E C O N O M I C R E P O R T O F T H E P R E S I D E N T

Box 6-3.—continuedIn addition, to promote dialogue on key economic and financial issues,a new informal mechanism known as the G-20 (a group of key industrialand emerging market economies that account for more than 80percent of world GDP) met for the first time in December 1999. Thisgroup will be focusing on how countries can further reduce theirvulnerability to modern capital account crises.Improvements in national policies are necessary to strengthen the internationalfinancial system, but not sufficient. Policies and incentives must alsobe appropriate at an international level, as discussed in Box 6-3. Thesereforms seek to reduce the incidence and severity of future crises by providingsuitable incentives for the effective working of a market-oriented system.When reversals of capital flows do occur, an important task is to keep thedamage to a minimum. Several actions can help in this regard. First, itappears clear that countries should avoid policy biases that encourage excessivereliance on short-term, foreign currency-denominated debt, since it isthose flows that can flee most quickly. Second, ensuring that the financialsystem is sound can enable a country to cope with capital and exchange ratemovements without excessive damage to financial intermediation.Debt Relief for Developing CountriesAn important goal of the proposed reforms of the international financialsystem is to ensure that countries realize the substantial benefits of open marketsin trade and investment. However, some of the world’s poorest nationsare not benefiting from globalization. Many developing countries haveunsustainable debts and policies that are not conducive to economic growthand development. Recognizing the need to integrate these countries into theglobal economy, the United States has actively pursued several multilateraland bilateral initiatives to reduce their debt burden.Most recently, the United States helped forge an international consensusamong the G-7, the International Monetary Fund, the World Bank, andother creditors to provide broader, faster, and deeper debt relief to many of theworld’s poorest, most heavily indebted nations. Together with previous debtrelief commitments, the June 1999 Cologne Debt Initiative, which expandedon the Heavily Indebted Poor Countries (HIPC) Initiative of 1996, mayreduce these countries’ combined nominal debt by as much as $90 billion, inreturn for genuine reforms aimed at reducing poverty and encouraging longruneconomic growth. The combined external debts of the 33 HIPCs mostlikely to benefit from the Cologne Debt Initiative were estimated at $127billion in 1998, or nearly 120 percent of their combined GNP.230 | Economic Report of the President