Speech

98/4 Remarks by Michel Camdessus
Managing Director of the International Monetary Fund
at the Annual Meeting of the Bretton Woods Committee

Washington, D. C., February 13, 1998

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I am very pleased to have the opportunity to discuss the IMF with you, and I would like to thank Ambassador Owen and the Bretton Woods Committee for providing this occasion to do so.

I have been asked to offer some thoughts on where the IMF is going. Since what's past is often prologue, I think it would be useful to take a quick look at where the Fund has been recently, before turning to the institution's current role in Asia and other parts of the world, and where, in my view, the IMF is heading. I will try to keep my remarks short so that we will have more time for discussion. So, if I touch rather lightly on some subjects and leave others aside, I do so in the hope of returning to them in a few moments.

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So, let's begin by considering briefly where the Fund has been. I need hardly remind the Bretton Woods Committee about the origins of the Fund. So let me simply recall this much: the IMF was established to help restore economic stability and growth in the aftermath of global depression and world war, and it was founded on a simple, but enduring principle: namely, that all countries share certain basic economic goals--including high levels of employment and income--and that these goals can best be achieved if countries follow sound macroeconomic policies, open their economies to foreign trade, and work together to make the international monetary system function more smoothly. The world economy has had a number of ups and downs in the intervening years, but the validity of this approach has stood the test of time. Indeed, among the countries that adhered to it, trade expanded briskly, national incomes rose, and employment grew, bringing the world a half century of unparalleled prosperity.

Of course, the world economy has become more much complex than it was when the IMF first opened its doors. Among other changes, the volume of private capital flows has grown exponentially, and the development of new technology has made private markets extremely agile. At the same time, the system of fixed exchange rates has been superseded by a variety of exchange rate arrangements, and the membership of the IMF has expanded from some 40 countries in 1947 to 182 today.

In the course of these developments, the IMF itself has had to change and develop. To begin with, the institution now advises and provides temporary financing to countries facing a much wider range of problems and circumstances. Consequently, the scope of its policy concerns has broadened beyond sound money, stable exchange rates, and open markets to encompass a number of other elements that also contribute to economic growth and a stable financial system. Among these are:

• the deregulation of domestic economies and the establishment of a more level playing field for private sector activity;
• stronger financial systems and the development of effective regulation and supervision;
• reductions in unproductive government spending, such as costly military build-ups;
• increased spending on basic human needs, such as primary health and education, on adequate social protection for the poor, the unemployed, and other vulnerable groups, and on key environmental problems;
• greater transparency and accountability in government and corporate affairs; and
• a more effective dialogue on economic policy with labor and the rest of civil society.

I would add that, over the years, the IMF has also had to help its members deal with a number of issues and problems that were not foreseen when the institution was being established. For example, during the energy crisis in the mid-1970s, the IMF helped create a mechanism for recycling the surpluses of oil exporters and helping to finance the oil-related deficits of other countries. During the 1980s, the IMF played a central role in helping to overcome the debt crisis in Latin America. In 1989 and after, the IMF helped design and finance the massive international effort needed to help the 26 transition countries of Eastern Europe and the former Soviet Union overcome the legacy of central planning. In 1994-95, the IMF came forward to help avert the financial collapse of Mexico, the United States' neighbor and third largest export market. Meanwhile, the IMF has continued to nurture economic reform in Russia, and thereby support Russia's fragile democracy. It has also helped reverse the economic tide in sub-Saharan Africa, turning a situation of deepening poverty and despair into one where growth is now twice the rate that it was at the beginning of the 1990s and where per capita incomes, opportunity, and hope are rising. Needless to say, not one of these achievements--none of these positive responses to the major economic challenges of our times--would have been conceivable without a daily, close, and fruitful cooperation with the World Bank, a cooperation that will be, if anything, even more crucial for the challenges of the future.

Yet for all the changes in the world economy and at the IMF, some things have remained unchanged: notably, the emphasis on sound policies at the national level and effective monetary cooperation at the international level. Here I would like to emphasize a point that is so often overlooked in discussions of the role of the IMF. The Fund is not simply a source of financing or a mechanism for crisis management. A key obligation of every IMF member country is the commitment to consult annually with the Fund, at which time our staff prepare an in-depth analysis of the economy and policy advice for the member's authorities. The Executive Board then reviews the staff's conclusions. In the process, the experience of individual countries is discussed, distilled, and disseminated throughout the membership. This is by far our best instrument of crisis prevention. Of course, the crises that are thereby prevented generally go unnoticed, but the importance of this surveillance, as we call it, in promoting economic growth and financial stability cannot be overstated.

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In recent months, the world economy has faced a new challenge: the crisis in Asia. Undoubtedly, you have already heard a great deal about the developments that led to the crisis and the factors that have contributed to its contagion. Likewise, you have access to the full texts of the commitments that Korea, Indonesia, and Thailand have made to the IMF under their Fund-supported programs, since their "letters of intent" are all available on the IMF website and in each of the countries concerned. So let me simply highlight what is new and different about these programs.

The centerpiece of each program is not a set of austerity measures to restore macroeconomic balance--as some seem to think every IMF program must be--but a set of forceful, far-reaching structural reforms to strengthen financial systems, increase transparency, open markets and, in so doing, restore market confidence. To this end, non-viable financial institutions are being closed down, and other institutions are being required to come up with restructuring plans and to comply--within a reasonable period that varies from countries to country--with internationally accepted best practices, including Basle capital adequacy standards and internationally accepted accounting practices and disclosure rules. Other institutional changes are under way to strengthen financial sector regulation and supervision, increase transparency in the corporate and government sectors, create a more level playing field for private sector activity, and increase competition. Taken together, these reforms will require a vast change in domestic business practices, corporate culture, and government behavior. Of course, all of this will take time, but the process is in motion, and already some dramatic steps have been taken.

A dramatic departure, yes. But is it the proper approach? I will be happy to return to the various questions that have been raised on that point. And certainly there are a number of ways in which the IMF and its member countries could strengthen their ability to deal with future crises. But when all is said and done, I think it will be clear that the Fund-supported programs in Asia responded to the needs of the countries concerned--both in helping to restore confidence in their currencies and correcting longer term structural problems in their economies--and to the interests of the international community in preventing the crisis from deepening and spreading to other markets.

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Let me turn now to where the Fund is going. As I said at the outset, the Asian crisis is likely to have an important influence on the Fund. In some areas, it may inspire new initiatives to strengthen the architecture of the international financial system so that such crises will be less likely to occur and those that do arise can be handled more effectively. In other areas, it will add urgency to initiatives already under way. In any event, let me mention seven areas in which the architecture of the international financial system should be strengthened and what the Fund is doing toward this end.

• one, more effective surveillance over countries' economic policies, facilitated by fuller disclosure of all relevant economic and financial data. As you may know, the IMF has established data standards to guide members in releasing reliable data to the public. It is also promoting fuller disclosure through its programs and policy advice. We are now in the process of developing this system and we are entering into very delicate sectors, but we will put in place the appropriate means for ensuring success.
• two, regional surveillance, because experience shows that there is considerable scope for improving economic performance on a regional basis when neighboring countries get together to encourage one another--or put pressure on one another--to pursue sound policies. The Fund is assisting with such initiatives in Asia, just as it already does in the G-7 and other fora.
• three, financial sector reform, including better prudential regulation and supervision. Working with the World Bank and others, the Fund has helped develop and disseminate a set of "best practices" in the banking area, so that standards and practices that have worked well in some countries can be adopted and applied in others.
• four, more effective structures for orderly debt workouts, including better bankruptcy laws at the national level and, as recommended by last year's study by the G-10, better ways at the international level of associating the private sector with official efforts to help resolve sovereign debt problems; and
• five, orderly capital account liberalization: this means neither a return to outmoded capital controls nor a mad dash to full liberalization, regardless of the risks, but a prudent and properly sequenced liberalization, so that a larger number of countries can benefit from access to the international capital markets;
• six, a worldwide effort to promote good governance and fight against corruption. I don't need to elaborate on this point, since I have discussed these issues recently in addresses to Transparency International and the Financial Action Task Force, both of which are available to you on the IMF website.

Suffice it to say, when all these elements are in place, the architecture of the international financial system will be more modern and more substantial, and more equal to the challenges in the global economy today. But there is another way in which the architecture of the international financial system must be strengthened and that is to reinforce the international financial institutions, including their financial resources.

The IMF cannot continue to do its job--in Asia or elsewhere in the world--unless it has adequate resources. Let there be no doubt that there are major risks in the world economy today. Indeed, only a few months ago, many observers thought the Asian crisis was about to spill across the Pacific. In fact, it did not, but I cannot guarantee you that it won't. Thus, it is a matter of some concern that the IMF's usable resources have declined rapidly by more than one third, or by almost $30 billion since 1996 to about $45 billion today. This leaves the institution little room for maneuver--either to protect the liquid reserves that members hold in the Fund or to meet the more normal, but at times very large, financing needs of our 182 member countries--much less to respond to a new crisis.

The international community has proposed an increase in IMF quotas that would amount to approximately $88 billion, of which the U.S. share would be nearly $14.5 billion. We estimate that the new quotas would yield up to $58 billion of usable resources, which should suffice for some years into the next century. In addition, IMF members have taken steps to increase the special credit lines available to the IMF in the event that additional resources are needed to forestall or cope with an impairment of the international monetary system, or to deal with an exceptional situation that poses a threat to the stability of the system. The U.S. share in the increased credit lines of $23 billion--what we refer to as the New Arrangements to Borrow, or NAB--is about $3.5 billion. It is worth noting, however, that the NAB is only useful and relevant if accompanied by the increase in quotas, since otherwise tapping the NAB would immediately increase Fund liabilities and thereby drive the IMF's liquidity ratio to an unacceptable, even risky, level.

We are deeply aware in the IMF that our members' support for the IMF ultimately derives from their legislatures, which vote to approve their countries' subscriptions, or quotas, in the IMF. We must earn that support. But I hope it will be recognized that participation in the IMF is not fundamentally an expense to the taxpayer; rather, it is an investment. It is an investment in the narrow sense that the member countries earn interest on the IMF's use of their currencies. Far more important, it is also an investment in the broader sense--an investment in the stability and prosperity of the world economy.

Thank you very much.