The Global Economy - Outlook, Uncertainties, and Policy Responses

Uncertainties in the global economy remain great, despite the prospect of an early resolution to the war in Iraq and the stabilization of oil prices. Combined with slower than expected growth in the high-income economies this will pose a difficult environment for many developing countries. In the short term the Bank stands ready to help member countries adversely affected by developments. And in both the short and longer term the uncertain outlook underscores the importance of actions that will help us meet the Millennium Development Goals (MDGs), including, crucially, making progress on the Doha trade round.

Moreover, some current economic and financial developments are likely to have longer-term implications. A particular feature of the current slowdown is the prevalence of debt-servicing difficulties in a world of low nominal income growth. This is an important issue in advanced countries, but it may also have lasting implications for financial flows to and debt burdens of low- and middle-income countries. Handling debt and debt sustainability issues in a world that is increasingly integrated and where financial markets play a crucial, but evolving, role is a key challenge for the future.

Trade and the Doha Round

We all know the central importance of trade for global growth, for development and for attaining the Millennium Development Goals. For example, the Bank has estimated that merchandise trade liberalization could reduce the number of people living on less than $1 per day by 110 million by 2015 (or around 15 percent). And agricultural products and textiles that are produced most by the world's poor face tariffs in the industrial countries that are on average twice as high as those on other goods. At a time of global slowdown and economic uncertainty it is more vital than ever that we demonstrate we can take vigorous multilateral action to reduce the worst barriers and distortions to trade that penalize the poor. We must not compound uncertainty with inaction. At Doha the international community made a commitment to collective action that holds the promise of truly integrating trade with development. The importance of this commitment was reinforced at Monterrey a year ago. As we approach the halfway mark of the Doha Round with the upcoming Ministerial in Cancun, we are far from meeting the challenge of translating the commitment in Doha into concrete results. Clearly agriculture is the most important and the most difficult issue on the agenda. As I have consistently argued, market restrictions and subsidies in agriculture are the single most important external impediment to tackling poverty in developing countries. There are also contentious issues that need to be tackled on TRIPS and medicines, on Special and Differential Treatment and on the so-called Singapore issues (investment, competition, government procurement and trade facilitation). It is particularly important for countries to come to an agreement quickly in those areas where Doha deadlines have already been missed, particularly in medical and related TRIPS and in agriculture.

The Bank is working with the Fund to support the work of the World Trade Organization (WTO) with analysis, advocacy and advice, for example on the impact of market restrictions and other interventions such as subsidies on developing countries. We are also helping countries integrate trade and development agendas and address "behind-the-border" issues: the policies, infrastructure and institutional capacities which are major determinants of competitiveness. The dozen trade diagnostic country studies that have been undertaken as part of the Integrated Framework help focus especial attention on the critical barriers to greater integration by the Least Developed Countries that limit their trade and growth opportunities. The Bank will be stepping up its assistance efforts in this area as it seeks to include trade-enhancing actions, capacity building and lending operations in Country Assistance Strategies where such trade-related support is a priority.

Crisis Prevention

As a key element in the work on crisis prevention, the Bank and Fund continue to work closely together in implementing the Financial Sector Assessment Program (FSAP) and work on standards and codes, including the Reports on Observance of Standards and Codes (ROSCs) initiative. There is growing understanding of the contribution the two exercises have made to crisis prevention by identifying potential vulnerabilities and steps needed to strengthen financial systems and related institutional underpinnings. In the three years since we embarked on these initiatives much has been achieved, as set out in the Managing Director's note for the Committee.

For the future, and learning from experience, we will be streamlining and focusing both exercises, seeking to tailor them better both to the specific needs of individual countries and to broader systemic concerns, while maintaining a sufficiently broad coverage. Recent developments--in developed and developing countries--have highlighted the importance of enhanced focus on corporate governance and accounting and auditing, areas where as between Bank and Fund the Bank is in the lead. We have stepped up our own work in these areas accordingly, in partnership with other relevant bodies. The Bank is also collaborating with UNCITRAL, the IMF and other partners in finalizing our Principles and Guidelines on Insolvency Regimes and Creditor Rights. Meanwhile, the Bank and the Fund are also helping countries assess and strengthen systems for debt management. As a follow-on to the joint Bank-Fund Guidelines for Public Debt and the Handbook on developing government bond markets, a three-year project for Country Assessments on Public Debt Management and Domestic Debt Market Development is now being implemented by the Bank.

Perhaps the most important task ahead for the Bank, and the Fund, however, is to continue to build on the diagnostic work from FSAP and ROSCs to help countries develop and implement systematic programs of capacity and institution building to tackle vulnerabilities that have been identified. In the Bank we are steadily mainstreaming such follow-up support in our Country Assistance Strategies, and lending and advisory work. We also need to mobilize external technical and financial resources for the task. A first and important response to this challenge is the Financial Sector Reform and Strengthening Initiative (FIRST), which was established to supplement efforts already underway and to put in place a systematic mechanism to support follow-up to FSAP and ROSC assessments. I would like to thank the donors that have already pledged more than US$53 million over the initial four-year term and to invite others to participate. At this point, FIRST has approved 11 projects, and 30 projects are in the pipeline.

Countering Money Laundering and Terrorist Financing

Combating money laundering and the financing of terrorism has become of increasing concern around the globe as the devastating effects of these criminal activities on the integrity and functioning of financial systems, good governance, financial stability and development have become more evident. Because this is a priority for our client countries the Bank and the Fund have significantly expanded our joint work in this area. Last fall the Bank and the Fund launched a 12-month pilot program to conduct AML/CFT assessments and prepare associated reports on observance of standards and codes (ROSCs). The first AML/CFT ROSCs have recently been completed under this program and we will report the results of the pilot program to our Boards next year. We are also helping countries identify sequenced and practical measures for building internal capacity. We have already increased assistance through individual country TA programs based on AML/CFT assessments: since September 2001, the Bank and the Fund have undertaken 40 TA programs in client countries and 12 regional and sub-regional projects.

For the Spring Meetings we have published the first Country Reference Guide, containing in one volume all the basic information needed to build an effective AML/CFT regime. Hard copies are available for all delegates and we will follow up with electronic versions to keep the Guide up to date. We have also sought to raise awareness through a series of Global Learning Dialogues targeted at policy makers, and public and private institutions responsible for implementation of the global standards, and we are planning an electronic information exchange which will allow GLD participants to continue their discussions on line. Since last June, more than 40 developing countries have been engaged in such dialogues. In December 2002, we established a global TA database, housed on the Bank website, to facilitate delivery of TA and reduce duplication of efforts by TA providers. We are also incorporating AML/CFT issues, where relevant, into Bank Country Assistance Strategies and country technical assistance programs.

Crisis Resolution: Dealing with Unsustainable Sovereign Debt

We in the Bank have been following closely the Fund's extensive work in this area. The comprehensive analysis and consultations undertaken in this process have served to promote better understanding by market and public sector participants alike of the issues to be addressed in a more orderly resolution of crises in those cases where sovereign debts have become unsustainable. As Horst Kohler notes, there are remaining issues that require further work of importance - such as issues of creditor equity - under both statutory and voluntary approaches.

Meanwhile, the recent bond issues by Mexico and others incorporating collective action clauses (CACs) should pave the way forward on this approach. The Bank, of course, has considerable relevant experience both through our own borrowing operations and through our extensive advice to member countries on debt management. We stand ready to assist in developing a consensus on CACs and codes of conduct for debt negotiations, and in advising member countries in the use of CACs in new debt instruments as part of our work on debt management and debt sustainability.

Support for Low-income Countries: Implementing the Monterrey approach

We will have an opportunity at the meeting of the Development Committee tomorrow to have a more extended discussion of progress in implementing the approach to development and poverty reduction endorsed at the Monterrey conference a year ago. It provides a framework of agreed actions and accountabilities for all parties, developing and developed countries alike: the actions needed if we are to succeed in reducing poverty and meeting the (MDGs). The focus is on the centrality of country-owned strategies, as set out for low income countries in PRSPs. The Bank and the Fund, working together, have pioneered this approach and made it operational.

The discussion tomorrow will be based on a report prepared jointly with the Fund - and developed in close cooperation with the UN, regional development banks, WTO and the OECD Development Assistance Committee (DAC) - setting out a framework for monitoring progress by all parties in implementing the policies and actions needed to achieve the MDGs. Our intention is that we should use and develop the framework as a basis for regular review of progress at future meetings of the Development Committee.

I strongly welcome the continuing commitment of Horst Kohler and the IMF to work with us, in close partnership, in the global fight to reduce poverty. I would like to underscore five points in particular.

· We have developed very good and strong cooperation between the Bank and the Fund in our support for low-income countries, with each institution contributing according to respective mandates and comparative advantage, and with all our assistance linked to country strategies set out in PRSPs.

· We should re-emphasize the range of policies that have to be included in country strategies and PRSPs if countries are to succeed in reducing poverty. Economic growth is an essential element. Growth requires sound macroeconomic policies, but also much more besides. Above all, it requires good governance and an environment conducive to private sector development and investment. It requires access to markets for exports, which is why the Doha trade agenda is so important. And it requires good and corruption-free public sector management so that the public as well as private sector is effective and efficient. We also know from our experience and research that growth alone, and the greater domestic resources it brings, will not be sufficient for many countries to reach the MDGs. Countries also need policies to target resources and services to assist and empower the poor. And they need more and better-targeted development assistance to support both the policies that produce growth and those that directly target poor people. Economic growth, pro-poor policies, effective and accountable implementation, and more and better aid are mutually reinforcing, and all four are needed if we are to achieve the MDGs.

· We need to do more to make aid more effective than in the past. The principal challenge now for development partners, including the Bank and the Fund, is to support implementation with concrete steps to align their support better with country strategies at the country level. The Rome Declaration from the February High Level Forum on Harmonization commits to delivery of development assistance in accordance with recipient country priorities and capacities. Increasingly Bank Country Assistance Strategies are being better aligned with national strategies. I welcome steps being taken to ensure that PRGF programs, too, are well aligned with PRSPs in all cases. Bank and Fund staff are also engaging with other multilateral and bilateral partners to work out, on the ground, the scope for better alignment with PRSPs in terms of conditionalities, a common framework for budget support, and disbursements consistent with country budget processes.

· We need to recognize the crucial importance in many countries of strengthening public expenditure and financial management to make better use of both domestic and aid resources. This is a key area where improved governance can pay high dividends, and also provide donors with the assurance they need that their support is being properly used and accounted for. In this context, the agreement reached recently between the Bank and the Fund on a new framework for working together and with member countries on public expenditure issues is an important step forward. It complements ongoing work in the Bank to help countries strengthen their financial management and procurement systems as a basis for administering budget- and donor-financed activities.

· We continue to cooperate closely with the IMF in implementing the HIPC initiative. Eight countries have now reached completion point, with 18 between decision and completion points. These 26 countries are benefiting from debt relief and represent two-thirds of the total number of HIPCs as well as total estimated cost of the Initiative. Of the twelve HIPCs yet to reach decision point most are affected by conflict, in several instances with large arrears outstanding. The framework has so far committed to the 26 decision point countries an estimated $27.3 billion of HIPC relief in 2002 NPV terms - of which the World Bank Group's contribution is $6.9 billion (equivalent to $11.3 billion in nominal terms). I welcome the commitments made by donors in October to close the US$850 million financing gap in the HIPC Trust Fund to finance debt relief by key multilateral development banks. Looking forward, the HIPC Initiative faces three key issues requiring careful consideration: the methodology for calculating topping up, creditor participation and debt sustainability after completion point. On the first, discussions are continuing with the two Boards. On the second, where the cost of debt relief prevents a HIPC creditor from participating, we are exploring the feasibility of establishing a donor-financed HIPC-to-HIPC trust fund and comparing it with other available options. Staff are also exploring ways to help HIPCs settle outstanding commercial claims through possible expansion and more active use of the existing Debt Reduction Facility for IDA-only countries. On the third, debt relief under HIPC does not guarantee debt sustainability over the longer term. It is my intention to ensure that debt sustainability analysis becomes an integral part of the foundation on which the Bank's country assistance strategies and lending operations are built. It is important to do everything possible to help low-income countries avoid the build-up of unsustainable debt, and that the Bank be a leading force toward achieving this objective. Simultaneously we must do all in our power to assist HIPCs work towards attaining the MDGs. This will require greater use of grant financing, and the IDA-13 agreement to provide grants to the poorest and debt vulnerable countries is an important first step in this direction.

Conclusion

The Committee is meeting at a time of considerable economic uncertainty, when it is more important than ever to reaffirm our commitment to the national and multilateral actions needed to reduce poverty and meet the Millennium Development Goals. We have an agreed framework of mutual commitments coming out of Doha, Monterrey and Johannesburg. We will I believe secure immediate benefits in helping to restore confidence in the global economy, as well as longer lasting gains if we can use our meetings today and tomorrow to reaffirm our agreement to act multilaterally to implement this agenda, and to do so quickly and with determination.