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Governments need to help workers without resorting to protectionism, new report says

WASHINGTON, DC – 04/19/07 – Individual countries need do more to help workers who have not gained from increases in global trade and competition, without resorting to protectionism, according to the new 2007 World Economic Outlook published by the International Monetary Fund (IMF).

In the new report, the IMF cautions that protectionist forces "undercut" trade and foreign investment and reverse gains resulting from an increasingly integrated global economy.

A combination of technological progress, trade and finance systems that are increasingly global and more resilient macroeconomic policies have laid the foundation for "superlative" global growth, but countries are not doing enough to prepare for increasing fiscal challenges, said Simon Johnson, the IMF’s director of the research.

Countries need to do more to improve their education systems, and create more flexible labor markets and welfare systems that can help workers adjust to a more globalized economy, he said.

Johnson also said that countries need to develop public finance systems to cover increasing pension and health care costs related to aging populations.

However, the report provided an upbeat outlook, saying that overall economic risks to the global economy have declined since the IMF last reported its assessment of risks in September 2006, he said, adding that “the problems related to the slumping US housing market are not expected to spread to other countries.”

US economic growth is projected to be 2.2% in 2007, down from 3.3% in 2006, according to the report.

Even if the US economy were to slow further, Johnson said, risks to other countries' economies "should be manageable" because over the past 20 years many countries have strengthened their economic policies.

Global economic growth was 5.4% in 2006, and is expected to dip to 4.9% in 2007. Johnson said global growth can be sustained at around 5% "for some time to come."

The new report was made public as US Treasury Secretary Henry Paulson recently reiterated his call for far-reaching reform of International Monetary Fund (IMF) policies and procedures, most critically in the area of foreign exchange surveillance.

"For the IMF to remain modern and relevant, it must re-invent itself," he said in a statement to the media delivered at the spring meeting of the IMF and World Bank last weekend in Washington.

Paulson urged adoption of rule changes that would enable the IMF to monitor and deal with countries' currency manipulations.

For us, reform of the IMF's foreign exchange surveillance is the linchpin on which other reforms depend, and we look forward to action in this important area very soon after these meetings," Paulson said, adding that, beyond implementation of needed policy changes, the “IMF staff must do a better job in addressing foreign exchange surveillance on a day-to-day basis."

The secretary called for "greater exchange rate flexibility in Asian emerging economies," singling out in particular China, whose exchange rate policies have helped produce massive trade surpluses with the US and the rest of the world.

"The counterpart to a falling US trade deficit, by definition, is falling trade surpluses in other economies," he observed.
While stressing the exchange rate issue, Paulson said the IMF's modernization process also must involve a complete overhaul of its structure of governance, with a greater role for developing nations.

Noting that those emerging markets are producing an increasing share of global output and "will increasingly drive global growth," Paulson said the US supports protecting the shares of the poorest countries through an increase in basic votes – and, toward this end, would forgo an increase in IMF voting share it otherwise would receive.

"The fund no longer looks like the world economy in which we live," the secretary said, and "marginal reforms that do not fundamentally alter relative quota shares are insufficient – bold action is needed to boost the share of dynamic emerging market countries."

The Treasury chief stressed the need to "continue pushing forward on the trade agenda, including a successful Doha Round of negotiations, to keep all our economies growing."
Paulson termed the case for trade liberalization "clear and compelling," adding that “if we want more people to support it, we need to ease anxieties and help more people realize the benefits of trade."

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US Hopes for Success as Doha Talks Resume

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