Distinguished participants,
Ladies and gentlemen,
It gives me great pleasure to participate in this conference to mark Korea’s 46th International Trade Day. I want to congratulate the Korea International Trade Association and the Petersen Institute for International Economics, the joint organizers of this initiative. The conference is timely, and the topic — “The New Global Trading System in the Post-Crisis Era” — could not be more relevant.
When I was last in Korea, in February this year, the global economic downturn was peaking. The collapse of industrial output and exports was approaching some 40 per cent year-on-year on average. Trade was shrinking dramatically. The outlook was indeed gloomy.
Policy-makers faced four major challenges. First, it was essential to stabilize the financial system, which had moved from facing a liquidity crisis to a solvency crisis. Second, governments needed to develop stimulus packages to support a tumbling demand. Third, it was essential to contain protectionist pressures. Fourth, financial regulation was widely seen as being in need of reform. The financial crisis had been triggered by too many incentives for taking ill-considered risks, but also because of the inability of supervisory authorities to properly regulate the financial system domestically and internationally.
So where are we now? Less than a year on, progress has been made but we are not yet out of the woods.
Actions taken by governments and central banks have restored some order in international financial markets. Efforts to remodel the international financial system have been engaged. Governments have launched targeted spending plans to facilitate the recovery.
Stricter monitoring of trade and investment policies has also been engaged, with the aim of preventing protectionist tendencies from frustrating the overall recovery efforts.
On the financial front, a massive process of financial de-leveraging is underway. It is putting pressure on banks' balance sheets and is likely to discourage fresh lending for some time to come. However, progress has been made in dealing with systemic failures. IMF estimates of future write-downs have now been reduced to some $3 trillion, meaning that the clean-up process has reached the half-way mark. But this progress is still too slow. Balance sheets are being hit by “second-round” effects of the downturn — that is, the direct effects of poor economic activity on loan repayments.
Efforts to deal with the solvency crisis come at a high cost for the world economy. International and domestic banks have to be recapitalized in line with the losses provisioned in their balance sheets, meaning that hundreds of billions of dollars of public or private money will still be necessary to restore sound and safe conditions in the financial sector. All this points to a continuing contraction of bank balance sheets rather than an expansion in lending. The credit crunch in industrialized countries will remain a delaying factor in the global recovery.
The restoration of public confidence in banks and other financial intermediaries is contingent on macro-prudential reforms involving the regulation and supervision of the financial sector. A “business-as-usual” approach is not an option. One of the first steps has been to strengthen the governance structure under which new standards can be set for banking regulation and supervision globally. The Basel Committee on Banking Supervision has broadened its membership and been placed under the authority of a newly established Financial Stability Board, which reports to G-20 Leaders.
At the G-20 Summit in Pittsburgh, the Financial Stability Board proposed a number of measures such as increasing capital and liquidity requirements, reducing the scope for leveraging and pro-cyclicality and reducing the scope for excessive risk-taking by framing compensation. Other regulatory gaps will need to be filled, including the establishment of fair accounting rules and improvements in the surveillance of systemically important financial institutions.
It is important that re-regulation be applied in a non-discriminatory manner, avoiding any form of “re-nationalization” of lending. Countries that have provided support to banks should be able to exit support as the de-leveraging process takes place, in a manner that ensures a level playing field between national and foreign-owned institutions.
Although the economic contraction we have just lived through is every bit as severe as anything experienced in modern times, the policy response has been very different. Governments and international institutions intervened early. By and large fiscal stimulus worked. Countries have acted in line with their domestic situation, and public expenditure has been a major element of support to global activity in 2009. Wherever fiscal space was available, such as in China or Korea, governments have acted — and must be commended for this. Stimulus packages have avoided a spiral of negative expectations, which could have altered consumer behaviour in the longer term. Of course, this has come at a cost for public finances, and fiscal stimulus should not be implemented for any longer than necessary or sustainable. In Asia, where the recovery has been faster, stimulus should not be allowed to overheat the economy. Governments will have to confront the challenge of managing a substantial increase in public indebtedness.
Others present are more qualified than I to speak on finance and other macroeconomic issues. But I think it is important to set the wider scene that forms the context for addressing trade-related issues. To these, I now turn.
The existence of a solid, rules-based world trading system has contributed to containing protectionism. While some trade restrictive measures have been adopted, the volume of global trade affected has remained below 1 per cent. For the second time in a little more than a decade — the first being the 1997 Asian financial crisis — the multilateral trading system has passed the “stress-test” of a significant downturn without major reversals in trade policy.
But we are not in the clear yet. Pressures for protectionist actions, as smartly as they be devised, with their illusory gains for the domestic economy, will not necessarily diminish any time soon. On the contrary, with persisting unemployment which continues to grow, these pressures may intensify.
Furthermore, if global imbalances expand again with increased economic activity, as well they might, this will add an additional layer of protectionist pressures, as it did in the 1980s — rising unemployment and increasing trade imbalances proved a potent combination in increasing demands for protection.
There is, in my view, an unfortunate irony in this, since the imbalances are manifested in trade terms but are not caused by trade. They reflect macroeconomic and sometimes macro-prudential realities.
These realities leave us with no room for complacency as far as trade is concerned. And this is part of the much bigger systemic context for why rising to the challenge of completing the Doha Round is so vital. This is not only about reaping its underlying economic gains. Success also sends a powerful signal in terms of business and consumer confidence, and governments resolve to match words with action. Just as importantly, a successful Round will strengthen the hand of governments as they confront protectionist pressures.
The poorest countries have been hit hard by the crisis. In particular, capital flows to developing countries have contracted sharply as a result of the global credit crunch, from 9 per cent of their GDP on average to a mere 2.5 per cent. This is affecting capital accumulation, and hence growth, in countries that need capital the most. It is also limiting investments in trade-related infrastructure that would expand poor countries' capacity to trade in the future.
We have a collective responsibility to ensure that the poorest countries do not lose access to capital and product markets. In the short run, there is certainly a role for international financial institutions to close some of the financing gap. The second WTO global review on Aid for Trade held this year concluded that an increasing share of international aid was directed towards trade-capacity building of the poorest WTO members. In the medium term, this effort should be maintained to make sure that the poorest countries keep up with the infrastructural requirements for trade. Key to this effort would be the adequate capitalisation of the multilateral development banks. The Asian Development Bank has taken the lead. We must now ensure the African Bank, the InterAmerican Development Bank and the World Bank follow suit.
In addition to coordinating the Aid for Trade initiative, the WTO has been active ensuring availability and affordability of trade finance, which fell very sharply with the onset of the crisis. The efforts deployed found expression at the G-20 Summit in London in the form of a short-term trade finance package offering $250 billion in new capacity to markets. Even if the situation has improved, actions now need to better target small and medium-size enterprises, particularly in areas such as Africa, Central America, Eastern Europe, Central Asia and low-income countries in East Asia.
Just last week the WTO held its Seventh Ministerial Conference. It provided a timely opportunity for its 153 members to look at the entire waterfront of WTO activities. Collectively we identified priorities for our future work, aimed at strengthening the global trading system.
First priority is to seek a conclusion of the Doha Round in 2010. WTO members recognised the technical progress made in 2009. But they are also conscious that closing the few gaps remaining on big ticket items will only happen when they enter in the end game. And this will not occur unless they are all ready for heavy political lifting at home. They have therefore agreed to hold a “crunch time meeting” in the first quarter of next year to see if the conditions for their goal of concluding in 2010 are there.
A second cluster of issues that attracted ministerial attention concerned improving the functioning of existing WTO agreements, and in particular monitoring and surveillance of our members' trade policies, in light of our recent experience with monitoring of protectionism.
A third element discussed relates to the ability of all WTO members, especially the weaker among them, to take full advantage of the opportunities arising from trade. The WTO Aid for Trade agenda received a strong vote of confidence from our members as a necessary complement to trade opening. Korean Minister Kim showed Korea's leadership on this front by participating at an event related to capacity building for the poorest countries through the Enhanced Integrated Framework.
We also addressed the means to facilitate the accession of new members to the WTO family. Many ideas were also gathered to ensure better synergies between regional trade agreements and the multilateral trading system which can provide a robust programme of work over the coming months for our Committee on Regional Agreements. Finally, we also shared the need to ensure a better coherence between the WTO and other areas of international governance, starting with climate change.
This leads me to the broader canvas of international governance that I see emerging and, I believe, needs strengthening. In the first instance, the G-20 is fast becoming the glue that will hold the system of international economic cooperation together. We need a body like the G-20 to be an embryo of consensus building over inter-locking elements of economic policy in a coherent fashion. On the trade front, I look forward to working with Korea when this nation holds the G-20 chair in the second half of next year.
The G-20 can provide much-needed political leadership and direction. In sum, it can and must be a “laboratory of coherent global economics”. But the G-20 does not decide. International binding decisions will continue to be made in the members-driven international agencies and organisations. Finally, we need to ensure the United Nations becomes the “accountability forum” for coherence through an updated and more visible ECOSOC activity. These three ingredients could provide a potent combination of leadership, action and inclusiveness.
I should like to thank you for giving me the opportunity to address this conference and to wish you well in your deliberations for the rest of the day.
Thank you very much.
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