United States and the IMF
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The Role of the IMF: Past, Present, and FutureRemarks by Michel Camdessus
Managing Director of the International Monetary Fund
at the Annual Meeting of the Bretton Woods Committee
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.
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 At the same time, the system of fixed exchange rates has been superseded by a variety of exchange rate arrangements, and the membership of the IMF has expanded from some 40 countries in 1947 to 182 today.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:
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.
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.
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.
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.
IMF EXTERNAL RELATIONS DEPARTMENT