2006 APEC Finance Ministerial Meeting

I. Introduction

We, the Finance Ministers of the APEC economies, convened our 13th annual meeting in Ha Noi, Viet Nam on 7-8 September 2006 under the chairmanship of Mr. Vu Van Ninh, Minister of Finance of Vietnam. The meeting was also attended by the First Deputy Managing Director of the International Monetary Fund, the Managing Director of the World Bank, the President of the Asian Development Bank, the Executive Director of the APEC Secretariat, and private-sector representatives from the APEC Business Advisory Council.

We met under the policy themes of "Promoting Public Finance Efficiency and Sustainability: Towards Stable and Efficient Revenue Sources" and "Financial Sector Reform to Attract Capital Flows". In discussing the themes, we noted that many APEC member economies are pursuing tax reform aimed at securing stable and efficient revenue sources. Our discussion also emphasized the importance of open, adequately supervised, and robust sound financial services sectors.

We moreover welcomed the overall reform of APEC underway and stressed our commitment to further strengthen the prominence and relevance of the Finance Ministers' Process in order to more effectively complement the work of the APEC Leaders' Process and successfully achieve the Bogor Goals.

II. Global and Regional Economic Developments

We welcomed the continued strong performance of the world economy despite higher oil prices. We noted that although growth in the APEC region has moderated somewhat in 2005, the region is still experiencing strong growth that is expected to surpass 4.1% this year. Increased trade and investment have been key drivers of expanding economic prosperity in member economies. Therefore, we remained firmly committed to restarting the multilateral trade negotiations and achieving the breakthrough in market access and support to bring the negotiations to a successful conclusion which is so important for growth and development. We resolved to work with our own trade authorities to make tangible contributions to restart the Doha round. We also stressed that the conclusion of regional trade agreements and free trade agreements can make an important contribution to trade liberalization and can help invigorate the DDA negotiations.

We recognized the importance of joint action towards an orderly readjustment of global imbalances in a way that sustains strong regional and global economic growth, and the shared responsibility that APEC economies have in bringing this about. Reducing global imbalances while maintaining growth requires fiscal sustainability, price and exchange rate flexibility, and reforms to promote investment, strengthen financial markets, generate more balanced domestic demand, and improve corporate governance and legal infrastructure across the Asia-Pacific region. This entails greater national saving in the United States, further structural reforms including fiscal consolidation in Japan, stronger domestic demand growth in other APEC member economies and Europe, and greater exchange rate flexibility for some economies as appropriate in emerging Asia. Progress has been made but further efforts are necessary.
III. The 13th APEC Finance Ministers' Process Policy Themes

1. Promoting Public Finance Efficiency and Sustainability: Towards Stable and Efficient Revenue Sources

We recognized that stable and efficient revenue systems are crucial for the fiscal health of APEC member economies and for ensuring an appropriate level of public expenditure in social and economic development. We also recognized that tax incentives can be tools for growth and development but they can affect the efficiency and sustainability of revenue systems. We noted the importance of developing transparent revenue systems that have minimal distortionary impact on the operation of open markets.

Having acknowledged the potential risks of the erosion of tax bases to the development of sound fiscal policies, we agreed that careful consideration should be given to tax incentives that affect revenue bases as part of the budget process. We encouraged member economies to identify and review all tax incentives that may erode revenue bases regularly, and ensure full accounting of the costs and benefits of tax incentives relative to other policy instruments. The impact of selectively targeted tax incentives on regional and global commitments to the fair and free flow of capital, labor, and technology should also be considered.

We noted that many APEC member economies are pursuing tax reform to modernize tax systems, improve their sustainability and equity, and reduce economic distortions. We also noted that there may be trade-offs in achieving these objectives; thus it is important to prioritize and reconcile competing objectives. We encouraged member economies to share tax reform experience to assist in the development of efficient and sustainable revenue through academic, business, and governmental meetings and through direct economy-to-economy assistance programs. We reaffirmed our commitment to work together and cooperate on common interests for efficient and sustainable revenue systems.

2. Financial Sector Reform to Attract Capital Flows

We noted that capital flows can be a powerful force for development and growth in member economies. Capital flows can provide additional resources for productive investments; enhance access to technology, management skills, and international markets; and improve competitiveness and efficiency. Capital flows, in particular portfolio flows, may also provide an efficient source of finance to economies facing capital shortages, fill the saving-investment gap, permit portfolio diversification and indirectly enable production diversification. The capacity of the domestic financial sector can also be complemented by foreign direct investment in financial services which can lead to deeper, more competitive, resilient, and efficient financial markets, as well as a better financial infrastructure by lowering financing costs, and raising standards of business and corporate governance. We noted the importance of further liberalization in this area and the need to continue efforts on this in multilateral trade negotiations.

However, the potential volatility of international capital flows could carry risks to developing economies with less resilient financial markets and could undermine macroeconomic stability. Thus, the strengthening of the domestic financial sector, including its capacity to absorb the risks associated with large and potentially volatile cross-border capital flows, and ensuring a sound fiscal discipline are essential for economies to benefit from capital flows. It is also important to further explore more effective means of monitoring volatile cross-border capital flows.

Recognizing the contribution of capital flows, as well as the risks associated with them, we emphasized the importance of open, well-supervised, and systemically sound financial services sectors. We resolved to continue our efforts to strengthen financial oversight in order to build deep, resilient, and efficient financial markets, including developing the institutional investor base.

In this context, we re-affirmed our commitment in 2005 to international standards set forth by the Financial Action Task Force (FATF) to combat terrorist financing, money laundering, and other abuses of our financial systems. We urged FATF to make efforts as appropriate in enlarging the membership of the Task Force.

We also agreed that structural reform aimed at strengthening the domestic financial sector should be well sequenced, appropriately paced, and tailored to the specific circumstances of each economy as the financial sector is opened up internationally. Ideally, the process needs to be implemented as a coordinated package of initiatives moving in parallel with, but also with due consideration to, progress in reform of other parts of the economy. Financial sector reform is a necessary but not sufficient condition for attracting capital. In that context, financial sector reform should be supported by a sound macroeconomic framework, a sound and effective legal framework, well functioning product and factor markets as well as greater regional, and global cooperation. Participation in the IMF and World Bank's Financial Sector Assessment Program (FSAP) can inform that process, including prioritizing reforms. We encourage all members to participate in FSAPs taking into account the level of development and the specific conditions of each member economies in support of domestic financial market development.
IV. Review of the APEC Finance Ministers' Process

We took stock of the APEC Finance Ministers' Process and assessed how to further strengthen its prominence, policy-relevance, and complementarity to the work of the APEC Leaders' Process, particularly given the rapid evolution of the global and regional economic and business environment and APEC's activities overall.

To this end, we agreed to a set of updated strategic goals and a framework for conducting medium-term reviews of all aspects of the APEC Finance Ministers' Process (Annex A). We believe that there is value in conducting periodic reviews of the process.

In pursuit of the strategic goals, we also adopted the Hanoi Medium-Term Agenda which suggests priority policy areas and a planning framework for the process over the next three to five years (Annex A).
V. Other Matters and Venue of the Next Meeting

We welcomed the IMF Executive Board's decision to submit to Governors a two-stage package of significant reforms to improve the Fund's governance structure so that countries' voice and quota shares better reflect the world economy, including the fast growth in many emerging economies. We underscored the importance of reaching an expeditious conclusion to this long overdue reform.

We welcomed our dialogues with the APEC Business Advisory Council (ABAC). ABAC has provided valuable inputs from the private sector, as well as support for the work under the themes of the 13th APEC Finance Ministers' Meeting. We welcomed ABAC's recommendations and look forward to working more closely with ABAC.

We noted the APEC Deputies Chair report on the progress of policy initiatives, as appears in Annex B.

We reiterated our commitment to address the challenges and seize the opportunities of population aging and commended the Experts' Group on Aging issues for their progress report (Annex C).

We thanked the Vietnamese people for their warm hospitality, and the Vietnamese Government and the Ministry of Finance for their excellent arrangement of the 13th APEC Finance Ministers' Meeting.

We will meet again for the 14th APEC Finance Ministers' Meeting in Australia, on 2-3 August 2007.