Promoting International Financial Stability: the IMF at 60, Address by Anne Krueger, Acting Managing Director IMF

June 3, 2004

Promoting International Financial Stability: the IMF at 60
Address by Anne Krueger
Acting Managing Director International Monetary Fund
University of California at San Diego
Economic Roundtable
San Diego, June 3, 2004

Good morning. I'm delighted to be with you today-and not just because we're meeting in sunny San Diego. I know that this Economics Roundtable has an impressive record of distinguished speakers, so I was honoured to be invited to participate.

The timing of my visit was largely dictated by practical considerations-we had to find a date that suited you and to which I could commit. But I am pleased that, in the end, we were able to agree on a slot that fitted in nicely with our upcoming sixtieth anniversary.

As I am sure you all know, the International Monetary Fund and the World Bank were established sixty years ago next month, when those attending the conference in Bretton Woods, New Hampshire, agreed on a new international framework for the post-war era.

I suspect I read our Articles of Agreement rather more often than anyone else here. You might be surprised at how often we at the Fund do go back to what I suppose would nowadays be called our mission statement. Familiar as I am with those articles, though, I am frequently struck by the far-sightedness of their authors.

These were people meeting at what was still an extremely dangerous time for the world. The outcome of the war both in Europe and the Far East was still far from certain. Yet the men-and one woman-who gathered in the eastern United States were able to take a remarkably detached view of the post-war world.

Detached and prescient. The multilateral framework they created is still governed by the same principles sixty years on. It has brought economic growth and rising living standards that even the wise participants at Bretton Woods could not have imagined.

Promoting international financial stability was seen as the core function of the IMF when those Articles of Agreement were drawn up. It still is, even though the world is, clearly, a very different place.

So this morning, I would like to outline what has changed over those six decades: how the Fund has adapted not its mission but its methods in order to fulfil the objectives set for it so long ago.

The original aims of the IMF

I am not going to rehearse the full text of our Articles of Agreement. For those sufficiently interested, they can be found on our website-as can pretty much anything you might want to know about the Fund and the way we conduct our business. We pride ourselves on being one of the world's most transparent organizations.

I would, however, like to quote from Article One. It neatly encapsulates why we do what we do. Part of that article says that the IMF should:

facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real primary objectives of economic policy.

The link between our role in promoting international financial stability, which other parts of Article One spell out in more detail, and trade and economic growth was therefore clearly established from the start. It has always been our job to help raise living standards and reduce poverty.

If anything, though, I think that delivering global financial stability has become even more important as the years have gone on. Globalization-which, in its most fundamental sense, I take to be the rapid integration of the world economy-has made stability crucial for growth and prosperity. A stable, well-functioning international financial system helps all countries exploit the benefits that globalization has already brought. It also enables policymakers in both developed and developing economies to adapt to the changes that globalization brings. And that in turn means their citizens can continue to gain from the faster growth and rising living standards that only the multilateral framework makes possible.

Does that sound too good to be true? Look at the evidence. And start by recalling the beggar-thy-neighbor world of the 1930s. High and rising tariff barriers did nothing to protect countries from economic contraction and rising unemployment-quite the reverse. The end of the nineteenth century liberal trading system and free capital flows made it difficult even for the richest countries to escape from depression.

Recognizing the harm that protectionist policies had inflicted was at the centre of the Bretton Woods deliberations. The postwar multilateral economic framework was the result. It included a stable international financial system, including help through the IMF for countries that needed short-term assistance; finance from the World Bank for countries that needed longer term help in reconstructing their economies; and an international rules-based trading system, based on the presumption of falling tariffs.

In spite of the ravages of war, this framework helped transform the global economy. In the decades that followed its creation, the growth rates of the major industrial countries made the achievements of the nineteenth century seem modest. America saw per capita income growth averaging 2.4% a year between 1950 and 1973: Germany grew on average by 5% a year, and Japan by more than 8%.

Impressive though this performance seemed at the time, it was only a foretaste of what was to come for the newly-industrializing countries. Korea and the other so-called `Asian tigers' set world records in the 1960s and 1970s with growth rates of real GDP of 8, 10 and even 13% a year. Most of the other Asian economies followed with annual rates of 7%, 8% or more between 1985 and 1994. China averaged GDP growth of more than 10% a year during the same period.

Some economies have been transformed in the post war period. We're all familiar with the rapid growth of China as a force in the global economy. But look, too, at Korea: its per capita income rose almost sevenfold between 1962 and 1992. Even India, slow at first to engage with the world economy, has recently enjoyed very good economic performance: in the 1990s, following the first wave of economic reforms, it averaged GDP growth of about 6% a year, making it one of the most rapidly-growing of all developing economies.

Greatly improved performance at the macroeconomic level has translated into better living standards for all. Infant mortality rates have declined sharply. In East Asia and the Pacific, for example, they dropped by nearly 60%, to 39 per 1,000 births, between the 1960s and the 1990s. Literacy rates have risen worldwide, to around 80% for men and 70% for women. During the 1990s, the number of people living in poverty fell by some two hundred million people-mostly thanks to the rapid growth of the Chinese and Indian economies.

Perhaps most striking of all is the improvement in life expectancy in the developing world. It now averages 65 years, up from 40 years half a century ago. And the gap between life expectancy in the developed and developing world has narrowed, from 30 years in 1950 to around 10 years today.

The IMF's role in the postwar period

The IMF cannot claim credit for these achievements. But the Fund has played its part, and I do not think we should underestimate that. The past six decades have not been without upheaval, sometimes very great. And the Fund, like everyone involved, made mistakes over the years. We attach high priority, and invest considerable manpower, in seeking to learn from experience. The international economy is always evolving and there are always new situations and new problems we must address. But it is hard to imagine a world without the IMF. It is even more difficult to imagine that the world economy could have progressed so rapidly without somebody fulfilling the role with which we were charged in 1944.

Between 1946 and 1973 the system of fixed exchange rates established at Bretton Woods served the world economy well, in spite of occasional bouts of turbulence. Yet the switch to floating exchange rates among the industrial countries from 1973 onwards was, in its turn, far more successful than many anticipated, and has also contributed to sustained economic growth. The oil price shocks of the mid and late 1970s were disruptive, of course: but much less than they might have been, because of the flexibility that floating exchange rates provided.

The oil shocks are sometimes seen as a turning point in postwar economic history. As prices rise again today, we see some people wondering if history is about to repeat itself. But the rise in oil prices in the 1970s was related to the worldwide surge in inflation in the late 1960s and early 1970s. Dearer oil certainly brought important changes in the nature of the Fund's work, because it was in this period, and after, that developing countries became the IMF's biggest customers.

The oil producing countries suddenly found themselves awash with cash surpluses in need of a home. As oil revenues were recycled, Western commercial banks lent aggressively to oil-importing developing countries, usually on a floating rate basis. With hindsight, the result was predictable: many countries were unable to service their debts as interest rates rose in the early 1980s in the drive to curb inflation in the industrial countries. The IMF played a leading role in helping resolve what became known as the third world debt crisis of the early 1980s.

Of course, financial crises have always been part of the Fund's work. The challenge for the IMF is to do as much as possible to prevent them but, once crises occur, to resolve them as smoothly as possible. Of course, even if the Fund were always right in detecting trouble ahead, governments would not necessarily follow the advice on offer. There are many reasons why a government might want to delay acting on external advice or might choose to ignore it altogether. And unless a government seeks financial assistance from the Fund, the staff ultimately has little leverage in persuading reluctant governments to introduce reform.

Failure to heed warnings by the Fund will inevitably lead to crisis in some cases. Crises in individual countries have been frequent: but they have rarely brought widespread disruption to the global financial system. I come back to my point: that the multilateral framework put in place in the 1940s has served the international economy well.

The 1990s

The 1990s were years of profound change,in the international political system as well as in global finance. The changes brought with them some of the biggest challenges the IMF has yet faced. It was, in many ways, a difficult decade. But it was, in some senses, an enriching experience for the Fund, and I think we,and many of our members,emerged the stronger for it.

The most dramatic change, of course, was the collapse of the Soviet empire. The political upheaval was momentous and altered the character of international relations. It brought us a large number of new members,all urgently needing our help. They needed financial assistance, of course. But they also needed advice on how to develop normally functioning market economies. We, along with other agencies and governments, tried to provide that advice.

In the early days, the learning curve was steep for everybody concerned: the sort of economic transformation needed had never been attempted before. But it is perhaps a measure of how far all those involved succeeded that many of the countries that for decades had been completely outside the international financial system have just joined the European Union. Towards the end of last year, the IMF recognized the extent of the progress made when we closed the department known as European II, and merged its responsibilities into other Fund departments. We concluded that those countries once under the yoke of Communism have made sufficient progress that they no longer need a special department of their own.

But the former Comecon countries weren't the IMF's only pre-occupation during the nineties. One crucially important development was the rapid growth in private international capital flows that followed the deregulation of capital markets in many countries. Some of the biggest financial crises the Fund has ever dealt with erupted over the past decade or so. The Mexican debt crisis in 1994; the Asian crisis of 1997-98, Russia in 1998, Turkey in 2000 and, most recently, Argentina in 2001: these all involved enormous upheaval for the countries concerned, for the IMF and, to a greater extent than usual, for the international financial system.

These crises were different in nature as well as scale. The most significant factor was that they were capital account crises, rather than the current account crises that the IMF had been used to handling. They erupted much more quickly, and the provision of assistance was often much more urgently needed. Many of us belatedly realized that financial market liberalization brought with it the need always to be conscious of the markets' judgment. At the time, that judgment can sometimes seem harsh; it can certainly be unforgiving. But we and our member countries are learning, as I shall explain in a moment, to live with and benefit from the discipline that the market can impart.

I noted that capital account crises can occur very rapidly and require an immediate response. Such crises occur because the holders of a country's debt lose confidence in its ability to service that debt. In principle, a crisis can occur even if the country's current macroeconomic policies are sound,if the creditors believe such policies will not be sustained. When there are real,and justified,doubts about a country's economic policy, these can erupt into a full-blown crisis with astonishing speed. The only effective response is to restore creditors' confidence that a country will be able to meet its debt obligations in full. That, I hardly need add, is easier said than done.


So the past decade or so has been a very steep learning curve: for the IMF, for economists in general, and for governments. We have been trying to work out how best to detect when a crisis is imminent, how to respond to the warning signs, and, of course, how to handle crises when they do occur. Our conclusions have led us to shift the focus of much of our work: though, I as I have already pointed out, for the IMF, the learning process is continuous as we adapt to new information and developments.

We now know how important debt sustainability is in judging whether a country has sound economic policies that will deliver lasting economic growth. And we have also learned that many more fundamental reforms are needed if emerging market countries are to enjoy greater economic stability. Our experience in the former Communist economies reinforced our view that countries need properly functioning judicial systems, enforceable property rights, accountable and transparent public institutions, efficient tax systems, modern and effective public expenditure management. Their absence impedes everyday economic activity.

Investors get nervous if they cannot be sure they will get legal protection in the event of, for example, arguments about property ownership or contract enforcement. If tax evasion is the norm, ordinary citizens have no incentive to pay their taxes, and the government's public finances remain precarious. Inadequately supervised banks can undermine confidence in the domestic financial system. Secretive public institutions do not inspire the confidence of citizens or foreign investors. Bribery and corruption do not usually go hand in hand with prosperous well-functioning economies.

All these issues are now an essential part of the Fund's work. We regularly examine the economies and economic policies of all our members,in our Article IV surveillance work. As part of that process, we now pay far more attention to debt sustainability. We have introduced what we call the Financial Sector Assessment program, aimed at looking more closely at banks and other financial institutions, and at how they are regulated and supervised. We also help countries adopt internationally established Standards and Codes. We provide technical assistance to countries that need help to implement some of the reforms I've mentioned. And, of course, we continue to provide advice on macroeconomic policy.

Facilitating globalization

The Fund, then, is a facilitator of globalization. By promoting international financial stability, and by encouraging our 184 members to pursue sound macroeconomic policies we aim to enable everybody to enjoy the benefits that globalization brings.

And we do seek to help all our members. We now invest much more effort in our work with low income countries: in numerical terms, these now account for a sizeable number of our members. Here our aims are quite clear. We want these countries to be full participants in the global economic system; we want them to reap the benefits that sustained high rates of growth can bring. We want to help them succeed in meeting the Millennium Development Goals. We want to help them be in a position to absorb the increased aid flows agreed on at the Monterrey Conference in 2002.

The Fund is not a development agency of course. But we work closely with the World Bank and we can help governments in poor countries put in place the sound macroeconomic policies that are the prerequisite for sustained and rapid growth. We seek to do so in a way that enables governments and their citizens to have full ownership of the reform programs for which we provide financial assistance. We do this through the preparation of Poverty Reduction Strategy Papers (PRSPs) that are prepared by the government rather than by the Fund or the World Bank in consultation with a broad cross-section of civil society. The PRSPs are used as the basis for the Fund-supported programs that are established under the Poverty Reduction and Growth Facility (PRGF); this provides financial support on concessional terms.

The problems that many low-income countries face makes rapid progress difficult to achieve. But where governments have established stable macroeconomic frameworks we have begun to see encouraging results. Growth rates have picked up in several African countries that have made progress in curbing inflation and establishing better control of the public finances.

One of the ways developing countries could do more to help themselves is in the area of trade liberalization. I started out by drawing attention to the multilateral framework established after the Second World War: and I mentioned the significant role of trade liberalization in this framework. Much has been achieved, but there is still a long way to go and we need to do more to encourage governments in poor countries to seize the benefits on offer. There is much talk of the protectionist behavior of the industrial countries. I do think the rich world should do more to lead by example-to demonstrate a genuine commitment to free trade.

But few people seem to recognize that developing countries are heavily protectionist, and at great cost to themselves. Trade barriers between developing countries are much higher than those imposed by rich countries on poor ones.

Developing countries would be the principal beneficiaries of a successful conclusion to the Doha round of trade talks now under way. Around two thirds of the benefits would accrue to them. When you consider that estimates of the total benefits range from several hundred billion to one trillion dollars over the next decade or so, you begin to realize how much is potentially at stake.

Here, too, the IMF is seeking to do its part to promote globalization. I was in Geneva two weeks ago to explain to members of the WTO General Council how we hope a new initiative, the Trade Integration Mechanism, will help reassure those countries afraid of the short-term costs of trade liberalization. The benefits of further liberalization will be overwhelmingly positive, of that we have no doubt. But some countries might need time, and assistance to adjust, and we don't want a successful outcome put at risk because of their anxieties.


Few of those who attended the Bretton Woods conference would recognize the modern world. It has changed in ways they could hardly have imagined. The world economy is far richer, and far more dynamic than they envisaged possible when they drew up the plans for the new international economic order.

In many ways, the IMF's task has changed, as I have sought to explain. We have more members, in a more complicated international political system, than we had in the1940s. Yet the challenges we face have changed surprisingly little. We are still concerned with promoting financial stability; and promoting trade and economic growth.

When you examine the facts it is hard to dispute the evidence of widespread economic progress in the last sixty years. We in the Fund can hardly take credit for that. But we have sought to play our part; it is an important task and it is not yet completed. I fully expect that in sixty years time my successor will be telling your successors what we have accomplished in the intervening period-and commenting, too, on how apposite those original articles of agreement still are!

Thank you.


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