Global Financial Reform: The Evolving Agenda - Remarks by Michel Camdessus
June 4, 199994/14 Remarks by Michel Camdessus
Managing Director of the International Monetary Fund
at the Council on Foreign Relations
New York, June 4, 1999
I am delighted to have this further opportunity to address the Council on Foreign Relations. Since I spoke here about 15 months ago, a great deal has transpired in terms of both economic developments and the continuing debate on the international financial architecture. I know that you have yourselves established an Independent Commission on the Future International Financial Architecture underscoring the importance you attach to this task. Let me tell you of my appreciation for this contribution to the debate which in view of the caliber of people you have selected will no doubt be outstanding. It makes me shy to report to you about the ongoing work in other fora and to look with you to the challenges ahead.
You will also realize that the appearance of greater stability in the financial markets--I have termed it "euphoric relief" that the worst of the crisis seems to be over--draws in part on the assumption that policymakers are acting to correct the situation. So I would like to reflect briefly with you today on just what has been accomplished, while at the same time identifying some of the next steps.
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If we take six major areas of activity under the broad umbrella of reforming the international financial system, then my review today will reveal a mixed picture. I would say that there are three areas--transparency and standards, financial sector strengthening, and social issues--where significant progress has been made: practices are changing, policies are being implemented, or broad agreement exists about how to go forward. As a matter of fact, these are domains where the lessons of the Mexican crisis were clear enough, for changes to be initiated before the Asian crisis. In three other areas--the involvement of the private sector in crisis prevention and resolution, the liberalization of capital movements and adaptation of the international financial institutions and of the IMF itself to this new world--the debate has clearly advanced but a number of issues remain to be resolved.
In the area of transparency and standards we have come farthest. We can report tangible progress in the search for transparency in the public sector, where the standards designed by the Fund are concentrated. Standards for data dissemination are now fully operational, and the more demanding Special Data Dissemination Standard (SDDS) has now been adopted by about one-quarter of the membership. To illustrate the importance of this, under a recent review, standards have now been established for reporting on foreign reserves and associated liabilities, which, if they had been in place in countries such as Korea and Thailand, would have provided earlier indications of impending difficulties. In other areas, the Code of Good Practices on Fiscal Transparency has been made operational, and the parallel draft code for transparency in monetary and financial policies is being prepared. An unusually broad participatory approach was used in this latter code, which continues through consultations with the public and other agencies.1
Efforts are being made in a variety of fora to develop standards in areas such as accounting, auditing, securities, corporate governance, payment and settlement systems, insurance, and bankruptcy. As agreement is reached, the key issue for these new standards will become a highly practical one: implementation--how to disseminate the standards, promote their adoption, and monitor their observance.
Many of the standard-setting agencies tell us that they do not have the capacity to conduct the country-by-country consultations that will be necessary. Although the Fund may not have the technical expertise to assist in implementing many of the new standards, its mandate enables it to have regular--usually annual--contacts with all member countries for in-depth policy discussions. This has led to a number of calls for the Fund to use its surveillance to play a significant role in encouraging the implementation and monitoring of observance of standards. A further reason for the Fund to become involved in this area, arises from the newly-established Contingent Credit Line facility. Among the five criteria for access to the CCL is the country's "progress in adhering to relevant internationally-accepted standards". In making such assessments, we will build on our experience with the standards that are the direct responsibility of the Fund and rely heavily on the skills, resources, and advice of the World Bank, the other institutions and the standard-setting agencies.
Another proposal is that countries should prepare "transparency reports" on their implementation of the various standards, and in the first experimental round, three countries--Argentina, Australia, and the United Kingdom--have volunteered such reports.
In the critical area of financial sector strengthening, where broad principles are well-established, implementation is also of the essence. Our collaborative work with the World Bank, under the newly-concluded Financial Sector Assessment Program, is based on the internationally accepted Basle Core Principles for Effective Banking Supervision. Already we have incorporated the analysis of financial sectors as a core, ongoing part of our dialogue with countries and we are now working with the World Bank on the modalities of financial sector stability analyses that will deepen these analyses further. One of the major benefits of this approach is the potential for observing early warning signals of stress in national financial systems, and, even more important, for addressing promptly the underlying problems. But in this area also, we shall be looking to our members and other agencies as a source of some of the technical skills that are needed to carry forward the work.
However, there is scope for even deeper international cooperation, and the Financial Stability Forum, established to encourage dialogue among the many relevant national and international agencies, will make an invaluable contribution. I will note here my hope that participation in the Forum can be extended to countries beyond the G7, and I am glad to note that the first working groups established by the Forum will include emerging market participants. The topics for these first three studies--short-term capital flows, highly-levered institutions, and offshore financial centers--recognize key issues, and remind us that all countries, including the most advanced industrial countries, have responsibilities to fulfil. Moreover it is not just the public sector that has obligations; the primary responsibility in making investment decisions lies--need I say it?--with investors, who need to find ways of strengthening their risk assessment techniques and risk management practices. Certainly national regulators should encourage continuous review and improvement of these practices.
Finally, in this list of issues where progress is being made, I would mention work to provide the architecture with a social pillar. The Asian crisis showed that even countries with quite high levels of income had limited formal social welfare systems, highlighting how important it is for countries to build up their social defenses in parallel with their economic defenses--before crisis strikes. But here we enter a domain where we should be particularly attentive to local specificities and traditional responses. I must say I have been particularly impressed by the three principles on which the Thai authorities have based their action in this domain during the recent crises. Let me quote here Minister of Finance, Mr. Tarrin Nimmanahaeminda2:
"First, social policy must be consistent with our values and culture. Some social policy instruments may promise to produce great relief in the short term, but we have to make sure that they do not undermine our national values of hard work, self-reliance, community and family cohesion, and spiritual strength.
Second, social policies must be sustainable after the crisis, in both fiscal and governance terms. Program entitlements that are unaffordable later or that encourage lax and corrupt implementation are not suitable.
And third, social policies should deepen our reform agenda in terms of transparency, people participation, and community development. Therefore, our social policy approach is to encourage direct involvement of civil societies at all levels."
It is gratifying that the international community is now paying explicit attention to this--in an effort led by the UN and the World Bank and endorsed at the April meeting of the Development Committee--by developing principles and codes of best practices that can guide national authorities in formulating domestic social policies.
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Let me turn now to the areas where less straightforward issues arise, and although the lines of the debate may have become clearer in recent months, a sufficient degree of consensus has not yet emerged.
It is the respective roles of the public and private sectors in preventing and resolving crises that gives rise to some of the most complex issues. But progress is needed urgently, since we have, and will have permanently, this problem with us.
The focus must of course be on preventing crises. Just as the public sector is being asked to adapt its culture, so too the private sector--in the interests of developing more mature and stable markets--will need to change. This will mean an increase in 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 and management of risk. Then, if crisis strikes, an active and cooperative resolution is more likely to be feasible.
Valuable lessons have emerged from the varying experiences with the involvement of the private sector in resolving the crises in Korea, Thailand, Indonesia, Ukraine, and Brazil. Is it possible to distill generalized lessons to assist orderly debt workouts in crises? A critical concern is to see that contracts are honored; this is central to well-functioning capital markets. Of source, that should go without saying, but I observed without an excessive sense of surprise that the Interim Committee was of the view that it was worth repeating in its communiqué. This being said, we must acknowledge that in extreme situations, countries may face difficulties in meeting their debt service payments. In such cases, it will be important to ensure that public money is not used to shield private creditors from adverse outcomes. The debtor country must be able to meet with its private creditors to discuss continued private sector involvement.
Looking to the future, one promising route to encourage mutually beneficial workouts from such discussions is to introduce collective action clauses in new bond contracts. Rescheduling could then take place with the consent of a majority of creditors, rather than requiring unanimous assent as at present. And as default will not always be avoided, it will also be important to ensure that good faith negotiations are not disrupted by unilateral legal action by dissident creditors. This could be achieved by providing a stay on legal action during the negotiations. Here we come to the question of whether the Fund should be endowed with the right to declare such a stay, on the basis for instance, of an agreed interpretation or an amendment of Article VIII 2b of its Articles of Agreement. Consensus has yet to be reached on this.
The next issue is the question of liberalization of capital movements. Capital flows have been central both to the tremendous advances of the past decade as well as the crises. The international community has been considering whether to extend the IMF's mandate to incorporate capital account liberalization in its purposes, and to amend its jurisdiction as necessary to prevent the Fund to promote the process. Indeed, in Hong Kong, at the IMF's Annual Meetings in 1997, the international community acknowledged that "[it] is time to add [this] new chapter to the Bretton Woods agreement".
The emerging markets crisis has brought the issues into sharper focus. Recognizing that de facto capital liberalization is irreversibly under way, are we prepared to accept a haphazard, piecemeal, and potentially volatile process, or should we help countries to manage the process in a way that increases economic stability and growth? The crisis, of course, gave rise to second thoughts on this matter but in fact only one country resorted to capital controls despite the severity of the crisis. In this light, and as the crisis recedes, it is now time to proceed. Some confidence is returning to world markets, financial flows are starting to grow again, and undoubtedly new forms of innovation will take place. The next phases of integrating global financial markets need to take place within a well-structured framework rather than continue the piecemeal approach of the past decades. If countries wish to gain access to capital markets, they should be able to do so in a way that places due regard on their stability and economic security.
This means that an orderly, judicious approach is called for on the part of both creditor and debtor nations, and one in which the IMF has a major contribution to offer. Creditor nations and institutions need to pay attention to assessing and managing risk adequately, issues for both investors and regulators to explore. Above all, debtor nations need to satisfy a number of key prerequisites, prime among which are a sound macroeconomic framework, a robust, well-supervised financial system. This will necessarily take time; better to start right away.
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We have seen that the reform of the international financial architecture will have pronounced implications for the scope of activity of the IMF, giving it a new role, in collaboration with others, in promoting financial stability and in monitoring adherence to standards. But is this enough? Let me discuss two further ways in which the IMF is being, or should be, adapted.
First, we are seeing a significant evolution in the nature of the IMF's activities to avail ourselves of appropriate instruments for crisis prevention. Very illustrative of that is the creation, about a month ago, of a new financial mechanism, the Contingent Credit Line. This doesn't seem that revolutionary! In fact, this new window could change dramatically the way in which the Fund interacts with its members and the global financial community; it shifts the emphasis from curative medicine to preventive medicine. Existing IMF facilities generally help countries that are in a weak condition and experiencing an actual balance of payments need--perhaps because of policy shortcomings or adverse external developments and, in many cases, because the countries came too late to the Fund for assistance. In contrast, the CCL is designed to help countries that are strong--with sound macroeconomic management, strong financial systems, and making progress in applying internationally recognized standards--withstand the pressure on their balance of payments that might arise from a sudden loss of confidence through contagion from developments elsewhere.
The other issue for the Fund involves its 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 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. Now, a quarter-century on, and at a moment when we are trying to design a new ambitious world financial architecture, it would make great sense to correct this institutional anomaly and to make clear to citizens of countries around the world that they have appropriate and effective representation in its affairs.
The establishment of the Council would be a powerful symbol: 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 taking 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 some way from consensus on this. I believe this suggestion needs to be kept very actively on the agenda in the coming months.
Such a 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 as needed 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.
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Before concluding, let me mention two further issues that will need to be on our minds in the next few months as we consider how to strengthen global financial stability and promote economic progress.
First, legitimate questions have been raised about the role of exchange rate arrangements in economic management and crisis situations. It has been striking that most countries in crisis over the past two years were 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 development, at certain times and under certain conditions. Indeed it may be argued by some that the problems are primarily technical--reflecting poor composition, or too rigid adjustment mechanisms. In some quarters at least a preference is emerging 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. But ultimately, the primary focus has to be on domestic economic policies which must support unwaveringly the regime of choice. These issues will be debated carefully by the Executive Board in the coming months.
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.
Second, we must redouble our efforts to integrate into the globalized economy those developing countries that are not yet benefiting from globalization. Many obstacles stand in the way. One of the issues high on the agenda at present is an effort to strengthen the heavily indebted poor countries (HIPC) Initiative. I am confident that, with many proposals having been put forward by the international community, we will soon see agreement on an enhanced initiative that will offer deeper relief to countries pursuing strong reform programs.
But we should not forget the cost element. The Fund is fully committed to this initiative--an initiative it took with its sister the World Bank--yet even under the existing level of debt relief, the Fund's contribution to the HIPC Initiative--which must rely importantly on contributions from members--is not yet fully financed. While some members have made substantial pledges, a shortfall still exists in what is needed to finance the Fund's contribution to the existing Initiative--and to keep ESAF operations running without interruption.
Among the financing options for these operations for the poorer countries, has been the proposal that the IMF should sell a small portion of its gold. I would hope to see a resolution of this question, together with the other financing issues related to the ESAF and the HIPC Initiative, ahead of the IMF Annual Meetings in the Fall. If a decision is taken to sell gold, we will make every effort to ensure that such sales are conducted with minimal disruption to the markets.
Even if this initiative is successful, it will remove only one obstacle to development for a limited number of countries. At one level, I am pleased by the desire that is coming from our membership to see a firm linkage between social policies and debt relief which certainly will contribute to alleviation of poverty. But broader efforts still are needed. The best antidote to poverty is sustainable high-quality growth: without that debt relief will be ineffective in the long-run, and any social progress will prove transient. Therefore we must provide the opportunity for the low income countries to realize export-oriented expansions. The industrial countries can play a part by liberalizing their trade regimes to allow broadly unrestrained access to the access 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 for at least the past decade, and that has caused official development assistance (ODA) to fall to its lowest level relative to GDP in a generation. What the international community has learned over the period is that ODA is ineffective when it is not supported by sound policies. Rather than withdrawing assistance, let us find ways of encouraging good policies to promote growth in parallel with enhanced flows. And as we have so lamentably failed in fulfilling our pledge to get the 0.7 percent of world GDP allocated to ODA by the year 2000, may the leaders of the world, instead of undertaking new generous pledges, commit themselves to seriously review those pledges they have already undertaken on the occasion of previous world conferences.3
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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 build up the defenses of the international economy against further attacks of contagion. But now we have the opportunity to press ahead with longer-term changes to the system, including the task of making the benefits of globalization available to a much larger number of countries, including the poorer developing countries. Clearly we need a stable global economy for this to be carried forward, and the prospects are now much better than a few months ago. But we also need a high degree of commitment and cooperation within the international community. That too is within our reach.
1Public comment is still being invited on this code, which may be viewed on the IMF's website, www.imf.org/monfintransparency. Comments are invited by June 15.
2Speech on the occasion of the ECOSOC Meeting, New York, April 29, 1999.
3The international community has subscribed to seven pledges on development, including: reducing extreme poverty, universal primary education, gender equality, infant and child mortality, maternal mortality, reproductive health, and the environment. Further elaboration of these pledges is contained in the attachment.
Reducing extreme poverty
The proportion of people living in extreme poverty in developing countries should be reduced by at least one half by 2015. (Copenhagen)
Universal primary education
There should be universal primary education in all countries by 2015. (Jomnen, Beijing, Copenhagen)
Progress towards gender equality and the empowerment of women should be demonstrated by eliminating gender disparity in primary and secondary education by 2005. (Cairo, Beijing, Copenhagen)
Infant and child mortality
The death rates for infants and children under the age of five years should be reduced in each developing country by two-thirds the 1990 level by 2015. (Cairo)
The rate of maternal mortality should be reduced by three-fourths between 1990 and 2015. (Cairo, Beijing)
Access should be available through the primary health-care system to reproductive health services for all individuals of appropriate ages, no later than 2015. (Cairo)
There should be a current national strategy for sustainable development, in the process of implementation, in every country by 2005, so as to ensure that current trends in the loss of environmental resources are effectively reversed at both global and national levels by 2015. (Rio)