Annex C
STATEMENT BY RT HON GORDON BROWN MP TO THE
INTERNATIONAL MONETARY AND FINANCIAL COMMITTEE, WASHINGTON, 24
SEPTEMBER 2005
INTRODUCTION
We meet in Washington in a year that has brought
us face to face with both the immediate and long term challenges
that arise from what future historians will describe as the biggest
restructuring of the global economy the world has seen since the
industrial revolution.
In particular, Asia will soon be manufacturing
more than Europe and is now consuming 30% of the world's oil—one
of the reasons for the doubling of oil prices and the return of
inflationary pressures. While the rapid growth in Asia's exports
into Europe brings the threat of manufacturing jobs losses and
a new protectionism.
In Britain over the last eight years, when faced
with global economic challenges, we have had the strength to take
the right long term decisions to overcome them. To protect against
the old British stop-go, in 1997 we made the Bank of England independent
and created a new regime of monetary and fiscal disciplines that
have stood the test of time:
— monetary policy set to meet our symmetric
inflation target, which has allowed the Bank of England to act
pre-emptively as circumstances change while securing inflation
expectations at low levels for the long term; and
— fiscal policy set over the economic
cycle allowing it to support monetary policy at times of economic
slowdown while ensuring the public finances remain on a long-term
sustainable course.
This framework has withstood the global challenges
we have faced. The 1998 Asian crisis required action to ensure
growth in Europe. In 1999 an IT bubble, in 2000 a stock exchange
crash, in 2001 and 2002 a US downturn all required pre-emptive
cuts in interest rates and supportive fiscal policy to meet our
inflation target and keep the economy moving forward.
As a result of our new economic model for stability—Bank
independence, low debt, fiscal responsibility—Britain has
enjoyed not only the lowest inflation and the lowest interest
rates and the lowest unemployment for 30 years but Britain has
had the longest sustained period of continuous growth—52
consecutive quarters—in our history. This stability has
only been possible because we rejected the old-style backward-looking
approach to monetary and fiscal policies based on asymmetric inflation
targets and nominal fiscal deficits that take no account of the
economic cycle, debt and the important role of public investment.
OIL
Now facing the highest sustained oil prices
for a quarter of a century we will continue to have the strength
to take the right long term decisions.
When we met in Washington in April, the price
of oil Brent crude reached a then new nominal high of $55 per
barrel. Since then the price of Brent has increased by a further
fifth and peaked shortly after Hurricane Katrina at just under
$70 per barrel, while the US West Texas Intermediate (WTI) peaked
at over $70. Oil prices have trebled since 2002 and doubled since
2004, and currently are estimated to be $18 higher on average
in 2006 than the IMF forecast five months ago.
Concerted international action—with dialogue
among producer and consumer nations—is required to tackle
the risk to global growth posed by current high and volatile oil
prices and stabilise the market for the long term. This was endorsed
by European Finance Ministers last week and we now ask the IMFC
to do the same.
The proposals include: in the short-term, an
immediate increase in appropriately priced supply in response
to rising demand; greater transparency, particularly from OPEC,
about oil reserves and plans for development to ensure there is
no unnecessary uncertainty in the market which may cause instability
and speculation; additional investment in production and refining
capacity; new funds from the World Bank to support the framework
that is already being developed for investment in alternative
sources of energy and greater energy efficiency in developing
countries; and the adoption by the IMF, with an invitation to
oil-producing countries to contribute, of a facility to help developing
countries affected by commodity price shocks. It is also important
that the IMF continues its work in analysing the oil market and
working closely with its members to help address the challenges
high prices pose for them.
GLOBAL ECONOMY
It is a measure of success of a decade of anti-inflation
policies that the most recent increase in oil prices has not seen
a return to the stagflation of the 1970s. However, stability in
the oil market is a precondition for global prosperity and high
oil prices are already having a negative impact on world economic
growth. Estimates from international organisations and independent
analysts, such as the OECD and the IMF suggest that oil prices
sustained at their current level could reduce growth in the developed
countries by up to 0.5 percentage points.
At a time of ongoing global imbalances, this
shock to the world economy threatens to derail already slowing
growth. On the basis of the IMF's latest estimates, growth in
the G7 economies is expected to slow from 3.4% in 2004 to 2.6%
in 2005. On some estimates, US growth could be reduced by 0.5%
in the second half of this year due to Hurricane Katrina. While
in some regions growth has been stronger than expected growth
in the UK's largest export market, the euro area, at 1.2% this
year is again expected to be lower than originally forecast. Of
the three largest euro area economies, Germany and Italy have
been in recession during the past 12 months while growth in France
is forecast to slow to below 2%. So while UK exports to the rest
of the world have remained robust, net exports to the slower-growing
euro area have been weaker than expected.
HOUSING MARKET
And in Britain, not only have we faced the consequences
of the global oil shock and weak growth in the euro area, but
we have had to manage the transition from double-digit growth
in house prices down to a more sustainable level, moderating from
23% in the year to the final quarter of 2002, to 11% in the second
quarter of 2004 and to 4% in the second quarter of this year.
In each of the past three house price cycles—in
the mid 1970s, in the early 1980s and again in the early to mid
1990s—a period of such rapid house price growth has been
accompanied by a rapid rise in inflation and sharp increases in
interest rates followed by sustained falls in real house prices,
rising unemployment and recession. But it is because of the new
framework for economic stability—with interest rates low
and stable, inflation low and employment at record highs—that
the economy is better placed to adjust to the moderation in the
housing market. So that instead of the old British stop-go, house
prices are adjusting free of recession.
UK ECONOMY
In previous decades any one of these shocks—the
biggest sustained rise in oil prices for a quarter of a century,
recession in some of our main export markets and adjustment in
the housing market—would have the tipped the British economy
into recession. In the last oil shock, inflation rose to 25%,
unemployment surpassed two million and the British economy was
the first in, last out and worst hit by world recession. Today
inflation is 2.3% and employment is at a record high.
The point of our monetary and fiscal framework
is that we can not only take long term decisions that ensure stability,
but that we can respond quickly to changing trends. The Bank acted
proactively last year to meet its inflation target and slow house
prices. This year as European growth has slowed and oil prices
have risen it has been able to be proactive bringing rates down.
But no country can insulate itself from the
ups and downs of the world economy. With European activity much
lower and oil prices much higher, there has been an impact on
growth right across the continent, including the UK. We will update
our forecasts in the Pre-Budget Report. But while trends so far
this year suggest the UK is likely to see growth at or slightly
below our cautious view of the trend it is because of the tough
forward-looking decisions we have taken in monetary and fiscal
policy that, even despite the new challenges we now face, Britain
is continuing to grow faster this year than the other major European
economies, all of whom are forecast to grow by less than 2% with
just 1.2% growth in the euro area.
We will continue to take no risks with inflation
and steer a long term course of stability, and in doing so reject
the old short-termist easy option, the inflationary pay rise and
the resort to the old industrial conflicts. By taking no risks
with stability Britain remains well placed to respond to any pick
up in global growth next year.
GLOBALISATION
Rising Asian demand for oil—itself partly
the result of rapid Chinese and Indian growth rates—starkly
illustrates that we are witnessing the biggest global economic
and industrial restructuring shift in economic power in our industrial
history.
Twenty year's ago, developing countries produced
only 10% of manufactured goods. This is forecast to rise to 50%
in the next few years. China alone manufactures 30% of the world's
televisions, 50% of the world's cameras, 70% of photocopiers,
and possibly, soon, 60% of world clothing. The global sourcing
of goods is now combined with vast technological innovation, from
the internet, the DVD and the e-mail to digitalisation—all
virtually undeveloped less than a decade ago.
With the pace of innovation faster than at any
time, the scale of industrial transformation greater, the breadth
of competition more global, the shift in manufacturing activity
more profound, the prize for success greater but the penalties
of failure greater too—in particular, there can be no hiding
place in protectionist policies.
Nor up against these flows and forces should
governments do nothing. Even with global manufacturing and technology
replacing old skilled work, we must not now abandon the goal of
high and stable levels of employment. Indeed with the right long
term policies we can seize rather than squander the opportunities
of globalisation.
Nations will rise and fall depending upon their
ability to master globalisation. As with companies no country
today, however prosperous, can take its economic success tomorrow
for granted.
For Britain, we are determined to make the correct
long term decisions—to invest in education of all, to build
our science and technology, and value enterprise and flexibility—we
can combine our stability, our creativity, our belief in hard
work and education, our openness to the world so that more so
than any other country we can turn globalisation from a threat
to an opportunity.
ACHIEVING THE
MILLENNIUM DEVELOPMENT
GOALS
Developed countries have made significant steps
in 2005 in committing to increased aid and 100% debt cancellation.
We know that both developed and developing countries must deliver
on these commitments and do more if we are to achieve long-term
global prosperity. In addition, action on trade is essential to
ensure that the Doha Development Round delivers real benefits
to developing countries.
The HIPC Initiative has played a significant
role in alleviating the burden of unpayable debt in 28 countries;
writing off 70 billion dollars and reducing debt payments from
an average of nearly 24% of government revenues to 11%, and with
65% of resources released from debt relief now going to health
and education. And so we will work together to ensure the completion
of the HIPC Initiative so that all eligible countries can benefit
from HIPC debt relief, so that all creditors participate; and
to ensure that the initiative is securely and fully financed.
But, we know that a substantial increase in
resources for debt relief is needed in order to build on the success
of HIPC. This was recognised by the G8 in June, when we put forward
proposals for providing 100% multilateral debt relief for HIPCs.
We welcome the work by Staff since then to demonstrate the benefits
of the proposals and indicating how the operational issues can
be dealt with.
We must now move swiftly to implement the proposals,
so that the poorest countries can begin to benefit from the predictable
and reliable stream of funding that the debt service savings will
provide.
The UK Government will maintain its unilateral
initiative to provide its share of multilateral debt service of
eligible non-HIPC IDA only countries and urges other governments
to pay their share. If debt is to be kept sustainable in the future,
we will need to complement debt cancellation with aid. Earlier
this year, the EU committed to double its aid by 2010, from around
$40 billion to over $80 billion a year. The G8 then confirmed
that global ODA will increase by almost $50 billion a year by
2010, with at least $25 billion flowing to Africa. All member
States who joined the EU before 2002 have now set a timetable
to reach the longstanding goal to spend 0.7% of national income
on aid by 2015. The UK has set a clear timetable to reach 0.7%
by 2013.
However, we know that 2010 and 2015 are too
late to mobilise the scale of finance we need if we are to achieve
the MDGs by 2015. Innovative financing mechanisms are needed to
help deliver and bring forward the required financing.
That is why we have put forward our proposal
for an International Finance Facility (IFF), a complement to our
commitments to 0.7%, to increase the resources available for the
poorest countries now, when they are needed most. The IFF is specifically
designed to bring forward donor aid commitments. Using existing
and new resources, the IFF will be able to increase aid to the
levels required to meet the MDGs, ahead of 2010.
The Bank and Fund have conducted further detailed
analysis of the IFF and work on it is technically advanced. As
a first step, on 9 September, the UK—in partnership with
France, Italy, Spain and Sweden—launched a pilot International
Finance Facility for Immunisation (IFFIm). The IFFIm will ensure
the provision of an additional $4 billion over the next 10 years
to support the work of the Vaccine Fund and the Global Alliance
for Vaccines and Immunisation (GAVI), tackling some of the deadliest
diseases in some of the world's poorest countries. Frontloading
resources through the IFFIm is expected to save five million children's
lives by 2015, and a further five million adult lives thereafter.
We all know that more aid needs to go hand in
hand with better aid. In order to achieve the MDGs it is crucial
that the international community prioritises the poorest countries,
and improves the effectiveness and long-term predictability of
aid. In order to deliver better aid, donors need to increase co-operation,
harmonise operational procedures and align aid behind country-owned
priorities in accordance with the commitments in the Paris declaration
on aid effectiveness agreed on 2 March 2005. Finally, developed
and developing countries must continue to work together to tackle
corruption.
The international community must grasp the opportunity
presented by the Doha Development Agenda of world trade talks
to achieve an ambitious outcome that makes a real contribution
to poverty reduction. It is essential to maintain momentum on
the key issues of interest to developing countries, particularly
agriculture, leading up to the Hong Kong Ministerial in December.
An ambitious agreement providing significant increases in market
access for developing countries, substantially reducing trade-distorting
subsidies, including the elimination of agricultural export subsidies,
and providing effective special and differential treatment for
developing countries is key to increasing growth in developing
countries, integrating the most vulnerable countries into the
world economy, and maintaining the credibility of the multilateral
trading system.
The international community needs to recognise
and address the constraints faced by developing countries in benefiting
from more open global markets. Many developing countries will
not be able to benefit from trade even with greater market access
because they lack the economic capacity and infrastructure to
trade competitively. We need to consider how best to provide the
additional aid we have announced this year, to help developing
countries build the capacity to enable them to produce and deliver
goods to international markets competitively. We also need to
deliver additional assistance to help vulnerable countries and
their most vulnerable people adjust to more open markets. Finally,
developing countries must have the flexibility to carefully decide,
plan and sequence their trade reforms into their own development
and poverty reduction strategies. Trade liberalisation must not
be forced on developing countries through aid conditionality or
a mercantalist approach to trade negotiations.
We welcome the existing work of the IMF on the
assistance they give to poor countries to enable them to benefit
from trade, and call on the Fund to build on this and to work
with other partners through the integrated framework to explore
further ways of building capacity to trade as well as easing adjustment
in low income countries.
IMF'S MEDIUM-TERM
STRATEGY
As the structure of the global economy continues
to change, the IMF's role should be to help the entire membership
to maximise the benefit and meet the challenges that globalisation
raises. The Fund needs to respond to the new challenges by clearly
defining its mission and priorities.
The Managing Director's report on the Fund's
Medium-Term Strategy is a welcome step forward, rightly acknowledging
many of the challenges now faced by the IMF and providing a guide
to the Fund's agenda and work programme over the next few years.
But as the international monetary and financial system continues
to evolve, there is an ongoing need for the Fund to reflect on
how these changes will further redefine the IMF's role and priorities.
As this stage of the Fund's review draws to
a close, the IMF should take forward the analysis begun in the
report and develop its strategy for responding to the long-term
challenges of globalisation.
Going forward, we welcome the progress the Fund
has made in developing the new medium-term budget; together with
the ongoing compensation review, this will provide the necessary
framework within which important decisions can be made about the
effective reprioritisation of IMF resources and which of the ideas
presented in the Medium-Term Strategy should be put into practice.
In a modern, rapidly changing global economy,
the Fund's surveillance role is crucial. In recent years, the
IMF has made considerable progress in improving the quality and
effectiveness of surveillance. We warmly welcome the emphasis
of the Managing Director's report on the continued importance
of stronger, more effective, and authoritative Fund surveillance.
We can support many of the proposals in the report.
Nevertheless, we believe further improvements
can be made to increase the quality and traction of Fund surveillance
advice. In particular, there is a strong case for reconsidering
the form of surveillance, as well as its focus. Key priorities
for further reform should include establishing a framework for
assessing the effectiveness of surveillance, as an important step
towards improving its impact on members' policy decisions.
We continue to believe that the credibility
and objectivity of IMF surveillance would be greatly enhanced
by the development of proposals to separate surveillance from
the Fund's lending decisions; especially ensuring assessments
of debt sustainability are independent from other lending decisions
within the Fund. Further questions also remain about whether surveillance
should be carried out principally through the Article IV or ROSC
processes.
As the events of July have reminded the international
community, fighting the financing of terrorism remains of crucial
importance. As part of their work to ensure compliance with international
codes and standards, the IMF has a central role to play in ensuring
countries are meeting international counter-terrorist financing
standards, and provided well-targeted technical assistance where
necessary.
We look forward to further detailed consideration
of these issues in the context of the next Biennial Surveillance
Review.
Efforts by the IMF to harness the benefits and
challenges of globalisation must be underpinned by an appropriate
organisational structure. We welcome the attention of the Managing
Director's report on this important issue. However, the emphasis
of the report on refocusing and reprioritising the Fund's work
presents an opportunity for a more fundamental review of the Fund's
internal governance and management framework than that set out
in the medium-term strategy.
The IMF should be at the cutting-edge of best
practice in governance and management to ensure it does not lag
behind the considerable progress made in modernising private and
public sector management practices. The Fund should give further
consideration to the most appropriate and effective governance
structure in order to meet the challenges of globalisation over
the long-term.
The Medium-Term Strategy places an important
emphasis on the issue of quotas and representation at the Fund.
This is an issue that affects the entire membership. Quotas should
reflect changes in the world economy and we need to look at measures
to enhance the voice of all members at the Fund. We look forward
to full consideration of these issues as part of the 13th General
Review of Quotas.
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