Toward an Agenda for International Monetary and Financial Reform--Address by Michel Camdessus
November 6, 199898/21
Final versionAddress by Michel Camdessus
Managing Director of the International Monetary Fund
to the World Affairs Council
Philadelphia, November 6, 1998
It is a very real pleasure to participate in your celebration of the fiftieth anniversary of this Council. For one moment let us reflect on how much the world has progressed during the past half-century from the global ruin caused by economic mismanagement and war. Of all the gains that have been made, historians will undoubtedly identify, as a hallmark of the twentieth century, the extent to which the world economy has become globalized. And yet, when we look to the new millennium, major questions arise. We face a crisis in the functioning of this global system of economic and financial relations, and we see that far too large a proportion of the world’s population is not yet benefiting from the progress that has been made.
Since mid-1997, when the Asian crisis first broke, we have seen almost unprecedented turmoil on international financial markets. After its onset in Thailand, the contagion spread to other countries in East Asia with a speed that caught everyone by surprise. The second round erupted in mid-August with Russia’s moratorium on its debt servicing leading to renewed, stronger pressures on many emerging countries around the world, especially in Latin America. Simultaneously, Japan, to which many had looked to help recovery in the East Asian countries, found itself in a deepening recession exacerbated by a severely stressed banking system. Even the other industrial countries were not immune. The emerging markets crisis was a factor in the sharp third-quarter equity market correction in North America and Europe, and was also reflected in lower external trade volumes, even though economic fundamentals in both regions remained sound.
As the year progressed, it was clearly no longer appropriate to speak of a crisis affecting just Asia, or even emerging markets alone. Instead, what we faced was a systemic problem, a crisis of the system of global finance that had not yet developed sufficiently to reconcile the needs of all the participants—investors seeking new opportunities, emerging market economies seeking resources for investment, and governments seeking to ensure that markets operate safely and efficiently. Even if, in the past few weeks, an air of calm has begun to return to global markets, we could argue that the crisis in the functioning of the global financial system is certainly not over yet, and that instead we now have a better opportunity to press ahead with fundamental reform.
The IMF/World Bank Annual Meetings last month focused world attention on the crisis in the functioning of the international monetary system. It served to bring together three aspects of the responses to the crisis: first, responses by individual countries in crisis; second, policies aimed at keeping the world economy on a more even keel in the near term; and third, system-wide reforms at the global level. While guarding against any premature sense of relief, it is possible to discern encouraging developments on all three fronts.
- Individual countries in crisis are courageously implementing policies to strengthen their economies and to warrant international support. Korea, Thailand, and even Indonesia are continuing to show promising signs that recovery could be around the corner. Brazil, unlike many other countries, has not waited until the last moment to acknowledge its policy shortcomings and to take strong action. Throughout Latin America, countries have signaled their readiness to do whatever is necessary to maintain their access to international capital markets. This preemptive action is helping to defuse potential crisis in the region. I hope that soon we will hear convincing announcements from Russia in its effort to tackle a most severe crisis.
- Measures are also being taken by the major economies to diminish the risk of the global economy slipping into recession. After a September statement in which the industrial countries acknowledged a shift in the balance of risks away from inflation, several policy steps have improved the prospects for sustaining growth. Japan has been moving more vigorously to deal with its banking crisis, and is considering further fiscal stimulus. In other countries, notably the United States and Europe, interest rate reductions have been announced.
- Active consideration has been taking place of a wide range of proposals for international monetary reform, and progress is being made in that direction, including at the highest level among the major economies. The statements on reform by the heads of government, and by the ministers of finance and central bank governors of the G-7—the largest industrial countries—represent a clear signal of the economic leadership from the major economies that is so essential to move forward with reform of the international financial system. But what reforms are we talking about?
For many months, we have been talking in metaphors about the new architecture of the international monetary system. Today I shall be direct and concentrate on the elements of the reform on which I see a consensus emerging. These include the following measures: to minimize the risk that systemic crisis will recur; to promote a more orderly working of the international monetary and financial system; and, when isolated crises do happen, to ensure that we have early warning, effective policy tools, and adequate resources and broad support to assist countries in trouble. In other words, we start by trying to correct the basic weaknesses the present crisis has revealed.
This is an agenda that is truly challenging in both its breadth and complexity. A starting premise is that significant development and integration of the international financial markets already exists, and has contributed to higher investment and stronger growth in many countries. But this integration has not always taken place in the most orderly or optimal fashion. The objective is to promote an integrated financial system based on stable economic policies, sound national financial systems, open capital accounts, transparent behavior by market participants, and equitable socioeconomic policies. It must bring together the roles, rights, and responsibilities of the different constituents of the global economy: governments, citizens, private corporations—especially financial institutions—and international organizations. Needless to say, this is not a task that the IMF can perform alone. We shall be working with national governments, the World Bank, the OECD, the BIS, and other specialized agencies and organizations. The agenda at this stage addresses seven broad domains.
First, adoption of standards and codes of good practice. The best functioning economies and financial markets operate within the context of transparent standards and codes of good practice that have been developed and adapted over the years. Often these rely on compliance that is voluntary or market-based, but reinforced by a strong institutional framework of regulation and supervision. These, together with well defined legal and judicial systems, form a structure that helps markets operate efficiently, and generally promotes good governance. Much of the work of reforming the international monetary system will consist of extending to the global level the same principles and similar rules and codes of conduct that have long existed in the best developed financial systems at the national level. This principle—the adoption and dissemination of standards—permeates all other aspects of the agenda for reform.
Second, transparency. It is the golden rule for successful markets and for sound economic policymaking. Without guarantee of timely and accurate information, they just cannot work. The highest priority must be assigned to an all-round improvement in this regard.
- Governments will be asked to comply with codes of good conduct in transparency in fiscal policy, monetary and financial policy, and standards for data dissemination, all of which the IMF has established or is in the process of compiling;
- The nonfinancial private sector will be asked to comply with standards of accounting, together with standards of sound corporate governance;
- Financial institutions, including those that engage in international capital flows, will be expected to accept standards of disclosure aimed at greater transparency and predictability, and to comply with risk management standards.
It will be one of the important tasks of the IMF to disseminate and monitor the standards in its surveillance activities of its 182 members. But there will be complex issues: for instance, companies may feel that more disclosure compromises their proprietary information, and governments may wish to preserve their confidentiality.
Third, liberalization of the capital account. Capital markets have been developing with almost breakneck speed. Many financial institutions have extended their operations into these new markets, often developing sophisticated new financial instruments, and, in some cases, emerging markets were eager to benefit from the available flows, but to do so they tended to liberalize at the short, riskier end rather than the longer end. Quite an imprudent approach indeed! No wonder, then, that a broad debate has emerged about the risks and benefits of capital liberalization.
Let me set this question in a broader context. Globalization has affected three important areas: one is trade, a second is payments for trade flows and services, and the third is capital flows. During the past half-century, liberalization has proceeded in the first two of these areas, within institutional frameworks offered by the World Trade Organization (for trade) and the IMF (for current account payments). But the equivalent for the capital account began to be considered for emerging countries only recently. The international community took an important step at the 1997 IMF/World Bank Annual Meetings in Hong Kong in recognizing that the purposes of the IMF should be formally extended to encompass capital convertibility, and that the Fund’s responsibilities, its jurisdiction, should be extended as necessary to supervise this process. This step does not imply that we wish dogmatically to press liberalization on countries in a hurry. Quite the contrary. We believe that an orderly progression towards liberal capital flows is appropriate and desirable when the preconditions are right within the country.
Fourth, financial sector reform. One of the essential preconditions to liberalizing capital flows is to ensure the soundness of national financial systems and of the private institutions engaged in international capital flows. Yet, almost three-quarters of the countries of the world have experienced domestic banking system stress or crises in the past 15-20 years, including in a number of industrial countries. And, we have seen concerns re-emerging in the past few weeks over some of the riskier, highly leveraged types of international investment.
A sound international financial system will require—will consist of—sound and resilient national systems, monitored according to transparent and consistent standards. These standards of soundness should be sought at the level of both national banking systems and international market participants. High on the agenda for all countries—industrial countries and emerging markets alike—will be to promote strong banks and other financial institutions, prudent regulation, and effective supervision.
The process of refining standards in this area will involve many institutions with relevant expertise. The IMF will have a key role in monitoring the implementation of standards in the area of financial sector soundness within the framework of surveillance—our regular policy dialogue with our members to which I have already alluded. Our membership is no longer hesitant to invite us to develop our work in this domain, the need for which had already been demonstrated by the Mexican crisis. Early this year, we published our study "Toward a Framework for Financial Stability," a kind of road map for this work, which, together with the Basle Core Principles—25 principles of effective bank supervision—provides a solid reference point for our work with the national authorities. In deepening its capacity to undertake responsibilities, the Fund will need to continue to work closely with many other institutions that have the relevant expertise.
Fifth, private sector involvement in resolving and preventing crises. One of the most complex issues of the new agenda is how the private sector can be engaged in resolving crises. Rather than bailing out investors—something we are always careful to avoid—we would seek solutions which contribute to "bail-in" the private sector under voluntary and market-based arrangements to work out, when needed, a country’s debt problem. Let us look at just one example of the dilemmas involved. Much attention has been paid to one aspect of moral hazard, where borrowers may be encouraged to take unnecessary risks because of the prospect of bailouts. But there is a similar risk that under any new arrangements, the private sector could be deterred from investing in a country by the risk that a country might default too readily. By reducing moral hazard in the case of the creditors, we must ensure that we do not increase it excessively in the case of the debtor. There is a very fine line to walk here, and many issues that will have to be debated in considerable detail, including, for sure, appropriate bankruptcy procedures, and clarification of ways in which governments can act in order to avoid explicit and implicit government guarantees of private debt.
Sixth, social policies and support for the most vulnerable. Reform of the international monetary system can only be regarded as complete if it is consistent with the social goals endorsed by the international community. I welcome warmly the recognition given by the G-7 heads of government to the impact of the global financial crisis on the poor and most vulnerable, and their agreement on the need for general principles of good practice in social policy. We must adopt policies to assist the poorest countries to develop and to become integrated with the global economy, while ensuring that the poorest people within these countries see rising living standards. Sound monetary and macroeconomic policies are essential to this end, as the price for high inflation and economic stop-and-go are disproportionately paid by the poorest. Our task as a monetary institution is precisely to promote such sound policies, but we must also look to others to assist these countries in developing their economies, with a particular emphasis on alleviating poverty and providing debt relief in the most serious cases of indebtedness. The World Bank, together with the regional development banks, plays an essential role in this domain, but I would again appeal to donor nations to ensure that all initiatives are fully funded.
Seventh, adapting the international institutions and IMF. I will not talk about the other institutions, all of them in one way or another are in the process of reform. But, as you can see, the IMF itself has a central role in the global economic and financial system. If the global system is reformed, then the IMF too should be adapted. I would even say that we should not wait for global reform to advance before reforming ourselves! During the past year, the IMF has come closer to being a household name than at any time in its history. Although it has received strong—I might say almost unanimous—support from its membership for its responses to the immediate crises, harsh criticism has been heard, principally from those who see us as a kind of scapegoat for all the problems of the world, but more importantly, many legitimate questions and suggestions have been raised. And we have been listening. Let us consider a few of the issues that we face in adapting the IMF.
Over the years the IMF has been called upon to assume an ever-increasing range of responsibilities. For instance, in light of recent developments and the requests of its members, the IMF is being asked to undertake surveillance of countries’ financial systems, a task that will call for mobilizing and coordinating expertise from around the world. The IMF is also invited now to promote ambitious but orderly capital account liberalization. A third new task would be the administration of a precautionary facility, using the IMF’s resources to assist countries that are pursuing appropriate policies but come under pressure because of difficulty in obtaining financing owing to world market conditions. And the list of calls on us could be longer.
To perform these responsibilities, we need appropriate authority and adequate resources. And the IMF should reciprocate through an acceptable level of political accountability. Let me elaborate these points.
The question of authority arises in many areas of the IMF’s operations and in a fast-changing environment mandates need to be kept under continuous review. One of particular importance at this juncture relates to the need for an amendment to the IMF’s Articles of Agreement to include capital liberalization among its purposes. Similar issues may arise when we come to the question of how to involve the private sector in the resolution of financial crises.
The IMF’s financial position had been a source of growing concern as the use of our resources grew to unprecedented levels. Now that the U.S. Congress has ratified its contribution to the increase in the IMF’s quota, our de facto capital stock, I am confident that the rest of the membership, which had looked to the U.S. to initiate action, will now proceed quickly to finalize this issue.
The IMF is often questioned as to the transparency of its operations and its accountability. In these matters, the pace of change is largely in the hands of the IMF’s members. The governing bodies of the IMF recognize that we have already made rapid progress on transparency, but are increasingly persuaded by the arguments that it is necessary for many of the operations of the IMF to be subject to more extensive disclosure and evaluation. I do agree with this objective. At the same time, we must recognize that the calls for more IMF transparency are, in many respects, calls on the member countries; after all, it is their policies that will be opened to scrutiny when documents are published. For that we need their consent. Once consensus is established, we will be enthusiastic to proceed with the necessary adaptation of procedures and policies. To promote accountability, one proposal that we have put forward is to put in place a body that would be able to act authoritatively and with a representative voice to adapt the international system or to adopt major decisions on strategic issues. That is why we have proposed strengthening the Interim Committee of the IMF, the ministerial level committee that gives policy guidance to the IMF’s Executive Board, including the possibility, enshrined in our Articles of Agreement, of converting this committee into a Council accountable to the full membership, with decision-making powers and not merely a consultative role.
The task ahead of us is challenging indeed, but it is an essential one if we are to underpin the gains made over the past half-century and encourage the trend to continue. In a few years time, we may well look back with some surprise and wonder how we could have run an international financial system as we do today. But in the coming months and years, as we aspire to a more stable, sound, transparent, liberal, and equitable global system, we shall have to rely on a new higher level of international cooperation. I have no doubt that this stronger spirit of international cooperation will emerge, just as our common founding fathers were able to fifty years ago. The task before us is monumental! Let us be inspired by their vision, determination and success.