For more information, see France and the IMF

Speech of Mr. Laurent Fabius
Minister of the Economy, Finance, and Industry
to the International Monetary and Financial Committee

September 24, 2000


List of IMFC Statements
IMFC Communiqué

Dear colleagues,

Our meetings this year in Prague have a dimension both symbolic and practical : the fall of the Berlin Wall and the integration of the central and eastern European countries into the international community constitute the great shared endeavors of the last ten years. Meeting here in Prague also symbolizes the role which Europe has and must continue to play in pushing forward the construction of a more just and effective international monetary and financial system. The speech which I also present to you in my capacity as the current President of the Council of Ministers of Finance and the Economy of the European Union, is witness to Europe's commitment and determination to work together towards this goal.

The mobilization of civil society at these meetings shows that many misunderstandings still exist. Despite progress achieved, we have a long way to go to limit the negative or unwanted effects which may come with economic and financial integration. We must respond to these concerns through fully exercising our political responsibility and through heightened transparency. In the international financial institutions, we must constantly emphasize the fight against injustice and poverty. We must as well pursue our efforts to democratize these institutions.

To my mind, the International Monetary and Financial Committee is the political authority which must set the direction of the IMF. It is our mission to be sure the IMFC fulfills this role, defining the broad directions to permit the IMF to evolve and respond to new challenges. We must consolidate this essential responsibility of the IMFC, whose representativeness is the strongest proof of its legitimacy. Today we have the opportunity and the duty to do so.

In the run-up to the Prague meetings, the consequences of events in the exchange market for the global economy have often been highlighted. The interventions undertaken on September 22 by the monetary authorities of the G7 clearly demonstrated that this concern was shared and that we were ready to use together the instruments available to us.

1.  Facing disequilibrium in the oil market

I want first of all to share with you my concern about the impact current oil prices are having on the global economic situation. At a time when we have entered a period of promising rapid and non-inflationary growth, the abrupt rise in the oil prices over the last few months have raised worries in public opinion, can derail economic expectations of economic agents, and put public budgets in danger of new imbalances. And, this everywhere in the world—in industrialized countries, in emerging non-producing countries, in transition countries, and most of all in the poorest countries. This should be, for us, Finance Ministers from the world over, a shared responsibility, a pressing responsibility to search for and find the escape route which will allow the IMF's positive forecasts to become reality.

What are the causes ? The main factors are well known . There has been a recovery of global demand, the result of a period of low prices followed by another, in which real capacity had not yet sufficiently increased. In this context, pressures have progressively reappeared, which together with a market environment in which uncompetitive mechanisms have provoked price increases beyond those which even the producing countries themselves would judge desirable. To this, must be added the market fluctuations which accompanied OPEC's recent positive decision to raise its production by 800,000 barrels a day : overtaken by jitters, perhaps due to fear of insufficient stocks this winter, or to other more complex reasons, the market has slid into an additional and self-maintained spiral. We have strayed far from a rational market equilibrium and it is our duty to reset this market's reference points, which would provide oil producers as well as consumers with stability and growth.

Because the current chain reactions carry the seeds of serious macroeconomic consequences. If the current pressures were to be perpetuated, they could threaten the pursuit of global growth, as we have learned in a different context it is true, from past oil market shocks. The IMF, in the World Economic Report, takes a prudent stance, but it recognizes that a 10% hike in oil prices (in fact we must keep in mind that this price has actually tripled since January 1999) reduces growth by 0.1 percent in the richest countries and by 0.2 percent in Asia (with a strong impact especially on India). In certain regions of the world, growth could be especially impacted, notably in the non-producing countries of Asia, Africa and the Caribbean. We must do everything possible so that this temporary excess of volatility does not transform itself into a new global shock. This being said, we should keep especially in mind, the potentially adverse consequences for the least advanced countries. In sum, it would be illusory to concentrate on mechanisms of financial aid to these countries if at the same time a petroleum shock were to destroy their efforts and ours.

We are all determined to see oil prices return to a level of stability—I insist on this notion of stability—in conformity with a good balance between the interests of producing and consuming countries. A price bracket between $22 and $28 per barrel was proffered a few months ago, mechanisms of self-regulation had been invented. I will not comment here on the details of the measures which would be appropriate, but I want to say, in this place where the principle ministers in charge of the economic health of the planet are gathered, we have been given a responsibility by our public opinion, by our people. In the face of market disorder such as we observe today, we cannot ignore the risks of inaction. It could cause us to again slip into a situation wanted by no one. Let us today, between Ministers of Finance, agree to define the terms of a common diagnosis and to act in such a way that tomorrow, through a fruitful dialogue, after having found together solutions within our reach, the market will be able to regain its balance.

2.  The fight against poverty is one of the central missions of the IMF

Undeniable results have been achieved in the fight against poverty. To strengthen the support of our fellow citizens for the actions of the international community, it is our duty to explain these results better. But, faced with increasing inequalities and with huge needs, no one can be satisfied with the progress made up to now.

The universality of the IMF is one of its founding principles. Its cooperative structure is the source of its legitimacy. Its support to all countries, especially the poorest, is necessary for sustainable development. The IMF cannot relieve itself of this role and this responsibility. It must assume them fully, of course in close cooperation with the other concerned institutions—notably the World Bank and the regional development banks. I expect at the outset that our Committee will reaffirm this message : the fight against poverty is our collective priority, and therefore, that of the IMF.

Let us nonetheless be clear : the IMF must have at its disposal the means necessary to attain this goal. The difficulties which could appear in the next few months on the financing of the Poverty Reduction and Growth Facility (PRGF) give us reason to worry. Our agreement of September 1999 to create this instrument in the service of the fight against poverty should not remain pigeonholed. Faithful to our commitment to support development, which is witnessed by our contribution to the flows of ODA, France is ready to contribute to the financing of the PRGF.

This is why we have decided at Horst Köhler's request—and this despite the increasingly unbalanced burden-sharing between the developed countries in financing support for the poor countries—to lend nearly FF10 billion additional to finance the PRGF. It would be justified for all other developed countries to stand with us, most particularly there must be no further obstacle to the long anticipated IMF gold sales, indispensable to HIPC financing.

Reducing the debt burden is an essential component of our fight against poverty and I welcome the decision to hold a joint meeting of the IMFC and the Development Committee on this initiative. Any progress in coordination between these two institutions is a step in the right direction and, to better assure consistency in Bank and Fund policy, some other subjects would also merit being jointly addressed in the future,—I am thinking particularly of money laundering and the regulation of off-shore centers.

All of us here are convinced that the HIPC initiative must quickly reach its goal : that of enabling a real reduction of poverty in countries which benefit from debt forgiveness. Since our last meeting, we have shown that we want to keep our promises. Ten countries have achieved their decision points for eligibility in the enhanced HIPC initiative, and most of them are benefiting from this decision or soon will, through immediate relief from the majority of their debt service. The largest multilateral lenders and the Paris Club have resolutely committed to this end. I call on all the other creditors to do the same. The IMF and the World Bank have indicated to us that ten other countries could become eligible for the initiative before the end of the year. I deeply hope that this will be the result. But, I also want to repeat clearly that the policies engaged must be well adapted for debt relief which benefits the most vulnerable. This implies making strong commitments, notably in the fight against corruption which constitutes the greatest risk of diverting the funds freed up by the initiative from their intended purpose.

3.  The progress thus far achieved in the reform of the international financial architecture must be fully put into practice

Over the last three years, we have made great strides in international financial regulation, but we must avoid the risk that the improvement in the world economic situation is leading to a certain complacency. We would do better to completely draw the lessons from the financial crises of the last years : we must resolutely make progress on better regulation of the international financial system.

Private investment is a major source of financing for developing countries and I welcome its expansion. But, experience shows that rule is indispensable to efficient market functioning. Progress has been made in the last few months, we must speed up its operational implementation.

  • Surveillance must be strengthened. There should be better integration of structural and regional dimensions in the IMF analyses. In today's global economy, it would be frankly inappropriate for the IMF to pay little attention to the structural aspects of the economy. France, of course, favors a precise approach, targeted measures truly necessary to macro-economic and financial stability. We have been advocating this for a long time, notably to ensure that conditionalities are equitable and efficient. These requirements should not be counterproductive : to deny the importance of structural questions and their influence on stability, would be dangerous, notably in the financial sector. We must therefore together ensure that in the matter of surveillance the IMF fully exercises its prerogatives, which it alone can assume. It is the stability of the international economy which is at stake, that is to say the collective benefits which we can draw from globalization.

  • The private sector must be involved in crisis prevention and resolution. Last April, we arrived at an agreement on a framework for action based on the principles of equity and accountability for all actors. There is no need to repeat here the arguments underpinning this approach : many among us are disappointed to see that too often still, the adverse effects of adjustment weigh most heavily on the weakest and most vulnerable segments of the population. Our new approach, based on the principles of social equity and economic efficiency, as a matter of fact seems to me to be commanding increasing attention from the private sector. It is thus indispensable that we press forward in operational terms.

  • New adequate prudential regulations are necessary to face up to the risks created by financial globalization. The Financial Stability Forum (FSF) has done remarkable work. Its recommendations are central to the integration of the micro and macro economic aspects of financial stability. In this regard, the Forum's conclusions and recommendations on hedge funds and on the financial regulation of off-shore centers constitute a definite step forward. France is committed to the implementation of these recommendations and to evaluating their impact. It is essential that the concerned countries impose if necessary by legal means the obligations of transparency judged indispensable by the FSF on the hedge funds based in their territory.

Further, if the measures thus far recommended turn out to be insufficient or inadequately enforced, we should reconsider the possibility of establishing direct regulation on the financial leveraging of hedge funds. As regards off shore centers, I expect the IMF to fully play its role to incite stock markets to promptly improve regulatory quality and to better cooperate at the international level. The Fund should encourage its member states listed by the FSF, or which harbor territories or jurisdictions in this category, to have the soundness of their financial system evaluated by the Fund's services.

  • The fight against money laundering world wide must be of primary concern. The harmful effects of money laundering on the stability of the international financial system and on sustainable development of the global economy, especially of the emerging countries, no longer needs demonstration. Recent progress has been wide-spread and dramatic. The Financial Action Task Force's recent publication of a report and a list of non-cooperating countries and territories constitutes a definite step forward. For the first time, an international body has had the courage to clearly denounce lax or complacent countries. From now on, it will be incumbent upon the IMF and the World Bank, as they define their priorities and programs, to take into account the question of money laundering in general and the conclusions of multilateral work on it in particular. The IFI's have a major role to play to incite -or constrain- non-cooperating countries to appropriately apply international norms, particularly the 40 FATF recommendations. To do so, they must consider restraining or conditioning their support of those non-cooperating countries and territories which refuse to modify their harmful rules and practices.

  • The implementation of international codes and norms in the financial area also constitutes an important aspect of international financial system reform. Last March, the FSF set out a list of 12 priority norms for financial stability, which constitute the sine qua non of growth and economic development. I welcome that they incorporate the 40 recommendations of the Financial Action Task Force. These 12 norms constitute the essential universal rules to be applied over the medium term. Some have criticized the process by which these norms were developed, and of course, their implementation should always be adaptable to country specifics. For example, the Basle principles on banking regulation have, from the beginning, taken this necessity into account and are, today, thanks to this flexibility, considered the reference for the banking sector. This being said, the final goal must not be jeopardized : that is, progressive and orderly implementation which takes into account the country's level of development and which aims at having all the countries take ownership of these norms, notably through dialogue with the Bretton Woods institutions.

  • Adapting the instruments of the IMF to a new set of needs has today reached a decisive stage. We have made considerable progress since last April. I will highlight the two points which seem especially significant to me.
  • (i) the preventive role of the IMF will be strengthened. The new Contingent Credit Line (CCL), created at the beginning of last year, was unable to fulfill its goal because of what could be termed a certain number of design faults. Today, this facility is less expensive, and, in procedural terms, more accessible for countries carrying out sound economic and financial policy reform. I hope that emerging countries will seek out or continue to practice such policies to benefit from the protection against financial contagion which comes with eligibility for the CCL.

    (ii) the incitation role of the IMF will as well be strengthened by reform of its two main facilities : the Stand-By Agreement (SBA) and the Extended Financing Facility (EFF). The shorter maturities and slightly rising costs of IMF loans will, in effect, encourage borrowing countries to turn to stable and sustainable international private financing, and to have less recourse to IFI financial support. Through this orientation, our goal is to dissuade borrowing countries from eventual abuse and to incite them, more generally, to implement sound, long-term economic policy reform, and certainly not to increase the strictness of the aid which the IMF provides to developing countries. This is why I welcome the agreement achieved in the Board, as a result of the impetus given in April in Washington, to preserve the delicate balance between incentive and support.

4.  Important advances will still be necessary to give greater consistency to the regulation of the international monetary and financial system

All these efforts in the process of being achieved or making distinct progress, are encouraging. We must go to the end of reform, that is to say, we must assure better consistency. We cannot acknowledge on the one hand that private capital flows play an ever greater role, and on the other feign ignorance of their consequences on the international financial architecture and on the fundamental missions of the Fund. The opening of developing countries to private capital flows carries with it considerable opportunity, but it also brings important risks, as we have seen in the not too distant past. We have to overcome these risks so that inclusion in the international capital markets will not harm the most vulnerable. It is a question of the legitimacy and credibility of our action vis-à-vis these populations.

We already have at our disposal numerous elements to rapidly find agreement on a « road map » on opening to international capital flows, a concept sometimes referred to under the rubric « orderly financial liberalization ». The goal is to accompany the movement toward increased openness in full knowledge that it cannot bear fruit absent certain preconditions. The goal is naturally not to propose a rigid framework, aimed at promoting an excessive or uncontrolled liberalization. It is to structure a process already undertaken and benefiting the concerned countries. It is also to recognize the lessons of the past, as well as the diversity of different practices, to stress the importance of the institutional structures which must be in place for this evolution to have positive effects. It is to arrive at an agreement on the scope of instruments now available to the international community, and I think here notably of what we can learn from the Chilean experience.

The IMF must today be ready to manage capital account crises provoked by capital flight, and no longer only the traditional current account crises generated by budget or monetary imbalances. Isn't the IMF a financial institution, and not just a monetary one ?

To be complete, the financial edifice will depend on relaunching the discussions on enlarging the IMF's mandate to cover capital accounts, and if necessary on the revision of its Articles of Agreement to this end. We must provide the institution at the core of the international financial architecture with a mandate which reflects the main development in the international financial and monetary system over the last fifty years : the explosion of private capital flows. This is why I call on the IMF to take up again its consideration of how to put in place the legal and operational means necessary to advise and support the emerging countries seeking access to international capital markets. The IMF must develop a doctrine which makes ample room for the concerns of emerging countries. Both choice of scope and the rate at which opening takes place must remain within the purview of the concerned countries. I consider it equally legitimate for emerging countries to be provided the tools which will allow them to defend certain fundamental strategic and economic interests. Thus, financial liberalization can usefully be combined with regulatory measures in normal times and with controls in times of crisis. The idea of an agreed upon, but not legally binding, international « standstill » seems to command a large consensus internationally. In the same way, it may be necessary, in order to fight efficiently against money laundering, to maintain temporary controls on the financial sector, at the domestic level.

5.  More balanced growth should be our collective goal

The macroeconomic situation in the eurozone is positive. This year, we have sustained growth of over three percent and this trend should continue next year. Growth is based on robust internal demand : the dynamism of household consumption is fed by strong job creation, which assures rapid decrease in the unemployment rate. Business investment is accelerating and new technologies have begun to diffuse throughout the economy.

Growth is being used by all the European countries to reorganize public finances and to achieve fiscal balance. This will allow for better preparation of the challenges linked to the aging of our societies. Thus, in 2000, the deficit of the French public administration should be 1.4 percent of GDP, down from our initial target of 1.8 percent. In 2001, the government is targeting a deficit of 1 percent of GDP, with gradual reduction of our financing needs in conformity with commitments.

From now on, the question for us Europeans will be to perennialize this growth cycle, that is to say, to maintain a high level of activity growth without causing the outbreak of inflationary pressure. For the moment, these pressures are being contained . If one corrects for the direct effects that the rise that crude oil prices is having on the price of fuel, prices are evolving moderately and this thanks to wage moderation. Moreover, the development of new technologies, which we are encouraging at the European level in the wake of the European Council of Lisbon, should translate into an acceleration of productivity likely to raise our non-inflationnary growth potential. I am thus optimistic, even if we must, of course, stay watchful given the uncertainties surrounding the rise in oil prices.

We have been equally engaged in accelerating our structural reform. Tax reform and improvements in the functioning of labor markets as well as continued opening of a number of sectors to competition have stimulated supply, both on the business and labor supply sides. These reforms also favor the spread of new technologies. These reforms should help us to advance toward a dynamic, modern, full employment, non-inflationnary economy, that is to say what I referred to in a document recently as « stabcroissance » -stable growth.

In this context of strong and sustained growth, it is more and more apparent that the actual level of the euro does not reflect the solid fundamentals of the euro zone. The IMF, in the report of the CGER included in the latest World Economic Outlook, as well as financial market economists, judge unanimously that the single currency is significantly under valued. At the Euro-group of September 8, my colleagues, the European Central Bank, and myself, underlined our determination to accelerate this process and to promote the necessary structural reforms with a view to increasing the growth potential of the euro zone. The recent Central Bank interventions go in this direction. We are all convinced that a strong euro is in the interests of the zone and the stability of the world economy. We will not cease in our effort.

In the emerging and developing countries, the results of the first semester confirm an upturn of activity, with the IMF estimating that growth should reach 5.7 percent this year (6.7 percent in Asia, 4.4 percent in Latin America, and 4. percent in the transition countries. However, if the oil price hike persists, Asian growth could be reduced by 0.2 percent. This growth in emerging countries is no longer led simply by foreign trade, but now also by internal demand. All in all, in the wake of the Asian, Russian and Brazilian crises, most of the emerging countries have strengthened their efforts with great determination, and with support from the international financial community. Thus, the Latin American countries have for example undertaken to reduce their budget deficits, with encouraging results as of today. It's a question of pursuing the effort with out smothering the recovery.

The challenge for emerging countries will be to stabilize and organize their growth, for sustainable and balanced development. To this end, structural reforms are critical : a healthy and transparent financial sector, a fiscal policy which favors internal savings and renders these countries less dependent on external financing, establishing an attractive environment for both internal and external investors, the fight against corruption and establishing rules of governance, strengthening social safety nets whose coverage is still partial in the emerging countries, all these are the indispensable conditions for harmonious and thus sustainable development.

The fact that this Committee is being held in Prague, as well as the fact that it is now possible to consider the transition process from a certain distance, inspires the effort to extract some lessons from this experience in the central and eastern European countries as well as in the former states of the Soviet Union, two groupings whose trajectories have been very different from one another. Most of these economies, and I rejoice in this, have -finally- regained growth and certain are even experiencing a particularly vigorous recovery, which is encouraging after the first difficult years of the transition. It remains that beyond these good performances, which in some countries, are no more than cyclic, we must together learn from this transition, even if it is still incomplete.

We must highlight in this regard the importance of structural reform to the success of the transition process. In the context of market opening, of lively competition, price and salary liberalization, property redistribution, the capacity of countries to create an adequate environment is as important as their aptitude to register good economic indicators from time to time.

To do this, the government must be sufficiently strong, and this in a situation where much remains still to be created, including a legal context for property, bankruptcy, and banking regulation and the framework for fighting money laundering. The government must equally have the means to assure the redistributive functions which are incumbent upon it, in as much as every improvement in the economic situation after a long period of crisis can engender strong expectations. I observe and welcome that the possibility of adhesion to the European Union constitutes a strong factor in legitimizing the essential role which the government must play to enable the economic and social transition now underway.

The international financial community, and at its forefront the IMF in close coordination with the World Bank, must accompany these reforms by offering financial support, but also the requisite expertise and by keeping watch over the implementation of sometimes difficult but always necessary reforms.


Dear colleagues,

The stakes and risks created by economic and financial integration require a strong mobilization on our part, to define the political guidelines of the international financial institutions which play a central role in its development. We must accept the debate and act resolutely and transparently. Many endeavors to give a more human face to globalization are now underway, and several have yet to be undertaken. We have to shoulder our political responsibilities to achieve their rapid progress.