Address by Michel Camdessus to the Board of Governors of the Fund
September 23, 1997
Managing Director of the International Monetary Fund
the Board of Governors of the Fund
Hong Kong, China, September 23, 1997
Mr. Chairman, Governors, ladies and gentlemen. I would like to join Jim Wolfensohn in welcoming you here and in expressing our thanks to the government of China and the people of Hong Kong for their warm, their generous, their splendid hospitality. What better opportunity could we have to see for ourselves the potential for Hong Kong to become an even more prosperous place, an even more dynamic center for the benefit of all of southeast Asia within the framework of "one country, two systems"?
Mr. Chairman, our global environment this year is generally favorable. Indeed, many positive trends have been confirmed during the last twelve months. Global inflation remains subdued, and countries appear more committed to price stability than at any other time in the post–war era. Fiscal deficits are being reduced in many countries—a good omen for interest rates, investment, and financial stability. And exchange rates among the major currencies appear to be consistent with economic fundamentals. Thanks in large part to these strong fundamentals and continued progress on structural reform, the world economy grew by 4 percent last year, and is projected to expand by 4 1/4 percent this year and next. In fact, this trend could continue for several years to come.
We can also applaud further progress toward Economic and Monetary Union in Europe and signs of better policies and stronger growth in many developing and transition economies. Indeed, average growth in transition economies is likely to be significantly positive this year, for the first time during this decade.
But as favorable as the overall outlook is, we do not need to look very far to find problems that stand in the way of our objective, namely, high-quality growth. Bythis, I mean growth that is sustainable, that results in a permanent reduction in poverty and greater equality of economic opportunity, and that is respectful of the environment and the rich diversity of national cultures and traditions. What are someof these problems? In parts of Europe, malfunctioning labor markets; in parts of Asia and Latin America, but not exclusively there, fragile banking systems and persistent inequalities in economic opportunity. In all too many countries in the world, poor governance and inefficient use of public resources perpetuate poverty and impede human development. And we must not overlook the risk that inflation may pick up again in the economies where output is pressing upon capacity.
What we see in all these contrasting developments is a new globalized world economy continuously unfolding with new opportunities, new risks, and new requirements—all of them clearly illustrated by the recent turbulence in this part of the world. Let me focus my remarks on these global trends, beginning with these last events since they are so present in all of our minds.
Crisis in southeast Asia
How did the events in southeast Asia unfold as they did, against the background of more than a decade of outstanding economic performance?
Certainly, there were early signs of emerging macroeconomic problems, including a loss of external competitiveness. And these problems, in turn, exposed underlying weaknesses in the domestic economy, among them: a fragile and over-exposed financial system, lagging industrial diversification, an inflated property market, and high levels of corporate debt. In our dialogue with the authorities over the past 18 months, we expressed our diagnosis, and we pressed for urgent measures.
Markets also expressed their disquiet. During 1996, the baht came under intermittent pressure. This year, the pressure increased, as doubts about the sustainability of policies grew. Finally, in the absence of a sufficiently comprehensive set of measures, the crisis broke. Meanwhile, the market’s anxieties spread to other countries in the region.
I will say no more about the history of this crisis. Rather, let me put on record a tribute to Finance Minister Thanong and Governor Chaiyawat, who, confronted with a very deteriorated situation, had the courage to launch, in a very few weeks, a bold and comprehensive program that goes to the heart of market concerns about large external deficits and troubled financial institutions. Thanks to their efforts, and those of the rest of the government, the budget is moving back into surplus and a comprehensive restructuring of the financial sector is getting under way. Naturally, it will take time and forceful action by the authorities to restore market confidence. But I fully expect confidence to strengthen as the adjustment program is implemented.
In the meantime, the Philippines has taken necessary measures and extended its program with the IMF under which remarkable progress had already been achieved. Indonesia has substantially strengthened its policy stance in continuous dialogue with us. Malaysia is also adapting its already solid macro policies. In all of these countries, and in the supportive cultural context of strong Asian values, the authorities are relying increasingly on measures to strengthen economic fundamentals, rather than on controls. Hence, my confidence that markets will soon recover and that, after this period of adjustment, these economies will emerge stronger than before. If I had only one message to leave with you today, it would be this: these economies will emerge stronger.
What are we to make of these events? Well, we now have evidence that the IMF’s procedures put in place after the Mexican crisis work, as they were expected to. In keeping with our efforts to strengthen surveillance, the staff’s analysis of this region’s problems was timely and on the mark. And once IMF assistance was requested, the Board’s emergency procedures allowed a program to be put in place in record time. The Fund’s assistance, in turn, catalyzed financial support from the region in an amount that, even by conservative estimates, is commensurate with the dimensions of the problem.
And yet, this crisis remains disturbing. Why? First, because the crisis was foreseen and preventable, but still struck with full force. Second, because one country’s problems have not only cost its own economy dearly, but also, through contagion effects, imposed high costs on others. And more basically, because we all perceive the need to adapt further, in one way or another, to the new globalized context. This new context that requires from each of us an even more acute, an even more far-reaching sense of responsibility and solidarity. So, let’s turn to what these entail.
Responsibility! Let me mention three aspects of it. First, vis-à-vis the market, responsibility involves maintaining the proper perspective about the benefits of private capital flows. Certainly, there are risks in tapping global markets: sometimes they react too late, and sometimes they over-react. No country—I repeat, no country—is immune to these risks. But let us not forget that markets also provide tremendous opportunities to accelerate growth and development, as southeast Asia itself so vividly shows.
Thus, the lesson to be drawn from recent developments is not about the risks of globalization—and still less about demonizing the markets—but rather about the importance of exercising good citizenship when tapping them. Indeed, countriescannot compete for the blessings of the global capital markets and refuse their disciplines. Hence, the importance of pursuing sound policies that give markets confidence, of respecting the signals they provide, and of maintaining transparent and market-friendly policies so that they can do their job.
Second, vis-à-vis national policies, responsibility involves avoiding macroeconomic imbalances and correcting them promptly when they arise. It also means making cost-effective use of public resources, explaining to citizens when and why policy changes are required, and taking the difficult steps to sustain growth in a timely manner. Constant refrain of the IMF? Of course! But may I suggest that it should also be the rallying cry of all those who value high-quality growth, particularly those who defend the poor. For indeed, it is the poor who are most likely to lose their livelihoods during economic downturns and who are least able to protect the real value of their meager incomes and savings during periods of high inflation. Thus, helping countries achieve monetary and macroeconomic stability—together with the necessary structural reforms—remains the IMF’s major order of business.
The third aspect of national responsibility is to get policy priorities right. This is an obligation for each country in the world that benefits all of the others. Here in Asia it means that countries must give priority to the pressing business of strengthening current account positions and ensuring financial sector soundness, rather than to spurring growth prematurely.
In Europe, in its momentous journey toward EMU, it means giving at least as much attention to the urgent tasks of reforming social security systems and labor and product markets, as to the precise decimals around the fiscal consolidation targets.
Getting the priorities right also means that efforts to press on with macroeconomic adjustment must not delay other reforms that will enhance growth, that will make human development priority number one, and that will ensure that growth benefits are widely shared—this equity in the distribution of income on which Jim has so eloquently insisted. We know very well that achieving all of this requires not only macroeconomic stabilization, but also a range of broader reforms—a "second generation" of reform—to strengthen banking systems, allow labor markets to function better, create a more favorable climate for long-term investment, and level the playing field for private sector initiative. These reforms are not the icing on the cake, but essential ingredients in achieving sustained, high-quality growth. This is why the IMF has focused increasingly on a broader reform agenda, aspects of which may have caught your attention.
•You have heard that the IMF is now raising issues of income distribution in its ongoing dialogue with member countries and emphasizing the need for greater equality of economic opportunity. All true.
•You have heard that the IMF is speaking out more forcefully against unproductive spending, especially in countries with pressing social needs. And you have heard of instances in which members have decided to postpone military and other less productive expenditures in favor of increased spending on education and health. All true.
•You have heard that the IMF has issued new guidelines on how it will deal with issues of governance and that, in some cases, our financial support has been interrupted or delayed due to concerns about corruption, accountability, and transparency. All true.
•You have heard that the IMF is helping its members increase the transparency of their economic policies and that we see this as a way to give policymakers more incentive to pursue sound policies, as a way to diminish opportunities for corruption, and as a way to make countries less vulnerable to the brutal reaction of markets when economic problems are eventually revealed, as they always are. Yes, all true.
•You have heard that, building on the work of the Basle Committee, the World Bank, and others, the Fund has developed a framework for financial sector stability, which will help the IMF disseminate a set of internationally recognized best practices in the financial area. All true.
•Finally, you may have noticed that, far from being discouraged by recent events in southeast Asia, the IMF is all the more motivated to continue work on an amendment to the Articles of Agreement that will allow the Fund to promote freedom of capital movements. This, too, is all true.
Let me elaborate on this last point. I know you could ask us: "When you have such financial turbulence on your doorstep, is this the right time?" Yes, we believe it is!
Freedom has its risks. But are they greater than those of complex administrative rules and capricious changes in their design?
Freedom has its risks. But is there any more fertile field for development and prosperity?
Freedom has its risks! Let’s go then for an orderly liberalization of capital movements. Certainly, the point is not to make a sacrifice on the altar of fashion. The point is not to encourage countries to remove capital controls prematurely, nor to prevent them from using capital controls on a temporary basis, when justified. Rather, the objective is to foster the smooth operation of international capital markets and encourage countries to remove controls in a way that supports the drive toward sustainable macroeconomic policies, strong monetary and financial sectors, and lasting liberalization.
In a nutshell, we are striving toward a multilateral and non-discriminatory system that provides the necessary safeguards and proper transitional arrangements. The Fund would, of course, continue to exercise surveillance and stand ready to provide advice, technical assistance and, when appropriate, financial support for countries’ adjustment efforts. Mr. Chairman, we now have abundant evidence of the benefits of steady progress toward the freedom of capital movements and the prudence it requires. Let us now add this promising chapter to the work of our founding fathers. This certainly would have been part and parcel of their response to the challenges of today.
Responsibility, Mr. Chairman, is all of these things, including this cautious, but decisive, step toward liberalization. But responsibility must go hand-in-hand with solidarity.
What then are the requirements for international solidarity in this new global context?
Contagion effects can be so rapid, so overwhelming, so unfair to countries with sound policies that, no doubt, the first tenet of a charter for world solidarity is to "keep your house in order." The bigger the economy, the stronger the requirement. But no country is exempt from this responsibility to other countries. And no country should accept the risk of going down in history as one that triggered a domino effect.
But solidarity calls for more. There are many instances in which national efforts are likely to be more successful when bolstered with international support. And there are many challenges that exceed the capacity of individual countries to resolve alone. To cite one critical example, in spite of significant progress on economic reform, many of the poorest nations still do not attract enough foreign investment. For them, foreign aid is crucial.
I will not dwell today on what I have so frequently repeated about the responsibility of industrial countries to help integrate the poorest countries into the global economy; to open their markets, especially to products in which the poorest countries have a comparative advantage; to prosecute their nationals for taking part in corrupt practices in foreign countries; to recognize that their ODA budgets are one of the best investments in building a more secure and prosperous world; to refrain from promoting unproductive military expenditure through aggressive sales strategies; and to provide the mutual assurances that obviate the need for wasteful military buildups. Let me only pay tribute here to the Latin American presidents who, in their "Declaracion de Asuncion," reiterated their decision to keep their region free from arms races—a goal that would be advanced, of course, by increasing the transparency of military spending and, thus, enhancing mutual trust.
In this globalized world economy, solidarity also calls for countries to complement IMF surveillance by joining voluntarily with their neighbors in mutual surveillance on a regional basis. The idea is to develop a "club spirit" among neighbors through which they can encourage one another to pursue sound policies. Indeed, a healthy dose of peer pressure could be a most valuable contribution to stability.
Such a tradition is most firmly established in Europe, where regional surveillance and peer pressure have produced an impressive degree of macroeconomic convergence. The G-7 also practice mutual surveillance with the contribution of the IMF. In Asia, there are signs of growing regional cooperation—through regional groups and the region’s rapid and sizable financial support for Thailand’s adjustment program. This cooperation would be even more effective if it were supplemented with regional dialogue to ensure that the policies of individual countries are supportive of stable markets and high-quality growth throughout the region. To be effective, such regional surveillance has to be based on a sound analysis of the economic situation. The management and staff of the IMF are ready to contribute to regional surveillance to the best of their analytical and technical abilities. Supporting regional surveillance could be one of the important tasks of our Tokyo office, which we will inaugurate in December.
Of course, this suggestion does not detract from your responsibility to help the IMF discharge its ever growing, ever more complex central responsibilities. You know what this means, and you already do a lot by demonstrating on so many occasions your unfailing trust in our institution, by facilitating our surveillance work, and by reinforcing significantly the financial means available for us to discharge our systemic responsibilities.
The agreements on quotas and SDRs reached over the past few days demonstrate once again your tremendous confidence in and support for this institution. The membership has reached two critical decisions: one, to recommend an increase in IMF quotas by 45 percent, that is, by nearly $90 billion; and two, to recommend, through an amendment to the Articles on which you will be voting this afternoon, a doubling of the amount of SDRs allocated so that all members can receive an equitable share of SDRs in relation to their quotas. Thanks to these agreements, along with the New Arrangements to Borrow, or NAB, that were agreed earlier this year, the Fund will be in a much stronger position to carry out its systemic role in this increasingly demanding global economy. We pledge to do our utmost to justify your confidence.
But there is another area where greater solidarity is needed. Of course, I mean Africa. You know how close to our hearts and minds this continent is. Earlier in this decade, sub-Saharan Africa was drifting toward the abyss of misery and marginalization after five consecutive years of negative per capita income growth. Now, thanks to the courage of leaders implementing adjustment and reform policies in the framework of ESAF programs, this trend is being reversed, and the region is now in the third consecutive year of positive per capita growth. Indeed, average annual growth in sub-Saharan Africa reached 4 1/2 percent last year and is expected to remain close to that level over the medium term.
Heavily indebted poor countries (HIPCs) and the least developed countries performed still better. Each group recorded average growth of 5 percent last year, levels they, too, are expected to maintain over the medium term. However, we must do more and better. Not only is there a most pressing human problem at stake, there is also a systemic interest in preventing marginalization of the poorest and providing them with a powerful boost toward an early, safe, and full integration into the globalized economy. Thus, it is indispensable to have a level of ESAF resources that is commensurate with its essential, continuing role and the Fund’s contribution to the HIPC Initiative.
Meanwhile, progress under the HIPC initiative has continued, with about $1.5 billion committed for Bolivia, Burkina Faso, and Uganda. In addition, six other countries have been identified for debt reduction. We must support these efforts by finalizing the implementation of the compromise arrangement we adopted in September last year. I am certain that I can count on the support of all of you and on an extra bilateral effort before the end of this year to optimize the indispensable financing package.
Trust and financing are essential, but there is more that you can do to help us equip the world for its future. Let me mention only one challenge on the horizon: theevolution of the international monetary system into a tripolar system dominated by the dollar, the euro, and the yen. With macroeconomic policies within these currency blocs likely to be determined largely by domestic policy considerations, factors contributing to world exchange rate stability will have to be kept permanently under review—both for the sake of these three major currencies and to promote a satisfactory exchange rate environment for countries outside these blocs. Here we will need your support and your renewed commitment to the multilateral approach. A new reflection on the best ways to facilitate effective international policy cooperation is needed, along with a strong center for international surveillance, multilateral consultation, and monetary collaboration, a role that the IMF is mandated to fulfill by the very first words of Article I of its Articles of Agreement. We are still some way from achieving this last aspect of international solidarity. But it is a goal that has gained in importance and that the membership, together with the Fund, should now have high on its agenda.
Mr. Chairman, Governors. During these few days in Hong Kong—this most exciting place—you have provided the Fund with a major new mandate and substantially strengthened its financial basis. You couldn’t have given a more eloquent demonstration of your trust in the capacity of the Fund to serve the common good. Let me express my heartfelt thanks for that.
Since we move abroad every three years, in the year 2000 we will meet in Prague, the historic capital of the Czech Republic. By that time, we will have traveled farther on the promising paths of freedom, good governance, and solidarity. Surely we will have met the unexpected along the way, but you know that we will continue to do all that we can to be well equipped and not be caught off guard.
One thing of which I am pretty certain is that the country where we will be meeting—and a number of others between Vladivostok and Bratislava and Tirana—will, by that time, be well advanced in their journeys toward modernity and cooperative, orderly market economies. With that, the Fund will have basically completed a very special task you entrusted to us. But new challenges will appear and, with them, new tasks: accompanying the countries of this part of the world from their "miracle times" to their maturity; supporting Africa as it builds on recent progress to achieve stronger, more sustainable, and higher-quality growth; assisting many other countries in their "second generation" of reforms; adapting the international monetary system to the launching of the euro; and the list may be longer. We look forward to all these tasks with confidence. We know that the IMF can count on your support. We know that we will continue to join forces in making the most of the opportunities of our times.