Speech

Fighting Poverty and Promoting Growth in South Asia, Remarks Shigemitsu Sugisaki, Deputy Managing Director, IMF

October 13, 2003

Honorable members of parliaments, ladies and gentlemen, it is a great privilege for me to be with you today. On my flight from Washington, I was looking through the list of invitees to this seminar and was struck by the fact that this really is quite a unique gathering. Having together in one place such an illustrious group of leaders from across the political spectrum in four different countries provides us with a remarkable opportunity to learn from each other's experiences and gain a common understanding of the challenges we face in promoting growth and fighting poverty, and of how we can best work together to further these goals. Indeed, I am told that this is the first such seminar we have organized anywhere in the world for leaders from several different countries at once. I am very grateful that you have been able to take time out from your busy schedules to be with us for the next two days, and I hope that you will find this experience worthwhile.

Earlier this morning, you were given an overview on the work of the IMF and our role in low-income countries, and had an initial exchange of views on the political economy aspects of economic reform. Over the next two days, you will have further opportunities to discuss a range of important issues, including the challenges of building a national consensus for reforms, the critical issue of country ownership of reforms, without which there can be little hope of sustained success in reducing poverty, and the policy choices and tradeoffs involved in promoting pro-poor and pro-growth budgets. I expect you will find that, while each of your countries faces a unique set of problems and issues, there are also many elements that you have in common. In this way, I have no doubt that you will learn a great deal from each other, and that we at the IMF will also gain a deeper understanding of the political and social context within which key economic policy decisions are taken in your countries.

Let me today take a few minutes to outline for you how we see the global outlook and risks ahead. I will then turn to some of the common challenges facing your countries, and how we at the Fund can help in addressing them.

The Global Economy-Outlook and Risks

First on the global outlook, we have recently returned from the Annual Meetings of the Fund and World Bank in Dubai, and I can report that the general tone of those meetings was positive. For perhaps the first time in the past two years, I sensed that most participants were optimistic about the prospects for global economic recovery after the recent slowdown, and that they no longer saw the risks as being slanted mainly toward the downside. This reflects the range of positive economic signs that we have seen in recent months, notably in the United States and the emerging market economies of Asia, but also in Japan where growth has exceeded expectations. Even in the euro area, where growth remains weak, there are some signs that the worst may be over. It also reflects the remarkable resilience that we have seen in financial markets, despite a succession of shocks resulting from the bursting of the equity price bubble, the corporate governance scandals, and a number of adverse geopolitical developments. These signs of improved global financial stability are a source of encouragement to us at the Fund, because we have been working hard with our members in recent years to promote this objective, and it should be a source of strength going forward.

Overall, we project that global growth will rise from 3 ¼ percent in 2003 to 4 percent next year. Asia remains a bright spot in the global economic picture, and the Asia-Pacific region is again set to be the world's fastest growing region. Growth in your own region-South Asia-is expected to be about 5½ percent this year, and increase to nearly 6 percent next year.

While we are more optimistic than before, a number of uncertainties remain and we have cautioned our members against complacency. For one thing, the global recovery remains heavily dependent on the United States, and we need to see more balanced growth with stronger recoveries in domestic demand in other parts of the world. Related to this, we are still dealing with the legacy of the unbalanced global growth of the late 1990s, in the form of the large current account deficit of the United States and large surpluses of a number of European and Asian economies. These imbalances are not sustainable over the medium-term, and ensuring a gradual and orderly correction will require the participation of all regions. Third, the strength of the recovery in global investment remains uncertain, in view of the continuing overhang from the earlier bubble. And fourth, from a longer-term perspective, the recent breakdown of trade talks in Cancun was a setback, given the powerful role that trade plays as a force for growth and poverty reduction. All sides now need to work hard to overcome this impasse and return to the negotiating table as soon as possible.

Against this background, we have emphasized a number of policy priorities. As I told the gathering at yesterday's World Economic Forum, it is important that the advanced countries move ahead with tackling their deep-seated structural problems. In particular, labor and product market reforms are needed in Europe, while in Japan corporate and financial sector restructuring needs to be carried further and faster. And in the United States, a credible framework to restore budget balance is urgently needed.

For emerging market economies, we have stressed the importance of using the current period of favorable financial market conditions to push ahead with reforms aimed at fostering stronger growth and improving resilience to shocks.

Policies for Strengthening Growth and Reducing Poverty

Turning now to your countries, while the projected acceleration in growth is encouraging, it is still not enough to make real progress in poverty reduction. Thus, the key challenge you face is to address the impediments to stronger growth while taking steps to ensure that the poorest members of your societies benefit fully from these efforts. Let me highlight what I see as some of the key elements in such a strategy, which I believe are common to all of your countries.

I should start by saying that we very much recognize that the political and social backdrop against which your countries are seeking to implement economic reforms is not an easy one. Sustained progress in the peace process in Sri Lanka and Nepal is absolutely critical to the success of efforts to reduce poverty, while the political backdrop for reforms in Bangladesh and Pakistan also remains somewhat fragile. Such fragility can be exploited by the opponents of reform, and governments may feel constrained in their ability to move ahead on reforms given the need to preserve social stability. A key message I would like to leave you with today is the importance of an active and informed public dialogue on reforms in helping to overcome such resistance. I hope that this seminar will play a small part in these efforts, but what is really important is that this dialogue is carried on in your home countries. The PRSP process should be a central part in such a dialogue.

Turning to policies, macroeconomic stability is essential, and I am pleased to note that all of your countries have made considerable progress in this regard.

A second key ingredient is improved mobilization of tax revenues in order to generate the resources needed to help fund higher social spending on health and education and increased investment in basic infrastructure. Much can be achieved through improved tax administration, but this is an area where there is often strong resistance to change from vested interests and the politically well-connected. Efforts to strengthen tax administration and policies are an important part of the economic reform programs in all of your countries, and these efforts deserve your support.

Third, efforts need to be intensified to address weaknesses in the financial sector. A particular problem in a number of your countries is the dominant role played by often weak and inefficient state-owned financial institutions, which are both a drain on the budget and an impediment to the effective intermediation of private sector savings and faster economic growth.

Fourth, improvements in the climate for private sector investment are critical to raising sustainable growth rates in your countries. The priorities may vary but in all cases, measures to reduce bureaucratic red tape, and with it the potential for corruption, strengthen judiciaries and the rule of law, and make labor markets more flexible, have important roles to play.

The Role of the IMF

That brings me to the role of the IMF in supporting economic reforms in your countries. The main operational vehicle through which we have been providing such support is the Poverty Reduction and Growth Facility, or PRGF. Pakistan is the most advanced in this process-its current arrangement with the Fund was approved in late 2001. Both Bangladesh and Sri Lanka signed 3-year PRGF arrangements this year-in the case of Sri Lanka, this followed a successful stabilization program supported by a Stand-By Arrangement. We are hopeful that our Executive Board will shortly be in a position to approve an arrangement with Nepal.

The policy framework underlying these arrangements is provided by the Poverty Reduction Strategy Paper - or PRSP. The PRSP process is country-owned and country-driven, involving not only the executive branch of government, but also parliamentarians, NGOs, civil society organizations, and bilateral and multilateral donors, in a transparent dialogue. I would emphasize both elements-transparency of the policy framework, so that the people understand the government's economic strategy, and dialogue, so that the process is inclusive, and takes into account different perspectives. The poverty reduction strategy is your strategy, not the IMF's or the World Bank's. It reflects the recognition that for policies to be successful they must be owned and developed by the people themselves.

Beyond our lending arrangements, the IMF has also provided extensive technical assistance to help build capacity in your countries in a range of areas. In Pakistan, Sri Lanka, and Bangladesh, we are providing substantial assistance in strengthening tax administration and designing modern tax systems. We have also been active in helping to strengthen the financial sectors, and have provided assistance on money and exchange market operations. We have also provided considerable assistance to Nepal in its efforts to strengthen its capacity on data collection.

As I noted earlier, a speedy resumption of the Doha trade round is vital. Trade remains the strongest engine for global growth, and developing countries such as yours stand to be the biggest beneficiaries of a successful trade round. We must therefore avoid a situation where the failure at Cancun sparks a backlash in terms of increased protectionism or excessive reliance on bilateral rather than multilateral trade agreements. The IMF stands ready to do its part in supporting these efforts, and to this end we announced in Cancun a willingness to make additional financial assistance available to countries facing short-term adverse effects as a result of the Doha round.

Conclusions

To conclude, honorable members of parliament, ladies and gentlemen, as a partner, we at the IMF are committed to helping your countries achieve stronger growth and alleviate poverty. Our dialogue with you today is an important part of this process. Seminars such as this are part of our effort to demonstrate that the IMF is an open institution. By an open institution, I mean one that is willing to listen and learn, and one that takes into account diverse views in formulating its policy advice and in reforming the institution as well. In recent years, IMF management and staff have intensified our efforts to meet with parliamentarians, civil society organizations, labor groups, and faith-based groups both at our headquarters in Washington and in the field. Members of the IMF's Executive Board have also been involved in these dialogues. We hope that these exchanges will benefit you as much as they do us, by helping you to better understand the work of the IMF, how we assist our member countries in achieving their objectives, and the role that you can play as parliamentarians in supporting that process.

Thank you.