Speech of the President of South Africa, Thabo Mbeki, at the International Monetary Conference, Cape Town

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