The IMF in a Globalized World Economy--The Tasks Ahead -- Address by Michel Camdessus
June 7, 199595/10 Third Annual Sylvia Ostry Lecture by Michel Camdessus
Managing Director of the International Monetary Fund
Ottawa, June 7, 1995
It is a great pleasure and a privilege for me to have this opportunity to pay tribute to Sylvia Ostry and to do so in Canada, a country with such a tradition of openness to international cooperation and held in such high regard in all international fora. For more than 15 years I have had the honor of counting Sylvia as a friend and an ally in many a battle for international economic cooperation. In Paris in the early 1980s I witnessed at first hand the intellectual leadership she provided as head of the Economics Department of the OECD during one of the deepest recessions of the postwar period; and I saw the energy she applied to focusing the work of the OECD on the supply side and structural reforms--an orientation that still holds good today. Shortly after she returned home to Canada in 1984, she was named Ambassador for Multilateral Trade Negotiations, and we all know the vital role she played in the Uruguay Round discussions.
Let me just say that she was among the few who saw clearly and early on that fundamental institutional reform--the creation of a World Trade Organization--had become indispensable. Even if that were the only hallmark of your distinguished career, Sylvia, the world would be deeply in your debt for your invaluable contribution to the establishment of the WTO finally at the beginning of this year, completing at long last the three-pillared institutional structure for the promotion of international monetary cooperation, development, and trade--the IMF, the World Bank, and the WTO--envisaged by our founding fathers at Bretton Woods more than 50 years ago.
As you were performing so brilliantly in trade negotiations, the Prime Minister of the time hastened to select you to serve as the "sherpa" for the Group of Seven's economic summits between 1985 and 1988. I need hardly reiterate what a privilege it was for me then, to gain Sylvia's ear and be able to express my concerns, my hopes, and, because she had the good grace to entertain them, my suggestions. Sylvia was the sherpa par excellence, and contributed immeasurably to the development of international policy cooperation. As I was not altogether without experience in this line of work myself, having served as a financial "sous-sherpa" back in the prehistoric period, by which I mean the time before Sylvia--the period so well described in Sir Nicholas Bayne's book Hanging Together--in a sense I felt as if I was engaged with her in some kind of respectful complicity; I shall draw on this again today as you will see.
Let us recall some landmarks, culled from the compendium of communiqués from successful summits. From Bonn in 1985, when protectionism was looming ominously, I can cite the statement that "open multilateral trade is essential to global prosperity," which presaged the launching of the Uruguay Round in the following year. At the Tokyo Summit of 1986, which followed the Plaza Agreement, the G-7 decided that their finance ministers would subsequently meet regularly between summits, and agreed to "close and continuous coordination" of economic policies and to cooperation with the IMF to strengthen multilateral surveillance. In Venice in 1987, the Heads of State and Government endorsed the Louvre Accord to foster exchange rate stability, and acknowledged that international policy coordination "is essential to achieving stronger and sustained global growth, reduced external imbalances, and more stable exchange rate relationships." What is more, the Venice Summit endorsed my proposal for an enhanced structural adjustment facility (ESAF) at the IMF to meet the needs of low-income countries. Eight years later, I can tell you that ESAF arrangements have made it possible to introduce growth-oriented programs of adjustment and reform in 37 of the poorest countries in the world, and that these programs have succeeded beyond most expectations. Finally, the 1988 Toronto Summit is justly renowned for developing the "Toronto terms" that provided the basis for official debt relief agreements over the following years--just one example of Canadian leadership on behalf of the poorest.
Of course we all know that summit communiqués are written by the Heads of State and Government themselves. But still I sense that Sylvia's hand was somehow involved to some extent or other; one might at the very least wonder whether this is the case when, all of a sudden, the rather humdrum phrasing of these statements becomes vigorous, ennobled, in some undefinable way resembling you, Sylvia: un je ne sais quoi qui vous ressemble.
And so, Sylvia, we meet again today, thanks to the happy circumstance of the conferences organized in your honor. And what should we discuss together, if not summits? We are both of us now playing odd roles in relation to summit meetings. Not major players really, nor exactly veterans, we are nonetheless driven by our shared certainty that there is a common good for the international community that it is time to identify and promote; we are convinced as well, as Sir Nicholas pointed out in 1984, that few remarks are more applicable to summits than what Benjamin Franklin said upon signing the Declaration of Independence, "We must indeed all hang together or most assuredly, we shall all hang separately;"1 and finally we firmly believe that, in these times of what you have aptly termed techno-nationalism and techno-globalism, there are certain subjects on which it is essential that the common voice of Heads of State and Government be heard.
So permit me to convey my thoughts on the Halifax Summit, the subjects I would like to see raised there, and, in passing, to make a few suggestions just in the way I would if you were still in the office you held seven years ago, in asking you what tasks should lie ahead for the IMF in this globalized world economy.
Let us first examine a number of features that are quite peculiar to this 21st summit of the industrial countries. The first is this: its agenda, if rumor is to be trusted, grew out of the desires and vision of the Heads of State and Government themselves. It is the leaders, not the techno-structure, who asked the major question set forth in the preamble to the Naples Summit, namely: "What framework of institutions will be required to meet these challenges in the 21st century? How can we adapt existing institutions and build new institutions to ensure the future prosperity and security of our people?" It is fortunate that this question was raised, and six months after the Naples Summit three major monetary and financial crises confirmed how appropriate this agenda was.
This is, in fact, my second comment. Everything is happening as if, here in this first half of 1995, we had already embarked on the 21st century, making this 21st summit in effect the first summit of the 21st century. But judge for yourselves: Mexico, Barings, the dollar crisis. These three crises bear the marks of a new world dominated by the forces of globalization, a world to which our countries and our institutions must urgently adapt as best they can. It is against this background of globalization that the Halifax Summit will take place.
Finally, the third feature of this summit is that, because the globalization process is also characterized by the emergence of many countries now playing or preparing to play major roles in the international financial arena, it is important that at this meeting the G-7 countries make clear their concern to give these new partners the role they deserve in the management of the world economy.
Having said this, one conclusion is inescapable: Halifax is already a summit of the 21st century, dealing with the next century's challenges. And what subjects might be raised there to address them? Of course first, there are the issues that should already have been resolved, the ever-present issues of the first 20 summits; second, there are the urgent questions necessarily raised by these new crises of the 21st century.
The challenges we face in the world economy today are in many respects remarkably similar to those encountered in the mid-1980s. First, even though the Uruguay Round negotiations are now behind us and the WTO is in place, there is no room for complacency on trade relations. Protectionism, unilateralism, and associated trade frictions are still with us. In your most recent book,2 to which I have already alluded, you refer to the benefits of a transparent, rules-based multilateral trade system in terms of predictability, stability, and restraint on the use of trade policy to achieve political objectives. You go on to say that "The loss of these international public goods in an increasingly interdependent world would be serious in the extreme." At present, there is one serious bilateral dispute exemplifying these dangers. We must clearly be wary of assuming that the strengthened multilateral trade rules by themselves will keep unilateral action at bay, or make the protectionist threat disappear. Strong political will is also required to ensure that trade frictions are resolved within the framework of the multilateral trade rules overseen by the WTO. We hope that this wish will be heard, and that such tensions will not divert the attention of the Summit from its primary aims. We all know that we can rely on Prime Minister Chrétien to avert this, and to ensure that this summit gives the WTO the firm backing it requires at its inception.
The second familiar issue is the intensification of our efforts in favor of the developing countries. Many of them have made great progress since the mid-1980s, thanks in part to adjustment and reform programs supported by the Fund and the World Bank. Their dynamism has contributed markedly to continuing global growth in recent years, despite the slowdown in the industrial countries. Many others, however, especially in Africa, are still mired in poverty. What is more, while globalization is a monumental force of economic integration that can benefit the poor countries by speeding their development, it may also lead to the marginalization of those countries that refuse to undertake, or are prevented from undertaking, the necessary structural adjustment effort.
While the overall strategy for the poor countries has been well-established for some time, two of its components are of major importance and call for particular attention from the Seven. One is the World Bank's concessional loan facility, IDA. Let us not mince words. For the poorest countries that have resolved to do everything in their power to get out of their difficulties, there is no credible solution in the absence of IDA-type resources in sufficient volume at the World Bank. I say again that without a sizable replenishment of IDA resources, a critical component of the development strategy would be lacking, particularly for Africa. The IMF's efforts to put in place the macroeconomic preconditions for growth, through its enhanced structural adjustment facility, would be in vain. Such an IDA replenishment is therefore a major priority, along with our efforts to ensure that the ESAF remains operational after the resources provided by its first replenishment have been drawn down. We now know that the problem of the poorest countries is one that will be with us well into the next century. If we seek to address it credibly, and if, as the Chancellor of the Exchequer suggests, we wish to be in a position to deal with the problem of the countries most heavily indebted to the multilateral institutions, continuing the ESAF is essential. Indeed, I would propose that the IMF contribute itself by using its own resources--including, if necessary, limited amounts of gold--provided that this is done, I hasten to stress, in concert with a commensurate effort by bilateral donors.
The third challenge is progress in the transition economies. In Naples, the G-7 reminded us all that the Bretton Woods institutions were founded on two major principles: democracy and open markets. Nowhere has our work been guided more by these two beacons than in our efforts to promote the successful transformation of the former centrally planned economies. Even as we speak, more than half of the economies in transition in eastern Europe and the former Soviet Union have begun to experience growth after several years of stagnation or decline. While this development is significant, our efforts must continue; it is essential that the countries that have progressed the least on the transformation path know that the G-7 are resolved to support them, just as they did in the euphoric first years following the fall of the Berlin Wall.
It is well known that the international financial institutions are continuing and intensifying their efforts, but all too often inadequate levels of bilateral support cause the postponement of financing programs or a reduction in the volume of imports, however essential they may be. It is my fervent hope that decisions will be reached on bilateral contributions and debt restructuring in amounts that will dispel despair. Finally, as soon as possible these countries should be given all the prerogatives of our membership; in this regard, the time has come to move forward, as indicated by the Naples Summit, to an allocation of Special Drawing Rights that will place the transition countries and all other new members on a par with our members of longer standing.
There is finally a fourth theme which, in this more and more globalized world, takes on added importance--market stabilization. But first, out of respect for the bilingual tradition of your great country, let me, Sylvia, switch to my very poor English, and hope that it will not grate too much on your ears and those of your friends.
This is a matter of renewed and deep concern, since the increasing international integration of markets, and especially the globalization of financial markets, mean that international financial flows at times have a frightening dimension that makes more pressing the calls for their stabilization. Let me refer to just a few data.3 The outstanding amount of international bond issues rose to above US$2 trillion in 1994 from less than US$600 billion in 1985; and over the same period international bank loans tripled to US$4 trillion. And cross-border securities transactions in most industrial countries, including Canada, expanded to well above 100 percent of GDP in 1992 from less than 10 percent at the beginning of the 1980s. Trading in foreign exchange markets has accelerated in tandem with international securities transactions: estimates put current turnover at around US$1 trillion a day, roughly a four-fold increase from a decade ago.
The globalization of financial markets has brought great benefits, by fostering a more efficient allocation of global savings and boosting investment and growth in many countries. But to preserve these benefits, we must face up to the downside: vastly increased financial flows across national borders have also made countries that participate in international financial markets more vulnerable both to excessively favorable and to adverse shifts in market sentiment. And the adverse shifts, though generally related to concerns about economic fundamentals and policy shortcomings, can often be delayed, sudden, massive, and destabilizing. So financial globalization has heightened the challenges of fostering stable foreign exchange and financial markets, and of preventing and resolving financial crises. This carries important implications both for economic policies in all countries and for the IMF as the central institution of the international monetary system. Let us see how to handle this difficult new part of our agenda.
1. Exchange market stabilization
This has been a constant item on the agenda of the Summits since the beginning, as is appropriate for meetings of the countries responsible for the key reserve currencies of the world. I will not reopen the old debate between those who believe that the best way to achieve a reasonable degree of exchange rate stability is to rely essentially on the pursuit of domestic macroeconomic stability together with effective policy coordination among the major countries, and those--among whom I would count myself--who believe that the adoption of a more rules-based system of exchange rate stabilization could add to the efficiency of the whole endeavor. It is clear, in the present circumstances, that only the first approach has enough support. But there is no doubt that significant progress can be made toward stability if the major countries take seriously their macroeconomic responsibilities and their special responsibilities as issuers of reserve currencies. More than other countries, they have to recognize that "the foreign exchange markets," as German Finance Minister Theo Waigel says, are "exceedingly sensitive to even the smallest credibility gap in monetary as in fiscal policy." The IMF has a role to play in helping the G-7 countries in this process through its particular regime of oversight, or surveillance. Several suggestions have been made to strengthen Fund surveillance, some time ago for instance by Wendy Dobson, and just this week by Morris Goldstein. We indeed stand ready to do our best in light of such suggestions, knowing how important it could be for the world to contribute to exemplary behavior by the G-7 in this field.
2. Strengthening surveillance and crisis prevention
The other aspect of our surveillance work deals with the financial markets overall, and it relates to the prevention and cure of major financial crises, of which Mexico has just been a telling example. Openness to the world economy and international financial markets--an essential ingredient in Mexico's success over the past decade--today imposes an obligation of unfailing discipline on economic policy. Vigilance and discipline provide the most effective deterrent and defense against financial market setbacks. Mexico, unfortunately, after remarkable progress on many macro and structural fronts, had lowered its guard. As a result, the markets eventually exercised their own discipline, and Mexico paid a very high cost in the process.
But in light of this experience what can we say about what the globalized world economy requires of the IMF? Essentially two things: help for countries to improve their economic policies, so that currency misalignments and balance of payments crises are less likely to occur; and financial support for corrective policy action when crises do occur. In both areas, the Fund is seeking to ensure that it is strong enough to serve its purposes in the new environment of globalized markets, and I hope that the G-7 will endorse, encourage, and help to speed up the steps we are taking or planning to take.
The IMF's work in promoting exchange market stability and preventing crises has a name: surveillance. It should work as an early warning system, alerting governments to policies that need correction, and enabling them to encourage each other to take necessary measures. Over a number of years, with the encouragement of the membership--the Tokyo Summit Declaration, for example, which I referred to earlier--the Fund has taken actions to make surveillance more effective, and significant progress has been made. Fund surveillance has achieved many successes, although these have tended to go unnoticed: crises prevented are usually crises unseen.
Mexico's crisis showed that further adaptations are needed to make surveillance sufficiently strong to minimize the risk of the eruption and spread of crises in the new global environment:
- first, data: stricter requirements need to be applied concerning the
regular and timely communication by countries to the IMF of data on key
economic indicators; and the Fund also needs to make more use of financial
market data in monitoring developments. We shall also be working toward
the establishment of standards for the timely publication of economic data
by members to help markets work more efficiently;
- second, closer and more continuous policy dialogue: not only must
countries be willing to keep the IMF informed of developments and seek
its opinion on issues they are facing, but the Fund's internal procedures
must be adapted to foster dialogue more effectively in the intervals between
our regular consultations, particularly when countries have just ended
an adjustment program with the Fund;
- third, better focussed surveillance: especially given its limited
resources, the Fund must focus more effectively on countries at risk, and
countries where financial tensions are most likely to have spillover effects.
And surveillance must also focus more carefully on international financial
flows and their sustainability;
- fourth, more pointed and candid surveillance: in its policy dialogue
with member countries the Fund must be prepared to be more critical and
demanding--yes, even more critical and demanding than in the past.
These are the main items on our agenda of action to strengthen surveillance. It was endorsed at the ministerial level by the Interim Committee six weeks ago. I fear that implementing it will not be a straightforward matter: experience shows that while countries tend to be very eager for surveillance over others, they are less keen on surveillance over themselves. It will be a critical challenge for international policy cooperation and for the IMF. It is therefore important that the leaders of the G-7 re-affirm their commitment to it.
3. The resolution of crises
But even the most effective IMF surveillance would not eliminate financial crises altogether; and the IMF must also ensure that it has the means to provide countries with financial assistance adequate to contribute effectively to the resolution of crises when they occur. It was able to do so in the case of Mexico, by virtue of the increase in IMF quotas that came into effect in 1992, and by applying the rules allowing the Fund in exceptional circumstances to exceed the limits that apply to the use of its credit and to take its decisions under emergency procedures. The Fund's commitment to Mexico is the largest in the Fund's history, and it has demonstrated that the Fund is already equipped with instruments that allow it to take quick and decisive action when no other means are available to prevent a crisis from turning into a catastrophe. But there have been a number of other large financial arrangements in recent months, most notably in support of programs of stabilization and reform in Argentina, Russia, and Ukraine. Because of these and other actual and expected commitments, the Fund's liquidity position, adequate at present, is projected to weaken considerably over the next two years. The Fund's resources are probably sufficient for our normal business during this period, and if emergencies call for it the General Arrangements to Borrow (GAB) from some of our largest members can be activated.
But we must look beyond the next couple of years, since negotiations on quota size and shares are lengthy and require ratification by parliaments; we must take heed of the fact that the large and growing scale of international financial flows means that the financial resources needed to deal with crises will be larger than in the past; and we must see what action is needed to ensure that the Fund's resources are adequate to meet the demands that the Fund may face in the closing years of this century and beyond. This was agreed by our Interim Committee, and following their preliminary discussion and guidance we shall in the next few months be pursuing or considering a number of courses of action:
- the first and paramount priority is the next General Review of Fund
Quotas, our members' capital subscriptions to the IMF. Fund quotas are
the essential basis of our financial assistance to member countries. In
relation to any of the usual measures of the size of the world economy,
the size of the Fund as measured by quotas has declined continuously and
substantially over the 50 years of its existence. The challenges presented
by the globalized world economy point to an urgent need to reverse this
decline. The next quota review is due to be completed by March 1998 at
the latest. It must be initiated expeditiously, and in my view we should
aim to complete the review before the end of 1996. The review should in
my assessment lead roughly to a doubling in quotas, just to ensure that
the size of the Fund keeps pace with the growth in the world economy since
the last review and reflects to a modest extent the increased scale of
international financial flows;
- second, we should be reviewing the role, size, and procedure for
of the General Arrangements to Borrow and exploring ways to increase the
potential resources available to the Fund through borrowing from our members
in emergency situations. While considering these forms of borrowing, we
must nevertheless ask ourselves how usable these resources would be in
times of crisis, and how long it would take to activate them. In today's
globalized markets, we must try to ensure that our ability to react approaches
the instant decision-making of investors if we want to have the ability
truly to give confidence to markets and to our members;
- third, I believe that the SDR has an important role to play in the
working of the system. A decision on an SDR allocation is overdue as far
as equity for our 37 new member countries is concerned, who have never
received an allocation. We had difficult discussions last fall on this
matter. A large majority of our members would prefer to proceed with an
allocation on the basis of our present Articles of Agreement, recognizing
that there is at present a long-term global need to supplement existing
reserve assets; but an important minority have doubts about this and recommend
an allocation under an amendment of our Articles, a lengthy and uncertain
avenue. I fervently hope that a solution can be found, possibly by the
combination of a general allocation and a collective decision by the industrial
countries, for instance, that they would not use the SDRs that would be
allocated to them. This would limit to a very strict minimum the liquidity
Beyond this urgent equity issue, I hope we will be encouraged also to undertake a wide-ranging review of the role and function of the SDR, including the possibility of utilizing it for the financing of international financial safety-net arrangements, whereby SDRs could be issued on a temporary basis or lent to countries in support of strong policy programs in the context of liquidity crises.
More ambitiously, the perspective of globalization surely makes the question of the need for a central reserve asset issued by an international monetary authority much more relevant now and for the future. This would require a major reconsideration of the present characteristics of this instrument, as well as of the conditions required for its issuance. Discussion would then have to address questions that have up to now been left on the back-burner, such as how the SDR could become the numeraire and provide the central anchor of the international monetary system. Distant as such a goal may be, it is not too early to have preliminary thoughts on such issues, and in particular on whether the SDR can be developed as an instrument to help achieve price stability, and to redefine its characteristics accordingly. This is certainly not a higher ambition than those our founders dared to have fifty years ago;
- finally, we shall be exploring the possibility of developing
for more orderly international debt adjustment, taking into account the
experience with debt reorganization under national laws. In principle,
such arrangements could reduce the need for official financial support.
But consideration of this approach raises a number of complex economic,
political, and legal issues, and I should emphasize that our work on this
is still exploratory.
There are many other concerns I should have mentioned also, to tell you more precisely how I would like to see the IMF adapt itself to the challenges of this globalized world. But time is too short and my shopping list is already long enough. Let me mention only the obvious: the needs we see, together with our friends at the World Bank and the WTO, to face this world together in the closest possible cooperation. The IMF also wants to develop similar cooperation with the UN and particularly the ILO to face so many "post chaos" situations in the world and to follow up on the program of action agreed at the Copenhagen social summit. All this goes without saying!
So this is what I would be saying to Sylvia today if she were still a sherpa. I know that she would give me a questioning and critical hearing, and I would listen most carefully to her wise counsel. I am confident that at least on the fundamentals she would be supportive of the efforts to which I have been referring. Always a tireless advocate and tenacious champion of global economic cooperation, she understands as well as anyone the importance of the task of ensuring that the IMF is as strong and effective as the globalized world economy of the 21st century needs it to be. It is gratifying that the Interim Committee is guiding us in this direction, and I trust that with the support of Canada, and the determination and vision of its Prime Minister, next week's summit in Halifax will give added impetus to our work.
1. R.D. Putnam and Nicholas Bayne, Hanging Together: The Seven-Power Summits (London: Heinemann for the Royal Institute of International Affairs, 1984).
2. Sylvia Ostry and R.R. Nelson, Techno-nationalism and Techno-globalism: Conflict and Cooperation (Washington, D.C.: The Brookings Institution, 1995).
3. These developments are described nmore fully in World Economic Outlook, May 1995 (Washington, D.C.: IMF, 1995), pp.80-81.