The Global Economy - Outlook, Risks and Policy Responses

Since we met in the Spring, the global recovery has gained momentum led by growth in the US and in much of Asia, and some of the downside risks have abated. These developments together with modest gains in non-oil commodity prices, and low interest rates combined with falling spreads have helped the short-term prospects for developing countries. As a group, developing countries were able to withstand the global downturn since 2001 better than industrial countries and are at the forefront of the recovery that is now in train. This recovery has not reached all regions: growth in 2003 stalled in Latin America and is only in the 3 percent range in other regions outside Asia. Looking ahead prospects are good for a recovery of growth in all developing regions in the coming year. But the global recovery remains fragile, and risks remain because of longer-term imbalances and structural problems in the rich countries, the potential for geopolitical shocks and the reduced room for maneuver in macroeconomic policies. Moreover even with the recovery that is now in prospect, growth in the poorest countries will fall far short of what is needed to achieve the Millennium Development Goals (MDGs).

More than ever, therefore, it is critical that we act to scale up efforts across the developing world to accelerate growth and progress towards the MDGs. It is also crucial that all countries join together to resist the ever-present threat of protectionism and put the Doha Development Round back on track. And it is important that developing countries benefiting from renewed private flows take the opportunity to reduce vulnerability to future periods of market difficulty, and that all developing countries take steps to strengthen future debt sustainability and debt management.

These will all be central issues on which the Bank will be working with the IMF over the coming months.

Trade and the Doha Round

Action to improve trade opportunities for developing countries is a critical element of the Monterrey agreements. After the setback of the Cancun meeting, I hope that all participants will work to capitalize on the progress made and put the process back on track as soon as possible. We will be discussing the issues at the Development Committee meeting. The next phase of the multilateral talks will be crucial. A "good" Doha agreement could produce up to $520 billion in income gains to the world, with both rich and poor countries gaining substantially. Such an agreement would increase growth in developing countries, and would lift some additional 140 million people out of poverty by 2015. Realizing these gains will require action from all countries.

At the same time, the move to a more open trade environment may impose temporary costs on some countries, for example as a result of preference erosion, the loss of tariff revenue or other factors.  The Bank, along with the IMF, stands ready to help countries that need assistance in handling such transitional costs, working with countries to assess the nature and magnitude of any policy and institutional reforms and investments needed to take advantage of opportunities, address obstacles to trade expansion and manage the impact on affected population groups, and, where needed, to provide and help mobilize appropriate financial support.

Reducing barriers to trade is not enough by itself to fulfill the development promise of Doha. In order to fully exploit the opportunities that it offers, trade has to be part of a larger development strategy for each country that includes attention to macroeconomic policy, infrastructure, education and health as well as accountable and responsible governance, so that countries are placed to exploit the new opportunities. One small example is reforming customs procedures for both importers and exporters. While it takes on average about 2 days for goods to transit ports and customs in rich countries, it takes goods in developing countries two to three times longer. Reducing these times by a day has nearly the same value as reducing tariffs by 1 percent. As part of the Trade Assistance Program announced in Cancun, the Bank intends to increase its financial assistance in trade logistics and facilitation (including support for trade-related institutions and infrastructure) as well as its financial support to countries embarking on substantive trade reform programs. Trade logistics programs, now amounting to some $2 billion spanning 50 countries, could be increased to as many as 75 countries, with additional investment lending and technical assistance. Support for implementing countries' programs associated with any Doha agreement, as well as pro-poor trade reform programs more generally, could be undertaken through new programmatic lending. New lending for trade capacity building has also doubled, and we are providing increased training and research support. The Integrated Framework for Trade Related Technical Assistance (IF), which the Bank supports together with other international agencies, is gradually attracting increased funding and entering the key implementation stage.

Crisis Prevention and Resolution

The Bank continues its extensive involvement alongside the IMF in global efforts on crisis prevention and resolution. As of end June, about 100 countries had participated or agreed to participate in the near future in a financial sector assessment under the joint Bank/Fund Financial Sector Assessment Program (FSAP), and 432 ROSC (Reports on Standards and Codes) modules have been completed for 93 countries. Following up on the reviews completed last Spring by the Boards of the Bank and the Fund of FSAP and the international standards and codes initiative, work is underway to continue to align work program priorities, ensure systematic follow-up and expand support for capacity building to clients. The Multi-donor Financial Sector Reform and Strengthening Initiative (FIRST), established to supplement such efforts, has pledged more than $55 million over the initial four-year term, and has already completed 12 projects. The Bank is also engaged in the ongoing global discussions about Collective Action Clauses (CACs) and the idea of a voluntary Code of Conduct between sovereign borrowers and providers of emerging markets finance. Finally, together with the IMF, we are further strengthening capacity to advise on public debt management and enhancing the analytical framework for assessing external debt sustainability. This work is relevant to crisis prevention and resolution in middle income countries, as well as to low-income countries and in the context of the HIPC initiative.

Combating money laundering and the financing of terrorism (AML/CTF) continues to be a matter of grave concern to Bank member countries and an area of enhanced action by the Bank. Jointly with the IMF we will report next year on the results of the Bank/Fund pilot program of AML/CFT assessments using the comprehensive methodology endorsed by the Bank and Fund Boards, and adopted by the FATF, for assessing compliance with the FATF 40+8 recommendations. Thus far in the 12-months pilot program, we have undertaken 11 AML/CFT assessments of client countries using the comprehensive methodology in the context of FSAP missions and/or ROSC stand alone requests, and 2 more are planned for the next two months. We are using these assessments to help identify sequenced and practical measures for building internal capacity, providing targeted technical assistance and incorporating AML/CFT issues, where relevant, into Bank Country Assistance Strategies (CAS) and country lending programs. Since September 2001, the Bank and the Fund have undertaken TA programs involving over 75 client countries, utilizing regional and sub-regional workshops and seminars. Working with the IMF and other partners, including the UN Global Program on Money Laundering, the UN Security Council Counter Terrorism Committee and the regional development banks, we have focused on capacity-building for financial supervisors and financial intelligence units (FIUs), as well as training mutual evaluators for the FATF-style Regional Bodies (FSRBs). The Bank/Fund Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism, published in April 2003, contains in one source all the basic information about the inter-related components of an effective AML/CFT regime. It provides a roadmap for countries at various stages of development to enhance their AML/CFT framework.

In addition, the Bank has continued research on informal funds transfer (IFT) systems: their relationship to development and potential for financial sector abuse. We published a joint report with the IMF analyzing the Informal Hawala System and prepared a country framework study for discussion at the APEC Finance Ministers and Deputies meeting in September. We are also sponsoring in October in partnership with the UK a global conference on the developmental aspects of formal and informal remittance systems.

Implementing the Monterrey approach : Supporting Development and Reducing Poverty

It is now some 18 months since the historic agreements reached in Monterrey setting out the actions the global community agreed to take to reduce global poverty and meet the MDGs. As we have discussed at previous meetings, some progress has been made since then, but a great deal remains to be done. Progress will, however, be helped by two important developments. One is the consensus reached on the centrality of country ownership, as embodied in the Poverty Reduction Strategy Papers (PRSPs), now the universal instrument for development cooperation in low income countries. The second is the closer than ever Bank-Fund collaboration, building on the vision for the enhanced partnership between the Bank and the Fund that Horst Kohler and I set out in Prague three years ago.

The central topic for this year's Development Committee discussion is "Supporting Sound Policies with Adequate and Appropriate Financing". The Bank paper circulated for this discussion looks at the prospects for accelerating progress towards the Millennium Development Goals (MDGs) at the country level through a combination of better domestic policies and governance, higher aid levels, more effective aid modalities, and improved access to developed country markets. The analysis is based on a sample of 18 low-income countries with relatively good policies, which constitute a broadly-representative sample of this group of countries and account for a substantial share of the poor and of aid flows. This analysis is supplemented by a review of the effectiveness of increased aid to low-income countries under stress (LICUS) and middle-income countries. The paper's main conclusion is that with continued policy and institutional reforms, substantial increases in aid—increases going far beyond commitments already made—can be effectively used in scaling up progress towards the MDGs.

The country-level analysis and other work that we have been undertaking, much of it in cooperation with the Fund, point to the need for stepping up collective efforts across a broad front if we are to be able to help low-income countries accelerate progress towards the MDGs. Let me highlight some of the most important areas.

• First, the Bank and the Fund need to continue help countries improve the PRSP process. There is a separate Bank/Fund report reviewing progress to date and the challenges ahead. There is evidence of improvement and progress as more recent PRSPs build on the experience of earlier ones, and countries more advanced in the process gain experience of implementation. But the review also identifies a number of emerging tensions that present challenges for the future. Particular challenges to be addressed as we develop and implement the approach include:

• Striking the right balance between ambition and realism in setting PRSP targets, and linking poverty reduction strategies more explicitly to longer-term MDG targets.

• Ensuring Government commitment extends to all relevant parts of the Government, and beyond the team responsible for PRSP preparation.

• Increasing capacity for public expenditure management and linking PRSPs better to budgets.

• Better prioritization.

• Improving donor alignment and harmonization behind PRSPs to achieve successful implementation.

• A second area where in the Bank we are stepping up our efforts is helping countries improve the investment climate for the private sector. As part of this work the Bank has launched in-depth investment climate assessments in close to 40 countries to give voice to private sector concerns and identify the most important constraints to private sector investment. We have also developed a new global database to assess the cost of doing business across 130 countries, benchmarking the quality of institutions and regulations for firm entry, operations and insolvency. And our Foreign Investment Advisory Services have provided support to over 100 countries. As part of the Bank's emphasis on small and medium enterprise development, we are initiating a new program on SME development in Africa, combining the expertise and resources of the Bank and IFC, in collaboration with committed African governments and the private sector, to address three key constraints: access to capital, capacity building, and business environment.

• Third, as a complement to the work on private sector development, the Bank is giving renewed emphasis to infrastructure development including in low income countries given its importance to both growth and service delivery to meet the MDGs. An action plan on infrastructure including on water has been discussed by our Board and circulated to members of the Development Committee.

• Fourth, as noted above, given its central importance to pro-poor growth, the Bank has greatly stepped up its work on the trade agenda complementing the efforts of the Fund. The Bank's work program spans both analysis and assessment of trade policies and their impact on developing countries and helping developing countries address domestic policy, institutional and infrastructure impediments to trade.

• A fifth area of increased emphasis is public expenditure management and governance to help countries establish the foundations for growth and scale-up service delivery. The joint Bank-Fund agenda and framework for cooperation on one key component, public expenditure management, was outlined in the joint paper that was reviewed by our Boards this Spring. A stepped-up and better coordinated work program is now under implementation.

• Sixth, in addition to our cooperation in the implementation of the HIPC initiative, the Bank together with Fund is stepping up its work on debt sustainability and helping countries handle commodity shocks. We will be preparing a joint paper on debt sustainability in low income countries for review by our Boards later this year. And the Bank is currently reviewing its strategy for helping countries handle commodity shocks at the macro and micro levels.

• Seventh, there is an important follow-up agenda on ensuring the adequacy of aid and on improving aid modalities. The Bank is working with other partners to support this agenda including through the implementation of the recommendations of the February Rome High Level Forum on Harmonization.

Taken together this represents an extensive agenda to support the efforts of poor countries, on much of which the Bank and Fund are working closely together. We will jointly report to our Boards in December on the progress achieved over the year in Bank-Fund collaboration, based in particular on a survey we have just sent to country authorities. And as the Fund continues to reflect on its role in low income countries the Bank will work closely with our colleagues in the Fund to ensure that between our two institutions, and in line with our complementary roles and mandates, we cover all relevant issues and provide our members the help they need.

Conclusion

As we work to implement the Monterrey consensus and achieve the Millennium Development Goals I believe we have reached a point of sufficient agreement to give us a unique opportunity of success. For those who see the urgency of tackling global poverty, progress sometimes seems agonizingly slow. But there is an increasing degree of consensus not only on the broad framework but also on what has to be done on the ground—by developing countries, by developed countries, and by the international institutions. We now have to put these agreements into practice. These will be the central issues for discussion at the meeting of the Development Committee on the day after the IMFC meeting. I hope that Ministers at the IMFC will also help build momentum and give further impetus to the process of global poverty reduction.