Enhancing Global Economic Security--Address by Alassane D. Ouattara
March 21, 1998Address by Alassane D. Ouattara
Deputy Managing Director of the International Monetary Fund
at the Academie de la Paix et de la Securité Internationale
Conference on Globalization and International Security
It is an honor for me to join you today, at a time when you are reflecting on whether the Bretton Woods Institutions are equipped—in this new age of globalization—to cope with international financial crises, such as the one that recently surfaced in Asia. You are asking, in other words, are we up to the job? Or do we need to be reformed?
I think we should all take comfort in the fact that one of the hallmarks of the IMF—and, naturally, I will confine my remarks to the IMF—has been its ability to adapt to changing global economic circumstances. Of course, the world economy has become much more complex since the IMF first opened its doors. The volume of private capital flows has grown exponentially, and 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 At the same time, the system of fixed exchange rates has been superseded by a variety of exchange rate arrangements.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 grown from some 40 countries in 1947 to 182 today.
But over the years, we have stood by our members, helping them cope with problems that were not foreseen when the IMF was established. We were there in the 1970s, helping oil exporters recycle their surpluses and helping others finance their oil-related deficits. We were there in the 1980s, helping Latin America overcome its debt crisis. We were there, later in the 1980s and the early 1990s, helping the transition countries of Eastern Europe and the former Soviet Union overcome the legacy of central planning. And we were there in late 1994 and early 1995, helping Mexico avert financial collapse. These days, we remain active in Russia, nurturing economic reform; in Sub-Saharan Africa, helping reverse the trend toward abysmal poverty; and of course, in Asia, trying to contain the financial crisis.
What kind of policy advice have we given? Throughout, we have urged countries to pursue sound economic policies—and by that I mean policies that promote growth through low inflation, sound money, prudent fiscal policies, and a sustainable current account position. Yet, as the economic landscape has changed, and as we have come to better understand how economies work in a globalized world, we have broadened the scope of our advice to include other elements that are also vital for economic growth and financial stability. These include:
- the establishment of simple, transparent regulatory systems to create a more level playing field for the private sector—this includes, of course, demonopolization;
- stronger banking systems that protect the savings of small depositors and channel savings not just to a favored few, but to those who will use it productively;
- reductions in unproductive government spending, such as costly military build-ups and prestige projects;
- higher spending on primary health care and education; adequate social protection for the poor, the unemployed, and other vulnerable groups; and environmental protection;
- greater transparency and accountability in government and corporate affairs; and
- a more effective dialogue with labor and the rest of civil society.
Questions from the Asian Crisis
The recent financial crisis in Asia has underscored the importance of many of these elements. But it has also generated much debate about the IMF and its policies. Let me address three questions that strike at the heart of the debate.
First question: Are we giving the right advice in Asia? Some people say that the IMF-supported programs in Thailand, Korea, and Indonesia are too tough. There is no question that economic activity in the affected countries is slowing down. But this is mainly the result of the sudden reversal of capital inflows. Moreover, without these programs and the international support behind them—not to mention their confidence building effects—Asia’s suffering would be even more acute. We would be seeing more bankruptcies, larger layoffs, and even deeper currency depreciations. The point of the IMF-supported programs is to address the problems that precipitated the crisis. Thus, the primary focus of these programs is on strengthening financial systems, improving governance systems, increasing transparency, opening markets, and restoring market confidence. Needless to say, none of this will be easy, but already there are very encouraging signs in Korea and Thailand.
Second question: Are we creating a moral hazard for borrowers and investors? As for borrowers, no country would deliberately pursue reckless policies because it thought the IMF would bail it out in the event of a crisis. The economic, financial, social, and political pain would simply be too great.
As for investors, these programs are hardly bail-outs. Many private investors are taking heavy losses. With stock markets and exchange rates plunging, foreign equity investors have lost nearly three-quarters of the value of their equity holdings in some markets. Many firms and financial institutions will go bankrupt, and their domestic and foreign lenders will not be repaid. Moreover, fourth quarter earnings reports indicate that, overall, the Asian crisis has been very costly for U.S. and other foreign commercial banks.
That being said, it is true that some short-term private creditors are being at least partly protected. And looking ahead, the international community needs to find better ways of including the private sector in efforts to resolve sovereign debt problems. But please note that in the case of Korea, for instance, short-term creditors are being bailed in at longer maturities.
Third question: Is the IMF too secretive? Does it practice the transparency it preaches? Let me answer this by suggesting that you visit our Website on the Internet. There, you can find a wealth of institutional information and data—part of our effort in recent years to reduce the mystery surrounding the workings of the IMF. You can access, for example, press information notices that outline the Executive Board’s views on member countries; the full text of background country reports on member countries; the letters of intent of Thailand, Indonesia, and Korea; and the full text of the World Economic Outlook. The idea is to open up the IMF to greater public scrutiny—and in the process, it is hoped, advance the debate on how the world’s nations can derive the greatest benefit from open capital markets and globalization. Yet we remain ever mindful of the need to maintain sufficient confidentiality so as not to jeopardize the candor and comprehensiveness of policy discussions or to contribute to market scares.
That raises the issue of whether we should be whistle blowers, as some observers suggest. Personally, I do not think we should take that step. The danger is that our predictions, however well founded, might not always be right. Moreover, our warnings might provoke the very crises we hoped to prevent. It is far better that the markets come to their own conclusions. That is why we have set up data standards to guide members in releasing reliable data to the public. And that is why we are maintaining a bulletin board on the Internet that enables the public to track who is releasing what. Of course, member governments—throughout the world—also continue to have full access to information on Fund activities through their representatives on our Board of Directors.
In the initial months of Asia’s financial turmoil, much of the world’s attention was focused on how to contain the crisis. But now thoughts are turning to how best to strengthen the international financial system so that such crises will be less likely to occur in the future and those that do occur can be handled more effectively.
So what can be done to prevent crises?
- First, we must continue to look for ways to make our surveillance more effective and to enhance transparency. The IMF must be more ambitious and demanding about the data provided to us and communicated to the markets. We need to know more about the structure of countries’ domestic and external debt, their reserve levels, how highly leveraged their corporate sectors are, and the level of nonperforming loans; and so do governments and markets.
- Second, we must find ways to strengthen domestic financial systems by improving domestic regulation and supervision and increasing financial sector transparency. Over the past year or so, the Fund has helped develop a set of "best practices" in the banking area, so that practices that have worked well in some countries can be adapted and applied in others. We are now disseminating these best practices through our policy dialogue with member countries.
- Third, we must continue to pursue good governance and intensify the fight against corruption. Indeed, in recent years, governance issues have moved not only to the forefront of discussion, but in many cases, to the top of the policy agenda. Why the change? There is more evidence about the harmful effects of governance problems on economic performance—for example, losses in government revenue, lower quality public investment and public services, reduced private investment, and the loss of public confidence in government policies. That is why we are encouraging countries to maximize the transparency of government operations and thereby minimize opportunities for special favors.
- Fourth, we must promote more effective regional surveillance. As we have seen in Asia, spillover and contagion effects can be so rapid and so costly to countries with basically sound policies that every country has a strong interest in seeing that its neighbors manage their economies well. For that reason, it is very encouraging to see such initiatives under way in Asia, since experience shows that there is considerable scope for improving policies when neighboring countries get together on a regular basis to encourage one another to pursue sound policies. The Fund stands ready to contribute its technical expertise to these efforts, as it already does in the G-7 and other fora.
- Fifth, we must continue to liberalize international capital flows.
This means neither a return to antiquated capital controls nor a mad rush to full immediate
liberalization, regardless of the risks. We have to liberalize capital flows—but in an
orderly manner. The Asian crisis has cooled the enthusiasm for liberalizing capital flows
that was so evident at our Annual Meetings in Hong Kong. And although many may wish to
evaluate it in light of the crisis, there are solid reasons not to abandon the effort.
But realistically, the international community cannot expect to avert every potential crisis. What can be done to ensure that future crises can be handled effectively?
- Certainly better ways need to be found to involve the private sector in official efforts to resolve debt crises and avoid the problem of moral hazard, perhaps through orderly mechanisms for settling and restructuring debts.
- In addition, we need to significantly strengthen multilateral institutions, by ensuring more equitable representation of all countries on their boards, bolstering their authority, and of course, enhancing their resources.