which may eventually lead to a loss of confidence in the US dollar, renewed inflation fears and a consequent hike in interest rates. At this stage, this seems a rather remote possibility since the US compares quite favorably with other potential recipients of financial resources in many important respects. It should be noted that the good performance of the US economy, and in particular its safe haven character, is not only due to favorable external developments but also, to a large extent, to the sound macroeconomic and structural policies implemented. Moreover, it should be kept in mind that external imbalances are no longer related to fiscal deficits, as in the past, and that a large proportion of the external indebtedness takes the form of risk capital and does not impose, as such, any immediate burden on the US finances. In addition, the relatively high US interest rates and projected fiscal surpluses not only represent an incentive to holding dollars but they afford a considerable scope for the authorities to counteract any sharp reversal of activity. In sum, we are of the view that while the US economy will probably not represent any major risk to global financial markets in the near future, the present situation raises sustainability concerns, since the US cannot be indefinitely the main driving force of the world economy.
Assessing the strength of the incipient recovery that is being observed in Japan and Europe is critical for world growth prospects. The situation in Japan remains unsettled, since growth is supported to a large extent by an unsustainable level of fiscal deficit. In addition, the most recent strength of the yen may dampen prospects for a vigorous external demand, which, although necessary from the point of view of an orderly global adjustment, would seem warranted only if underpinned by the continuation of the strength of the present recovery. This seemingly premature large appreciation of the yen should call our attention to the autonomous character of capital flows and their preeminence over current account considerations. These developments, in turn, question the extent to which free floating exchange rates among major currencies is serving as a stabilizing factor of divergences in economic cycles or is further impeding a smooth rebalancing.
Growth prospects in Europe are being helped by a quite supportive macroeconomic policy-stance both in the fiscal and monetary areas, including through the impact of the depreciation of the euro that has taken place since its introduction last January. The main concern, both for the outlook of Japan and Europe and also for that of the crisis-struck economies of Asia, stems from the fact that the improved growth prospects have not been accompanied by a full-fledged process of structural reforms. It is indeed surprising that the return of capital to those economies of Asia has occurred before comprehensive progress in the implementation of structural reforms, which may raise some questions regarding the actual pulling factors that draw financial capital and their sustainability. Reforms in crisis struck countries in Asia, as well as in Japan, should focus on banking and corporate restructuring, including the appropriate assignment of losses that would permit a clean new beginning for commercial activity. Reforms in Europe, in turn, should focus on structural rigidities in the labor and product markets aimed at productivity gains and the attainment of fiscal consolidation, a goal that has lost some strength since the Maastricht criteria's three percent deficit was met in 1997.
Economic prospects in Latin America are being affected among other things by the political uncertainty that usually accompanies the presidential elections now taking place in several countries of the region. The adjustment fatigue in many of these countries, coupled with the consequences of recurrent external shocks leading to a dramatic deterioration of the terms of trade and to a substantial transfer of real resources to advanced countries, prompted some to question the benefits of both globalization and the process of structural reforms. Moreover, although markets have gained considerable discriminating capacity to assess prospects for different countries in a region, the fact is that financial contagion is still present . Unfavorable development in individual countries, even in those of relatively minor systemic importance, carry potential of spillover effects for the rest of the region. As a result of all these factors investors have adopted a conservative attitude, increasing financing spreads to unusually high levels which are difficult to justify, considering the scope of structural reforms already implemented in many countries. These unwarranted spreads, if they persist, may end up provoking a liquidity crisis. The critical issue, therefore, is not only that countries unambiguously pursue reform and integration to global markets, but also that the international financial community stands ready to develop and implement an effective framework to prevent and resolve crises if they arise, including through the provision of adequate financing. Clear and mutually agreed upon rules regarding the involvement of both the public and the private sector, particularly in the present scenario of recurrent external shocks and the still-prevalent phenomenon of financial contagion, are needed.
1.3 Conclusion
There should be few doubts that the world economy is now at a critical juncture. After having enjoyed the benefits of increased growth opportunities brought about by global markets, we are only now recovering from a series of shocks and crises that have crudely exposed the negative side of globalization. At the same time a better understanding of how these markets work is beginning to take shape. In this regard, the critical role of asset prices is becoming more widely acknowledged, just as the link between asset price volatility and macroeconomic instability is being clearly established.
There is also a growing awareness that while consumer price inflation has been subdued, signs of asset price inflation could be pointing to easy monetary policies particularly on the part of reserve currency countries. These policies have also been fueling surges of capital outflows toward the rest of the world in search of higher returns, setting the stage for the crises unleashed by the reversals of such flows. We may be already in a position to make a clear distinction between the consequences that can be attributed to globalization per se from those that can be assigned to the particular behavior of major countries or economic areas by which domestic policy considerations such as the need to stimulate domestic demand overshadow those concerned with global stability.
At any rate, the fact is that the world economy is presently working under a "de facto" benign neglect of exchange rates and asset prices resulting in both excessive volatility of exchange rates of major currencies and signs of asset price inflation. Countries should therefore equip themselves to be able to face the financial and real sector consequences of the inherent macroeconomic instability of today's' economic environment. It should be acknowledged that, barring the possibility of directly attacking the causes of such high volatility, there seems to be no other response to the requirements of global, open markets than a full-fledged implementation of structural reforms aimed at increasing the soundness of financial systems as well as the flexibility of labor and product markets both at the domestic and at the international level. It is these markets that need to be flexibilized, and not just the nominal exchange rates, to make the global market project a viable alternative.
In this regard, it is appalling that emerging market countries, particularly those that have already undergone a process of deep structural transformation and that have suffered a sizable economic loss in their terms of trade, still have to face the consequences of rigidities in the product markets of advanced economies as evidenced by the trade barriers that affect their exports of primary products.
The international community is embarked on an effort to reform the international financial architecture and we welcome in particular the emphasis on strong regulatory frameworks for financial institutions including those of advanced economies, and we hope that the Financial Stability Forum may soon come up with concrete proposals. We hope, however, that the drive for structural reforms in advanced economies will not be limited to the financial system, but that it encompasses a comprehensive reform effort, including the areas of trade and labor and product market rigidities. The critical responsibility in this regard resides in Japan and Europe, given their relative lack of progress on this front and their role in generating a smooth process of global adjustment.
2. Strengthening the International Monetary and Financial System
2.1 Involving the Private Sector in Forestalling and Resolving Financial Crises
On the involvement of the private sector, we reiterate our call for utmost caution regarding the way we approach this issue, lest the risks of making crises more likely and of propagating their effects increase, as a result of ambiguities in the way we make our intentions known to the markets. In this connection, we welcome the emphasis given in the Koln Economic Summit report to appropriately balance the potential gains of reducing net debt payments to the private sector with the eventual adverse impact on a country's ability to attract new private flows as well as the potential consequences for other countries throughout the region.
Our goal should be to secure an effective private sector involvement based on the self-interest of creditors who can see the advantages of operating with an internationally and freely agreed upon set of principles that may guide all participants should a financial crisis prove unavoidable, facilitating orderly workouts and reducing uncertainty. Successful involvement of the private sector should be measured, therefore, in terms of the reduction of the risk premia that can be obtained in new financing. Regarding the broad principles that should guide private sector involvement and given a recent "de facto" Brady bonds subordination, we express our concern on the impact that such measure may have on an asset class that is widely used to gauge emerging markets credit risk and also on the cost of issuing debt on other asset classes. We consider it indispensable, therefore, to minimize the damage in this regard by underscoring the principle that all categories of private creditors should be considered equal at the time of sharing the burden of an unavoidable debt workout.
Notwithstanding the latter, we are convinced that prevention remains the best strategy and that our efforts should be centered on fostering a diversity of mechanisms to that end. In this regard, our more pro-active surveillance process could contribute to the implementation of international best practices for debt management, prioritizing the maintenance of an appropriate liability structure. To this end, the suggestions made to manage external assets and liabilities in a manner that reconciles an optimal liquidity threshold with maturing debt obligations, such as the one-year rule. Efforts to simultaneously advance with other aspects contained in the framework for involvement of the private sector need to be followed up. Among these we place special emphasis on the timely access to official financing including through the Fund's Contingent Credit Line, and limited resort to enhancements by multilateral development banks to facilitate the involvement of private markets in a pre-emptive fashion.
We welcome the change in attitude of some bond market participants of G-7 countries regarding the introduction of collective action clauses in international and domestic bond issues which should serve as a useful mechanism for value preservation and orderly work-outs, if needed. In order to shorten the transition to a new market environment that includes collective action clauses, some broader coordinated action by industrial countries will be required to insure that their adoption by emerging markets will not be seen with an element of distrust by market participants. In any event, this is a reform that could have its full effect only in the long run.
In sum, we consider it essential to approach the issue of private sector involvement emphasizing crisis prevention and, when it comes the need to address a specific crisis situation, resorting to a comprehensive and predictable set of principles that help facilitate cooperative market solutions and hasten access to spontaneous credit.
2.2 Choices of Exchange Rate Regimes
To begin with, we would like to note that the discussion about the choice of the appropriate exchange rate regime for developing and transition countries in the present environment of increased capital mobility is framed against the background of the exchange rate regime dominant among major currency countries. Even so, this fact does not translate into the notion that floating exchange rate regimes may be, per se, better suited to face the present global environment. At the same time, the belief that fixed exchange rates, again per se, are prone to currency crises should also be avoided. As we have discussed extensively, what really matters is the strength of the supporting macroeconomic and structural policies, including the adherence to the internationally agreed codes and standards, and the consistency of those policies with the exchange rate regime chosen. In fact, for emerging market economies, the requirements for a successful peg or a successful floating are indeed quite similar.
Having said this, we agree with the view that for those countries that find fixed exchange rates a more amenable alternative it is indeed difficult to maintain market confidence in the present global financial environment, if a clear institutional framework to safeguard policy consistency at all times is not present. In this regard, hard pegs as those embedded in CBA, offer probably the better alternative to ground expectations, short of a monetary union or straight dollarization of the economy. In the same vein, those developing countries that find more comfort with floating exchange rates should avoid ambiguities and refrain from intervening in the foreign exchange market, except perhaps under cases of strong unwarranted volatility.
In addition, it is important for countries adopting flexible exchange rate regimes to realize that the degree of monetary policy leverage enjoyed by major currency countries is not available to them. In absence of the exchange rate anchor they will have to find another anchor for monetary policy to make their commitment to low inflation credible. If the choice is an inflation targeting framework, the authorities would have to develop a high level of expertise, and effective forecasting procedures needed for its effective implementation. Moreover, inflation targeting frameworks have so far been successful mainly in industrial countries, during a time when inflationary pressures in the world economy were not severe. The greater economic volatility prevalent in developing countries would make even harder the job of predicting and controlling inflation.
Another caveat to countries adopting floating exchange rate regimes is that quite often these regimes are justified not by their own merits but as being a better alternative to pegged regimes. While it is argued that pegs tend to foster excessive volatility of capital flows, experience with floating regimes has not proved that they have served as a deterrent to capital inflows. When inflows are strong, it is difficult to avoid the nominal appreciation of the exchange rate which, if substantial, could have deleterious effects on competitiveness. Moreover, an appreciating trend may well attract additional flows if agents believe the trend will continue for some time. As a result, there exists the potential for capital inflows to be actually larger and the volatility of cycles to be amplified in a context of exchange rate flexibility, particularly if there is some ambiguity as to the adherence of the monetary authorities to the goal of low inflation.
In sum, we are convinced that in the current circumstances of high capital mobility it is a disservice to focus exclusively on the exchange rate regime, to suggest that exchange rate flexibility per se can be equated with external sustainability or to indicate that it is the only reasonable choice for emerging market economies with substantial involvement in global financial markets. The credibility that CBAs afford to the formulation of sound macroeconomic policies, particularly in this age of rational expectations and time inconsistencies, constitutes an invaluable asset that frees economic agents from the burden of having to anticipate discretionary government policies while, at the same time, liberating the monetary authorities from having to fine tune policies to strike the right balance between supply and demand of money. We believe, therefore, that CBAs could be an equally good alternative for countries with full participation in global financial markets.
2.3 Orderly Liberalization of Capital Movements
The genesis and dynamics of recent financial crises highlight the important role played by capital movements in the context of the surges in capital inflows, contagion, and sudden shifts in investor sentiment which have characterized recent developments. The latter underscores the importance of orderly liberalization in the countries that have yet to advance the process and to avoid backsliding in those cases where substantial progress towards complete liberalization has been made. In any event, maintaining strong macro-economic discipline and adhering to international standards and best practices in the financial and corporate governance areas is critical to ensure that the private sector is able to cope with the consequences of heightened volatility associated with full capital account integration. In addition, clear procedures to deal with liquidity and solvency problems of the banking system and the corporate sector, including effective bankruptcy laws, as well as the development of forward and future markets to enhance the capabilities of economic agents to hedge interest rate and currency risk and the establishment of a credible exchange rate regime, are also needed. We should refrain from pressing members to pursue liberalization with undue haste, as these reforms require a complex and sustained effort of institution building. However, this is a process that should start as soon as feasible, since globalization is an irreversible and increasingly fast phenomenon.
We remain open to consider an extension of the Fund's mandate to capital account transactions through an appropriate amendment to the Articles of Agreement, provided that a consensus could be reached around rules that can flexibly accommodate members' specific circumstances. In this respect, it is important to stress the limited effectiveness of macroeconomic policy instruments in emerging market economies to deal with surges in private capital inflows, which tend to produce distortions in the form of significant upward pressure on asset prices, the real exchange rate, and the current account deficit, to be followed by pressures in the opposite direction if a reversal should occur. We see merit, therefore, when defining the set of rules to govern members' obligations under the amendment, to include, in some cases, priced-based provisions allowing for temporary restrictions to capital transactions, to mitigate the consequences of excessive surges in inflows. Restrictions on outflows are not deemed effective, are more difficult to implement, and even to justify, particularly since they often attempt to conceal domestic weaknesses. Similarly, those rules should seek to avoid unilateral back-sliding, which may bring with it potential contagion effects. Provisions of a more permanent character may be allowed particularly in order to address country-specific vulnerabilities of a prudential character, such as those aimed at preserving macroeconomic and financial stability through, for example, strengthening the liquidity position of financial intermediaries and/or facilitating an adequate time structure of foreign debt.
2.4 Institutional Reform and Strengthening and/or Transforming the Interim Committee
Pragmatism should continue to guide our efforts aimed at strengthening the internal governance of the Fund and improving the modus operandi and cooperation of its internal structures with other institutions and fora.
We are of the view that recently introduced changes to strengthen the Interim Committee have helped to make the meetings more productive and participatory, and we are confident that incremental improvements to preserve the Committee's advisory role will offer the best chances for the Interim Committee to better carry out its functions.
We do not see a need to pursue at this stage more ambitious proposals to broaden the Committee or to transform it into a Council, as lack of formal decision-making powers has not precluded it from agreeing on strategic decisions in the past or from bringing its legitimacy and political leverage to bear on the membership, once ideas were sufficiently distilled. We are prepared to support the proposal to transform the Interim Committee into a permanent Committee and change its name to "International Monetary and Financial Committee" while we continue our search for improvements in its operational structure that do not alter its advisory role or mandate, in order to make deliberations more productive and efficient. In this regard, we find strong merit in scaling down the number of topics for future discussion to those that require ministerial guidance or endorsement, leaving other topics for consideration in the form of reports to Ministers, to pragmatically avoid duplication and overlap between the Development and Interim Committees, and also merit in considering holding preparatory meetings at the deputy level as needed on issues that are critical to the process of orderly global adjustment and where political consensus-building is in order. Deputies' meetings should not, however, be seen as a substitute for the Executive Board.
3. Adapting ESAF and Securing IMF Financing for the ESAF and the HIPC Initiatives
Our Constituency has been very supportive of the initiatives oriented to providing a deeper, broader and rapid debt relief to HIPC countries. Therefore we welcome the Koln Debt Initiative and attach high priority to securing the necessary financing for the Fund's participation and for a self-sustained ESAF. We also believe that there is a need to strengthen the link between debt relief and poverty reduction in the context of World Bank and Fund-supported programs under the Enhanced HIPC Initiative and that a broader participation of civil society to strengthen ownership of the programs and reforms should be explored.
We share the view that poverty reduction should be an important goal of economic policy in those member countries, and that the Bretton Woods Institutions should do their best to help achieve the International Development Goals for the year 2015. However, in our view, helping countries to maintain sound macroeconomic and structural policies should remain the Fund's central role , as stated in Art. I of the Articles of Agreement. This is the way in which, for many decades, the Fund has been contributing to the promotion and maintenance of high levels of employment and real income, and therefore, indirectly, contributing to poverty reduction. In this light, while agreeing on the need to link debt relief to poverty alleviation in the particular case of ESAF-HIPC countries benefiting from such relief, we do not find it appropriate to include specific social indicators in the structural benchmarks or performance criteria of non HIPC Fund supported Programs.
The difficulties being encountered in securing the necessary counterpart resources for the enhanced HIPC framework are a source of concern and we regret that larger bilateral contributions could not be obtained requiring sales of gold to close the gap. In any event, we appreciate the efforts that were made to find an appropriate modality for those sales, aimed at taking due account of the possible negative market effects on the gold-price. The off-market transactions proposed by the staff have struck the right balance between the need for securing the proposed financing and the legitimate interests of the gold-producer developing countries.
4. Contingency Planning for Y2K Disruptions
We welcome the new IMF facility that has been proposed to mitigate potential Y2K-related balance of payments difficulties. We regard it as a useful preventive construct, irrespective of the efforts that each of our countries has been making to confidently ensure readiness to deal with Y2K issues. The market anxiety is generally there, and the end-year interest rate spike reflects that concern. Judgement on the part of the Fund for appropriate identification of the problem will be required. Nonetheless, we can go along with the proposal along the lines suggested in terms of qualification, fairly high access and fairly short repurchase period, with the proviso that this temporary facility should be fully floating and in place well before the end of the year.
On charges, we can accept a small surcharge, keeping in mind the exogenity of the event, or a progressive surcharge in case a repurchase expectation is not fulfilled. On duration, we see merit in keeping the facility open for a relatively limited period of time.
In sum, the possible economic effects associated with the response of business and households to generally unwarranted fears of disruptions resulting from the century date change warrant such a facility to deal with this particular uncertainty in the next few months.
5. Progress Reports on Strengthening Fund Surveillance and Programs
5.1 Standards and Transparency Initiatives
We welcome the consensus that has been achieved within the Fund to promote transparency and accountability of countries' policies through the development and dissemination of internationally agreed standards in the fiscal, monetary and financial areas.
Progress in other fora on standards on banking supervision, bankruptcy codes, corporate governance and accounting and auditing, involving both public institutions and private corporations, will also contribute to improving the performance of markets, thus helping to reduce volatility and macroeconomic instability throughout the world. It is clear, however, that in order to be effective, the agreed standards have to be properly and broadly implemented, and there is an important monitoring role for all the institutions involved, including the Fund.
We strongly feel, however, that the Fund should limit itself, in the context of its Article IV surveillance process, to the monitoring of those standards that fall within its specific mandate. Similarly the Fund should avoid commitments to examine compliance with standards in the so-called non-core areas which are beyond its expertise and purposes. We also believe that the adherence of member countries to the approved standards within the core areas (data dissemination, transparency of fiscal, monetary and financial policies, and, with other organizations, banking supervision) should remain voluntary. However, the Fund should exercise its right to know the practices in place in member countries and suggest changes when they do not meet the minimum requirements.
Finally, we support the efforts to increase transparency and accountability on the part of the Fund, which should lead to a better understanding of the Fund's role and thus enhancing its effectiveness. We agree with the present policies of releasing the letters of intent and the memoranda of economic and financial policies. In fact, countries of this constituency were following this practice before the present policies were agreed upon. Argentina is also part of the pilot project for the voluntary public release of Article IV staff reports and was among the first group of countries to produce, with the help of Fund staff, experimental transparency reports summarizing the degree to which our economy meets international standards in this area.