LEADERS CALL FOR NEW EFFORTS TO AVOID FUTURE CRISES IN GLOBAL MARKET

Press Release
ECOSOC/5761

LEADERS CALL FOR NEW EFFORTS TO AVOID FUTURE CRISES IN GLOBAL MARKET

Economic and Social Council Begins 1998 Substantive Session with Dialogue on Developments in World Economy

While present global conditions offered unprecedented prospects for peace and security, the international community seemed ill-equipped to fully harness that tremendous potential, Secretary-General Kofi Annan told the Economic and Social Council this morning as it began its 1998 substantive session.

The Secretary-General said economies and markets were global, but politics were local and there was a widening gap between what citizens demanded and what governments could deliver. The challenge of the international community was to bridge that gap. Global interdependencies, in all their complexities, needed to be addressed and success depended on collective leadership and multilateralism being taken to a new level.

Governments must show that global imperatives could coexist with local needs, he added. The international community, including the United Nations, had a duty to promote understanding of the new facts of global life, and support wider involvement in decision-making.

Opening the four-week session, Council President Juan Somavia (Chile) said the international community should develop an integrated policy outlook to help steer the world towards more economic, social and environmental stability. Macroeconomic policies should be balanced with efforts to stimulate investment, while ensuring respect for the rights of workers and the environment. The Council's policy could help to develop a shared understanding of the issues faced by policy makers and to devise a broad policy orientation to address them.

Well-calibrated national policies could help manage financial crises, limit their potential for lasting damage and re-establish economic growth, said the Secretary-General of the United Nations Conference on Trade and Development (UNCTAD), Rubens Ricupero. Opening a two-day high-level policy dialogue on developments in the world economy, he told the Council that the Asian crisis was only the latest in a string of financial crises that had disrupted the global economy since the breakdown of the Bretton Woods system.

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The international community still needed to learn how to manage such economic turmoil. The adoption of much-improved and effective controls and regulations were badly needed to prevent future economic crises.

Michel Camdessus, Managing Director of the International Monetary Fund (IMF), said the international community must pull together to support the adjustment programmes of the countries most severely affected by the Asian financial crisis. The transparency of international finance must be enhanced in order to make the world less prone to financial emergencies. The IMF should encourage its members to strengthen their macroeconomic policies and financial sectors. Financial and banking systems, as well as their supervision, must also be reinforced.

The President of the World Bank, James Wolfensohn, told the Council that countries needed to establish a fundamental economic base before they achieved access to markets. They must develop infrastructure and a basic capacity in order to attract foreign investment. The world trading system must also be more receptive in allowing smaller countries access to developed markets.

Also taking part in the policy dialogue were the Under-Secretary-General for Economic and Social Affairs, Nitin Desai, and the Deputy Director-General of the World Trade Organization, Anwarul Hoda.

Also this morning, the Council adopted its agenda and programme of work for the session.

The Council will meet again at 3 p.m. today to continue its policy dialogue and to open its high-level ministerial segment.

Council Work Programme

The Economic and Social Council met this morning to begin its 1998 substantive session with a high-level policy dialogue on important developments in the world economy. Scheduled to participate were the Managing Director of the International Monetary Fund (IMF), the President of the World Bank, the Secretary-General of the United Nations Conference on Trade and Development (UNCTAD) and the Deputy Director-General of the World Trade Organization (WTO).

Before the Council is the World Economic and Social Survey 1998 (document E/1998/50) which depicts a large and volatile world economy with growing volumes of trade and financial flows. The Survey notes, however, that the Asian financial crisis of 1997 had plunged several of the world's fastest growing economies into severe recession, and had slowed growth of world output and trade. (For further background on the Survey, as well as general information on the session, see Press Release ECOSOC/5760, issued on 2 July.)

Statement by Council President

JUAN SOMAVIA (Chile), the Council President, said the current economic crisis in Asia confirmed that integration into the global market place brought not only great benefits, but also serious risks. The negative effects of the new global economy could be countered by judicious and prudential management at the national and international levels. No country or region was immune to the consequences of economic events elsewhere in the world. To better confront and resolve a future economic crisis, a framework "global rapid- response capacity" should be developed. Such a mechanism would involve the participation of countries, international institutions, the private sector, trade unions and civil society organizations.

The Council's policy dialogue to begin today was relevant because international institutions acting individually could help steer the world towards economic, social and environmental stability, he said. The international community should develop an integrated policy outlook that reflected common objectives. For example, macro-economic balances should be promoted together with efforts to stimulate productive investment and entrepreneurship, while ensuring respect for the basic rights of workers and the environment. If such an integrated policy package was to be adopted, the Council was a good place to begin considering it. The work of the United Nations conferences and summits held during the last decade provided a good basis for defining the components of that package.

During today's policy dialogue, important potential complementarities among international economic institutions could be articulated, he said. Council discussions could also help to resolve possible conflicts among the macro-economic, social and political imperatives that policy-makers might

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face. In addition, the dialogue could help develop a shared understanding of issues and devise a broad policy orientation to address them. Thus, the Council could help develop a common framework for action to promote broad- based and high-quality growth that enhanced economic, social, environmental and political sustainability.

Address of Secretary-General

Secretary-General Kofi Annan said global conditions today offered unprecedented prospects for peace and security. Yet, the international community seemed ill-equipped to fully harness that tremendous potential. It was an era of stark contrasts. Tremendous wealth existed alongside chronic destitution. Economies expanded in some regions, while in others sudden disruptions eroded hard-won gains. People around the world were torn between the hopes engendered by decades of remarkable progress and the fear of future upheavals. Those hopes and fears were global, as were the economy and markets. However, politics were local and there was a widening gap between what citizens demanded and what governments could deliver. The challenge for the international community was to bridge that gap. Global interdependencies in all complexities needed to be addressed. Success would depend on collective leadership and multilateralism being taken to new level.

The Secretary-General said multilateralism had provided the world with the international trading system. While trade liberalization must continue, views differed as to how that should be done. He believed that full use should made of the United Nations system to pursue such goals. While there was every reason to treasure and nurture the achievements brought about by the international trading system, the Asian crisis was a reminder of how factors such as finance, economics and socio-political forces were working in tandem to shape, and at times shake up the world. The Asian crisis had provided the hard lesson that there were important distinctions to be made between short- term speculative flows and long-term commitment, such as direct foreign investment.

He said that for the United Nations three broad observations were paramount. First, the crisis had its most devastating effect on the marginalization of society. It threatened to undo the years of progress in alleviating poverty and advancing the rights of women. Second, developing countries were less able than their developed counterparts to withstand the fallout of the crisis. Even countries far removed geographically and economically from the Asian region were feeling the impact.

African nations, for example, were experiencing collateral damage in the form of reduced commodity prices, he said. International cooperation must focus first on those nations who did not have effective lobbying groups or whose voices were otherwise not heard. Third, interdependence among nations had an essential complement -- interdependence among issues. Finance, trade,

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governance and social equity were intimately linked. It was clear the Asian crisis was linked to trade and exchange rates, and that the crisis, in turn, was affecting both trade and exchange flows.

The open, inclusive, global economy was the most promising means of widely spreading the benefits of globalization, he continued. The aspirations and well-being of millions of people depended on the continued openness of markets. At the same time, the fear of globalization must be taken seriously. In the north, significant segments of the population saw measures towards further globalization and the integration of national economies into the global economy as threats to their jobs, environment and social "safety nets". The challenge for governments was to reconcile those demands and show that global imperatives could coexist with local needs. The international community, including the United Nations, had a duty to promote understanding of the new facts of global life, while supporting a wider involvement in decision-making. In the south, people feared that marginalization and lack of opportunity would jeopardize their very ability to find jobs, to feed families and to survive. The international community could make a significant, and immediate, difference by focusing on the needs of Africa and the least developed countries.

He said that non-tariff barriers facing Africa and least developed countries (LDCs) should be abolished. Exports by LDCs to developed countries should enjoy duty-free access and significant steps should be taken to relieve unsustainable debt burdens. It was also unacceptable that official development assistance (ODA) had fallen to its lowest point in history, at a time when aid was most needed. In the future, choices must be made between chaotic international markets and cooperation which created a supportive framework on which progress depended. Choices must be made between confinement to purely local points of view and the adoption of a more global perspective. One key choice wase whether the international community would use the institutions at its disposal. There was really no choice, as it would be grievous for the international community to retreat from multilateralism. Already there were examples that the United Nations was working more closely with multilateral entities in all respects. The Economic and Social Council was now adjusting its agenda, streamlining its subsidiary machinery and promoting greater coordination among the Organization's agencies.

Policy Dialogue on Developments in World Economy

MICHEL CAMDESSUS, Managing Director of the International Monetary Fund (IMF), said the international community must pull together to support the adjustment programmes of the countries most severely affected by the Asian crisis. It was also vital that countries with balance-of-payment surpluses recycled those surpluses in the form of untied loans and humanitarian aid to countries in the process of adjustment. As creditors, they should stand ready to grant generous terms for the restructuring of their claims and support

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economic recovery in Asia through new loans. Above all, those countries should keep their markets open. The international community should strengthen policies to improve fiscal management and help preserve the stability of those exchange rates crucial to market stability, such as China and Hong Kong.

With the completion of the Uruguay Round of the General Agreement on Tarifffs and Trade (GATT), developing countries had greater opportunities to integrate into the global trading system, he said. Those countries must now create the macroeconomic and institutional framework -- including trade liberalization -- that would allow them to exploit export opportunities. That meant going beyond the minimum requirements set by the Uruguay Round. The countries that pursued strong, progressive trade liberalization, in the context of general economic reforms and market-oriented policies, achieved growth and increased trade performance. For their part, industrial countries could liberalize import restrictions. However, they should also avoid replacing tariffs and non-tariff barriers with administered protection measures, such as anti-dumping restrictions.

He said the IMF was working to help African and other low-income countries avoid marginalization, while accelerating high-quality growth. Working with the World Bank, the IMF was exploring ways to accelerate public enterprise and financial sector reforms, improve the assessment of medium-term investments needs and the capacity to absorb external financing, and to identify potential adverse social consequences of reforms. The IMF was strengthening its support for heavily indebted poor countries and it had established in 1995 a special policy to provide emergency post-conflict assistance.

In order to make the world less prone to financial crises, the Fund's surveillance must be more effective and the transparency of international finance must be enhanced. The IMF could play a central role in crisis prevention by encouraging members to strengthen their macroeconomic policies and financial sectors. To that end, data provision must be timely, accurate and comprehensive. The financial and banking systems, as well as their supervision, must also be strengthened. In addition, effective procedures should be established to involve the private sector in preventing and esolving debt crises.

JAMES WOLFENSOHN, President of the World Bank, said the Bank had sought to assist the countries hardest hit by the Asian financial crisis. That assistance was provided to stabilize those countries and help them return to the path of reform and development. The crisis was not localized and issues in south-east Asia had affected all countries in different ways. Not only had the recession in the Japanese economy had a tremendous impact on the countries

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in the region that were dependent on it for financing and trade, the health of the Japanese economy was of crucial importance to the world economy.

The World Bank had also focused on the structural and social aspect of the crisis, he said. The Bank was working to assist several countries in the medium- and long-term restoration of structural programmes. Efforts were under way in the financial, judicial and regulatory systems to provide a framework essential for the success of the work of the IMF. Transparency between borrower and lender countries was necessary in order to avoid the distortions that came from corruption, crime and the divergence of funds.

Recognizing the importance of social factors, he said the World Bank had given assistance not only to reform a country's economic system, but also to assist spheres concerning employment, labour, medicine and food. Attempts had been made to deal with the segments of the economy most affected, including rural areas, so as to ensure provision of basic social programming that offered people a sense of hope. There could be no peace and stability without social stability and hope. The Bank was also working with the International Labour Organization (ILO) to ensure that there was a sense of social equity.

Countries, before gaining access to markets, must establish a fundamental economic base, including infrastructure and a capacity to attract foreign investment. Helping countries to build such a framework was one of the essential functions of the World Bank. The world trading system must also be receptive. The Bank supported the efforts of the United Nations and the WTO to open markets, including giving smaller countries access to developed markets. Without that, it would be impossible to achieve the equitable resource distribution that was necessary for peace.

RUBENS RICUPERO, Secretary-General of the United Nations Conference on Trade and Development (UNCTAD), said the Asian crisis had hit the poor particularly hard, in terms of sharp falls in commodities and in the export prices of some goods. The crisis had also forced the international community to come closer together in coping with heightened danger. There was now much more agreement than a year ago on the nature of the problems that the world faced and the international community must now build consensus on their causes and cures. In pursuing that course, countries should be guided by reason, objectivity and solidarity.

For more than 30 years, UNCTAD had worked to help developing countries attain sustainable economic development in an increasingly interdependent world, he said. The right course to development included the prudent management of trade liberalization, the gradual and careful opening up of markets, and the maximization of the benefits of globalization. The recent financial crises occurred because the governments concerned, among others, failed to manage their countries' integration into the capital markets.

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Well-calibrated national policies could help manage financial crises, limit their potential for lasting damage and re-establish economic growth, he said. Yet, when an economic crisis became a systemic problem, action was also needed at the global level. The Asian crisis was only the latest in a string of financial crises that had disrupted the global economy since the breakdown of the Bretton Woods system. The international community still needed to learn how to manage such economic turmoil. It would be useful to conduct an honest re-evaluation of the international policy response to assess its achievements and failures.

Due to the close integration of financial markets and the speed with which financial capital moved, almost every major financial crisis was a global one, he said. When a crisis occurred, defaults were inevitable unless massive bail-out operations took place. Yet, bail-outs protected creditors from bearing the full costs of poor lending decisions and placed the burden entirely on debtors.

He went on to say that it was much more difficult to manage integration into international capital markets than it was to successfully insert oneself into the international trading system. Developing countries should not be pushed or pressured into premature financial liberalization. That would deny them the option of protecting their economies from international financial instability and volatile speculative capital flows. Much-improved and effective controls and regulations that went beyond the conventional measures were badly needed in order to prevent future crises.

Exchange of Views

Mr.CAMDESSSUS, Managing Director of the IMF, responding to the question on capital account liberalization, said the IMF must improve its architecture for the future while dealing with current crises. The Fund's members were unanimous in the view that crisis prevention was better than crisis correction.

He said transparency had to be the golden rule of the globalized system. A step-up in the surveillance of the financial sector would be important in defining the best ways to achieve sound capital flows. There were also efforts to assist countries which were straying off-course in their policies and needed early warnings.

The strengthening and supervision of the structures of the banking system were also being addressed and the Fund was actively working at disseminating the best banking and supervision practices to its members, he continued. It was also collaborating with the World Bank to identify the major weaknesses in the financial sectors of developing countries. Another area being considered was involving the private sector of various countries in the resolution of a crisis.

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Turning to the pace of capital liberalization in the world, he said the Fund had a mandate to promote capital account liberalization. It must be done in a properly sequenced way. Premature liberalization could be detrimental when economies and banking sectors were too weak to withstand the pressure of the international financial markets.

He said the provision of social safety nets was imperative in IMF programmes. Those safeguards should be introduced in programmes, along with the resources and finances to ensure their implementation. Printing money was not a solution to financial crises. Support must come from the international community and especially from the industrialized countries.

Responding to questions from several speakers, Mr. WOLFENSOHN of the World Bank, said poverty reduction programmes should begin with education. Programmes should allow for job mobility and necessary health care matters should be addressed. Countries should focus on the gender issues in order to achieve equality of opportunity. In addition, countries must improve transparency in operations and fight corruption. Fair rules alllowed for a better chance to improve the distribution of wealth.

While countries in post-conflict situations did not immediately qualify for the initiative for heavily indebted poor countries, their needs were very great, he said. A special focus was needed for those countries, with a unique framework for debt relief.

Regarding the structure of the international financial system, he said the World Bank was sensitive to the crucial nature of social issues as well as structural reform. The Bank's programmes had supported education and rural development, with additional funding for social programmes. It was essential that the social programmes received the support of all countries.

Regarding capital account liberalization, Mr. RICUPERO of UNCTAD said he agreed with an earlier statement by the Managing Director of the IMF, during which he had said the IMF did not support a mad rush to full capital account liberalization, regardless of the risks. Benchmarks should be established to measure when conditions had been achieved to liberalize capital flows in a way that maximized the benefits and minimized risks. An emphasis should be placed on the difficulty of reaching that stage.

Regarding questions about the economic situation in Africa, Mr. CAMDESSUS said there should be a true partnership between the industrial components in Africa and the Bretton Woods institutions, as well as other international institutions. Addressing the situation in Japan, he said it was true that the volatility of the yen had made it difficult for those countries recovering from the Asian financial crisis. That was why Japan and other major industrialized countries were keen on restoring the stability of the yen. Yet, Japan continued to give aid to countries affected by the crisis.

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The IMF had encouraged interventions by the United States and Japan which had been beneficial to the yen, but those interventions could not do the job alone. Greater fundamental changes needed to be undertaken by the Government of Japan in order for the yen to achieve a more acceptable level of parity.

Regarding the relationship with the Bretton Woods institutions, Mr. WOLFENSOHN said the World Bank and the IMF had increased dialogue and cooperation. The Bank had strengthened its own representation as an institution, and there was now a greater understanding and cooperation between the two bodies. The Bretton Woods institutions were totally interdependen. For that reason, the creation of new financial institution was a scary concept. The Council should be very careful when considering such a notion. Instead, the Council should work with the current institutions which had done a pretty good job of monitoring the unprecedented economic growth throughout the world. The two institutions were working well together and with the United Nations system.

Regarding international capital flows, he said domestic investment had recently been far greater than ODA. In response to questions about the sale of arms to countries receiving aid, he said the Bank was against corruption and the purchase or sale of arms at the expense of social purposes. The funds provided by the Bank were not for arms but they could be diverted. In judging the effectiveness of a country's budget it was important to look at the amounts dedicated to investments of a non-social character.

Regarding Africa, he said the Bank was conscious of the Secretary- General's recent report to the Security Council on development in Africa, and was working in several crucial areas, including poverty eradication and sustainable development.

Mr. RICUPERO from UNCTAD said that most of the motivation for regional agreements stemmed from political, rather than trade and economic factors. Such agreements also provided a good opportunity for countries to learn how to compete in the world market place. The recent meeting of the least developed countries (LDCs) was only to assess the need for technical assistance. However, provision of the necessary resources to implement the technical assistance needed by LDCs in the field would be more difficult. Also, more attention should be paid to enterprise, if favourable market economies were to be created.

ANWARUL HODA, Deputy Director-General of WTO, joined the discussion by saying coordination, cooperation and coherence were the guidelines of the WTO. Cooperation efforts were evident in joint reports before the Council today, and in the efforts by various agencies and multilateral institutions in various areas. He cited the recent meeting on the provision of technical assistance to LDCs as one such example.

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Mr. CAMDESSUS said it was hoped that the Asian crisis would be over before the euro became a full fledged currency in 2003. On a longer term basis, the impact of the euro on the international system could be positive since it would be a major factor in the world's monetary stability. A block of 400 million people with a stable currency, experiencing sustainable economic growth, would also be of benefit to the world.

NITIN DESAI, Under-Secretary-General for Economic and Social Affairs, said the past year had shown that large portions of the world's financial problems were due to lack of arrangements to manage wounds. Some problems had involved instruments developed to deal with the access of financial flows. It was important to begin to examine the players involved in balance sheet transactions, which were different from those on the income expenditure side.

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