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Ottawa, October 5, 1998
1998-102

Statement prepared for the Development Committee

The Honourable Paul Martin, 
Minister of Finance for Canada

Washington, D.C.
October 5, 1998

Delivered text is official version.

Our discussion of the East Asian situation today in the Development Committee is no less important than when we met last April. The fallout from the East Asian financial crisis continues and the financial contagion has spread to other major regions of the world. The progress we have made as a global community on development and poverty reduction over the past two decades is under threat.

While there are positive signs for longer-term recovery in many of the affected economies in East Asia and elsewhere, we must be realistic. Economic recovery will not happen overnight. Continued sluggish growth, and even contraction in some countries, is inevitable.

While we have all felt the effects of the financial turmoil, the fragile economies of the world's poorest countries have been particularly hard hit. Although many of these countries have not been directly affected by capital market volatility, they are suffering the indirect effects of lower commodity prices and falling export demand. Moreover, the poor in these societies, those least able to protect themselves, are suffering most. Women and children, who are the most vulnerable, feel the impact of adjustment efforts first and hardest.

This reality has driven home what we all know to be the first real message from recent events – that we cannot ignore the real consequences for people in any crisis assistance or response package. The social implications have to be recognized up front and on par with the economic response.

The World Bank, and particularly the International Development Association (IDA), with its strong focus on poverty reduction, must lead in directly addressing concerns about the social impacts of financial crises. IDA assistance at this time, particularly in such areas as primary health and education, is critical especially in light of the widely shared international goal to reduce poverty by one half by the year 2015. Now, more than ever, it is important to ensure that IDA can fulfil its mandate to assist the world's most disadvantaged. To do so, sufficient resources must be available to carry out this challenge.

My Caribbean colleagues face the daunting challenge of adjusting their fiscal policies to adapt to the changing international economic environment. The loss of export markets, along with increasing international competition, threaten growth prospects in the region. Coupled with these economic pressures are external vulnerabilities such as those exemplified most recently by the devastating effects of hurricane Georges. We would urge the Bank and Fund, together with the donor community, to assist countries in the region with both their shorter-term reconstruction and longer-term adjustment efforts.

The second message from the many crisis events of this year, which we also now recognize, is that the Bretton Woods institutions are key to leading the response to the crisis. But they cannot work in isolation. They must co-operate more broadly with other international organizations – including the regional banks and the World Trade Organization – as well as with the private sector, bilateral donors, developing country partners and with each other. The strong emphasis by the Bank on the theme of partnership is particularly welcome; the challenge will be to put partnerships into action on as broad a front as possible.

Third, it is clear from our analysis of the causes of the recent financial turmoil, just how strong the linkage is between good governance and progress towards democratic societies and longer term economic adjustment and development.

Strengthened IMF-World Bank Collaboration

The World Bank and International Monetary Fund (IMF) are now drawing on lessons of experience to ensure they are better prepared to help solve the problems underlying financial crisis and to respond better in the event of future crises. Coming out of this experience are four key areas for particular emphasis:

1. Co-operation between the Bank and the Fund needs to be strengthened at all levels. It is not enough for the heads of the two institutions to meet together periodically – staff across the institutions must also be engaged in this effort. Better sharing of data and analysis, joint preparation of policy papers and more missions representing both institutions are a good start to making this happen.

Better co-operation and co-ordination between the two is particularly important in crisis-response situations in order to ensure that shorter term emergency financing does not undermine longer-term development work.

2. Policy advice to member countries must be effectively co-ordinated. This does not mean that debate on policy issues should be discouraged, in fact I would argue the opposite. However, discussions between the two institutions must begin earlier, as programmes are being developed, not when they are completed. And, a genuine effort must be made to work out any differences in advance. In effect, it means the IMF and World Bank must be open, transparent and equal partners in the policy-making processes. We have to "walk the walk" of transparency and good governance in our own institutions.

3. A clearer delineation of the roles and responsibilities of each institution is helpful. Generally speaking, the IMF will exercise surveillance over macroeconomic and stabilization policies, while the World Bank will promote overall economic development, structural and sectoral reforms.

But we know that, in practice, overlap is sometimes unavoidable. In this respect, the proposed Liaison Committee, drawing on expertise from both the Bank and the Fund, is a step in the right direction. The challenge will be for the Committee to provide open and objective guidance, based on what is in the best interest of the country, rather than in the interests of any one institution.

4. Collaboration on financial sector reforms should be a priority. Clearly, more needs to be done to make financial markets work better. Strengthening surveillance of financial sector regulatory and supervisory regimes is a key area where the Bank and the Fund have indicated they will work together. Canada strongly welcomes these actions and hopes that our continuing discussions on this issue in the Interim and Development Committees will result in more concrete proposals in the near future.

Although today we have focused on the issue of Bank-Fund collaboration, in keeping with the theme of building partnerships our discussion of institutional collaboration should be expanded to include the regional development banks and other international organizations such as the World Trade Organization.

Assistance to HIPCs and Post-Conflict Countries

The heavily indebted poor country (HIPC) initiative is a prime example of positive collaboration, not only between the Bank and the Fund, but also with the regional banks and bilateral donors. Considerable progress has been made since the initiative was launched in 1996. We applaud that progress and trust that ultimately more than 20 needy countries will receive assistance.

Canada is committed to timely, generous and flexible treatment of the unsustainable debt burdens of the HIPC countries. Canada has written off aid-related loans to virtually all the poorest countries, including all the HIPC countries, and has transferred more than US$22 million to the HIPC Trust Fund from our share of the Interest Subsidy Fund.

We also acknowledge that post-conflict countries pose a special set of challenges to the Bank, Fund and donors. Close World Bank-IMF collaboration to develop a strategy to assist post-conflict countries in clearing arrears to multilateral institutions and achieving debt sustainability supports all of our interests. Canadian officials have been impressed by the leadership and commitment shown by the Bank in its ongoing work with other agencies on joint approaches to post-conflict situations; these are concrete expressions of the theme of partnership. We would also urge the Bank to work closely with regional development banks, the Paris Club and other donors in developing this initiative.

Future Challenges: The Evolving Role of the World Bank

I would like to end by addressing the World Bank's challenge in defining its future role.

The Bank has seen a profound change in the global economy in which it operates and in the diversity of the members it serves. A host of new categories of countries – including heavily indebted, post-conflict and transition countries – have arisen in recent years. It is clear that the old way of delineating countries based only on per capita income is no longer sufficient.

Now, more than ever, we understand that individual countries require programs that meet their unique needs. The old "cookie cutter" approach to problem solving will not work. To ensure longer-term success, the countries themselves, and their citizens, must be involved in designing Bank programs from their inception. Bringing borrowers closer to the centre of the process is an important innovation. Without this sense of ownership, there will be no longer-term commitment to sustaining project results.

The Bank is grappling with the tremendous challenge of how to show more flexibility and be more responsive in meeting the needs of its clients in a world of considerable uncertainty. This will require greater attention to, and understanding of, an individual country's political, historical, societal and cultural context. Moreover, if it was not already clear, recent events have brought home to us that political, social and economic progress go hand in hand if we are to prosper together on this planet.

I am pleased that the World Bank and Commonwealth Secretariat, together with the IMF, are finally about to embark on a closer analytical examination of the particular circumstances of very small countries. My Caribbean constituency has been articulating for some time its concern that, below a certain threshold, size has important effects on economic behaviour. Unfortunately, this issue has not been widely examined to date in mainstream economic theory. This review should spark a meaningful dialogue with these countries as well as provide them with an assessment of their needs and help institutions tailor specific programmes and policy advisory services.

To meet these global challenges, the World Bank may need new instruments to assist borrowing members in times of crisis. The urgency of the crisis and the early response to East Asia raised a number of questions about whether the Bank was in a position to respond as quickly and effectively as it should. The useful exploration of options to better address crisis situations is clearly needed and timely. We must carefully assess the need for new instruments and their appropriate structure and pricing.

Ultimately, however, we must ensure that the Bank's overarching objective of longer-term sustainable development and poverty reduction is reinforced and is not jeopardized in the process. Developing countries, and particularly the poor in these countries, depend on us to ensure that resources remain available for their future needs.