Address by Michel Camdessus
October 10, 199595/14
and Managing Director of the International Monetary Fund
to the Board of Governors of the Fund
Washington D.C., October 10, 1995
Mr. Chairman, Governors, ladies and gentlemen: I join Jim Wolfensohn in welcoming you all, and especially the representatives of Brunei Darussalam, our 180th member country. Apart from being the 50th Annual Meetings of Governors, these are Jim Wolfensohn's first meetings as President of the World Bank. It is a great pleasure for me to be working with him to maintain, and strengthen yet further, the vital partnership between our two institutions. We all have much to gain as he applies his unique skills with his--literally--Olympic energy to his new responsibilities. May I also join in paying tribute to Lew Preston: Patsy, the world has lost, with him, a wise, a committed, a great man, and the Fund and I have lost a friend, a generous, a faithful, a caring friend. Thank you for him, Patsy, and thank you for being with us today.
Our 50th Annual Meetings! Last year in Madrid we started celebrating the 50th Anniversary and reflected on the evolution of our institutions. Everyone agreed that they have central roles in addressing the challenges that the world faces. And a lot of attention was given to the question of how the Fund needs to continue evolving in our increasingly globalized world economy. But not many of us then perceived the urgency of that question. Little did we know how soon and how rigorously we would be tested, by the Mexican crisis that erupted last December--a crisis truly of a new kind! Yes, a crisis without precedent; so, let me begin with a few words on it. Then I will turn to the strategy we need in order to address the challenges it reflected--the risks and opportunities of globalization.
The crisis showed how sudden and strong the pressures can be in today's globalized markets. It also showed what the Fund, with the support of its membership, can do to give confidence to a country tackling a crisis with strong policies. The Fund responded quickly: our Board approved the arrangement six days after the completion of negotiations. And it responded strongly, with financial assistance that was unprecedented by any measure.
Understandably enough, a number of you were surprised by our response, and raised questions. For the record today, let me make three points: (1) the Fund acted not in response to any kind of pressure, but--as it always does--in the interests of the membership as a whole; (2) even though the financing provided was exceptional in its size and in the procedures by which it was arranged, the package was entirely consistent, in all its elements, with the rules of the Fund; and (3) even though the decision was taken rapidly, it was considered carefully and deeply. The alternative was clear: in Mexico, immediate exchange controls, or a debt moratorium, or both; and outside Mexico, the risk that the crisis would spread in a few days--or even hours--to many other countries, with potentially devastating effects on capital flows and confidence.
Now, in October, we see the adjustment that Mexico has accomplished; we see that the spillover effects were promptly contained; and we see that capital flows to developing countries have resumed. These were our objectives. We all hope that the Fund will not have to undertake another operation like it for a long time. But the handling of crises is, after all, an important part of what the Fund was created to do. And needless to say, we were most gratified when the Halifax Summit, drawing lessons from Mexico, urged the Fund to establish a new "Emergency Financing Mechanism", to streamline further the procedures we followed in the case of Mexico. This is now in place.
But the Mexican crisis demonstrated a need for more than just emergency procedures. It signalled that the IMF and its membership need a comprehensive strategy to meet the challenges presented by our increasingly globalized world economy. What should this strategy entail--in your countries, and for the Fund? These are the two questions on which I now want to focus.
1. How should your countries face globalization?
Mr. Chairman, globalization gives rise to fears in many quarters. And we all know how such fears can lead to suspicion, protectionism, and to policies that are ultimately self-destructive. Such fears cannot be allowed to frustrate the great potential of a world in which countries are drawing closer together. We at the IMF believe that countries can face the challenges of globalization positively, demanding as those challenges may be. Your countries should not shrink from globalization. Rather, all countries should embrace its opportunities and rise to its challenges.
All countries can benefit from full participation in the world's markets, including its financial markets. Protectionist pressures in markets for goods and services must be resisted and reversed, and the principles of openness and multilateralism promoted by the WTO, the Fund, and the Bank must be honored. And financial market integration should be seen as a positive force: it offers access to global financial intermediation and a stimulus for more competitive and efficient domestic financial sectors; and it promotes efficiency and growth worldwide.
How encouraging it is, therefore, to see that so many developing countries and countries in transition have been freeing up their trade and exchange systems within the framework of our structural adjustment programs! One hundred and seven countries have now made the commitment to current account convertibility under the Fund's Article VIII, compared with 80 when I suggested here two years ago that we should put more effort into speeding up this liberalization. Particularly welcome in their ranks are 9 countries in transition in Europe and the former Soviet Union: what a change from only five years ago! Remember how long it took for the countries of Western Europe to attain current account convertibility! And globally, more than 60 countries have gone beyond the Articles to open fully their capital accounts.
These countries are embracing globalization. In fact, no country can afford to forego the benefits of integration into global markets: the alternative is marginalization and stagnation. But this means that all countries must take the steps needed to minimize the associated risks, so vividly illustrated by the case of Mexico. More than ever before, countries need tightly disciplined macroeconomic policies to maintain a stable environment for investors, whether domestic or foreign. And let us not forget that while foreign capital can be a useful--and sometimes vital--complement to domestic saving, it is not a substitute for it: domestic saving remains the key to investment and sustainable growth. It is also clear that strong financial institutions are essential to avoid market disturbances at home and to secure an effective defense against external pressures. Competitive banking and financial systems that are sound, well regulated and properly supervised are indispensable for countries to be able to expose their economies safely to the pressures that can arise in global markets.
The challenges of globalization therefore add to the need for the developing and transition countries to press ahead with their adjustment and reform efforts. For many, this means creating conditions to attract foreign financing and use it effectively. But a growing number of countries, in central and eastern Europe as well as Asia and Latin America, have been facing a different problem: how to cope with large-scale capital inflows. Such inflows, especially when they are easily reversible, provide no grounds for relaxation of adjustment and reform. They should not be used to finance domestic consumption. In many cases, they call for stronger fiscal discipline; and in some cases, exchange rates should be allowed to take part of the strain. Many developing countries and countries in transition also, of course, need to do more to deepen and widen the role of market forces, and to foster more competitive market environments, in order to promote transparent and efficient mechanisms for resource allocation. Is globalization any less demanding for the industrial countries? Not at all! It adds to the urgency of their taking full advantage of the current expansion to tackle the deep-rooted problems that are limiting the pace, the quality, and, perhaps, the sustainability of their growth. World economic growth in 1995 will be at least as strong as in 1994, and 1996 could see the strongest growth in eight years. Let us make wise use of this recovery: this was a central message of the Madrid Declaration, and it must still be heeded. Public debt burdens are excessive in most industrial countries, and in many they are still rising, despite the current expansion. I applaud the fact that many industrial countries have increased their efforts and commitments to reduce fiscal deficits; but in most cases underlying imbalances remain large and the pace of consolidation is too slow. More must be done not only to redress present imbalances, but also to meet the growing demands of the future. With populations growing older, it has become imperative to reform health care and public pension systems if they are to be effective and affordable.
Another deep-rooted problem--structural unemployment--must also be tackled sooner, rather than later. Budget laxity and high unemployment tend to feed on each other. It is essential that now, while cyclical conditions provide the opportunity, governments do not flinch from the task of improving the functioning of labor markets. How? It is not an easy task: reforming regulations and policies that impede employment creation and job search, and by improving the provision of education, training, and re-training. And all that, yes, within a framework of budgetary consolidation!
Let me also say that the industrial countries should be encouraged by their recent success in guiding key exchange rates back toward levels more consistent with economic fundamentals, against a background of appropriate interest rate adjustments. This is surely a reminder, ten years after the Plaza Agreement, of the potential effectiveness of coordinated policies when the circumstances are right, and of the opportunities that exist to create a more stable exchange rate system, less prone to misalignments. These lessons are indeed of the highest importance for our world of globalized markets, where instability reverberates so widely, and where all countries have such a vital interest in international monetary stability. This was the sense of the message the IMF received, for example, from the last ASEAN foreign ministers' meeting, and we cannot but be receptive to it.
Monetary stability, macroeconomic discipline, sound financial systems, and efficiently working market mechanisms--these are essential for all countries that embrace globalization. But they are not sufficient for any. I referred earlier to the fears that globalization inspires in some quarters. To fight those fears, countries need policies that promote not just economic efficiency, financial stability, and growth, but also equity and, yes, high-quality growth. In too many countries, the quality of growth suffers from widening distributional inequalities--you have heard some striking numbers on this from Jim Wolfensohn-- related partly to high unemployment but also to stagnating wages of unskilled workers. And too many countries continue to suffer from poor governance, corruption, and increasing crime.
Of course, economic policy can provide only part of what is needed to rid the world of these blights. But it is a vital part. Let me make just one point in this connection. To promote equity, efficiency, and sustainable growth, governments carry an inescapable responsibility for investment in human capital--through education, health care, and well-targeted social safety nets--and also for establishing and maintaining honest and effective systems of public administration, law, order, and justice. If these essential services are to be affordable, there is certainly no room for unproductive expenditures--military or otherwise--and wasteful subsidies: they must bear the brunt of fiscal consolidation.
So globalization demands a lot from governments if it is to deliver its promise of stronger and higher-quality growth. But what does it demand from the IMF?
2. What must be the response of the IMF to the challenges of globalization?
In full cooperation with you, the Fund has been working intensively to forge a comprehensive strategy to address the challenges of globalization through three inter-related efforts: to strengthen surveillance, to equip the Fund with appropriate resources, and to enable it to provide effective assistance to the poorest countries.
a. First, strengthening surveillance
The importance of effective Fund surveillance--a constant theme of my eight past speeches at our annual meetings--has increased with globalization. The world really does need effective Fund surveillance to help prevent crises by pinpointing policy weaknesses and emerging tensions at an early stage. And surveillance needs to be strengthened, particularly in terms of its continuity, its monitoring of data, and its attention to capital account developments and financial flows. This has had absolute priority for us over the past six months.
Concretely, and as many of you know from personal experience, we have adapted our procedures to foster a more continuous, intensive, and demanding dialogue with our members, including closer monitoring of developments between consultations. More than 30 countries have this year received special communications--messages or visits--from myself or my three deputies to press points of concern raised in our surveillance. And among those 30 are six of the G-7; I'll keep you guessing on the exception! Greater attention is being paid to financial flows and their sustainability, to countries at risk, and to countries where financial tensions are most likely to have spillover effects. Increased efforts are being made to improve the provision to the Fund of data needed for continuous surveillance. And the role of the Interim Committee, as a forum for peer pressure at the ministerial level, is being strengthened, thanks to the efforts of Minister Maystadt.
But of equal relevance to our objective of addressing fully the challenges of globalized markets are our actions to help countries improve the transparency of their economies and economic policies--in other words, the comprehensiveness, timeliness, and quality of the information they provide to the markets. This is a key tenet of the code of good citizenship in our globalized market place. This is why I welcome the Interim Committee's endorsement of our intention to finalize soon a set of standards that will guide countries on the publication of statistics, so that markets are kept better informed.
But despite all these efforts, crises will occur from time to time, and we must be prepared for them. This means:
b. Strengthening the Fund's financial resources
The Mexican crisis made it clear that fully adequate financial resources must be available to the Fund to help countries resolve their balance of payments difficulties. We were able to provide effective help in the case of Mexico because we had sufficient liquidity. But besides Mexico, there have been a number of other large arrangements this year, most notably in support of major programs of stabilization and reform in Argentina, Russia, and Ukraine--programs which, I must say, are being implemented with remarkable commitment and perseverance by the respective governments. The demands on the Fund's resources are, and seem likely to remain, large: nearly 60 countries now have arrangements, and more than 20 others are in active negotiation with us. As a result, the Fund's liquidity position is projected to weaken considerably over the next two years.
I therefore welcome the progress that is being made by the Fund and the G-10 in pursuing the objective of doubling the resources currently available to the Fund under the General Arrangements to Borrow. I look forward to early agreement also on the establishment of borrowing arrangements with a broader group of member countries, which could enable the Fund to tap global reserves more effectively to the benefit of the entire membership.
But everyone agrees that a doubling of the GAB cannot be a substitute for an increase in quotas. The review of quotas must be given priority. But what would be an appropriate increase in quotas? Well, let me follow a line of reasoning that is familiar to those--and I am among them--who have proposed or supported a doubling of the GAB from its 1982-83 level. Just to restore the relative size of the Fund in the world economy, measured in terms of GDP and trade, to its level in 1983 would call for an increase in quotas now of close to 70 percent. This is simple arithmetic. But how could we be confident, after the Mexico experience, that merely restoring the Fund's relative size to its 1983 level would be sufficient or prudent? Taking into account the massively increased scale of international financial flows,1 taking into account the need for the Fund to be credibly equipped to help the countries likely to need our financial support while dismantling their remaining exchange controls, and taking into account the fact that this quota review will determine the Fund's resource base into the early years of the next century--taking into account all of that--my judgment is that a doubling of quotas is needed. You will surely consider that, Governors, bearing in mind that no decision could show more clearly than this one the responsiveness of the membership to the challenges of this new world.
Let me now turn to the third--and at least equally, if not more, pressing--element of the Fund's strategy:
c. Helping to integrate the poorest countries into the globalized economy
You have heard the words of our Chairman and Jim Wolfensohn: in our increasingly unified world, the persistence of zones of extreme poverty is a scandal--a scandal that is potentially more disruptive to the world than ever before. Yet extreme poverty is what too many countries, especially in Africa and Asia, still suffer from. In some cases, conditions for a pick-up in economic growth have improved, and the improvement in the average growth performance of Africa, as well as South Asia, is encouraging. It is my great pleasure to observe, Mr. Chairman, that we can count Benin among the countries whose performance demonstrates that structural adjustment works in paving the way decisively toward improvements in living standards. But the need to tackle the international unevenness of global prosperity is still pressing. And globalization increases the danger that poor performers will be further marginalized from the mainstream of global growth. If this danger is to be averted, as it must, we need to give decisive support to the poorest countries.
The Fund's key instrument for this purpose is, of course, the Enhanced Structural Adjustment Facility, ESAF. It has enabled us to provide concessional assistance for growth-oriented adjustment programs in 38 low-income countries over the past eight years. Last year, ESAF was extended and enlarged; and now it has been agreed not only that ESAF will continue, but that a self-sustaining ESAF will be established. This is excellent news for low-income countries and for the world. It ensures that the Fund will remain a committed and effective partner in the policy efforts of its poorest members. We will now make every effort to find solutions for the financing of the ESAF until the self-sustaining ESAF becomes available, some time at the beginning of the next century. This will have a cost for the membership. But I believe that my proposal, including, if necessary, the mobilization and investment of a modest proportion of the Fund's gold, would limit the cost to a minimum--a modest cost indeed for the continuing promotion and support of strong policies of adjustment and reform among our neediest members. After all, such policies are the primary condition for any decisive improvement in the plight of poor countries.
But ESAF alone cannot suffice. The replenishment of IDA is essential--Jim Wolfensohn was kind enough to quote me on that-- as is an adequate level of concessional support from bilateral donors and other multilateral development banks. The declining aid budgets of many industrial countries are a major problem. How can we justify, in a world with such pressing human needs--in a world where, because of debt burdens, grants are often the only reasonable vehicle for the support of human development--how can we justify the fact that ODA is now even less than 0.3 percent of donor countries' GNP--its lowest level since 1973? Surely this trend must be reversed!
The implementation by the Paris Club of the Naples terms for debt reduction is an important contribution to easing the burden of bilateral official debt. We also need to consider very seriously the treatment of the multilateral debt of a small number of highly indebted poor countries. In this regard, you can count on our joint commitment to implement vigorously the important work program that Jim Wolfensohn and I have submitted to the Development Committee.
Governors, ladies and gentlemen, I am sure you would be surprised if I concluded without saying a word about the SDR. I will not disappoint you. With the help of our seminar of experts next March, we shall be examining all the questions concerning this instrument, including its potential role as an anchor for a globalized international monetary system. But we do have a more immediate agenda--in particular, the problem of equity, highlighted at the Halifax Summit for the second time by the G-7 countries. We must continue working on that, to satisfy the almost universal wish of the international community.
Mr. Chairman, Governors: What I have been speaking about with you today is not business as usual. These are not issues that committees can solve simply by their choice of words in their communiqués.
Today I have had to speak about averting the worst financial turmoils; about maximizing and achieving a new potential for stronger, higher-quality growth and human development; and about a new world, a world that is at a risky, but promising, stage in its historic long march toward unity.
These are truly issues for you, Ministers and Governors--issues for you, the leaders of the world's financial community--to consider. I am confident that your wisdom and vision will guide your deliberations.
Thank you very much.
1. For example, as pointed out by Chairman Greenspan, whereas world trade in nominal dollars increased by about 125 percent between 1983 and 1992, the stock of cross-border assets held by banks grew by 250 percent over the same period, and annual issuance of international securities increased by 300 percent between 1984 and 1994. (Alan Greenspan, "Challenges for Central Banks: Global Finance and Changing Technology," Remarks at Annual Monetary Policy Forum, Stockholm, April 11, 1995.