Mark Egan

Reuters, September 19, 2002

WASHINGTON, Sept 19 (Reuters) - The head of the International Monetary Fund said on Thursday that risks to the global economic outlook have increased in recent months but the recovery should still continue.

In a speech before the IMF's annual meetings here next week, the lender's managing director, Horst Koehler, said the United States should avoid falling back into chronic overspending while Europe and Japan should do more to bolster their economic growth prospects.

"The global economy has shown remarkable resilience in the face of multiple shocks over the past two years," Koehler told the Council on Foreign Relations. "Nevertheless, we need to be concerned about the strength and durability of the ongoing economic recovery, and the stability of the international financial system."

"Risks to the global economic outlook today are clearly tilted more to the downside than they were a few months ago," he said, adding, "On balance, we do still expect that the recovery will continue."

Koehler said the heightened risks included the continued fallout from the collapse of the equity bubble, corporate scandals that have undermined investor confidence, crises in some emerging economies like Brazil and Argentina, regional political tensions and volatility in world oil prices.

BOOST CONFIDENCE

He said it was crucial for leading economies to take steps to boost confidence, including steps to improve accounting standards and stamp out corporate corruption.

"The United States should beware of falling back into chronic public sector deficits," Koehler said. "Europe and Japan have to be more serious about accelerating structural reforms, to unlock self-sustained growth."

He also said Japan "should act decisively to bring an end to deflation" and more work was needed to bring a successful conclusion to the latest round of world trade talks.

Koehler also used his speech to hone his vision on how the IMF should be reformed, making a number of new suggestions.

Topping those reforms were his first public statement that the IMF should act as a whistle-blower on countries that are going astray -- something that the Bush administration has been seeking but the lender has resisted so far.

"We have a responsibility to speak out when countries live too long beyond their means, not least because the poor suffer most from disorderly adjustment, high inflation and volatility," Koehler said.

Critics have said that if the IMF had blown the whistle on Argentina earlier, it would have been forced to restructure its debts earlier, and could have avoided the messy debt default it undertook early this year after the IMF cut off aid due to a myriad of broken promises.

And with corporate scandals like Enron and WorldCom dominating headlines over the past year, Koehler suggested the IMF could play a role. He said the lender, in cooperation with the World Bank and Financial Stability Forum, could work on harmonizing accounting standards, enhancing corporate disclosure and ways to better align management incentives better with shareholder objectives.

The IMF chief also said he supports changing the lender's quota system so its decision-making board would more accurately reflect the economic strength of emerging economies and give a better voice for African nations.

Asian nations have complained they are under represented on the IMF's board compared to their European counterparts, while most African nations are represented by just two of the lender's 24 board members.

With the size of the global economy growing, Koehler also raised the possibility that rich nations might begin considering giving the IMF more cash to do its work.

Koehler reiterated the IMF should do more work on crisis prevention and should support countries with good policies and "be prepared to say 'no'" to recalcitrant nations and, as a rule, make fewer massive bailouts.

On Brazil, which recently secured a $30 billion IMF bailout, Koehler said, "I am confident that Brazil will stay the course of sound policies in the period ahead, regain the full confidence of international financial markets, and resume a strong growth path."

"The main problem in Latin America has not been too much reform, but too little. We have seen in Argentina that it is dangerous to stop halfway."

Copyright 2002, Reuters News Service