Managing Director's Opening Address: Higher Level of International Cooperation Needed To Tackle Crisis Facing Global Economic System

• Pages: 309-311

Page 309

Governors, you have come this year in the midst of a crisis-a crisis that has already cost hundreds of billions of dollars, millions of jobs, and the unquantifiable tragedy of lost opportunities and lost hope for so many people, particularly among the poorest. This is a time for hard thinking, for recognizing errors, and for bold steps.

Where Do We Stand?

The IMF's most recent assessment is that, in the absence of any further major shocks, world output will expand by about 2 percent in 1998, just one-half of what we projected a year ago. Two key factors have aggravated the crisis that first emerged in Southeast Asia: the recession and financial system distress in Japan has intensified, and the abrupt deepening of the crisis in Russia has triggered a new wave of instability throughout the world.

No country has been immune. Even countries with well-managed economies have not been spared. We did not anticipate the strength of this virus, which has struck far and wide. What a powerful demonstration of the real vulnerability of emerging markets to abrupt changes in confidence, and the risks that arise when relatively small economies become the recipients of very large short-term flows!

Evidence of the risks calls for immediate action. Recession on a global scale can be avoided. If we keep a steady nerve, if all countries pursue stability, structural adjustment, and orderly liberalization of their economies, this crisis can be overcome. Countries at the heart of the turmoil can emerge stronger and better prepared for the challenges of the next decade. But we must understand clearly what went wrong.

What Has Gone Wrong?

We are speaking not just of countries in crisis, but of a system in crisis-a system not yet sufficiently adapted to the opportunities and risks of globalization.

Let us turn first to Russia. In that country, an overall strategy for reform-supported by the international community for over seven years-had begun a fundamental transformation in the economy, the society, and the political system. But an appropriate strategy was not enough. In spite of the government's good intentions, too much was left undone, and support for reform was insufficient.

Now in our dialogue with the new government, we see that Russia will need to reestablish a sound path to recovery and to restore confidence greatly weakened by its unilateral debt restructuring. If Russia can begin again to help itself, and do so convincingly, assembling broad support for reform, the IMF will, of course, stand ready to help.

But earlier, in Asia, what went wrong after decades of remarkable performance? The crises were three-dimensional: macro-economic imbalances, reflected in short-term capital outflows; acute financial sector problems, reflecting the absence of robust banking institutions and practices; and the economic culture, which allowed unduly close links among the state, the banks, and the corporate sector. This "managed development" was simply out of tune with the demands of a globalized economy.

To the three-dimensional problem we had to consider a triple response. In the macroeconomy and the financial sector, we were on more or less familiar ground. In the third, we faced newer challenges: lack of transparency, misgovernance, and corruption. Nonetheless, reforms are now being implemented. Some are having immediate positive effect; others that address deep-rooted problems will need more time to take hold.

In brief, to an unprecedented crisis, we had...