We meet here in Washington at a difficult and critical time not just for the global economy but also for the international community. Representing 184 economies across the world, this meeting is a tribute to the spirit of international cooperation and multilateral progress that underpins the IMF. It provides an opportunity to demonstrate our common purpose in facing the challenges ahead and working to achieve our shared goals.

We must remain vigilant to the risks and challenges ahead. And we must all play our full part in promoting the conditions for stability and growth. But if we take the right decisions, we can look forward to the opportunity of stronger growth and a steady recovery in the months and years ahead.

We all want to see a swift and successful resolution of the current situation in Iraq. The reconstruction effort will require a coherent and comprehensive response from the international community if the Iraqi people are to be successful in their efforts to rehabilitate and reconstruct their country. We shall continue to work for an international mandate for the political, social and economic development of Iraq through the United Nations, in which the International Financial Institutions should take a leading role. The World Bank and the IMF have valuable experience of handling post-conflict countries, and we are committed to working closely with them, and others as this process moves forward.

And looking forward, there are four long-term challenges to which the international financial community must rise:

· Promoting the conditions for stability and growth, and our ability to improve the mechanisms for crisis prevention and crisis resolution;

· Making concrete progress with multilateral trade liberalisation and delivering on the commitments made at Doha;

· Creating the right domestic conditions for investment and stability, including in developing countries; and

· A new and urgent effort, going beyond debt relief, to combat the injustice and instability caused by world poverty.

Economic Stability

We know that stability is the precondition for global prosperity and growth. Aware ever more of our interdependence, we are more than ever aware that it is only by each country taking necessary action that we will secure economic growth. We must not allow the current uncertain outlook for the world economy to be an excuse for a slowdown in the momentum of reform.

So, in promoting the conditions for stability and growth, all countries and regions must play their part: in the US reforms are underway to tackle an issue that has affected confidence - to improve corporate governance and auditing and accounting standards; in Japan there is reform to the financial and banking sector; and in Europe, further reforms in labour and product markets are needed to promote flexibility and growth.

In the UK we are determined to play our part. In 1997 we introduced a new monetary and fiscal framework based on clear policy rules, well-established procedures, and an openness and transparency not seen in the past. This new framework makes us better placed than before to cope with the economic cycle - one reason why in the last five years, while other countries have suffered recessions, the British economy has maintained economic growth.

In my Budget statement I spoke about the case, over time, for moving to a new measure of domestic inflation. The advantages of the current indicator of inflation - RPIX - are that it is known, well understood and has served us well. The advantages, however, of the internationally recognised index of consumer prices, HICP, is that it is in line with best international practice and is used by every other G7 nation but Japan, and by our neighbours in Europe.

While the current differential between HICP and RPIX is 1.4 percentage points, this gap is expected to narrow as house price inflation moderates. The Budget forecast the differential to narrow to around half a percentage point from the end of 2004.

There is a case in principle for adopting for Britain this index of consumer prices and the Treasury will examine the detailed implications of such a change. In the Budget I reaffirmed our symmetrical inflation target based on the current RPIX measure for this financial year at 2.5 per cent.

At the same time, as I announced in my Budget, because our economy will have to be better equipped for the global upturn, we seek economic reforms, for each region and nation - greater flexibility in capital markets, in product markets and thus prices for goods and services, in housing and planning, in mortgages and in labour markets.

The flexibility we propose - in employment, in pay, in the liberalisation of capital, labour and product markets generally, flexibilities important for competitiveness in the global economy and our engagement in Europe - is not bought at the cost of fairness to families but is underwritten by policies for full employment, tackling poverty through tax credits, and more investment in public services.

And increasingly, in this age of globalisation, our national goals are shared international goals. So it is urgent that we also move forward at the international level to implement agreed reforms and shape the next steps on crisis prevention and crisis resolution.

I believe that, just as through central bank independence we set down a new rules based system in the UK with Bank of England independence and a new monetary and fiscal regime, we should, in pursuit of the objectives of stability, development and prosperity, consider also a new rules based system of economic governance for the community of nations.

This new system should be founded on clear procedures, with all countries, rich and poor, pursuing agreed codes and standards for fiscal and monetary transparency, and for corporate and social standards. That is why we have put in place a new system of internationally agreed agreed codes and standards. We must do more to enable all countries to participate, with technical assistance and transitional help for early implementation of codes and standards.

But there is a case for going further. This new framework depends on effective and authoritative surveillance. To ensure the Article IV surveillance process fulfills the key objective of early identification of risks and vulnerabilities, all Article IV reports should include: strengthened debt sustainability analyses; greater focus on the structural sources of instability; early identification of unsustainable macroeconomic frameworks; an assessment of adherence to codes and standards; and identification of countries which still need to take action to forgive debt under the HIPC initiative. We welcome the recent steps taken by the Fund to strengthen surveillance, and look forward to a report to the Annual Meetings on their implementation.

More fundamentally, I believe there is a strong case for further institutional reforms to ensure the IMF is as credible and independent from political influence in its surveillance of economies as an independent central bank is in the operation of monetary policy. We must implement further reforms to ensure:

- Greater independence - ensuring that the Fund applies objective, rigorous and consistent standards of surveillance to all member countries; and that surveillance is, and is seen to be, independent of decisions about programme lending and the use of IMF resources;

- Greater accountability - with the IMF Board or the IMFC having a formal responsibility to set an annual surveillance remit, with the IMF management and staff reporting back each year on their performance and effectiveness against that remit.

We call on the Fund to examine the full range of options and report back to the Annual Meetings.

But we must also strengthen the procedures for crisis resolution. Because however successful we aim to be at avoiding crises, we should recognise that, from time to time, crises will happen. So we need to ensure there are effective methods in place for crisis resolution, in a way that will ensure the burden of adjustments is not placed on the poorest and most vulnerable.

We welcome the recent progress on strengthening crisis resolution, including the work with the private sector and sovereign debt issuers to agree and encourage the adoption of Collective Action Clauses in international debt issues - these should become the norm and not the exception; and the progress on a voluntary code of conduct on crisis resolution.

In particular let me pay tribute to the leadership of the First Deputy Managing Director Anne Krueger and the Fund staff, whose work on crisis resolution and on the SDRM has helped to promote a much better understanding of the issues that must be addressed. It appears that it may not be feasible to proceed with the SDRM at the moment. But it is important to take forward work on the issues identified in the development of the SDRM, including aggregation, inter-creditor equity and the framework for sovereign debt restructurings.

With these reforms to crisis prevention and crisis resolution, we can move from letting crises happen and then intervening to a new paradigm: systems that in themselves diminish the likelihood of crises; an earlier awareness as difficulties arise; and more measured orderly responses when crises have to be resolved.

Trade

The second building block is moving forward and consolidating the great progress made at Doha at the World Trade Round. Making concrete progress with multilateral trade liberalisation is a key priority for the coming months. This will be critical for demonstrating the international communitiy's continued commitment to multilateral co-operation, supporting higher economic growth and financial stability, and enabling developing countries to participate on fair terms in the world economy.

Between us Europe and the United States account for 70 per cent of the world's output. And so we must strengthen not weaken our links, and deepen and widen the transatlantic alliance.

So I propose that we:

· act to remove the remaining industrial tariffs that divide us and cause unnecessary trade disputes;

· liberalise services across Europe and America; agree a more consistent approach to competition policy; and

· in the same way that in the 1980s the Cecchini study demonstrated that cooperation across Europe would bring growth, jobs and prosperity, that we examine and demonstrate the gains in jobs, output and prosperity from breaking down the barriers that frustrate trade and commerce between the USA and Europe.

We should recognise that when Europe and America are set apart from each other everyone loses, but when Europe and America work as one in partnership there is little that we cannot achieve in the world together.

Trade can be a powerful engine for growth. Research suggests that the elimination of barriers to merchandise trade in both industrialized and developing countries could result in welfare gains ranging from US$ 250 billion to US$ 620 billion annually, of which over a third would go to developing countries. And we all have to work to achieve this - although a large proportion of the gains would come from developed country liberalisation, over half are predicted to come from developing countries' own reforms.

Past evidence supports the link between developing countries' trade policies and their economic growth. In the last forty years those developing countries that have managed to be more open and trade more in the world economy have seen faster growth rates than those that have remained closed. But any liberalisation has to be appropriately sequenced, integrated into countries' poverty reduction strategies and supported by poverty and social impact analysis by the Bank and Fund.

We must ensure that all countries have the opportunity to reap the benefits of trade, and so we must deliver on the commitments made at Doha.

We must ensure that poor countries have access to the medicines the need to tackle the diseases crippling their societies - AIDS, tuberculosis, malaria - and protect public health and we must urgently rectify last year's failure to reach agreement in the WTO on this issue. We must continue to press for other developed countries who have not yet done so to follow the European Union's lead by offering duty and quota free access to all product except arms from the forty nine least developed countries. And since three quarters of the world's poor live in rural areas, urgent action is needed to reduce agricultural protectionism and open up trade.

That is why - in the interests of all countries - the world trade talks now stalled on agriculture, pharmaceuticals and services should be moved forward with urgency.

Creating the right conditions for investment

The third building block is the creation of the right domestic conditions for investment, including the adoption by the international business community of high corporate standards for engagement as reliable and consistent partners in the development process and the creation in developing countries of the right domestic conditions for business investment.

Globalisation means that there is hardly a good we produce that is not subject to intense competition from at home and abroad - competition not just from traditional competitors in the advanced industrialised economies, but competition from emerging market economies not least in Asia and the east of Europe - competition which is itself a spur to growth and prosperity.

Twenty years ago, even ten years ago, it was just possible - if costly and wrong - for countries to shelter their industries and sectors, protecting them from global competition. But today there is no safe haven, no easy escape from global competition without outting at risk long-term stability, growth and employment.

Because investmet will flow most to those coutnries that are the most stable, and ever more rapidly away from those that risk stability, there is an even greater premium than before on governments running a stable and successful monetary and fiscal regime to achieve high and stable levels of growth and employment.

Globalisation describes a world whose very mobility of capital and openness to competition is ushering in a restructuring of industry and services across continents. And while emerging market countries are ready to attract low value added, low investment and low skilled work, we have to concentrate on ever higher levels of skill and technology rather than ever lower levels of poverty pay.

Over the last decade, foreign direct investment flows across national boundaries, including to, and between, developing countries, have increased almost six-fold -- an important driver for growth and development. But the poorest and least developed countries suffer a double handicap. Not only is foreign direct investment too low - with just $3 per head going to low income countries compared to $1100 per head to higher income countries - but often the small amount of domestically generated savings and investment that do exist leave the country in capital flight.

In seeking more favourable business environments in which private sector investment can be more productive, country-owned poverty reduction strategies have correctly focused on creating the right domestic conditions for business investment, including improved infrastructure, sound legal processes that deter corruption and the creation of an educated and healthy workforce. And we know that getting the conditions right for domestic investment means that we are getting the conditions right for international investment.

High standards in public financial management and accountability are central to increasing the effectiveness of development programs and efforts to raise foreign investment in developing countries. We welcome the recent Bank/Fund paper on Public Expenditure Management, and look forward to a Fund/Bank implementation plan so that we can accelerate this agenda. We call for the reform process to now be accelerated and all low-income countries' governments to develop, with the assistance of the IMF and World Bank, country-led action plans for improved public financial management and accountability, with measurable targets, as part of their poverty reduction strategies. Complementing this, the international financial institutions should develop an annual assessment process, based perhaps on the successful HIPC tracking exercise, in order to measure progress.

And we welcome the development of investment forums such as those in Tanzania and Ghana, and hope that the Fund and the World Bank will continue to promote these. Most importantly, investment forums are helping to break down the assumption that private sector development should either be led solely by business, or directed by the state - instead recognising that public and private sectors must work together in partnership to secure economic growth and reduce poverty

The development compact and the International Finance Facility

Stability, trade and investment are all vital but there cannot be a solution to the problems that developing countries face without a fourth reform: a substantial transfer of additional resources from the richest to the poorest countries in the form of investment for development. Here the focus should not be on aid to compensate the poor for their poverty, but on investment that builds new capacity to compete and addresses the long term causes of poverty.

In 2000 for the first time the world community - international organisations, individual countries and non-governmental organisations - signed up to the historic shared task of meeting the Millennium Development Goals by 2015 - including to eradicate extreme poverty, achieve universal primary education and radically reduce child and maternal mortality.

Last year at Monterrey and then at Johannesburg the international community signed up not only to a coherent and principled approach to development but also -- with $12 billion a year of extra funding by 2006 - announced the first increase in official development aid for twenty years. For its part, the UK will increase its aid budget to nearly £4.9 billion by 2006 - a near doubling in real terms.

Our aid is increasingly provided in support of poverty reduction strategies, which are leading to improvements in the policies of developing countries and in the focus of donor support. We welcome the efforts the Fund is making to align the PRGF behind the PRSP, and we look forward to more realistic growth forecasts, improved discussion of macroeconomic alternatives and more systematic poverty and social impact analysis.

At the same time, we must also do more to make better use of existing resources. Reordering priorities, untying aid and pooling funds internationally could all release additional funds for the poorest countries.

The Enhanced HIPC Initiative has already committed over $60 billion to 26 countries with unsustainable debt burdens. The remainder of the $100 billion pledged at Cologne in 1999 will be released when all eligible countries, including those countries currently in conflict, are able to demonstrate a commitment to poverty reduction. We welcome the IMF/World Bank report on Enhanced HIPC Initiative -Creditor Participation Issues and urge the Bank and Fund to continue to consider additional measures to minimize the impact of creditor litigation against HIPCs. Where countries have to contend with external shocks - such as fluctuations in the price of key export commodities - we must form a broad consensus on the need for topping-up at Completion Point to ensure a lasting exit from unsustainable debt. And we must secure a change in the rules of HIPC so that the calculation of any topping-up at Completion Point excludes additional voluntary bilateral debt relief.

But debt relief and the aid already pledged will not be enough on their own.

The UK Government is therefore proposing a new International Finance Facility. On the basis of long-term, binding donor commitments from the richest countries, some of which have already been made, the Facility would leverage in additional money from the international capital markets to raise the amount of development aid for the years to 2015 from $50 billion a year to $100 billion per year - a level of aid still well below the absorption capacity of the poorest countries.

The Finance Facility we propose is designed specifically to help meet the internationally agreed Millennium Development Goals.

The Facility would provide a temporary framework seeking to raise additional funds for development in the years leading up to 2015. The Facility would be an integral part of a new agreement between developed and developing countries, with each country:

- First, pursuing anti-corruption, pro-stability policies and agreeing the necessary transparency in economic and corporate policies to achieve this;

- Second, a sequenced opening up of markets to global trade;

- Third, promote domestic and foreign investment for growth and poverty reduction, including agreeing a properly sequenced opening up of markets;

- Fourth, as part of the country-owned poverty reduction strategies, agreeing clear and costed plans for building education, health and economic capacity -- seeing development aid not as compensation for past failures but as investment for future success.

Under our proposal the developed world would make a commitment to providing long-term, predictable, untied and effective aid as investment to the countries that need it most.

And, in return, developing countries would demonstrate a commitment to poverty reduction strategies, addressing political and economic stability and creating an enabling environment for human, physical and social investment.

So in future no country genuinely committed to economic development, poverty reduction and to the transparency and standards I talked about earlier should be denied the chance to make progress because of a lack of investment.

So the Finance Facility concept offers a number of advantages:

· It is focused on the financing necessary to help achieve the internationally agreed Millennium Development Goals.

· It is founded on developed countries' long-term commitments to those countries that are striving towards achieving the goals it bridges the financing gap by leveraging these long-term commitments, enabling us to move more quickly to the target that each donor country contributes 0.7 per cent of GDP in development aid.

· It can deploy a critical mass of aid as investment over the next few years when it will have the most impact on achieving the targets.

· Its structure encourages donor pooling and co-ordination, so by bringing together donor flows and diversifying risk it is able to secure value for money.

· And by crystallising long-term commitments from donors it can provide a predictable and stable flow of aid over the medium term to countries that remain committed to achieving the goals

For its part the UK stands ready to provide the long-term commitment that is necessary, but we cannot make progress alone. We seek to build support within the entire international community for our proposal. Acting together with clear purposeand urgent resolve, the world can by 2015 meet the Millennium Development Goals and tackle the evil of global poverty.

The challenge we face is immense. The answer is not to retreat from globalisation or global cooperation. Instead we must step up our efforts to work together to advance social justice on a global scale, to the benefit of all.