Economic Prospects for the Americas Under a New Financial Architecture - Remarks by Michel Camdessus
June 2, 199999/131
Managing Director of the International Monetary Fund
at the Conférence de Montréal
Montréal, Canada, June 2, 1999
I am delighted to be able to participate in this conference, not just because of your forward-looking theme, nor simply because of your positive approach to globalization, but also because of the extraordinary cross-section of countries represented in the audience. You come from industrialized countries, emerging market economies, and from lower income developing countries, whose presence reminds us that the challenge for us is to make sure that every single country is being offered the chance of reaping the full benefits of globalization.During the past two years the world has suffered its worst crisis of the last fifty years. Today, I should like to tell you why some optimism--though certainly not euphoria--is warranted, but also why it must be tempered with a high degree of realism and supported by a sustained effort on the part of all of us--public sector, private sector, international institutions--to press forward with the national and international reform that has begun.
But let me start with the good news. Yes, I can confirm that, in our judgment, the worst of the Asian crisis is over and the Americas should benefit from it.
In the U.S. and Canada, the long-running economic expansions are products of the prudent macroeconomic policies followed by the two countries during this decade. Monetary policy has brought inflation down to low levels, and the dramatic fiscal consolidations in both countries have crowded in the private sector, contributing to strong growth in investment. In the U.S., the recent pace of aggregate demand growth has outstripped the consensus estimates, and the unemployment rate has reached low levels not seen in the last 30 years. This situation suggests that with sustained rapid growth of demand, the economy could quickly approach its limits, risking the re-emergence of inflationary pressures. At the same time, Europe's flagging economic recovery and the slow turnaround in the Japanese economy, in particular, point to the need for further policy initiatives on the part of these countries to help restore a more evenly balanced pattern of economic growth worldwide.
Looking further south, we find grounds also for some cautious optimism. In the past two months or so we have witnessed a rebound in investor confidence, and there is some evidence that the slump in activity has been less than expected, particularly in Brazil. The crisis now appears to have bottomed out, and in some cases we even see the beginning of an upturn. This led us to revise our forecast upwards, to a flat performance in 1999 for the region as a whole, and some recovery of growth in 2000. It was also striking that the crisis in Brazil had a relatively mild spillover into other countries, Argentina, Chile, and Mexico in particular. It is certainly too early to proclaim victory, but these countries must be praised for a vigorous policy stance which has contributed to their resilience. For over a decade their sound macroeconomic policies have tamed inflation, and reduced public sector absorption and extensive reform have strengthened economies, especially financial sectors. From this crisis, I believe that many countries, given the ever-present potential for volatility in capital flows, are perceiving the value of early, prompt policy reactions to external pressures, and many investors are learning to differentiate among economies. Let us hope these are lessons well-learned and remembered; particularly by the few countries in the region that still face major challenges.
And what of other countries in the hemisphere: Central America and the Caribbean? The persistent crisis of poverty and natural disasters-which so often seem to visit the same less fortunate countries-will take longer to overcome than the emerging markets crisis. I shall return to these countries in a moment, for I believe it is their situation that should be particularly high on our agenda as we approach the turn of the century. As a matter of fact, I can assure you that their needs are not forgotten: we now extend highly concessional financing through our ESAF2 to the five poorest economies in the hemisphere. Of these, two are with countries that have already qualified for exceptional debt relief under the initiative for the heavily indebted poor countries (HIPC); and two others may be able to qualify soon. As for the impact of natural disasters, emergency assistance has been disbursed in 1998 to four Latin American or Caribbean economies that had been devastated by hurricanes. And the Fund has taken an active part in international efforts to support reconstruction in Central America after Hurricane Mitch. But supporting individual countries would not achieve much if we were not to address the very problems which triggered the crisis of global proportions we have just suffered. Where are we in that regard?
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The crisis revealed deficiencies in the international financial system both on the debtor side--in national policies and institutions--as well as on the creditor side, notably in the capacity and willingness of investors to undertake adequate risk assessment and of supervisory authorities to monitor properly their activities. The international community has analyzed and debated intensely the reasons for the crisis, and how such crises could be prevented, or if they do strike how they could be better anticipated and managed. Let me try to give you an idea of how far the debate has progressed, and how much remains to be done.
The key value is transparency. Transparency is the golden rule, the principle that permeates
most aspects of the work on the new architecture; it defines a set of mature relationships
among market participants and governments.
- And the central method is the adoption of internationally accepted standards in a wide range of domains for truly modern-and I would dare to say--civilized global markets.
Of course, we should continue to perform our traditional relations with our membership: surveillance--that is a policy dialogue on economic policies with all member countries; financial assistance for countries that are addressing balance of payments difficulties; and technical assistance and training to help countries build the capacity to manage and develop their economies. This basic structure remains in place, but its content is being adapted, especially in the light of the recent crisis in Asian emerging markets. The Fund has had to respond more rapidly, with wider-ranging policy programs, and with larger amounts of resources, and with broader collaboration than in the past.Working closely with the World Bank, we have stepped up our efforts to promote financial sector soundness. The programs we have supported in recent years--including those in Asia, Russia, and Brazil--have all incorporated major elements of financial sector reform. In this work, we have drawn on the Basle Core Principles on Effective Banking Supervision--which we also helped design--as a road map.
With respect to new standards on which we rely so much, a very challenging phase lies ahead-dissemination, implementation, and monitoring. Clearly we will have to disseminate the standards for which the Fund is taking the lead--data dissemination, transparency in fiscal, monetary and financial policies, and, with other agencies, the financial sector. Beyond that, although many agencies are preparing or updating their own standards, they will need some support for their dissemination. The Fund is being invited to use its regular consultation with countries to encourage the adoption of standards, and assess progress in their implementation.One promising direction in which this work could lead, although it is still experimental, is the production of transparency reports. Here the IMF is being asked to work with countries to summarize the extent to which the country's practices are consistent with the various standards that are being developed. I am pleased to say that Latin America has led the way: Argentina was one of the first three countries-together with Australia and the United Kingdom-to prepare such a report, and I would encourage others to follow this example.
Always with a view to helping prevent crisis, the IMF undertook an important innovation in setting up the new Contingent Credit Line (CCL) to provide precautionary financing to countries with basically sound economies but which are threatened by the potential effects of contagion. This new window to IMF resources represents a major change in our approach. The CCL is specifically designed to help countries prevent crisis rather than only to respond after the event; it is a shift from curative medicine to preventive medicine. And one important criterion in assessing a country's eligibility for access to the facility, will be the extent of its adherence to internationally recognized standards. It is still premature to identify specific countries, but I have little doubt that a number of potential candidates are likely to be found for the CCL in Latin America.
Latin American countries have been making determined efforts for well over a decade to reform their economies, implement sound economic management, and integrate with the global economy. These efforts redoubled after the Mexican crisis of 1994-95. The measures adopted to strengthen their financial systems have included strengthening supervision, adopting better risk assessment procedures, disclosure systems and accounting standards; establishing higher capital requirements; restructuring bank assets; and privatizing banks and opening them up to foreign participation. Chile, Argentina, Brazil, Peru, and Venezuela have gone far in this regard, and Mexico has recently taken steps in this direction. When the crisis struck the economies of the region, they generally did not retreat behind protectionist barriers; instead, they have shown a commitment to strengthen their policy stances.But I believe there is more that could be done: trade liberalization, corporate reform, and public sector efficiency are constantly in need of improvement. And as reforms take hold, a few countries have already begun to exceed some of the prudential ratios implied by the Basle Core Principles. As this process continues, since the exposure of banks in the region may be greater than among more diversified international banks, countries could consider establishing regional norms for financial sector strength that are in excess of the international minima. What better way to signal the strength of the region?
What more will the new architecture imply for these countries? In common with economies everywhere, I hope they will signal their determination to operate their economies according to the highest standards of transparency and governance. This would mean bringing their national laws, codes of conduct, and standards into conformity with internationally accepted standards--for accounting, auditing, securities, insurance, corporate governance, bankruptcy, payments and settlements systems--that are being presently designed or revised. In the public sector, transparency is being fostered through three codes that have been or are being designed by the IMF in collaboration with other agencies. The first is a code on data dissemination for countries that aspire to mobilize resources on the international capital markets; it is fully operational and has already been adopted by nine countries in the Americas.3 The second, a code on transparency in fiscal policy that is also operational, and the third, a code on transparency in monetary and financial policies, which is in the final stages of preparation, should make authorities' strategies and actions more transparent to market participants.
- They must be exemplary in their application of new or revised standards, even if, of
course, they are frequently well advanced in many respects. As one example, the draft code
on transparency in financial and monetary policies will entail an important shift in culture, in
fact one that has already begun. Instead of relying on a certain "constructive
ambiguity" in the conduct of monetary and financial policy, central banks will be
invited to operate within a transparent framework for formulating and communicating policy
changes. Our host country, Canada, has been at the forefront in this area with its monetary
policy framework. Its use of inflation targets has made the conduct of policy more
transparent, and the determined implementation of this policy approach has delivered low
inflation and has greatly enhanced the credibility of the central bank.
- Regulators, supervisors, and market participants all have a part to play. The initial
working groups of the new Financial Stability Forum--a creation of the G7--will provide
valuable insights on the contribution to financial instability of short-term capital flows, the
highly levered financial institutions and offshore financial centers. These are all areas to
which regulators and supervisors in the industrial countries must pay special attention, and
Canada has made some valuable proposals in this regard. However, the conclusions of the
Forum would carry even greater weight if participation in its deliberations were extended
beyond the G7. Market participants should also expect to review and adapt their practices, in
particular by vigorously reviewing the models they use in assessing country risk.
- Finally, for many years to come there will be a heavy demand for technical assistance as emerging market and developing countries strive to strengthen financial systems and introduce new standards. The industrial countries will be an important source of expertise given the limited in-house capacity of many of the standard-setting agencies.
Well, now imagine that such an effort is being undertaken throughout the world. You will certainly agree that the international community has made considerable headway toward a safer system, but still an extensive agenda remains. Let me try to give you a flavor of some of the more pressing or controversial issues.
A first area where progress is urgently needed and where public and private sectors forces must join hands is their respective roles in preventing and resolving crisis. This is a delicate area of the debate, and although the issues have become clearer, there is still some way to go. The focus must of course be on preventing crises. The private sector can do so by increasing its own transparency and governance, using internationally accepted standards, promoting an arm's length relationship with government, and, as far as financial institutions are concerned, developing more effective evaluation, management, and pricing of risk. Then, if crisis strikes, an active and cooperative approach to their resolution is likely to be feasible. We have learned a great deal from the varying experiences with involving the private sector in Korea, Thailand, Indonesia, and Brazil. In moving forward, we will have to think more carefully about other initiatives to help the orderly workouts of crises if they do occur. These should entail, to my judgment, the introduction of collective action clauses in bond contracts and the definition of appropriate arrangements in extreme situations for allowing a stay on litigation to be organized to help promote orderly workouts.
Second, the international community has been considering whether to extend the IMF's mandate to incorporate the liberalization of capital movements in its purposes, and to amend its jurisdiction as necessary to encourage the Fund to promote the process. The issue can be reduced to the following question: Recognizing that de facto capital liberalization is under way, and that capital flows have been central both to the tremendous advances of the past decade as well as the crises, are we prepared to accept a haphazard, piecemeal and potentially volatile process, or should we try to manage the process in a way that increases economic stability and growth? Clearly, a prudent and judicious approach is essential, and before proceeding to liberalize capital movements completely, countries need to satisfy two prerequisites: one, sound economic policies, and two, a robust financial system.
Although it is understandable that the recent crises have made the international community think twice before proceeding, it is now time for momentum to be re-established on the question of whether to expand the IMF's responsibilities in this regard. Some confidence has returned to world markets, financial flows are likely to grow again, and new forms of innovation will occur. It is vital that these next stages of integrating global financial markets take place within a well-structured framework rather than accepting the risks of a return to the piecemeal approach of the past decades. The role of the IMF should be in the future to help countries wishing to gain access to capital markets, do so in a way that enhances their stability, economic security, investments, and development projects.
Third, we must add a social pillar to the international financial architecture. Each country needs a strong statement of social objectives in its policy framework, supported, when needed, by external financial and technical assistance. Equally, the stability of international economic system requires that a strong social pillar should be integral to the architecture. The disasters that struck so many Central American and Caribbean countries last year reinforce our determination in this regard. The international community is now paying explicit attention to this-in an effort led by the UN and the World Bank-by developing principles and codes of good practice that can guide national authorities in formulating domestic social policies. I hope the Cologne summit will encourage this orientation.
A fourth issue that we will be reflecting carefully on in the next few months is the question of exchange rate arrangements. It has been striking that very frequently the countries in crisis over the past two years was operating some form of pegged arrangement or tightly managed float. We must consider carefully whether such arrangements, per se, are defective or whether they simply have a finite life appropriate to certain stages of economic life, at certain times and under certain conditions. It would appear that a preference is emerging, in some quarters at least, in favor of regimes that are closer to one end or the other of the spectrum: free floats at one extreme, or currency boards at the other. And the Latin American region is adding a further dimension to this debate by the idea of dollarization, in the extreme version of which, an international reserve currency would entirely and formally replace national currencies.
But the debate is just starting and one could remember also that the historic birth of the euro offers another possible paradigm, a regional approach in which a single currency might be seen as the long-term goal, the final stage of a process of achieving a high degree of economic integration among a number of countries. It should also be noted that close economic ties do not necessarily require the adoption of a common currency. The North American Free Trade Agreement has increased the economic integration of Canada, Mexico and the U.S., while the countries continue to allow their currencies to freely float. These are just a few among the elements deserving consideration in this debate which can shape the future of American economic integration Whatever arrangement is adopted, ultimately it is the strength of domestic financial policies that finally determines the success of exchange rate policies.
In a related area, I see an increasing need for deepening the commitment to intensified cooperation among the leading industrial countries in the interests of balanced growth and international monetary stability. Increasingly we see the emergence of a tripolar system of currencies, reinforced by the recent launch of the euro, and yet the economic performance of the three currency areas remains quite unbalanced. Quite rightly, domestic concerns will remain uppermost in each country's decision-making, but, since decisions taken at home inevitably reverberate around the world, what we need is stronger cooperation between these three major currency zones, for they cannot ignore their responsibilities for maintaining the stability of the global monetary system.
Fifth, we must redouble our efforts on how best to integrate into the globalized economy those developing countries that are not yet able to benefit from globalization. Enormous obstacles stand in the way. One of the issues high on the agenda at present is an effort to strengthen the HIPC initiative. I am confident, that with many proposals having been put forward by the international community, including the very constructive proposals of Prime Minister Chrétien, we will soon see agreement on an enhanced initiative which will offer deeper debt relief to countries that pursue strong adjustment and reform programs. But implementation of this initiative will remove only one obstacle to development for a limited number of countries. Broader efforts are needed. The industrial countries can contribute by liberalizing their trade regimes to allow broadly unrestrained entry of the exports of the poorest countries. Just as important, it is time now for the industrial countries to shake off the "aid fatigue" that has afflicted them-with a few notable exceptions-for at least the past decade, and that has allowed ODA to fall to the lowest level relative to GDP in a generation. But I would also support the view that the most generous help should go to those who are willing to help themselves through economic reform and sound policies.
A final issue involves the institutional reform of international financial institutions to adapt them to their new responsibilities. Let me talk only about Fund's governing structures. From its birth over half a century ago, the IMF has been formally governed by its Board of Governors, one for each of our 182 members. For most practical purposes, the Governors delegated the operation of the IMF to the Executive Board, although without granting complete political authority to operate without some oversight. The Articles of Agreement were substantially amended in the 1970s to adapt the IMF after the collapse of the Bretton Woods system of fixed exchange rates, an amendment that included the possibility of a ministerial-level council that would "supervise the management and adaptation of the international monetary system...." But the consensus did not exist to proceed with establishing a formal decision-making body, and instead an "Interim Committee" was established and has functioned in an advisory role ever since. Here we are confronted with a confusingly paradoxical architecture where Ministers provide advice to the directors they appoint and who take the decisions, instead of the opposite.
Now, a quarter-century on, and at a moment when we try to cover deficiencies in world architecture, it would make great sense to correct this institutional anomaly. The establishment of the Council, in my judgment, is an idea whose time has come. It would be essentially symbolic, but important as it would demonstrate that, in the system that is emerging, where the IMF will find itself center stage, asked to do more, integrated more closely into decision-making processes that fundamentally affect the lives and livelihoods of most of the world's population. Governments are finally commited to take full responsibility for its strategies. In this increasingly democratic era, citizens of countries around the world could then understand better how the IMF is run, and be assured that they have effective political representation in its affairs. Surprisingly though, at least for me, we are still far from consensus on the need for a Council. I believe it needs to be kept very actively on the agenda in the coming months. But this will not suffice. Such a symbolic reform should be accompanied by more concrete steps, to make sure in particular that all countries feel effectively represented in the decision-making process. It would be useful also to adapt the representation of other institutions (World Bank, WTO, ILO in particular) to make sure that the members of the Interim Committee and later of the Council receive all the advice needed to discharge their ever-growing broader responsibilities.
These are just a few of the issues that stand out as we look forward to the next century. For the past two years we have been preoccupied with the need to resolve crises and to enable economies to resist contagion. In their responses, the Americas, both North and South, have demonstrated to the world the value of strong economic policies, and the determined reform of economic structures. Their ability to continue withstanding contagion will depend critically on whether they can maintain responsive, flexible policymaking, and a dynamic approach to reform. In order to ensure a more reliable international financial order, conducive to more sustainable economic progress, we should seize the opportunity to press ahead with the longer-term changes that are still needed and, above all, to make the benefits of globalization available to a much larger number of countries, including the poorer developing countries. The contribution of Canada, so actively present on many fronts of international cooperation, from the land-mines treaty to the International Criminal Court to CIDA activities, can make a major difference. I am certain, Mr. Chairman, ladies and gentlemen, the world can count on you for many new advances reflecting your strong sense of international responsibility and solidarity.
1 During delivery both English and French were used.
2 The ESAF is the Enhanced Structural Adjustment Facility.
3 The Special Data Dissemination Standard (SDDS) is designed for countries wishing to maintain access to international capital markets. It has been adopted by a total of 47 countries, including 9 in the Americas: Argentina, Canada, Chile, Colombia, Ecuador, El Salvador, Mexico, Peru, and the United States. The less demanding General Data Dissemination System (GDDS), aimed at member countries that do not subscribe to the SDDS, provides a framework for data improvements and guidance on data dissemination. A further 43 countries, including 14 in the Americas have indicated their interest in participating in the GDDS.