John Taylor is in buoyant mood. As head of international affairs at the US Treasury he is used to the role of firefighter, dousing the flames fanned by financial crises throughout the world. But as he surveys the global scene, the former Stanford University professor predicts a rosy future for most developed and emerging economies.
?Right now, we have one of the best global economies in over 20 years,? he tells Emerging Markets. He points to the global growth rate in the second half of last year and says that economic historians need to go back to the mid-1980s to find the last time the world experienced such a rapid increase.
The critics see things differently. The latest growth figures out of Europe and Japan don't make great reading. More worryingly, in the US the early impetus gained from President Bush's tax cuts appears to be waning, according to some observers. While the first quarter saw the US economy grow by 3.9%, the second quarter saw a less flattering 3% rise.
With the high oil price sapping disposable income and the latest employment data much worse than expected, more bearish analysts reckon difficult times lie ahead for the world's biggest economy. ?We fear the economic slowdown has more bite to it than the Fed wants to admit,? says Dominic Konstam, head of interest rate strategy at CSFB.
Outcome change
Taylor, though, is unrepentant. Another reason behind his optimism lies with the emerging markets. Typically, emerging markets fall into crisis during Federal Reserve tightening cycles ? as was the case in the late 1980s. So far, in 2004, the Fed has increased rates by 0.75%, and more rises are expected, if not this year, then next. But Taylor reckons that things will turn out differently this time.
?I don't see any stresses [in the financial system] building as in the past,? he says. ?Over the past 18 to 24 months, [bond] spreads have declined in many countries.? He cites the advances being made by Brazil and Turkey. Both countries have suffered financial crises over the past five years and both are vulnerable to interest rate shocks. Yet they are better placed to handle any forthcoming financial pressures due to what Taylor calls ?very favourable policies?.
Argentina's progress
He is also happy with the progress being made by Argentina. ?It's very pleasing ? Argentina has done well on the macro side of things,? says Taylor. ?It's an amazing bounce back from the low economic activity of 2002.? This year the economy is expected to grow by just over 7%.
Still, there are pressing concerns as Taylor acknowledges. Doubts have emerged over Argentina's restructuring of about $100 billion in defaulted debt held by the country's private creditors. A deal has yet to emerge and some analysts fear the worst. ?The Argentine government is realizing that the acceptance of the restructuring proposal is going to be dismal and the deal is going to fall flat,? says Walter Molano, head of economic research at BCP Securities, a sell-side firm.
Taylor says the situation needs to be resolved quickly. ?I very much hope that the government can complete negotiations with [Argentina's] creditors soon,? he says. ?[An agreement] is necessary for Argentina's long-term sustainability.?
He denies that there is any disagreement between the G7 countries and the IMF over how the Argentina crisis should be resolved. ?The G7 and IMF are on the same page. There is no space now,? he says.
Dubai split
The story was different at last year's annual meeting in Dubai when the Fund's board was split over a new programme for the Latin American country. The Nordic countries, Australia, Holland and Switzerland cast abstentions at an executive board meeting. The G7 countries and Spain voted in favour of the proposal, which included a primary surplus target of 3% plus. That target proved particularly controversial, especially as Brazil was given a much tougher 4.5% target as part of its IMF programme in 2002. ?Argentina's target is less than Brazil's but Brazil was in a good situation,? says Taylor. ?Argentina has experienced a very destructive default.?
He defends the big bail-outs of both Latin countries. ?At the time, the policies made sense,? he says. He points to, for example, the success of the US Treasury and its allies in preventing financial contagion after Argentina defaulted. ?We addressed the contagion issue quite well. Only one country was hit hard ? Uruguay ? but otherwise there was no contagion, unlike in previous crises,? he says.
Reform successes
Taylor says that since his appointment in June 2001, the international financial institutions have had success in implementing several reforms. These include the introduction of collective action clauses in sovereign debt (which was Taylor's big idea); a more streamlined conditionality at the IMF; the introduction of a new system for measuring results at the World Bank; the creation of a grant window at the World Bank for very poor countries; a focus on core expertise at the IMF and World Bank with an appropriate division of labour; and the creation of clearer limits and criteria for exceptional access from the IMF.
?All in all, the policies are working,? he says. ?Taken as a whole, these reforms represent an important policy shift for both the IMF and World Bank that is enabling them to achieve their goals more effectively.?
He adds that the initiatives in place now will make IMF policies more predictable, ensuring greater stability. What was needed in the past, he says, was ?more focus to be placed on what public sector actions were likely to be in a given circumstance, on what accountability there would be for those actions, and on what the strategy and the principles behind the actions were.?
Next steps
Looking forward, he says both the World Bank and IMF must continue to reform. ?I believe that still more can be done.? He says, for example, that transparency could be improved further, especially at the World Bank. In addition, he believes more consideration should be given to improving the Fund's surveillance capabilities, including greater independence between debt sustainability analyses and lending decisions.
In any case, says Taylor, private cross-border capital flows have increased sharply, meaning that IMF and World Bank loans are much less important than they used to be. For that reason, the Bretton Woods institutions should assist poor countries more in areas such as the benchmarking and monitoring of economic indicators rather than just lending to them.
?That doesn't mean the country wouldn't be able to have a borrowing programme if there was a balance-of-payments need,? says Taylor. The Treasury official reckons that these non-borrowing programmes will allow countries a greater say over their future. It will also mean that the international financial institutions will be able to identify more easily which countries are following so-called good policies.
Taylor says the IMF's and World Bank's aims are the same as they were 60 years ago: to increase economic stability and to raise economic growth, which will help reduce poverty. ?I see no reason to change these goals,? he says. ?Both institutions have important roles to play but they need to be more focused on development.?