ADDRESS BY THE HON. JOHN DALLI, MP, MINISTER OF FINANCE, MALTA

Prime Minister, Mr Secretary-General, Honourable Ministers, your Excellencies, Distinguished Guests, Ladies and Gentlemen,

It is an honour for me to welcome you to Malta to the 2000 Commonwealth Finance Ministers meeting. It is an added pleasure for me to welcome you personally for the second time in six years.

We are meeting today against a generally auspicious global economic backdrop. Recent United Nations forecasts indicate that global output will increase by 3.5% this year, an acceleration compared with 1999. Global economic expansion continues to be driven by the robust performance of the United States' economy, although growth in the euro area is also gathering pace. Recovery in Japan, however, remains weak. Developing countries, particularly in Latin America and South and East Asia, have rebounded in the wake of financial crises, but performance in many countries in Africa remains poor.

However, although the outlook is generally benign, risks to the global economy persist. Foremost among these is that of a slowdown in the United States, possibly prompted by monetary policy tightening and a correction in the equity market. More over, the recent rise in oil prices poses a significant threat to most developing countries both because their terms of trade have deteriorated and because monetary policy tightening to ward off inflationary pressures will dampen global demand.

In general, developing countries have benefited from world economic growth. Most countries have opened up their economies, seizing the opportunities provided by international trade and the consequent gains from specialisation in production. Like other developing countries Malta has dismantled barriers to trade and opened up to foreign investment flows, while restructuring its economy and pursuing macroeconomic stability. It is our view that membership of the European Union, our most important trade and investment partner, will facilitate our integration with the global economy.

But the benefits of globalisation are not immediate, nor are they evenly shared, either within nations or internationally. A backlash against the real or perceived ills of globalisation, particularly if it fuels increased protectionism in the industrialised world, could have serious repercussions for developing countries. Therefore, it is the responsibility of political leaders in the industrial economies to defend economic integration and ensure that openness and solidarity continue to enjoy popular support. Internationally, the uneven distribution of gains from economic integration is a primary concern. Even with a generally favourable external environment, a number of countries have not shared in the gains from globalisation, not only because of natural disasters, wars and poor governance, but also because the international transfer of resources, particularly of official development assistance, has been inadequate and the promised access to markets has not been fully realised.

The financing of development, which is necessary for growth, is one of the themes that we shall be exploring in the next few days. By definition, developing countries have the potential to grow. But to do so they require resources that must be imported and financed. In part, therefore, growth is a matter of access to financial flows. In our discussions, we shall be examining both official and private flows, as well as the interplay between them. In particular, two issues on our agenda are related to this: the role of the Bretton Woods institutions and the initiative to relieve the debt burdens of the most highly indebted countries.

The role of the World Bank and the International Monetary Fund in the global financial system has recently attracted much attention. There is a view that the operations of both institutions should be scaled back and re-defined. In the case of the Fund, while there appears to be general agreement that it carries out a useful surveillance function, the case has been put forward that, by providing liquidity in emergencies, the Fund is bailing out imprudent investors and governments and thus worsening a moral hazard problem. Somewhat paradoxically, the opposite concern has also been voiced, namely that in a world where international capital flows can destabilise economies in a very short time, the Fund is ill-equipped to act as an international lender of last resort. This gives rise to the danger that the Fund's resources will be stretched to the limit in an emergency.

The World Bank's role as lender to developing countries has also been questioned. In the case of middle income countries that have raised funds successfully from private investors the argument is that the Bank should cease lending to them. In contrast, the Bank's role in channelling resources to low income countries remains critical for accelerating growth and reducing poverty.

However, if they were to depend solely on private capital flows, a large number of developing countries would be perceived to be too risky to warrant private sector investment and would thus be unable to meet their capital needs. In addition, many of the projects financed by the Bank in areas such as the provision of health and education are in the nature of public goods that are unlikely to attract much private finance. Finally, market imperfections exist, such as asymmetric information, investor myopia and, sometimes, plain greed which may lead to a build-up of capital inflows. We have seen cases when bad news then prompts a belated re-assessment of risk and a rush to liquidate investments, with a sudden reversal of capital inflows. There is thus a strong argument in favour of global co-ordinated intervention through the Bretton Woods institutions to counter various types of market failure.

During our Valletta meeting in 1994 we had launched a multilateral debt initiative to address problems faced by the most heavily indebted countries. That initiative has borne some fruit and last year, in the Cayman Islands, we had welcomed the Cologne proposals on debt relief. However, despite the commitment to provide "faster, wider and deeper debt relief", the continued slow progress of the HIPC initiative in delivering actual debt relief remains a cause for concern. Malta believes that the seven-point strategy proposed by the Commonwealth Secretariat to breathe a new sense of urgency into the debt relief process should be pursued. The call to provide debt relief up front and to streamline conditionality deserves particular attention.

Debt relief is only part of the picture, even because some developing countries have avoided the worst problems associated with excessive external debt through more prudent economic and financial policies. It is important that countries outside the HIPC framework are not ignored. Equally important is the need for enhanced official development assistance flows. The recent increase in such flows should be sustained, and more efforts made to raise their effectiveness in facilitating growth and poverty reduction. Wider access to the markets of developed countries for the exports of developing countries is also necessary.

Developing countries themselves are increasingly acknowledging the importance of political and economic reform to mobilise domestic and international resources for development. A stable political system, respect for the rule of law, a sound macroeconomic policy environment and well-functioning markets tend to reduce risk and boost investor confidence.

Issues related to corporate governance are also coming increasingly to the fore and have indeed been the subject of a conference organised earlier this week by the Commonwealth Secretariat, the Central Bank of Malta and the Malta Institute of Directors. Good corporate governance practices acknowledge the potential conflicts of interest between shareholders and the management of private firms, which have to be carefully managed if the firm is to be run in the interest of the shareholders. Inturn, sound corporate governance encourages increased investment, supports financial market development and reinforces the health of the private corporate sector. We welcome the initiatives of the Commonwealth Secretariat and the Commonwealth Association on Corporate Governance to generate increased awareness and understanding of corporate governance issues, including through the work of the Expert Group. We also look forward to receiving the conclusions of this week's conference on corporate governance in the banking and financial sector.

For small states it is imperative to develop export industries to survive in the global market place. For many Commonwealth countries, including Malta, the provision of financial services has proved an attractive and successful option. Shorn of natural resources or sizeable domestic markets, in some cases far removed from major markets for primary commodities and manufactured goods, some small states have created international financial services industries. Malta appreciates the advocacy role played by the Commonwealth on behalf of small states and welcomes initiatives to increase technical assistance to build up their administrative capabilities as suggested in the Joint Task Force Report.

Malta has striven to develop a financial services industry based on the highest regulatory and supervisory standards and practices. It has established a comprehensive legal and institutional framework to combat money laundering and financial crime and has declared its willingness to co-operate on tax issues. But we remain concerned that international initiatives have been taken that did not emerge after a due process of consultation with interested parties and which, therefore, lacked transparency. Furthermore, it appears that recommendations and prescriptions have been made as a result of such initiatives and which are based on subjective perceptions. Malta would like to see a fair process established to allow the jurisdictions singled out by these initiatives to rectify any shortcomings and re-establish their reputation within a reasonable timeframe. We await with interest the report from the Senior Finance Officials on this topic during this meeting.

It is my hope that this Commonwealth Finance Ministers meeting will fruitfully address the issues on its agenda and thus contribute to support balanced, sustainable economic development in our countries.

It only remains for me to praise the sterling work undertaken by the Commonwealth Secretariat in preparation for this meeting and to wish all our guests a pleasant stay in Malta.