Address by Michel Camdessus at the 1996 Annual Meetings
October 1, 199696/18 Chairman of the Executive Board and
Managing Director of the International Monetary Fund
to the Board of Governors of the Fund
Washington, D.C., October 1, 1996
Mr. Chairman, Governors, ladies and gentlemen. I am very pleased to welcome you to the 1996 Annual Meetings. I would especially like to welcome the representatives of Bosnia and Herzegovina, the newest member of our institutions. I would also like to congratulate them on the first steps they have taken in their efforts to rebuild a peaceful country. Indeed, we want to support these efforts as much as we can. One last word of preamble, Mr. Chairman—a bit personal. Early next year, I will begin another term at the Fund. Let me take this opportunity to thank you and your governments for your continuing confidence and support.
* * * *When I see the 181 members of the Fund gathered here in this hall, I am reminded of what has brought us all together: the very purposes of the Fund—the desire for greater economic stability in the world, and the desire for stronger, more sustained, and more broadly shared growth. But we do not have to think back very far to recall major challenges to these goals. Remember! Three years ago, Africa was in the midst of a protracted decline in per capita income, as it had been for more than a decade. Two years ago, we were deeply concerned about hyperinflation in Russia and its risks for Russia and the world. Last year, it was Mexico, its spillover effects, and the unprecedented level of Fund support for that country's adjustment efforts. These were tremendous challenges, indeed, but they were met. Who would have dared hope that as early as this year, Russia would have strengthened its macroeconomic policy stance to such an extent that it would even achieve one month of zero inflation; or that economic recovery would be sufficiently underway in Mexico that it would begin early repayments to the Fund; or indeed, that Africa would be in its third year of per capita growth, thanks to the rigor of the programs that many countries follow!
Well, these are not minor accomplishments. And they do demonstrate that things can change for the better. But we all know that lying just below the surface in all our economies are the powerful trends toward globalization. And we know that the relatively satisfactory results of the last few months would be fleeting, if at the same time we were not striving to meet these fundamental challenges decisively.
As a matter of fact, when I addressed you last year, we were already confronted with them. After commenting on our steps to help stem the Mexican crisis, I concluded my remarks by trying to outline what this major crisis suggested for your countries' strategies, and for the Fund as well. I think it is proper today to review: first, how successful your strategies have been; and second, how the Fund itself has adjusted to the opportunities and challenges of this new world. Let me take these two issues in turn.
* * * *Economic strategies and performance
First, about your strategies, and how far we have come in enhancing global stability and growth. Well, there are encouraging signs of progress: world economic and financial conditions are generally satisfactory, and the outlook is favorable.
Among the more positive developments, I would cite the reduction in world inflation. In particular, many industrial countries have come close to achieving effective price stability.
I would also point to the continuation of solid 6 percent economic growth in developing countries, and the fact that this growth is now becoming more widespread. The pace of economic activity in Asia continues to moderate to a more sustainable, but still remarkable rate of about 7 1/2 percent. Let us pause here for a moment and take a slightly longer-term view of what has been happening. In two huge countries—China and India—which together account for more than one third of the world's population, there have been striking improvements in average per capita incomes, even though poverty is far from being conquered. Meanwhile the recovery in Latin America is gaining momentum, thanks to stronger policies in many countries. And here, I cannot but emphasize the continued outstanding performance of your own country, Mr. Chairman.
Africa's growth performance also deserves special mention. Last year, there were 25 countries with annual growth of 4 percent or more—nearly twice the average number in 1990-93. Although performance across countries is still mixed, we expect Africa as a whole to grow by 5 percent this year and next, the highest rates of growth in 2 decades. Africa, for which so many seemed to have lost hope, appears now to be stirring and on the move.
In the countries in transition, economic activity is projected to stabilize this year, after five years of decline. Among those more advanced in the transition, eight are expected to record growth of 5 percent or more, and four to achieve single-digit inflation. So the countries in transition that were thrust into a brave new world are no longer dazed and have begun their upward climb of growth and development.
For the world as a whole, I must also mention the continued growth in the volume of world trade, progress toward trade liberalization and current account convertibility, the trend toward increased freedom of capital movements, the rebound in private capital flows to developing countries, and developments in exchange markets, which have brought the relationships among major currencies more closely in line with economic fundamentals. These are major developments indeed from the point of view of the IMF's purposes, and they have all contributed to today's broadly favorable economic situation. But we must build upon them further, as globalization requires that we continue progressing toward freedom of capital movements, but that we do so safely.
* * * *Of course, these developments are not just happenstance. They are, first of all, a reflection of the growing consensus among Fund members on the need for adjustment and reform. And they are the result of the fact that many countries have had the courage—often in very difficult circumstances—to strengthen their economic and financial policies, and that the Fund has been in the position to provide an appropriate level of support for their efforts. Today, about 60 countries have programs with the Fund, amounting to commitments of roughly SDR 30 billion. In addition, there are some 25 new arrangements under consideration.
Yes, there have been many positive developments in the global economy. Yet, we also know that macroeconomic and structural weaknesses persist in all of our countries. Moreover, we know that the forces of globalization can magnify the adverse effects of policy weaknesses, pose new risks for all of our countries, and raise difficult policy dilemmas even when policies are sound. All of these considerations impel us to greater vigilance and renewed partnership in facing this new world. This is why I particularly welcome the broadening and strengthening of the Madrid Declaration, which was endorsed by the Interim Committee last Sunday.
Ladies and gentlemen, let me emphasize to you that this declaration you have on your tables is not just another text, another call to action. No, it is something quite special: it is the distillation of Fund surveillance lessons by the world's most representative body of finance policymakers.
You have eleven commandments there; let me emphasize four of them.
First point: it is clear that we must adopt a more ambitious approach to fiscal consolidation. The agreed common objective is to achieve budget balance and strengthened fiscal discipline in a multi-year framework. We know that many countries could achieve faster, more sustained growth if they could substantially reduce their large budget deficits and the sizable claims that these deficits place on private savings. But reducing budget deficits cannot be the only concern; the composition of fiscal adjustment also has profound effects on economic welfare, capital accumulation, and growth.
To put it another way, we know that the quality of adjustment also has a large bearing on its sustainability. Thus, fiscal adjustment must not only reduce budget deficits, but also improve the quality of expenditure by reducing unproductive outlays to make more room for spending on such critical areas as health and education. It must also improve the incentives for private sector activity; and in some countries, it must deal with medium-term problems associated with aging populations. Finally, fiscal adjustment must create enough room to put human development at the center of our fiscal strategy, as we know that the sustainability of economic growth hinges on that.
Second point: if countries are to benefit fully from globalization, they must take a bolder approach—not just to fiscal reform—but to structural reform in general. In every country, we can point to ways in which comprehensive structural reform—not just tinkering at the margin with this measure or that—would improve the effectiveness of macroeconomic policies, help create jobs, and protect against the risks I mentioned earlier.
Third point: in a number of our member countries, reform of the state. There can be no sustainable development without the responsible management of public affairs. This means, first, that governments must demonstrate that they have no tolerance for corruption in any form; and second, that they must dedicate themselves to fulfilling those tasks that are so essential to the confidence of private savers and investors and the smooth functioning of their economies. Tasks such as maintaining public safety, protecting property and contractual rights, providing reliable public services, establishing a simple and transparent regulatory framework that is enforced fairly, and guaranteeing the professionalism and independence of the judiciary. These are not easy tasks, but they are essential for sustained economic growth.
And fourth: to take urgent care of the Achilles heel of the global economy today—the fragility of national banking systems. Mr. Chairman, in many countries, a banking crisis is an accident waiting to happen. And we know all too well why. Why? Weak macroeconomic policies and poor economic performance undermine banking sector health and, conversely, weak banking sectors stand in the way of effective macroeconomic policymaking. As a result, countries with banking problems may shy away from tightening policies when needed, for fear of provoking a domestic banking crisis. The failure to take early action can be costly. For the country concerned, the fiscal costs of resolving banking sector problems can be truly exorbitant and involve a tremendous drain on countries' resources. On the basis of recent experience, let me tell you that this is something that we truly don't want to see repeated. At the same time, we must also avoid the systemic consequences such crises can entail.
Needless to say, in working closely with all other interested institutions, we will not fail to respond to the call for particular vigilance that this implies for the Fund. In this connection, I am happy to report that Jim Wolfensohn and I have decided to join our financing and surveillance forces to address these risks in a strongly coordinated way. The IMF and the World Bank's cooperation is already producing positive results—to cite the most significant examples—in Latin America, where we work hand in hand with the IDB, and in the FSU and the East European countries, where we work actively with the EBRD and continue to cooperate closely with the BIS in providing technical assistance on central banking issues.
No more on these key elements of our common strategy. Let me turn now to my second point.
* * * *The Fund's agenda
You remember certainly the agenda that we established last year. The purpose was to adjust, so that the Fund could help ensure that globalization truly becomes an opportunity for the world. Let us see where we are.
The first item of business was to strengthen surveillance. To this end, we have continued to sharpen the focus of Article IV consultations, giving greater attention to capital account developments, to countries where developments could have spillover effects, and to regional surveillance. We have also encouraged all countries to improve the quality, comprehensiveness, and timeliness of the basic statistical data they provide to the Fund and to the public.
As regards the latter, the Fund has helped develop and disseminate a set of standards regarding the coverage, frequency and timeliness of data; their quality and integrity; and their availability to the public. Countries subscribing to this Special Data Dissemination Standard agree to adhere to these sound practices and to provide information to the public on their own specific practices via an electronic bulletin board on the Internet, maintained by the Fund. This transparency promises to give market participants the information needed to form judgments on the policies and performance of subscribing countries, thereby contributing to more informed investment decisions and fewer market surprises. I am very pleased to report that 37 industrial and emerging market countries have subscribed to the new Special Data Dissemination Standard. I encourage many more to join, and I can tell you that many are preparing to do so.
But there is another essential part of our agenda: strengthening the Fund's resources so that the IMF can continue—as it is said in our Articles—to "give confidence" to all members to undertake bold programs of adjustment and reform. Moreover, since it is unlikely that we will be able to avert every crisis, we must equip ourselves to face unexpected, and potentially disruptive, developments. Decisive progress has been achieved on three fronts:
First, in securing additional resources for the Fund to use in emergency situations. In particular, G-10 countries and a number of other Fund members in a sufficiently strong balance of payments position to support the international monetary system are about to finalize arrangements to double the lines of credit previously available to the Fund and thereby bring the total amount of these credit lines to SDR 34 billion. Let me record here my appreciation for all those who worked hard in preparing these agreements.
These arrangements could become a key supplement to the Fund's own resources in a time of systemic crisis. But they cannot support the Fund's normal operations—nor should they. The Fund is a cooperative institution based on quotas, and its strength and credibility depend on its maintaining its quota strength. The current quota review, the Eleventh, is an opportunity to reflect in members' quotas the changes in the world economy that have taken place since the last increase in quotas was agreed. With relatively strong demand for Fund resources, the Fund's liquidity ratio is currently on a relatively sharp downward trend, and by the end of 1997, it is projected to decline to below the traditionally critical threshold of 70 percent. This would be the Fund's lowest liquidity ratio since late 1983, just before the Eighth General Review of Quotas came into effect. This makes it a matter of urgency, particularly at a time of increased uncertainty in the global economy, to finalize the negotiation on a substantial quota increase with no further delay. The Interim Committee has called upon our Executive Board to resume discussions on the Eleventh General Review of Quotas, with a view to coming to a positive conclusion in the near term. This truly will be a critical priority in the coming months.
The second front on which I can record major progress goes to the heart of the IMF's character as a cooperative monetary institution, and that is the issue of Special Drawing Rights (SDRs). We all have been concerned about the fact that many members have not been able to participate fully in the SDR system. I am very pleased that the Executive Board has reached agreement on a way for all members to receive an equitable share of cumulative SDR allocations and thereby put all participants on the same footing in the SDR system. This has required a very high cooperative spirit from our members, with the flexibility of some on the vehicle for the solution (now as an amendment of the Articles) being matched by the flexibility of the others on an amount broadly reflecting my own suggestion of SDR 26 billion.
And now the third breakthrough: a similar—and I must say truly remarkable—spirit of compromise by members of the Executive Board has allowed us to find a constructive solution to the complex issue of financing the continuation of ESAF and the Fund's contribution to our joint World Bank and IMF initiative in favor of the heavily indebted poor countries. We are all too close to the intricacies of this negotiation to realize fully what was finally achieved. But let me tell you that I am very proud of what has been done.
All of us have given in somewhat on our favorite option in order to contribute to an effective and efficient consensus.
All of you have pledged to secure the needed financing, through bilateral contributions, and, if needed, as we say in our jargon—through the "optimization of our reserve management."
Even the poorer countries have accepted a part of this burden to help those suffering from the most adverse conditions of poverty and indebtedness. Indeed, when you hear the representatives not only of Chile, but also of Armenia and Azerbaijan, Tunisia and Bangladesh, Paraguay, Peru and Russia—to mention just a few of those contributing to this effort jointly with the industrial countries—then you realize that, yes, the world can change for the better and that a new partnership is emerging. And I repeat, I have only mentioned a few. Many others join in accepting this individual and common responsibility for mutual support.
In doing this, you have endowed the Fund with a self-sustained—and de facto, permanent—instrument that will allow it to continue to play its role in addressing decisively—whenever it may be necessary in the future—the problems of the countries in the most distressed situations, provided they show their readiness to make all their own efforts to stand again on their own feet.
I have talked about NAB-GAB, equity in the SDR system, the new quota increase, and the permanent ESAF. Each of these issues or initiatives has illustrated a decisive new dimension of our partnership—namely, the greater share of responsibilities in the global economy that many countries, including emerging market economies, are now willing and able to accept. This, no doubt, has the full potential, provided we continue to adapt our institutions and procedures to reflect it, to forge greater international cohesiveness in meeting the common goals of a stable world monetary system and a growing global economy.
* * * *
Mr. Chairman, ladies and gentlemen, we have a very challenging agenda. But these are challenging times. In looking to the future, we must bear in mind that many of the challenges in today's global economy are much greater than any single country or group of countries can cope with alone. But when we, the international community, work together, our tasks become more manageable and our objectives, closer within reach. So let us keep our sights on our common goals: greater stability in the world and stronger, more sustained, more broadly shared and higher quality growth. Let us redouble our collective efforts to achieve these goals. This is what our partnership is now all about.
Thank you very much.