2002 Annual Meetings of the IMF and the World Bank Group
September 28, 2002
Documents Related to September 28, 2002 IMFC Meeting
Republic of Armenia and the IMF
Bulgaria and the IMF
Bosnia and Herzegovina and the IMF
Cyprus and the IMF
Georgia and the IMF
Republic of Croatia and the IMF
Israel and the IMF
Republic of Moldova and the IMF
former Yugoslav Republic of Macedonia and the IMF
Kingdom of the Netherlands-Netherlands and the IMF
Romania and the IMF
Ukraine and the IMF
Statement by Hans Hoogervorst
Minister of Finance of the Netherlands
International Monetary and Financial Committee
Washington D.C., September 28, 2002
Learning from the Asian crisis: an unfinished agenda
Five years ago, global financial stability was threatened by the Asian crisis. The emergency seemed to come out of nowhere, and dashed the prospects of countries that had been considered the most successful in the developing world. The crises shook confidence not only in the emerging markets and the global economy, but also in international institutions such as the IMF and the World Bank. In taking up the challenge to strengthen the international financial architecture, both institutions have drawn lessons from the crisis, as is visible in at least three areas.
First, the IMF and the World Bank have led new initiatives to monitor the complex interlinkages between a country's macroeconomic development and the quality of its institutions, notably through the Financial Sector Assessment Programs (FSAP) and the Reports on the Observance of Standards and Codes (ROSC). Second, along with promoting transparency and adherence to the universally accepted "rules of the game" among its member countries, the IMF itself has become increasingly open. This approach helps strengthen accountability and enables markets and policy makers to better assess risks. Third, the IMF has taken steps to streamline the conditions of its lending in order to align these with its mandate, take better into account countries' capacity to deal with complex reforms, and to achieve a good division of labour with the World Bank. Notwithstanding considerable progress, the agenda for a greater resilience of the financial architecture is yet unfinished.
New risks to global stability
It is ironical that, according to the World Economic Outlook, Asia - together with the CEE and CIS countries—seems to be almost the only bright spot in today's world economy. The recovery of the global economy is weaker than expected with growth prospects for the US economy being further downgraded. At least three risks to global stability and growth can be discerned, which—and that is important to emphasise- are not confined to the emerging economies or developing countries. As noted in the World Economic Outlook, one of the risks is the widening current account deficit of the US, which has already led to lower capital inflows and a lower dollar exchange rate. The deficit might lead to an abrupt and disorderly adjustment of trade flows and the dollar exchange rate. It not only calls for balanced policies in the US, but also requires for Japan, Europe and other countries, including developing countries to promote robust growth through a deepening of structural reforms. The world should thus decrease its dependence on the US as a source of growth.
The second risk to global stability relates to the seismic waves from the collapse of Enron and the WorldCom scandal, that continue to rip through boardrooms and the stock exchanges across the world. Everyone now agrees that laws against "the infectious greed"—self-dealing insider trading, manipulation of accounting reports and others breaches of fiduciary duties—are essential. The Enron-era scandals show that corporate law should keep pace with underlying changes in the financial world. Also, there is a need to give as much attention to risks and vulnerabilities arising in the so-called advanced economies, as we do to problems in emerging markets and developing countries.
The crisis in Latin America constitutes a third major risk to global stability. During the first part of this year, many observers noted with satisfaction that Argentina's debt default had not infected its neighbours. This optimism now appears to be overstretched. Contagion is back on the international agenda, fuelled by political uncertainty. So far, the IMF has properly differentiated between victims of contagion and uncertainty and countries which are largely responsible for their own predicament. The IMF should not be regarded as the global fire squad that unconditionally comes to rescue when financial crises break out.
The crisis in Latin America setting a new agenda
It is a sad truth that most initiatives to strengthen the international financial architecture to reap the fruits from the on-going liberalization of capital movements have been taken under the pressure of some kind of crisis. The Asian crisis is a case in point, and the same seems to hold for the Enron collapse and the calamity in Latin America. The latter should give birth to at least three new or renewed initiatives. The first is the new framework for debt sustainability as part of the Fund's work in crisis prevention and crisis resolution. This framework is especially valuable as it considers both external and public debt sustainability, employs stress tests to examine the effects of various shocks, and highlights the interlinkages between exchange rate fluctuations and debt dynamics, which reflect a key feature of the situation in Latin America.
The second initiative is the impetus given to the discussion on ways to smooth debt restructuring processes. We welcome the efforts by the IMF to make progress on the specific design of the Sovereign Debt Restructurering Mechanism proposal as well as the promising first results of the work by the G10 deputies to devise new collective action clauses and to encourage their widespread use. This two-track approach also expresses an intention to move away from large financial bail-outs towards better work-outs and needs to be pushed forward.
Third, as with the Asian crisis, the crisis in Latin America has nourished the discussion on the financing role of the IMF in managing financial crises. In the provision of the global public good of financial stability, the IMF has a crucial role to play. Executing this core task should however always be in a close partnership with both countries' authorities and the private sector. Otherwise IMF support might, by absorbing part of the costs of instability, provide incentives for private lenders to underestimate risks—and for national authorities to refrain from adopting policies that provide stability. Not only would it be an illusion to believe that the fire squad of the IMF is to quench all fires, nor should it be considered the sole party to be responsible for all extinguishing water for combating a crisis. Acknowledging this reality would also set a limit to the size of the Fund and would imply a stricter policy with regard to access to IMF facilities. The (improved) Fund is necessary, but not sufficient to promote global stability and prosperity.
Some specific issues of the unfinished agenda of the Asian crisis and the new agenda emerging from the turmoil in Latin America will be elaborated upon in the following sections on crisis prevention and resolution, the size of the Fund and conditionality, with some remaining issues in the final section.
Crisis prevention: an early warning system for unsustainable debts
My constituency applauds the progress made with regard to the FSAP and ROSC initiatives that emerged from the Asian crisis. After having given priority to emerging and transition economies in the FSAP exercise, a shift towards emerging markets and developed countries seems justified in light of the Enron and WorldCom events.1 Also, the time has come to capitalize on the progress in the ROSC process, for example through a stronger marketing of the information on the (observance of) standards and codes among private sector agents. This would contribute to improved country risk assessments, which in turn would lead to a better functioning of international capital markets. Learning from the crisis in Latin America, we strongly support the increased attention in IMF surveillance to debt issues and welcome the framework for debt sustainability assessment. The ongoing integration of markets makes debt sustainability increasingly important to the stability of the international financial system. Debt sustainability analyses should also play a crucial role in future financing decisions. Against this background, we urge the IMF to make such analyses a standard item in regular surveillance. The current crisis cases provide a sad opportunity to test the merits of the infant debt sustainability framework, and the lessons learnt will be useful for its further refinement.
Crisis resolution: it is the exception that proves the rule
The success in managing financial crises in partnership with national authorities and the private sector crucially depends on a clear and consistent official financing policy. We therefore appreciate the discussion on the Fund's access policy in capital account crises. In our view financing in such cases should preferably be channelled through the Supplemental Reserve Facility, which was set up specifically for this purpose, rather than through the regular financing facilities (Standby Arrangement and Extended Fund Facility). Any kind of "facility shopping" should be prevented. We also generally oppose the use of combinations of SBAs and SRFs.
Moreover, exceptional access should remain truly exceptional. Therefore, the conditions for exceptional access should be clearly defined and adhered to. They will help shape the expectations of members and markets and play a useful role in safeguarding the Fund's resources. We would propose the following conditions, which should be jointly met in case of exceptional access in capital account crises: (i) a realistic, transparent and strong adjustment programme, with proven ownership by the country, offering good prospects for regaining market access in a reasonable timeframe; (ii) a high probability that the country's debt remains sustainable; (iii) maximum efforts to involve the private sector in the resolution of the crisis should be made to the extent possible; and (iv) the country concerned should be either the victim or the potential source of contagion. The burden of proof for these conditions lies with the country concerned and the IMF. In addition, the documentation and procedural requirements needed for a request for access above the limits should be strengthened. This implies, inter alia, that adequate documentation, demonstrating that the above mentioned conditions are being met, will have to be provided to the Executive Board well in advance of the actual decision making. Exceptional access decisions should be closely monitored and consistently evaluated ex post.
Quotas: "handle with care"
A strict IMF access policy is based on the principle that the financial support by the Fund is necessary, but not sufficient to promote global stability and prosperity. Albeit crucial, the role of the Fund should not be overestimated. It is the same principle that leads us to the view that at the current junction, a general quota increase is not needed. We note that the Fund's forward capacity to commit resources is favourable and that the IMF is well-equipped to address possible financing requests in the foreseeable future. Moreover, we feel that it would be undesirable to expand the size of the Fund while the pressing issues of PSI and access policy have not been resolved. Indeed, a general quota increase under the current circumstances would run counter to the objective of a more limited financing role for the Fund and might fuel moral hazard.
Beyond the issue of the 12th quota review, on a general note, we believe that individual quotas should adequately represent countries' share in the world economy and the international financial system. The current system of quota formulas performs this complex task relatively well. There may be cases of misrepresentation, but these are mostly due to discrepancies between actual and calculated quotas and cannot be attributed to the formulas themselves. Therefore, the review of the quota formula system requires utmost care so as to ensure that changes to the system do indeed constitute improvements, and do not weaken its logic and robustness. In particular, we feel that any change to the quota system should be consistent with at least three broad principles: (i) the quota system should reflect each countries' openness in both trade and financial terms; (ii) the financial solidity of the Fund should be safeguarded through an emphasis on variables that capture countries' ability to contribute to the Fund's resources; (iii) the adequacy of the system is more important than its simplicity (a system of multiple formulas may therefore be preferable over a one formula approach). We urge the IMF to take these considerations into account in its on-going work on quota formulas. At the same time, there is a need to look into practical ways to enable African countries to participate more effectively in decision making.
Streamlining conditionality and fostering ownership
As noted before, the effectiveness of IMF policies hinges on a fruitful partnership with the private sector as well as authorities of countries it intends to assist. In order to better involve the latter and to promote ownership of IMF-supported programs, the Managing Director initiated the discussion to focus and streamline conditionality some two years ago. Since then, the IMF Board has extensively discussed both the coverage and the modalities of conditionality. However, in a recent assessment, the actual progress in streamlining conditionality in IMF programs appears to have been fairly limited. The number of structural conditions has remained more or less constant and the number of prior actions has even increased in recent programs. As noted in the IMFC communiqué of the Spring Meetings, the time has now come to move forward. Therefore we welcome the adoption by the Board of the revised conditionality guidelines aiming at streamlining conditionality and thereby fostering national ownership.
These new guidelines include a `macro relevance test': structural conditionality should be limited to conditions that are critical for the achievement of the macroeconomic objectives of IMF-supported programs. This will also bring conditionality more in line with the Fund's mandate. Furthermore, we believe it is worthwhile further exploring the feasibility of outcome-based conditionality in IMF-supported programs, i.e. conditions which relate to the achievements of intermediate or final objectives in more aggregate terms, rather than to specific policy measures expected to lead to the program's objectives. This would not only allow national authorities greater flexibility in the design and implementation of adjustment programs, but could also contribute to mitigating the perception of micro-management by the Fund. In this sense, the IMF should be a health advisor rather than a physician prescribing treatment. In addition, we believe that prior actions should be used sparingly and with selectivity. It should be avoided that prior actions are used to subject a member to a sort of `prior program'. As a rule, Fund management should convincingly justify in advance why certain prior actions have to be met. Finally, close collaboration between the IMF and the World Bank is also a key component of streamlining conditionality and promoting ownership. In this respect, we feel that the `lead agency concept' could be made operational by including a `structural policy matrix' in all staff documents, providing an overview of all structural conditions indicating the institution primarily responsible for monitoring each condition.
Other areas of concern
1We welcome that Japan is undergoing an FSAP. The Netherlands will participate in an FSAP in 2003.