Building stability on the back of global recovery

Rodrigo de Rato, Project Syndicate

The world is a study in contrasts nowadays. We are haunted by images of terror and warfare. Yet every region of the globe has experienced some of the strongest economic growth seen in years, inflation remains subdued despite surging oil prices, and financial markets are doing well.

Several economies that recently faced financial crises are rebounding strongly. At the same time, much more needs to be done to help prevent future crises and reduce poverty.

What do these contrasts mean for the future? The answer depends crucially on how each country and the international community respond to key policy challenges: Addressing global imbalances through macroeconomic policies and long-overdue reform; meeting the costs of aging populations; strengthening defenses against economic and financial crises; and delivering on the pressing imperatives of poverty reduction.

Recently, financial leaders from 184 countries met in Washington at the Annual Meetings of the IMF and World Bank. This year marks the sixtieth anniversary of the Bretton Woods Conference that established those two organizations as pillars of international economic cooperation.

As IMF Managing Director, my message was one of vigilance and action. Simply put, the international community must take advantage of the current recovery to broaden efforts to ensure financial and economic stability, and help those countries with limited prospects.

Periods of strong economic growth allow countries to put in place defenses to reduce the likelihood and severity of future downturns. But such opportunities are all too easy to squander. In an era of globalized financial markets, when countries can find it hard to cope with rapid cross-border capital flows, there is no time for complacency. A lesson of the 1990s is that vulnerabilities must be dealt with before they become crises.

The world's rapid economic growth in 2004 shows that the efforts to shore up our defenses since the 1990s has paid off. But growth has been unbalanced: Europe and Japan -- despite some recent gains -- are far from reaching their potential, and the United States and China have continued largely to drive the world economy.

One priority is to reduce global payments imbalances. The US must move to reduce its budget deficit in the medium-term. Europe and Japan can increase their growth by stepping up the pace of structural reform.

Moves toward increased exchange rate flexibility in China and other Asian countries, supported by financial sector reform, will have domestic and global benefits. Emerging market countries elsewhere have made considerable reform progress of late, but they must sustain the momentum to guard against potential shocks.

Other challenges loom. Issues that we once regarded as "medium-term" are becoming more urgent. Aging populations are forcing many countries to address pressures on their budgets and social security systems.

The problem is imminent in North America, the Euro Area, and Japan. But, before long, many developing countries will also have to face up to it, and in many cases without a cushion of affluence.

Then there is the energy issue. High oil prices have resurrected an old vulnerability. Countries need to reformulate their energy policies -- including by boosting production and refining capacity, diversifying energy sources, and giving new impetus to conservation. A better balance between production and consumption would avoid large swings in oil prices.

The IMF focuses on crisis prevention, and in the past decade encouraged greater transparency and stronger financial systems. The Fund also actively monitors capital market developments, and is implementing a more systematic assessment of debt sustainability.

There will always be ways to strengthen our work so that we provide well-articulated advice based on a clear understanding and the best analysis of each country. We need to communicate our positions clearly to policymakers and reinforce incentives for countries to take appropriate corrective actions. But in the end, the effectiveness of our advice hinges on countries' willingness to act on our recommendations.

Poverty also threatens economic stability. For all the successes of recent decades, the fact remains that 20 percent of the world's population still lives on less than US$1 a day, while HIV/AIDS and other communicable diseases are ravaging many societies. Other social indicators offer a bleak picture. Indeed, most developing countries are likely to fall short of the international community's target of halving poverty by 2015.

In 2002, at the Monterrey Conference, the international community agreed on a framework for reaching that goal. Developing countries would implement sound economic policies accompanied by good governance. Industrial countries would increase aid levels and lower trade barriers. The IMF and World Bank would offer advice, expertise, and financing, with the Fund concentrating on the macroeconomic and financial stability that is crucial to fostering durable growth and poverty reduction.

Some progress has been made on this "Monterrey Consensus." But international support is falling far below promised levels. Strong political commitments are needed to provide the aid that is needed to accelerate progress, and to secure success for the Doha trade round that is so crucial for developing countries' longer-term prospects.

The resilience of the global economy in the face of political and economic shocks demonstrates the central relevance of the reform process -- and underlines the importance of continuing along this path. Governments and institutions like the IMF must keep this in mind as they seek to ensure a durable economic recovery that will benefit all of the world's people.

The writer is Managing Director of International Monetary Fund.