Economic Crisis Calls for Immediate Action and Global Reforms

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Chairman of the Executive Board and Managing Director of the International Monetary Fund

The global economic crisis is no reason to abandon or hobble the market economy and free trade principles that have brought unprecedented prosperity and promise to most of the world. But immediate action is needed to escape today's crisis, and for longer-term growth, reforms are needed to cure defects and make markets work better. With immediate action, the world economy can continue to grow next year, but the pace will be slower and the risks are real. The head of the IMF assess the causes of the crisis, the immediate action that should be taken, and the needed reforms. Speech to the board of governors of the International Monetary Fund, Washington, D.C., October 6, 1998.

Governors, you have come this year in the midst of a crisis. A crisis that has already cost hundreds of billions of dollars, millions of jobs, and the unquantifiable tragedy of lost opportunities and lost hope for so many people, particularly among the poorest.

This is a time then, for hard thinking, for recognizing errors, and for bold steps. So let us try together to find answers to four basic questions:

1) Where do we stand?

2) What has gone wrong?

3) What should be the basis of a new financial architecture? And,

4) How can we travel from today's crisis to a more secure, stronger international monetary system?

Where do we stand?

The Fund's most recent assessment is that, in the absence of any further major shocks, world output will expand by about 2% in 1998, just one half of what we projected a year ago.

What has changed? Two key factors have aggravated the crisis that first emerged in Southeast Asia: One, a crisis at the heart of the crisis--the recession and financial system distress in Japan -- intensified. Two, the abrupt deepening of crisis in Russia triggered a new wave of instability throughout the world. No country has been immune. Contagion has spread through the emerging markets, especially Latin America, and financial markets in Europe and North America have turned down. Finally, this turmoil has travelled full circle, creeping back into Asia to make its prospects for an early recovery more uncertain.

This virulent contagion was felt most keenly in those countries with weak policies and inadequate institutions, but even countries with well-managed economies have not been spared. We did not anticipate the strength of this virus, which has struck far and wide, for instance, attacking Latin America because Russia ran into trouble. What a powerful demonstration this has been of the real vulnerability of emerging markets to abrupt changes in confidence, and the risks that arise when relatively small economies become the recipients of very large short-term flows!

Now, in the aftermath of this second shock of the crisis, most developing countries face a sharply weaker environment, greatly diminished capital inflows, and declining commodity prices:

* In Africa, where many successful adjustment programs were producing positive per capita growth for the fifth year in succession;

* In Latin America, where many countries had greatly strengthened their macroeconomic and structural policies; and

* Among the economies in transition, many of which, after years of painful structural transformation, were preparing themselves for another year of significant growth.

All of these, and others in the Middle East and the rest of Asia, now face difficult challenges.

It would be perhaps too dramatic yet to talk of global recession, but the evidence of the risks calls for immediate action. Fortunately, in the industrial countries of North America and Europe the fundamentals remain sound. For some time, inflation has been subdued. Economic expansion continues in the United States, while in the economies of the euro area the recovery has continued to firm. …