Annex C
STATEMENT BY RT HON GORDON BROWN TO THE
INTERNATIONAL MONETARY AND FINANCIAL COMMITTEE
WASHINGTON SEPTEMBER 24 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 per cent 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 thirty 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 organizations 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 per cent in 2004 to 2.6 per cent
in 2005. On some estimates, US growth could be reduced by 0.5
per cent 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
per cent 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 per cent. 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 per cent in the year to the final quarter of 2002, to 11 per
cent in the second quarter of 2004 and to 4 per cent 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 per cent,
unemployment surpassed 2 million and the British economy was the
first in, last out and worst hit by world recession. Today inflation
is 2.3 per cent 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 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 per cent with
just 1.2 per cent 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 per cent of manufactured goods. This is forecast to rise
to 50 per cent in the next few years. China alone manufactures
30 per cent of the world's televisions, 50 per cent of the world's
cameras, 70 per cent of photocopiers, and possibly, soon, 60 per
cent 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 per cent of government revenues to 11 per cent, and
with 65 per cent 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 per cent 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 per cent of national
income on aid by 2015. The UK has set a clear timetable to reach
0.7 per cent by 2013.
However, we know that 2010 and 2015 are too late
to mobilize 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 (1FF), a complement to our commitments
to 0.7, to increase the resources available for the poorest countries
now, when they are needed most. The 1FF is specifically designed
to bring forward donor aid commitments. Using existing and new
resources, the 1FF 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 ten 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 5 million children's lives by 2015, and
a further 5 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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