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Ottawa, April 17, 1998
1998-045
Statement prepared for the Development Committee
The Honourable Paul Martin, Minister of Finance of Canada
Washington, D.C.
April 17, 1998
Delivered text is official version.
Introduction
Today's discussion of East Asia at the Development Committee could not be more timely. Collective bilateral and multilateral efforts to respond to the East Asian crisis are now well underway and clearly have helped to stabilize the situation. We now have an opportunity to move beyond crisis management to look at the longer-term reforms needed to restore the health of the East Asian economies. Equally important, we are now in a position to take stock of the lessons learned to work towards preventing similar crises in the future. But this will not happen without a co-operative effort among all parties. Clearly, the private sector, developing and developed country governments, and bilateral and multilateral institutions must all play a role.
World Bank's Role
Yesterday, in the Interim Committee, I underlined the challenge that we face in strengthening domestic financial systems and improving regulatory and supervisory regimes. I noted that we need to consider whether a new entity is needed to promote better financial sector practices. I am not wedded to a particular structure, but I find the idea of a joint Fund-Bank effort very appealing.
Today, I would like to expand on our discussion to focus particular attention on the critical role of the World Bank in addressing financial sector reform. It is essential that the Bank participate not only in crisis management but that it address the longer-term structural problems underlying financial sector instability. In doing so, the Bank must focus on those areas where it has a comparative advantage to ensure the effective use of its resources.
In brief, I see five requirements to strengthen the Bank's role:
Greater attention to underlying structural and regulatory issues and governance: In order to facilitate the restructuring of the financial and corporate sectors, the Bank will need to assist in a variety of ways including: putting in place appropriate legal and institutional frameworks, particularly for bankruptcy laws; strengthening institutional capacity in the areas of supervision and regulation; and improving the governance structure for banks and corporations. I am pleased to see the early efforts of the Bank in this respect, for example, in helping to establish a financial restructuring agency in Thailand and introducing reforms to strengthen credit appraisal and risk management in Indonesia.
A more frank and timely assessment of country conditions: One key lesson from the East Asian situation is the importance of identifying early on structural weaknesses before a serious crisis develops. The Bank's proposed pilot program of Structural Policy Reviews, which will periodically review the key structural areas that underpin macroeconomic performance and vulnerability, should help respond to this need. It is also clear that the Bank must be more frank in its assessments of potential problems through its Country Assistance Strategy discussions. While issues of confidentiality must be respected, this should not be done at the expense of downplaying obvious structural weaknesses in member countries.
Improving internal capacity: The recent financial crisis in East Asia flagged the need for skilled financial sector specialists, both to better assess internal financial sector weaknesses in borrowing member countries and also to help respond to crisis situations. The Bank urgently needs to expand its human capacity in this area. To achieve this, the Bank will need to ensure that appropriate incentives are in place to attract top-notch staff in today's competitive market.
Better co-operation between international institutions: Evidence suggests that co-operation among international institutions and between them and bilateral donors did not always run smoothly in the early days of the East Asian crisis. Admittedly, this is difficult when a swift response is required. However, there is now an opportunity to step back and review what can be done to improve co-operation in the future. Better sharing of information, co-locating offices in member countries and joint work on developing policy prescriptions are needed to ensure consistent and timely advice is provided.
Last, but certainly not least important, the Bank has a leadership role to play in assessing the social impacts of financial crises, particularly on the poor, and catalyzing the international donor response. The Bank, as the world's pre-eminent development institution, with the overarching objective of poverty reduction, has a clear mandate in this area. The Bank should be commended for the early work it has done in East Asia, for example, in designing a social investment project for Thailand, in introducing a component on social protection and food provision for the Korean Emergency Loan, and in co-ordinating the donors' food aid response for Indonesia and other developmental needs. Now it needs to move on to look at longer-term issues, such as developing appropriate social assistance packages and assisting groups – especially women – that are most vulnerable to financial sector instability.
Canada remains committed to assisting in the international efforts to strengthen financial sector reform efforts. As noted in the Development Committee paper, the recognition that weaknesses in financial sector regulation and supervision were major factors behind the recent crises in financial markets led the Government of Canada and the World Bank to jointly establish the Toronto Centre for Executive Development of Financial Sector Supervisors late last year. The Centre will provide experience-based training for senior financial supervisors and regulators in emerging markets.
Canada is also part of the international effort to assist Korea as part of the second line of defence. A package of US$57 billion has been provided to help respond to the immediate need to overcome Korea's liquidity problems, restore investor confidence and assist in the resolution of fundamental problems in the financial and real sectors.
Canada will also provide a $280 million assistance package to Indonesia to address the hardships its people have suffered as a result of the economic crisis affecting the country. This initiative will support implementation of the International Monetary Fund program in Indonesia, while helping to alleviate the suffering of the Indonesian people by providing export credits for agricultural and other essential imports, food aid and assistance to combat forest fires.
Canada will also contribute US$500 million to the Thailand support package to replace some of the initially pledged money that has had to be withdrawn. This reflects our belief that the Thai authorities have taken the necessary measures to deal with the crisis.
Response to the MDB Task Force Recommendations
The recommendations of the Multilateral Development Bank (MDB) Task Force Report are extremely relevant to this discussion. Canada stressed the importance of working together better at the Halifax G-7 Summit and it is well worth reiterating this point today. With scarce resources, all international institutions, as well as their bilateral partners, must work to their comparative advantage if our joint mandate of reducing global poverty is to be achieved.
In this respect, I welcome the MDB's response to the Task Force recommendations. Progress has clearly been made and Jim Wolfensohn should be congratulated on the Bank's efforts in this respect. Three areas need to be emphasized:
Better co-operation and co-ordination among the MDBs and between these institutions and the IMF is essential, not only in addressing financial sector issues, but more broadly. This is needed not only at the management level, but at the level of country co-ordination. Data sharing, developing common impact indicators and harmonizing evaluation methodologies can all help to cut down on duplication and ensure complementarity of efforts. For maximum effect, this improved co-ordination should be part of a broader partnership strategy, including bilateral donors, which assists recipient partners to formulate, implement and co-ordinate donor participation in the country's own development strategies.
A more innovative and flexible response is needed to address the widespread poverty that continues to cripple many areas of the developing world, particularly in sub-Saharan Africa. More thought needs to be given to designing programs that meet the unique and increasingly divergent needs of borrowing members. In this respect, the World Bank's new adaptable lending products should be useful in testing new ideas. In particular, the new "Learning and Innovation Loan", available for small demonstration projects, should be beneficial for the poorest countries, particularly in building institutional capacity.
As is clear from recent developments in East Asia, assistance is needed to ensure that effective governance systems are in place. This can range from encouraging more effective management of borrowing member public expenditures to supporting more open and participatory approaches in decision making. The Bank is also working to help countries create conditions that discourage the practice of fraud and corruption. The Bank should be commended on taking a leadership role by revising its own bidding documents to provide mechanisms for disbarring bidders from future Bank-financed projects if there is evidence of fraud or corruption.
Heavily Indebted Poor Countries
The Heavily Indebted Poor Countries (HIPC) Debt Initiative is a prime example of how international co-operation can help to improve the future prospects of the poorest countries. Canada and Ireland have been strong supporters of the HIPC Initiative since its inception. We have pressed for the earliest possible consideration of eligible countries under this initiative, as well as maximum flexibility in applying the initiative to generous treatment of all eligible countries.
To underline its strong support for the poorest countries, Canada has recently agreed to provide C$8 million from our aid budget to help in the HIPC package for Mozambique, one of the poorest countries in the world.
Canada's Announces An Additional HIPC Contribution
Today, I am also pleased to announce that Canada will be directing its US$22 million share of the World Bank's Interest Subsidy Fund to support the HIPC Debt Initiative.
We have come a long way since the details of the Debt Initiative were endorsed by the Interim and Development Committees at the 1996 annual meetings. Since that time, it has been agreed that six countries – Bolivia, Burkina Faso, Côte d'Ivoire, Guyana, Mozambique and Uganda – would receive debt relief under the initiative. In addition, Uganda has now reached its "completion point" and so, in effect, crossed the HIPC finish line. The total assistance for these countries is estimated to amount to US$3.0 billion in present value terms, which corresponds to a reduction in nominal debt service of about US$5.7 billion. Ultimately, we hope to see more than 20 countries benefit from the exceptional debt relief provided by the initiative.
Conclusion
Recent events in East Asia underline the challenges facing us all in this increasingly interrelated global economy. But they also show what can be accomplished by a concerted and co-operative effort to address common problems. It is my belief that we can move forward together to help restore the health of the East Asian economies and that the lessons we have learned can offer better protection against similar crises in the future.
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| Last Updated: 2004-07-15 |
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