T Mbeki: International Monetary Conference

3 June 2007

International finance and financial institutions in the developing
world
Mr Walter B Kielholz
Distinguished guests
Ladies and gentlemen

I am very honoured warmly to welcome you to Cape Town, to South Africa and
to Africa. We are indeed very privileged that you decided to convene on our
continent at a critical moment in its evolution.

You have come to a continent that is driven by hope. The millions of our
people rejoice in the fact by and large we have left behind a period in our
continent's history characterised by military coups, the denial of democratic
rights, economic regression and the further entrenchment of poverty, with no
prospect that this would end.

Yes, we continue to face many serious problems in all areas of human
activity, including with regard to such issues as peace and stability, the
entrenchment of democracy, the further acceleration of economic growth and
development, the development of our human capital, and the sustained reduction
of poverty.

But with regard to all these, today is better than yesterday. It is better
because we have, as Africans, consciously assumed collective responsibility to
correct what was wrong and do everything we need to do to give meaning to our
dream for an African renaissance. This is what the establishment of the African
Union means, and this is what the New Partnership for Africa's Development
(Nepad) and the African Peer Review Mechanism (APRM) signify.

I know I speak for all Africans when I say we do sincerely hope that your
decision to convene here, on African soil, signals your own determination to
walk side-by-side with us as we move this great continent away from the
periphery. I would therefore like to thank you most sincerely for coming here,
which will communicate the good message to many in the world, that Africa's
time has come.

The International Monetary conference meets here at a unique time in our
collective history. It is a time of extraordinary change in the political and
economic fabric of our world, one marked by a sustained and high rate of world
economic growth, of the rise of industrial production on an unprecedented scale
in China and India, of the inclusion of hundreds of millions of people in the
world's market economy, and of a decline in global poverty due to growth in
those emerging economies.

It is also a time of great disparity in wealth and incomes within and
between countries, of countries and their peoples that struggle to find the
right mix of policies and institutions to initiate the positive spiral of
economic surpluses to break free from poverty, and of many other countries that
are creating the means to launch into more rapid economic growth.

It is also a time when we as the international community are beginning to
recognise in a more visceral way than previously that the neglect of our global
commons and the race for wealth if not done with foresight and acknowledgement
of the associated costs, can and will have far-reaching ecological
consequences.
Our thinking about the international system and its importance to the paths our
societies take through time in achieving our economic, political, and cultural
aims has sharpened greatly in recent years.

In part this is because strictly speaking the international system has
become more important to what we want to achieve, witness the ever-growing
flows of private capital from economy to economy and in part because as
countries we have the confidence to explore our plural world in ways denied to
us not so long ago, the fall of apartheid for us, and for all humanity, the
fall of the Berlin Wall have resulted in greater interactions among the peoples
than any of us could have imagined.

And so while we rightly seek to celebrate our plurality, our diversity, and
in so doing also celebrate those human, social, and environmental traits we
have in common, we must ensure that inclusion and progress remain the driving
forces for what we do now and will do in future.

Economic marginalisation and environmental degradation can be products of
the world we live in, as can environmentally sustainable development, economic
inclusion and an end to poverty. As an international community, as leaders of
governments and leaders of financial institutions, we need to apply ourselves
to the task to make certain that the outcomes we want are those that we
realise.

Part of the solution to achieving our goal of economic development is to
ensure that private capital becomes a permanent element of the financing of
growth in the developing world. A second part is to ensure that the
international financial system is supportive of that role and helps countries
to make sound long-term economic policy choices.

Global portfolio flows have surged in recent years as low interest rates
around the world have encouraged increased risk taking and borrowing by
investors. Macroeconomic stability has been enhanced by the move towards
floating exchange rates and inflation targeting in many countries, and has
contributed, alongside high commodity prices in recent years, to the flow of
capital into emerging markets and developing economies. Emerging market
fundamentals have improved dramatically over the past few years as external
debt ratios have declined and foreign exchange reserves increased.

As you know, assets under management of institutional investors more than
doubled in the decade between 1995 and 2005 from US$21 trillion to US$53
trillion. Investment in alternative vehicles such as hedge funds has also
surged in recent years, with assets under management by hedge funds reaching
US$1,4 trillion at the end of 2006 from US$30 billion in 1990.

Portfolio investors have become increasingly active in local currency debt
markets, especially in sub-Saharan Africa. The region's economic fundamentals
have improved, increasing returns to investments. For South Africa, portfolio
inflows totalled R144,2 billion last year after inflows worth R36 billion in
2005.

Yet much of the dramatic rise in capital flows to Africa and the rest of the
developing world has occurred partly in response to 'global imbalances', the
giant current account deficits and surpluses generated by the United States
(US), the Chinese, and other major world economies.

Rapid growth in China and a set of seemingly intractable geopolitical
tensions have bid up commodity, gold and oil prices, raising growth rates for
many exporters of these products, and contributing to further increases in
global liquidity. Vast foreign exchange reserves in China and other Asian
economies and among the oil exporters, in turn, have helped to perpetuate the
unsustainable rise in consumption spending in the US as well as slow the
unwinding of the US current account deficit.

The indirect effects of the ongoing slowdown in the US economy, largely
through a weaker dollar, have promoted reserve accumulation in much of the
world outside the US. The global economy has become less dependent on the US as
a source of growth, which has facilitated some rebalancing, although US current
account deficit is still about six percent of Gross Domestic Product (GDP).
Europe and Japan, along with China have become the main engines of growth.

Emerging markets have also benefited from relatively benign global economic
conditions, experiencing strong growth, improving terms of trade, and strong
capital inflows. The result has been a robust expansion without undue
inflationary pressures.

These developments are, however, also creating challenges. Even as growth
rates remain strong, rising currency values weigh on manufacturing activity
outside the commodity sector. And governments and central banks have tried to
limit exchange rate appreciation with limited success.

The surge in global liquidity, rapid economic growth in many parts of the
world, and speculative investment in commodities has contributed to the sharp
rise in prices over the past three years. This further complicates the
prospects for inflation, at the same time as it has fostered investment and
growth in developing countries endowed with zinc, platinum, gold, coal, iron
and many other commodities. Tardiness by producers in responding to price
signals has also helped to push up prices as supply has struggled to catch up
with rising demand.

These factors; strong capital inflows and commodity prices, have added a
welcome degree of buoyancy to the recent economic performance of many African
economies. This comes on top of the steady strengthening over the last ten
years of macroeconomic policies and institutional development. Africa's GDP
expanded by 5,6 percent in 2006, continuing the momentum of strong growth
achieved over the previous three years.

Macroeconomic stability is being consolidated, with average consumer price
inflation rising by about 7,2% in 2006 down from 9,7% in 2003 and 13,2% in
2001. Underpinning these improving inflation figures are our fiscal balances,
which have changed from 5,2% of GDP in 1994 on average, to a surplus of 1,5% in
2005 and 4,1% in 2006.

Macroeconomic policy reforms and improved stability underpin the stronger
economic performance. Lower and more stable inflation, manageable debt levels,
sound fiscal policies and improved public financial management have been
central areas of reform in many countries in the Sub-Saharan region.

Economic growth in Africa is expected to average between six percent and
seven percent in 2007 and 2008. This is more than twice the average growth we
achieved from 1984 to 1993.

This record represents a major turnaround from previous decades. Yet for
many countries growth rates remain insufficient to achieve the desired
development goals. Growth is highly concentrated in a narrow range of
activities, making many African economies extremely vulnerable to factors such
as weather conditions, terms of trade developments and aid flows.

From 1998 to 2006, only seven countries out of the 52 countries monitored by
the Economic Commission for Africa (ECA) achieved an average real GDP growth
rate of more than seven percent. By this measure, and at current trends, few
countries would be on track to achieve the Millennium Development Goals (MDGs)
by 2015.
Raising growth rates further and sustaining an elevated performance is critical
to the development challenge. And while continued policy reform and
institutional development is central to that effort, so too is the continued
easing of the debt burden for many African economies, greater financing of
cross-border infrastructure projects, and reform of the international financial
system.

The Heavily Indebted Poor Countries (HIPC) Initiative remains the primary
means of providing debt relief to low-income countries. The launching of the
Multilateral Debt Relief Initiative in 2005 has provided a much-needed boost to
the debt relief effort, and will provide about US$50 billion in additional debt
relief.

The key economic importance of the debt relief lies, however, in the
official financing and government resources freed for development in the HIPC
process. These must be used to leverage greater investment in among others; the
telecommunications and transport linkages between African economies that are
needed to boost regional trade and lower the cost of engaging in economic
activity.

Some of these resources must also be used to develop human capital and
institutional capacity, to develop our skills and knowledge and to create the
regulatory institutions; the tax administrations; the knowledge networks; and
the myriad of other private and public institutions that are critical for
market economies and the ability of people to engage in economic activity.

And so while there is much to be done to make the flow of capital into our
economies a permanent rather than accidental feature of our economic
trajectory, we must also work to strengthen the international financial system
and the multilateral institutions that operate in it. Reform remains critical
to the growth-enhancing potential of the one and to the legitimacy and efficacy
of the others.

It is difficult to overstate the importance of the World Bank and the
International Monetary Fund to countries that require their resources to avoid
major reductions in their public spending or severe adjustments to their
balance of payments. They play a key role in signalling to private investors in
major global financial centres of the readiness of countries for foreign
investment.

Beyond their importance as providers of financial resources, they seek to
provide 'knowledge' functions to help guide countries in their macroeconomic
and microeconomic policies. Yet their effectiveness is in question alongside
their legitimacy, in part through not-so-benign neglect from some quarters and
from an inflexibility of the institutions in recognising the importance of the
issue of legitimacy in making them more effective in the work they do.

Both institutions need recapitalisation to enable them to meet the
development challenges of the countries that will make up their core clientele
in coming years. Low-income countries will continue to draw heavily on a wide
range of macro and microeconomic policy advice linked to financing needs. And
countries on the cusp of emerging market status and many emerging market
economies will continue to use them to fine-tune policies and engage in
institution building.

International financial crises are more likely to be a hazardous feature of
our common future than a phantom of our past, this is one price we pay for a
liberalised international financial system and the steady elimination of
national controls on capital flows. It is a cost that we can help to mitigate
and to insure against by working to improve the multilateral financial
institutions.

Part of that effort should also be to enhance legitimacy, and this should be
achieved via better representation and accountability. The distribution of
voting shares in the Fund and Bank need reform the better to reflect the more
plural economic world we live in now, compared to that of the 1940s, as well as
to prepare for the changes to come. Gains to legitimacy will translate into
gains in effectiveness; we must have the courage to make them happen.

Legitimacy can also be enhanced with reform of the procedures by which heads
of the Fund and Bank are chosen. The recent resignation of Paul Wolfowitz from
his position as head of the World Bank has reopened the debate about that
process. And while we warmly congratulate Robert Zoellick in his appointment
and wish him well in his new post, we must also note that we support the
position articulated by the Group of twenty (G-20) that future appointments
should be made using an open and transparent selection process with candidates
not restricted by nationality.

Allow me to conclude by reminding ourselves that all of our multilateral
institutions need to play an important role in holding a mirror to ourselves,
helping us to reflect on the policies we must pursue with vigour to raise our
growth rates, improve our standard of living and recognise and understand the
costs imposed on all of us as an international community by the scourge of
poverty.

Few challenges have emerged in recent years as daunting as the environmental
ones that we are increasingly turning our attention to, largely because they
threaten so much of what we hold dear in terms of economic development as well
as those we already know are so vulnerable, our poor and marginalised. As an
international community we need to ensure that we do indeed address those
challenges.

Once again, I am pleased to welcome all of you to South Africa and Africa
and thank you for the privilege you have given me to address you this evening.
I look forward to hearing about the fruits of your deliberations, and wish this
important International Monetary conference success.

Thank you.

Issued by: The Presidency
3 June 2007
Source: The Presidency (http://www.thepresidency.gov.za)