Good morning. I would like to thank the United Nations and the Spanish Department of Foreign Affairs for hosting this conference. This is a time of great opportunities for middle income emerging economies. I would like to talk to you today about some of the policies that they can pursue to take these opportunities, and some of the work we are doing at the Fund to support them in their efforts.
Middle income countries are making rapid progress in integrating into the global economy, and are enjoying a period of robust economic growth. During the last four years, they grew at an average 5.6 percent, more than 50 percent faster than the growth rate of the preceding decade. Openness has also increased. Trade as a share of GDP has nearly doubled since the mid-1980s; while private capital flows to these economies have nearly doubled over the last five years.
The task now is to capitalize on this success, to produce sustained growth and to reap the benefits and contain the risks stemming from financial globalization. Middle income economies still have a long way to travel. They are home to three quarters of the developing world's poor, and sustained growth and financial stability remain crucial if they are to reduce poverty and ensure that prosperity is widely shared.
Continuing to expand trade will be especially important. A recent study produced jointly by the WTO and the ILO makes a case for gradual trade liberalization combined with carefully designed educational and other pro-poor policies to spread the benefits of trade as widely as possible. We in the Fund have many times pointed out the benefits of trade reform, and especially the importance of multilateral liberalization. Export-oriented emerging economies have a keen interest in strengthened multilateral rules and reduced global trade barriers. They should join other countries in doing all they can to produce an ambitious conclusion of the Doha round.
Many emerging economies have taken advantage of improved economic fundamentals and benign conditions in world markets to deepen their access to international capital markets. Just a few years ago it seemed a distant dream for these countries to be able to attract foreign investors into local currency fixed income markets. Now it is routine. But while increased financial openness helps facilitate growth, it also brings vulnerabilities. There is a particular risk of abrupt changes in market sentiment when risk premia are unusually compressed, and when a search for yield is encouraging some investors to look toward lower tier credits. To help reduce these vulnerabilities, emerging economies should maintain sound macroeconomic policies and put in place effective institutional frameworks to deepen local markets. The movements of financial markets this week should be a reminder to investors that they need to focus on credit quality and be aware of risks from volatility in currency markets. Investors should not expect governments to bail them out if they run into trouble. This would create great problems of moral hazard.
The Fund is adapting to the increased importance of emerging economies in the global economy and addressing their particular challenges. We are strengthening our surveillance work. We are reviewing the tools we have to help emerging economies prevent and respond to crises. And we are reforming our governance structure to make the voice of our emerging market members commensurate with their economic weight.
Surveillance is a central task for the Fund. By surveillance, I mean monitoring the global economy and conducting discussions—consultations—with individual members on their economies. Fund surveillance offers independent analysis and trusted advice to members, and passes on knowledge and experience across boundaries. For example, based on our global surveillance, the Fund has warned about economic risks, such as those stemming from global imbalances, and financial market risks, such as those stemming from the yen carry trade. Increasingly, through the publication of reports and assessments, the Fund also informs public debate on economic policies and promotes well-functioning markets.
We are making a number of changes to the way we conduct surveillance
• We are doing more to integrate financial sector and macroeconomic analysis. This is particularly relevant to emerging economies, which have much to gain from global financial integration, while also remaining vulnerable to it.
• We are strengthening our focus on global and regional spillovers. Our new Multilateral Consultation vehicle brings the Fund and groups of members together for policy discussions on issues of shared interest. Regional Economic Outlooks are prepared regularly by all our area departments. And, we have extended to emerging markets our multilateral framework for analyzing equilibrium exchange rates.
• Finally, we are reviewing the policy framework of surveillance, to ensure it is clear and relevant to today's economy. We are also considering adoption of a "surveillance remit," to set time-bound priorities for the Fund's work.
Preventing financial crises remains a key focus of the Fund's work. Strong surveillance helps, by enabling the Fund to identify vulnerabilities early on and encourage appropriate policy responses. In addition, a number of members have called for a Fund lending instrument specifically designed to help prevent capital account crisis. To this end, the Fund is considering a new instrument which, contingent on a commitment to sound policies, would provide liquidity support that is predictable, flexible and substantial enough to stabilize confidence in member countries facing shocks.
Developing such an instrument now, when market conditions are benign, would allow us to be prepared when conditions are less favorable. The staff has engaged in outreach with emerging economies and other countries as well as with market participants to solicit views on the appropriate design of this new instrument and to gauge potential demand for it. We will be holding further discussions of this in our Executive Board before the ministerial meetings next month.
I believe that reform of the Fund's governance is essential to the Fund's continued credibility and effectiveness. As a first step, our Board of Governors adopted a resolution during the 2006 Annual Meetings in Singapore that gave stronger voice to the four of the most underrepresented emerging economies: China, Korea, Mexico and Turkey. Building on this resolution, the second stage of the quota reform process aims at finding a new simpler and more transparent formula for measuring members' relative positions in the global economy more accurately. This includes how to update and modernize the variables used in the quota formula to reflect today's realities. There are technical complexities to be sorted out and difficult tradeoffs to be considered, but all Fund members will benefit from having an institution that more effectively represents the world we live in.
These steps—toward more effective surveillance, setting up the right instruments for crisis prevention, and ensuring that quota and voting shares reflect global realities—are important to ensure the Fund is well adapted to the needs of all of its members, and not least the middle income countries. We hope they will continue to support durable growth for our most dynamic members.
Thank you very much.
Remarks by Rodrigo de Rato, Managing Director of the International Monetary Fund, At the Intergovernmental Conference on Middle Income Countries