The last report on this subject, prepared just before I assumed the position of Managing Director, indicated that much of the work on international financial architecture would come together in the context of IMF surveillance. Executive Board discussions since then, drawing on the experience under pilot programs, have begun to clarify some of the ways in which the linkage to IMF surveillance might be put into practice. There has also been progress in the reform of the IMF’s financing facilities and in fostering constructive engagement of the private sector in crisis prevention and management. Experience has also underscored the crucial role of technical assistance in support of members’ efforts to implement these initiatives.

Overall, roughly three years after the outbreak of the financial crises in Asia, there has been substantial progress in applying the lessons of those and other difficult experiences in the work of the IMF and the policies of its members. Many concrete steps have been taken, or are underway, to enhance our collective ability to identify sources of vulnerability, to increase the resilience of domestic and international financial markets, and to improve the functioning of the system as a whole. As a result, the world should be better placed today than it was three years ago to deal with the emergence of difficult country situations and manage their regional and systemic implications.

But there is no room for complacency. International financial markets have the potential to make an enormous contribution, and the system has shown a remarkable ability to absorb shocks and adapt to ongoing technological changes. However, the inherent tendency toward constant reassessment and innovation is not always comfortable to live with. There will inevitably continue to be corrections and crises in financial markets. But we have an obligation to find ways to make these less frequent and less severe, without compromising the creative dynamism of those markets. Effective oversight of the functioning of the international monetary system—which is one of the IMF’s most basic responsibilities—requires careful attention not only to the policies and institutions of member countries, including those of the largest industrial countries, but also to systemic dimensions. To fulfill this responsibility, the IMF must be a center of competence on financial sector issues.

Moreover, as important as crisis prevention and management are, it is clear that the international community as a whole, and the IMF in particular, must also intensify its emphasis on promoting sustained growth and broadly-shared prosperity, within and among member countries. We must make globalization work for the benefit of all. Market-oriented economic policies and globalization—the development of an open system of international trade, increasingly integrated world capital markets, and the underlying technological innovations in transportation, communications, and information processing—have been among the main reasons for the unprecedented economic expansion and spectacular improvement in the welfare of ordinary citizens in much of the world since the end of the Second World War. But to function well and to contribute to broadly-shared prosperity, markets require sound institutional underpinnings, appropriate supervision, and regulation. In addition, the international community needs to help ensure that the opportunities of globalization are accessible to all, and to provide assistance to our most disadvantaged citizens and poorest member countries while they prepare to take advantage of those opportunities.

In the remainder of this statement, I will summarize the unfinished agenda of work on the international financial architecture and explore some of the operational implications for the future role and priorities of the IMF.

The Unfinished Agenda

The IMF has already done a great deal to reorient its surveillance and technical assistance activities to play a more effective role in preventing crises and promoting domestic and international financial stability. But there is also a substantial agenda of unfinished business, in the following areas:

• Improving the ability to identify sources of external and financial sector vulnerability at an early stage and to propose timely corrective measures. Much has been done to increase the focus on vulnerability in the IMF’s work and the candor with which the issue is addressed; to improve data at the national and sectoral levels; to develop vulnerability indicators and techniques for stress-testing; and to distill guidelines on debt and reserve management. We must recognize, however, that vulnerability indicators are highly imperfect and, more fundamentally, that the requisite improvements in members’ data systems and institutional arrangements will, in many cases, take years to bring to fruition. The IMF will continue seeking to mobilize technical assistance to bring essential capacity-building efforts in these and other areas to fruition as quickly as possible.

• Careful assessment of the appropriateness of a country’s exchange rate system, in light of its economic characteristics and policy framework; and increased attention to capital account issues including, inter alia, the sequencing of financial sector development and capital account liberalization. These are areas in which further research and analysis is needed to help facilitate a consensus on future IMF policies and underpin advice to members.

• Enhanced financial sector surveillance, backed up with detailed information derived from Financial Sector Stability Assessments (FSSAs); and the development, dissemination, and assessment of the observance of standards and codes, in areas that are important to the functioning of financial markets. Work in these areas not only helps to promote financial stability, but can also serve as a guide to institutional development and related technical assistance to enable countries to take advantage of the enormous potential of private capital markets. To ensure the maximum benefits for members and to prioritize the use of expert resources, the IMF should play a central role in coordinating and distilling the results of work being done to improve the functioning of domestic and international financial markets in a variety of international organizations and fora.

• Increasing the transparency of members’ policies and of the IMF’s assessments and policy advice. Following a review of the IMF’s pilot program, the Executive Board has agreed on a substantial change, to move to a general policy of voluntary publication of staff reports and other country papers. The Board also indicated that the IMF should, in principle, encourage the publication of these documents. At the same time, bearing in mind the differing institutional and political contexts facing member countries, it was clear that for some, publication is likely to be a longer-term objective.

Efforts must also continue to enhance the transparency and openness of the IMF itself. Here, too, there has been a sea-change, through the placement on the IMF website of a huge and rapidly-growing volume of information on its policies and operations. Priorities for the immediate future include the establishment of the independent Evaluation Office and more effective two-way communication with the markets and with the public. The IMF needs to explain itself better, and also to be more attentive to outside experience and advice—including advice from civil society—and to take this visibly into account. But at the same time, it needs to be recognized that the IMF is accountable directly to governments in member countries.

The experience in dealing with recent financial crises demonstrated that the IMF is reasonably well equipped to help its members to address temporary payments imbalances. Reviews of the IMF’s facilities and policies against the background of this experience have concluded that a differentiated set of tools is necessary to respond to the widely varying circumstances of individual member countries. But they have also revealed a need to further sharpen and adapt these tools. Further steps are underway to adapt these tools, to encourage greater efforts at crisis prevention—including through changes in the CCL—and to ensure that countries do not come to rely on IMF resources as a regular source of financing.

• In keeping with our emphasis on crisis prevention, we have agreed to enhance the Contingent Credit Lines (CCL)—a facility which has not so far lived up to the hopes that attended its creation, but which has the potential to become an important tool for crisis prevention and management. Because members that have met the strict eligibility criteria will be members with very strong policies, we are providing for greater automaticity in the availability of resources under the CCL, and we have clarified that the monitoring of arrangements under the facility will be less intensive than under other arrangements. We are also reducing the cost of the CCL to members.

• Reflecting the growing importance of international private capital markets, we have agreed to introduce new mechanisms, and sharpen existing ones, to ensure that countries do not rely on Fund resources for excessively long periods or in excessively large amounts. We are introducing into stand-by arrangements and the Extended Fund Facility (EFF) schedules of repurchase expectations under which members able to repay before the final maturities will be expected to do so; we have agreed to add a surcharge on the use of Fund resources at high levels of credit outstanding; and we have reaffirmed our determination to confine the use of the EFF to those cases where longer-term financing is clearly required.

• To provide additional safeguards for Fund resources, and to monitor policies to ensure that the achievements of arrangements are preserved, we have also agreed that there should be a presumption that members with substantial credit outstanding at the end of an arrangement would engage in post-program monitoring by the Fund of economic developments and policies.

• In order to promote a stronger and truly globally-integrated international financial system, the IMF must stay actively engaged with all of its member countries. It will therefore continue to provide financial assistance to its poorest members on concessional terms, through the PRGF. As outlined in a separate report to the IMFC, we are seeking to make this facility more effective in helping to reduce poverty, in close collaboration with the World Bank and other partners. The IMF and Bank are also making every effort to bring the benefits of debt relief under the HIPC Initiative to as many countries as possible, as rapidly as possible, building on the countries’ commitment to making effective use of the resources released for poverty reduction.

There has been good progress in developing a framework for involvement of the private sector in preventing and resolving crises. Directors have encouraged the use of tools that can contribute to both crisis prevention and resolution, such as collective action clauses and a regular dialogue between member governments and their private creditors. In addition, we intend to engage with the private sector in efforts to better understand capital market dynamics and developments, including through the Capital Markets Consultative Group, which recently met for the first time.

There also appears to be broad agreement on the IMF’s approach to ensuring that private creditors are involved in the resolution of crises, building on the guidance provided by the IMFC in April of this year. An important guiding principle is that the IMF’s financing is and will remain limited, so that private creditors will know that they must bear responsibility for the risks they take. Major features of the operational framework are:

• Where a member’s financing requirements are moderate—or where needs are large but the member has good prospects for regaining market access in the near future on terms consistent with medium-term viability—strong adjustment policies with IMF financial support should be expected to catalyze private sector involvement. Strong justification for taking this approach will be needed in cases of exceptional access to IMF resources.

• If a member faces large financing needs and its prospects for regaining market access in the near future on appropriate terms are poor, a more concerted—but preferably voluntary—approach may be required. In exceptional circumstances, if it is not possible for a country to reach agreement with its private creditors on their financial involvement, members may find it necessary to impose a standstill as a last resort. In such cases, the IMF may need to be prepared to lend in the presence of arrears to private creditors.

There are still differences of view about aspects of this framework, and difficult issues of judgment arise in applying it. We intend to continue our work to refine the basis for such judgments, and will take up these issues again in the Executive Board in the coming months and report to the IMFC.

Are We On the Right Track?

As I have already noted, a guiding theme for all of the IMF’s future activities must be to make globalization work for the benefit of all. But of course, success in promoting broadly-shared growth and, especially, helping to ensure that the poor are not left ever farther behind, is a collective responsibility of the entire international community. A country’s own actions will inevitably be the most important determinant of its economic progress. International institutions such as the IMF, the World Bank, and the World Trade Organization have important and complementary roles to play in this process. Through its Articles of Agreement, the IMF has been assigned the tasks of overseeing the functioning of the international monetary system; acting as a permanent mechanism for cooperative action among governments to promote economic and financial stability; and helping to promote sustained growth in member countries (through its surveillance over their economic policies, its provision of temporary balance of payments assistance, and its efforts to eliminate payments restrictions and promote the expansion of world trade). For its part, the World Bank has taken on special responsibilities regarding development strategies, development projects and their financing, and helping countries to reduce poverty, particularly by focusing on the institutional, structural, and social dimensions of development. The World Trade Organization is responsible for dealing with the global rules of trade between nations, with the main objective of ensuring that trade flows as smoothly, predictably and freely as possible. All three of these specialized agencies of the United Nations are essential to the collective ability of the international community to promote broadly-shared growth

Ongoing work on the international financial architecture has entailed a considerable widening of the scope of the IMF’s activities, compared to the situation only a few years ago. Such flexibility and responsiveness are undoubtedly encouraging. But at the same time, it is important to safeguard the effectiveness of the institution and the legitimacy of its activities, by ensuring that the IMF’s activities are well prioritized and focused in areas where the IMF has a mandate and expertise. In future deliberations, it is thus important to clarify:

• how various proposals fit into the IMF’s core areas of responsibility—macroeconomic stabilization; fiscal, monetary, and exchange rate policies (along with the institutional underpinnings and closely-related structural reforms); and financial sector issues, including the functioning of domestic and international financial markets;

• how the IMF should further adapt its oversight function to the quantitative and qualitative changes in global financial markets and the systemic issues arising in this context; and

• how to ensure the best possible complementarity with the activities of other institutions. There is a clear understanding between the heads of the IMF and the World Bank on the need to enhance cooperation between the two institutions, drawing on the encouraging experience over the past two years with enhancements in their collaboration in financial sector work (through the FSLC), implementation of the HIPC Initiative (through the JIC), and the development and assessment of observance of standards and codes.

This focus should carry over into the IMF’s surveillance, policy advice, technical assistance, and lending activities. And even with such a focusing of its work, the IMF will need to find better ways of working closely with other providers of technical assistance within its core areas, and to reach out to organizations with specialized expertise for advice and assistance to our members in crucial areas that do not fall within the IMF’s core.

Finally, consideration is being given to ways of increasing the effectiveness of IMF-supported programs in promoting macroeconomic stability and, thereby, contributing to sustained growth.

• Efforts are underway to streamline the policy conditionality associated with IMF financing, in order to ensure that it is focused on the issues that matter most to the achievement of the members’ macroeconomic objectives and sustained growth.

• Through this and other initiatives, including the prioritization of technical assistance, we will be reinforcing our efforts to ensure ownership and sustained implementation of IMF-supported programs by the countries concerned.

Ultimately, adaptation and reform of the IMF must be viewed as a permanent activity. The IMF must be a learning institution, preparing continuously to adapt to the needs of a changing global economy, in order to make a maximum contribution to sustained growth and broadly-shared prosperity.

I will make a presentation to the IMFC on the key elements of my vision of the future role of the IMF, at the upcoming Annual Meetings in Prague.