A year ago, when the Board of Governors of IDB met in Cartagena, the international financial crisis that had broken out in Asia was beginning to make itself felt in Latin America and the Caribbean. World financial markets were starting to rebound at that time, however, and this buoyed our hopes that the impact of the crisis on our region would be fairly mild. These hopes were not borne out. The even greater disturbances experienced in the international capital market in the wake of the Russian moratorium of August 1998 have been compounded by the uncertainty that has arisen as a result of the industrialized countries' delay in finding effective means of coping with the crisis and the sharp downturn in raw material prices on the international market. This has triggered an economic slowdown and has propelled a number of the medium-sized and large countries in our region into outright recession.
In seeking to deal with this difficult situation, during the past year and a half the region's economic authorities have displayed a degree of determination to implement adjustment measures of a magnitude perhaps never before seen in the region's history. We are therefore convinced that, given a favourable international economic environment, our region will soon extricate itself from its present difficulties. There is no question as to the fact that the scope of the disturbances experienced by the region is a reflection of serious flaws in the international financial order and particularly of the marked asymmetry existing between an increasingly sophisticated, yet unstable, international financial system and the institutions that regulate it. In short, the world lacks the types of institutions that financial globalization requires.
There is a growing awareness of this fact at the international level, where the discussion of these issues has given rise to a consensus on a number of issues. These areas of agreement are reflected in the statements issued by the Group of Seven, the Heads of State and Government of our region, the International Monetary Fund and other international organizations, including a document recently drafted by the economic and social agencies of the United Nations in whose preparation ECLAC played an important role. There is consensus as to the need for the industrialized countries to maintain expansionary policies so long as the present financial uncertainty persists and for contingency financing to be made available to buttress troubled economies before --rather than after-- their international reserves reach critically low levels. There is also a basic agreement about the wisdom of improving the flow of information, developing international codes of conduct in various areas and upgrading prudential regulation and supervision at the global level; there are still, nonetheless, many differences of opinion as to which institutions should be entrusted with this responsibility at the international level. A consensus also exists as to the need for more effective oversight of all countries' macroeconomic policies, especially during the bouts of financial euphoria that engender such crises, and for a means of ensuring that the industrialized countries' macroeconomic policies will be consistent with the objective of stable, non-inflationary growth for the world economy.
Just as importantly, today it is widely recognized that programmes aimed at liberalizing the capital account must be properly sequenced and must be implemented cautiously, especially in relation to short-term flows. There is also an awareness that strong prudential regulation and oversight mechanisms at the national level are a prerequisite for any such process and that, whatever the nature of the international rules that are instituted in this sphere, they must include safeguards for coping with difficult circumstances. The international community has also recognized the need to establish orderly debt workout mechanisms to deal with critical external debt problems and to ensure an equitable distribution of the burden of adjustments. And there is also a broad consensus as to the need to strengthen our social safety nets to protect the vulnerable groups in society from the harmful effects of adjustment processes. I must also note, however, that this last tenet has thus far advanced primarily in terms of rhetoric rather than in actual practice.
Alongside these important areas of consensus, however, there are many differences of opinion, some of which are of vital concern to the developing countries. I would like to refer briefly to five of them here. The first and foremost of these issues is the financing of contingency mechanisms. The periodic contributions made by industrialized nations to IMF or for specific contingency loans have proven to be a highly unreliable funding mechanism. Under these circumstances, it is clear that we need to design much more reliable instruments to respond rapidly to the demand for additional liquidity in times of crisis. The active use of special drawing rights for this purpose would surely be the best way of doing so. In fact, and this is my second point, the active use of special drawing rights in international finance is of the utmost importance to developing countries. The current state of affairs should therefore serve to restore this instrument to the central role that it should play in the international financial order.
The third issue is the most controversial of all. Outside of an influential circle, the consensus view is that the conditionality of the International Monetary Fund has been carried beyond what can be perhaps considered reasonable bounds. It has, in particular, been extended to include questions relating to economic and social development institutions and strategies, which fall within the purview of other international organizations and of legitimate national authorities, and should be founded upon broad-based social pacts. Thus, the current discussion should also help us to arrive at a new agreement as to the limits of that conditionality, which will, in turn, endow it with the required legitimacy. The fourth point I would like to make here is that, so long as we lack an adequate order and, most importantly, clear-cut rules regarding access to appropriate amounts of contingency financing, the developing countries should, in our view, maintain their autonomy in the management of their capital accounts.
Finally, the present situation provides an invaluable opportunity for re-thinking the role of regional and subregional financial institutions. We are convinced that an international financial order that is based on a network of regional and subregional reserve funds and development banks, rather than on a few international organizatons, will contribute not only to the stability of the world economy but also to more equitable conditions at the global level. Latin America and the Caribbean should therefore work to strengthen existing regional and subregional financial agencies and to complement them with new mechanism of cooperation in this area.
Distinguished Members of the Board of Executive Directors, Members of the Board of Governors and Chairmen: