The instability of the world economy has become a major source of difficulties in the developing world in recent years. Financial flows to our countries never fully recovered from the Asian crisis, and have experienced an extraordinary degree of volatility in recent years. The strong slowdown currently under way in major industrial economies is generating additional difficulties. Weak demand compounds the oversupply that characterize some commodity markets of great relevance to developing countries.
These conditions emphasize the importance of adequate macroeconomic coordination among the major industrial countries, as well as continued IMF surveillance over them. Such surveillance provides, in effect, the only institutional mechanism available by which developing countries can express views on economic policy making in the developed world.
Illiquidity is the greatest threat that developing countries face during crises. The need to design strong macroeconomic frameworks, with a focus on crisis prevention, is now widely recognized. Yet, despite significant improvements in this regard, external shocks continue to hit frequently, and in recent years too frequently, the developing world. The interruption of external financing, the sharp rise in spreads and the reduction in maturities for new lending, force the adoption of severe adjustment packages. This procyclical performance during crises generates pressures that generate excessively expansionary behavior during booms, that go counter to the expressed objective of the international community to move towards broader crisis prevention frameworks.
This stresses the need to strengthen liquidity provision by the IMF during crises, including preventive credit lines, such as an improved contingency credit line (CCL). It implies that, as the United Nations and the former Managing Director of the IMF have proposed, special drawing rights (SDRs) should be actively used to provide, on a temporary basis, the additional resources required by the Fund during crises. It also means that, even if the IMF credit lines should approach market conditions, the abnormal terms typical of crisis conditions should not be considered appropriate guides. Furthermore, it implies that, although avoiding moral hazard and designing orderly debt workout procedures is essential, forcing negotiations between borrowers and lenders during crises is unlikely to provide adequate solutions to the basic source of the problem, the inadequate supply of liquidity.
Let me finally emphasize that these considerations also mean that development banks are called to play a complementary anti-cyclical role. This implies a significant change in the way we view development banks. In particular, it means that the essential role they continue to play as a source of funds for low-income countries must be combined with anti-cyclical long-term financing to all developing countries, which includes support to strong social safety nets.