Köhler calls for balanced growth of capital flows and trade

• Pages: 115-117

Page 115

Following are edited excerpts of an address, "Promoting Sustained Growth and International Financial Stability," by IMF Managing Director Horst Köhler at the National Press Club in Washington, DC, on April 17. The full text of the speech and the question and answer session that followed are available on the IMF's website (www.imf.org).

In April 2002, it is clear that September 11 did not pull down the global economy for long. This is mainly due to the leadership of the United States, with its bold decisions to lower interest rates and reduce taxes.

A recovery is under way now in the United States, and this is already beginning to have a positive impact on the economies in other regions. It is only fair now for me to pay off my bet with U.S. Secretary of the Treasury Paul O'Neill and treat him to dinner.His faith in a relatively early turnaround of the U.S. economy has prevailed over my more cautious assessment.

And, of course, I am happy about that. The question mark is mainly how strong and durable the recovery in the United States will be.

This relates in particular to uncertainties about company earnings with their implications for business investment, the volatility of the oil price, and political uncertainties in the world, in particular related to the situation in the Middle East.

Vigilance needed

Such a situation does not call for frantic action.What is needed is vigilance and a firm policy hand to make the recovery robust and more dynamic. This means the main focus of policy must shift from short-term considerations to tackling decisively underlying problems.

And, here, a main responsibility lies with the advanced economies.

The United States must pay special attention to preventing the reemergence of the twin deficits (fiscal and external) of the 1980s. This requires firm control over public spending and the definition of a longterm strategy to increase national savings.

The other major economies also can and must contribute to the reduction of the global imbalance related to the U.S. current account deficit. Europe has been a stabilizing factor during the recent slowdown.

What I still miss is a stronger ambition to move to a higher potential growth path with stronger domestic demand dynamics. The road map for this is already defined in the reform agenda to create a truly single common market. And there is enough evidence that structural reforms must also be accelerated at the national level, in particular in labor markets and social security systems. Japan's ongoing recession is still a drag on global growth, particularly on activity in the Asian region. There is now hope that the recession is bottoming out. But the return to a growth performance that corresponds to Japan's size and potential demands decisive action for the disposal of nonperforming loans, industrial deregulation, and restructuring of its banking and corporate sectors.

For emerging markets and low-income countries, the worldwide slowdown in 2001 confirmed one important lesson: good policies pay off. Countries with sound fiscal and monetary policies and persistence with structural reforms have...