From the Crises of the 1990s to the New Millennium -- Remarks by Michel Camdessus
November 27, 1999The topic of your conference, focussing as it does on the challenges of the new millennium, presents a challenge for the head of an institution that, in the popular mind at least, has a strong bias toward the short term, and indeed in its detailed assessments of the global economy hesitates to go beyond a year or two into the future. So, I hope you will understand if I feel that one thousand years, or even a century, is too long a reach, and confine myself to a period of, say, up to a decade. Even that, in today's extraordinarily dynamic world, is an ambitious task.
We find ourselves at a unique conjuncture on the eve of the new millennium. The international community is more than usually galvanized to seek consensus on how the international monetary and financial system can be improved. This is not surprising considering that we were not far from a cataclysm little more than a year ago, when the Asian crisis was spreading to other emerging market economies, and threatening the entire global economy.
The IMF is at the heart of these reflections in great part because it is the institution in charge of fighting economic or financial crises. So today, instead of engaging in speculative reflection on what the next century or even the next decade may bring, I will try to identify the crises that explain the tremendous instability of the last ten years and, with the clearer understanding that we now have of these crises, the strategies that could make the next ten years more stable and more prosperous.
Several major factors, with intertwining effects, can explain the recent instability. I will mention just four of them:
· a new breed of national economic crises;
· a crisis in the world financial system;
· poverty, as the ultimate systemic threat;
· a crisis in world governance.
These four factors are directly relevant to the activities of the IMF, and indeed each of them calls for large-scale changes, including in the way in which the IMF operates.
Let's analyze each of them and see what changes they call for and what kind of future these changes could create.
I. The new breed of economic crises
The IMF long considered itself fully conversant with economic crises. Crises were its job. Indeed, it had been created in the first place to respond to such crises and to ensure that they did not, as had occurred in 1929, turn into global catastrophes and lead to war. For the first forty years of its existence -- until the mid-1980s -- crises were mainly external payments crises, often resulting from macroeconomic policy weaknesses and exacerbated by unsustainable debt.
The Mexican crisis, and much more evidently the Asian crisis, were unlike any seen before. Crises of this new type explode on the open capital markets, arise from complex dysfunctions, and are much less exclusively macroeconomic in nature. They quickly take on systemic proportions, and can be checked only through the immediate mobilization of massive financing. Take the three major Asian crises, for example: Thailand, Indonesia, and Korea. Dealing with them meant dealing with a three-dimensional problem: a dimension, obviously, of macroeconomic imbalances, along with massive outflows of short-term capital; an acute crisis in the financial sector, reflecting institutional and banking practice weaknesses; and a much more fundamental crisis in the economic management model to which the previous successes had complacently been attributed, but which was quite simply in conflict with the new demands of a globalized economy. I'm thinking here of unhealthy -- I would even say incestuous -- relations among corporations, banks, and government. This third dimension, which the students in Djakarta shouted down in 1998 with cries of corruption, collusion, and nepotism, implied that fundamental reforms were immediately required. It would have been out of the question for the IMF to provide massive financial assistance in the absence of a body of measures or rules that would lead to greater transparency, better management, and anticorruption efforts. These reforms are now underway: some have already produced their expected positive results; others, which are tackling deeply rooted problems, will take more time, but are resolutely being applied.
If there is any characteristic distinguishing this series of crises from others, it is the prominence of the private sector -- financial institutions and corporations -- on both sides of the equation as creditors and debtors. It is instructive to contrast the recent round of crises with earlier ones, especially the debt crisis of the 1980s. With the explosive growth and increasing integration of the capital markets during the past decade, a number of notable trends stand out, all of which have tended to increase the complexity of the process:
· The domestic private sector -- both banking and corporate -- is typically a much more significant player now. Domestic financial and capital markets have sprung up around the world. Who would have forecast a decade and a half ago equity markets in Beijing, Warsaw, Prague, or Moscow?
· The "foreign investment community" is far more diverse: direct investors, portfolio investors, banks, bondholders, and other creditors have all become major players.
· The different types of investment have responded to crisis in very different ways. Even in this most difficult of periods, flows of direct investment have not fallen precipitously. By contrast, banks, after having been the largest source of net inflows in 1996, had become major recipients of net outflows by 1998, the first full year of crisis.
· It is too simple to conceive of nations as belonging to one camp or the other: debtor or creditor. There are powerful flows in many directions. For instance, the largest source of direct foreign investment in Asia is Asia. Korea, Hong Kong, Thailand, Taiwan Province of China and, of course, Japan, are all important sources of foreign investment within the region, and remain so despite having been at the heart of the crisis.
I lack the time today to go into greater detail, but it is clear that the multifaceted factors behind today's national economic crises have been evident -- mutatis mutandis -- in a good many other cases, particularly in Russia, of course, on a grand scale. As we well know from our annual analyses of each of our 182 member countries, these symptoms exist in differing degrees almost everywhere and they were no stranger to the Japanese protracted crises of the 1990s. So here comes the basic question: what, then, are the lessons we can learn from this new breed of crisis to make the next millennium safer?
1. Whether a country is large or small, any crisis can become systemic through contagion on the globalized markets. Domestic economic policy therefore must, now more than ever, take into account its potential worldwide impact; a duty of universal responsibility is incumbent upon all. Every country, large or small, is responsible for the stability and quality of the entire world growth.
2. This adds a new dimension to the duty of excellence that is required of every government in the management of its economy. I use the word "excellence"; I could also say "absolute rectitude." Globalization is, in fact, a prodigious factor in accelerating and spreading the international repercussions of domestic policies -- for better or for worse. No country can escape, and all are fully aware of this. There is a unanimous consensus within the Executive Board of the International Monetary Fund, where the entire world is represented, that we must, in the exacting dialogue that we hold with each of our member countries, from the largest to the smallest, place our emphasis -- in this context of globalization -- on four points:
· rigor and transparency in overall economic management;
· banking and financial sector soundness;
· reform of the institutions of the state, and all that that implies in terms of seeking public sector efficiency, appropriate regulation, emphasis on the rule of law, independence of the judiciary, anticorruption measures, etc.; and
· growth that is centered on human development.
The aim of an international financial organization in making such suggestions is not so much to seek balanced books at all costs, but rather to encourage countries to discover and realize what the consequences are of the circular relationship between integrity of monetary and financial management, high-quality growth, and poverty reduction. Without the last, the first two have little chance of enduring, and without the first two, any efforts to reduce poverty will be protracted. Understanding all the consequences means being more flexible and adapting with a view to achieving an additional measure of growth and, especially, the human development that will result from such growth and that will in the end allow each country to play a greater positive role in the world economy. I call your attention to this circular relation: it was not seen that way some time ago. The recognition of this fact by the world policymakers is a major silent breakthrough.
II. Identifying and correcting the weaknesses of the global financial system
It goes without saying that while crises are different from what they used to be, we have to look beyond their national components alone in order to explain everything. Countries have not only been actors in crises; they have also been victims. Systemic cracks have also come to light. To repair them, it is necessary to analyze the weaknesses of the global financial system and not only of national economies.
Considerable thought has been given worldwide to the ambitious project of designing a new financial architecture. The defects of the current architecture are well known. Here are seven of them, to use a nice biblical figure:
1. The inadequacy of financial information and the failure to respect the rules of transparency, which undermine policy credibility, market stability, and, obviously, the effectiveness of IMF surveillance; this more or less explains the "denial" syndrome on the part of governments, and the herd behavior in response to fads and downturns that are part of the world financial system; this denial syndrome prevented the governments of Thailand and Korea from recognizing the enormous magnitude of their problem a few weeks before the peak of the crisis.
2. The weaknesses of financial and banking institutions and systems;
3. The poorly managed liberalization of the capital markets, which facilitated the flows of potentially unstable short-term capital even as direct investment was shackled by legal restrictions or administrative red tape -- the opposite, in other words, of what would have been appropriate;
4. The reluctance to define the terms and conditions for involvement of the private sector, which nonetheless is responsible for a growing part of world financing, and of crisis prevention and resolution;
5. In the face of a proliferation of increasingly sophisticated forms of international financial intermediation, the delay in establishing the required discipline on international markets, which are at the anarchic stage that the domestic markets of the industrial countries were at a century ago;
6. A global system that allows extreme poverty and growing inequality to persist -- an issue I will come back to; and, finally
7. A system that makes people wonder whether anyone is in the driver's seat: the problem of global governance.
Building a stable, open global financial system clearly implies starting by correcting these major flaws, focussing especially on crisis prevention, but -- bearing in mind human frailties -- also being prepared to work effectively with private sector support to deal with such crises when they occur.
The financial foundations of the new structure must be based on five basic principles: transparency, sound financial systems, private sector participation, the orderly liberalization of capital flows, and modernization of the international markets on the basis of universally accepted standards with the necessary means to ensure that they are respected. This then is the beginning. To build a more durable, integrated international financial system, we need to foster a mature market, which is based on stable relationships among players that rely on enlightened self-interest, and in which official involvement can be limited to establishing strong legal, regulatory and supervisory frameworks. How far advanced are we in this work?
First, what has been achieved? Consensus has been reached on a number of areas that are designed to prevent crises.1 These focus on transparency in policymaking and corporate affairs, on financial sector stability, and on working towards stable, efficient, transparent markets through standards and codes of practice -- accounting, auditing, securities markets, insurance, bankruptcy, and corporate governance. The work may not yet be complete, but in most areas we see broad agreement on objectives. The IMF itself has been responsible for developing standards or codes in data dissemination, transparency in fiscal policy, transparency in monetary and financial policies, and (jointly with the Basle Committee) banking supervision. And to round off the tools for crisis prevention the IMF has introduced a new lending window -- Contingent Credit Lines (CCL) -- to provide financial support to countries that are otherwise in sound economic condition but find themselves threatened by contagion from turbulence elsewhere in the global economy.
Second, what remains on the agenda? A number of issues remain under active debate that have direct implications for the Fund. Time does not permit me to elaborate, but let me hint at some of the questions that arise. There are three issues that arise from the debate on strengthening the architecture.
· Concerning surveillance, how far should monitoring standards and codes of practice enter the day-to-day work of the Fund? For the Fund, the codes for which we have direct or shared responsibility are operational and with help from our members, they can be implemented. But in other areas much remains to be done, and some of the responsible agencies tell us that they do not have the capacity to monitor implementation on their own. The international community, and the Fund itself with its limited resources, must consider the extent to which our surveillance should be used. This work is in progress.
· One of the key objectives of the new architecture is to involve the private sector more fully in crisis prevention and resolution. This is a tremendously complex subject, which is going through multiple rounds of debate. I cannot pretend to convey a full picture, so will just mention one of the "bottom line" issues that could have direct effects for the Fund. All our efforts should be devoted to preventing crises. When difficulties occur, the expectation should be that voluntary, market-based solutions will be found to keep the private sector engaged. Yet we can envisage extreme situations, in which some international intervention is needed to ensure that debtors have time to reach orderly resolution with their creditors. One possible mechanism, a controversial one indeed, is to design a mechanism under which the international community could sanction a temporary stay of litigation by creditors. It could be achieved by an appropriate amendment or interpretation of the IMF's Articles (Article VIII (2b)).
· Another key goal of international financial reform is to foster sound, open, integrated capital markets. The central question is how to achieve that goal, and what role the IMF will play. In the coming months, the IMF will be considering proposals for a gradual, country-specific approach to the liberalization of capital movements that explicitly recognizes the great variety of country situations. Clearly, the Fund will have a key role to play in assisting countries to ensure that the right conditions -- in particular sound macroeconomic framework and a strong financial system -- are in place. Indeed, that role could be strengthened by an appropriate amendment to the Articles of Agreement, which is being negotiated now. But when we see the many years that were needed to bring 150 countries to current account convertibility, we suspect that this task -- of liberalizing capital movements -- will not be completed by 2010.
But anyway will all this be enough? Some will no doubt say that these proposals are not bold enough, that the dissemination of the standards and codes of good conduct will depend too much on consensus, on mutual confidence between countries, and on an exceptional sense of responsibility on the part of all those involved. And they will advocate the application of mandatory rules or global taxes. But the fact is that there is not much consensus for that in the world at the moment. It would therefore be wiser to use as a building block the agreement that now appears to exist on the five principles I have outlined, and to endeavor to expand upon and apply it vigorously without delay. This is in itself a monumental task, and one that will take time. The authorities must also become accustomed to acting in a spirit of "subsidiarity," intervening at the world level only if national or regional action is not sufficient. Above all, they must, at their own level, adopt the measures needed to strengthen their own financial systems. They will also have to energetically tackle the serious problem of lack of transparency and control over the hedge funds and the transactions that transit through the many off-shore centers. The world can no longer tolerate such "black holes" in its financial system. I am pleased to say that my country has joined in with this effort.
I am sure that some will shrug their shoulders and say to me: "All that's just finance!" But we must be careful not to look upon the world of finance as being somehow separate. When we measure the human cost of all this financial upheaval, when we remember that many banking crisis in the past 20 years have cost the countries in question 20 percent of GDP or more, we must realize that finance cannot be separated from economics. Crisis prevention and market stabilization are safeguards that we owe to the most vulnerable segments of our societies. A sound financial architecture is also a factor of social protection, but any financial architecture will be unstable so long as the world does not rally its forces to face up to the "ultimate systemic threat":2 poverty.
III. Poverty, the ultimate systemic threat
The slow progress on poverty around the world and the fact that in many places poverty reduction seems to be losing ground are clearly the most serious crisis factors at the end of this century. Here more than anywhere else, we must reflect on our collective capacity to place the human being at the center of our policies -- to humanize globalization.
I hardly need dwell on the global dimension of the problem, and on the risks that it will grow worse. I'm sure that each of you knows the key statistics.3 But what can we do to reverse these trends, including the decline in official development assistance, that are now so evident throughout the world?
I am far too familiar with the constraints and inertia we face as we wage this battle to suggest that there is an easy solution of some kind, but I would like to bring you up-to-date on a campaign and two initiatives that could lead to some progress.
The campaign is aimed at ensuring that giving one's word means just that. Over the past decade, we have witnessed two rather paradoxical phenomena. On the one hand, while the major industrial countries have happily been collecting their peace dividends, they have steadily reduced their official development assistance, falling further and further short of the target of 0.7 percent of GDP that all -- with the exception of the United States -- had set for themselves for the year 2000. At the same time, they have made pledges, alongside the developing countries and transition economies, at one world conference after another, to promote measurable and achievable human development objectives. Do you remember the Copenhagen Declaration, in which we promised to reduce by half the number of people on this planet living in abject poverty by 2015? Do you remember Rio, Jomtien, Cairo and Beijing, where we promised to achieve at least six other objectives in the next fifteen years: universal primary education, reduction of infant and child mortality by two-thirds and maternal mortality by three-quarters, universal access to reproductive health services, reversal of the current rate of destruction of the environment, and elimination of the disparity in access to primary and secondary education for girls and boys by 2005?
Imagine for a moment that these pledges were to be actually fulfilled: what a giant step this would be toward a better world, what a giant step it would be toward improving the lot of the most disadvantaged among the poor -- women and children! But many of the world's top leaders are losing sight of these pledges, as I myself have had occasion to discover. I am therefore very pleased that they have agreed that each year, at the G7-G8 meeting, they will look at a detailed report by the main institutions concerned evaluating their progress toward these goals and, if there are delays, they will reflect on the measures to be taken to define a new path to achieve them. This is only a small step, but it shows us, above all, how fragile our collective commitments are, and how small the chances are that they will be fulfilled without a universal mobilization of public opinion, as has been the case with the Jubilee 2000 campaign. This makes me wonder what churches, what Christian and other movements, could do together to promote the humanization of our world.
I will come right out and say it: we must undertake to ensure that the pledges made in our name are fulfilled. I have asked the heads of state of the G7-G8 to make the first decade of the new century the decade of fulfillment of existing pledges. The key is clearly our solidarity. With 1.3 billion people living in extreme poverty, what is needed is something that is also fundamental in human relations: abiding by one's word. If we allow cynicism to prevail in this area, we may as well give up the dream of progressing to a more fraternal global society. It is a matter of great urgency, my dear friends. I see the time soon coming when we will say that, considering the amount of time we have lost since these pledges were made, the targets are no longer attainable. We have not reached this point yet, but the situation is urgent. We need a jolt of responsibility and solidarity.
Two other current initiatives, which must be harnessed in favor of these seven pledges, could make a big difference:
· One is the vigorous implementation of the debt reduction operations in follow-up to the Cologne summit. There is now agreement on the need to ensure that the resources freed up by debt relief operations, which should total some $60 billion over the years, result in additional expenditure on human development: education, health, rural infrastructure, and so forth. This is fundamental.
· The other is the adoption of a new joint strategy by the IMF and the World Bank, aimed at making poverty reduction the centerpiece of their joint strategies in the 75 poorest countries. Assume for a moment that recipient and industrial countries alike take our seven pledges seriously. This could trigger a kind of virtuous circle that could generate additional growth over and above current trends, as long as this effort develops in the context of programs focussing on high-quality growth implying bold reforms, including reforms of public institutions and methods of government. This should be the contribution of the developing countries themselves, as they have also subscribed to these seven pledges. They should in fact be the main protagonists in these efforts. The rest of the world should do its part, by providing the promised financing, by opening borders to goods from the poorest countries and, I might add, at the risk of sounding naïve, by making a greater effort to curtail the arms trade, for it is the wars and the civil strife that they provoke or support that are a primary cause of delayed development, particularly in Africa.
But, you may say, poverty alleviation is the job of governments or of voluntary relief agencies. What can the private sector, with its profit motivation, do to alleviate poverty? In a word, it can invest. It should do so on exactly the same principles that are deployed by businesses everyday in making investment decisions, by seeking opportunity and assessing risk on the basis of high-quality information. I suggest to you that new avenues for investment are continually expanding, as world-wide we see a continuing trend toward market-oriented and outward-oriented policies. But opportunities may be missed by investors if, driven by "herd instinct", they focus exclusively on a few well-established locations. Another key result of all our work on the international financial architecture is to improve the framework within which potential investors can assess risk. Greater transparency, better information flows, the spread of internationally recognized principles and standards: all these make the task of risk assessment more straightforward.
In brief, what we are seeing in many countries, is an improvement in governance, and the establishment of transparent, arm's length relationships among governments, corporations, and financial institutions, as are typical of mature, dare I say, civilized markets. And there are responsibilities on all sides. Just as the public sector is being called upon to reform, so too the private sector can reciprocate by complying with relevant standards and codes of practice. And here I can mention the Principles of Corporate Governance endorsed in May 1999 by the OECD, which together with the World Bank, cooperating with other international organizations, has established a Global Corporate Governance Forum, a Private Sector Advisory Group, and regional roundtables to promote an effective and continuing dialogue on corporate governance. None of this is mandatory, but it provides a set of principles that can be adopted voluntarily by corporations to signal their commitment to sound business principles, and thereby to sustained growth and poverty reduction.
Even with all these initiatives, we know only too well that in the world today many people feel that they lack control over their own destiny, and fear that there is no legitimate authority to deal with problems that are increasingly taking on worldwide dimensions: the environment, drugs, corruption, crime, money laundering, etc. Which brings me to our fourth crisis: it is the question of the pilot in the plane! What we might call the crisis of world governance.
IV. The world governance crisis
Humanizing globalization also means creating conditions -- institutional or other conditions -- that will enable us to better protect ourselves as a group against collective risks on a global scale, and together obtain a clearer view of our collective destiny.
To be sure, what is currently being accomplished with the available resources by the Bretton Woods institutions and all forms of bilateral and multilateral cooperation is certainly not negligible, and it is probably for that reason that the Asian crisis and its aftermath did not turn into the major systemic crisis that loomed just a year ago. But we all still feel that we could, and must, do a lot better.
One of the first problems to look at in this area is the issue of the "political responsibility" of international institutions, which are too often viewed as irresponsible technocracies, when in fact day after day they are given ever greater responsibilities, even though in the final analysis, the governments themselves are ultimately responsible for their policy direction. One reform recently proposed by France responds to this problem. It consists of transforming the Interim Committee of the IMF -- which is made up of ministers -- from an advisory committee into a decision-making committee for the major strategic orientations of the world economy. This would, in the eyes of the public, place responsibilities squarely where they already rest. To my disappointment, despite the courageous support of France, and Dominique Strauss-Kahn in particular, we are far from having been successful. Another suggestion, along the lines of an Economic Security Council proposed by Jacques Delors, would consist of replacing the G7 Summit every two years by a meeting of the heads of state and government of the 24 countries represented on the Executive Boards of the IMF and the World Bank, with the heads of these organizations and the Secretary General of the United Nations. This would be a way of establishing a clear and strong link between these institutions and the most legitimate representatives of the world community. Here again, apart from some sympathetic murmurs of interest, I do not see any sign of movement.
All we can do is persevere with this effort, because it is the right one. It calls for only a modest first step in an urgent and essential task. To understand this, we need merely compare our world to the world in 1945. Each country has now achieved sovereignty, each wants to shoulder its full responsibility in the face of global problems, and we know full well that the effective participation of each country in managing the "Global City" is key to its proper functioning. What is more, while globalization has until now operated at the whim of more or less autonomous financial and technological forces, it is high time that we took on these responsibilities and took the initiative, so that progress toward world unity can be made consistently and in the service of humankind. All this requires institutions that can facilitate joint reflection, at the highest levels, whenever needed, and that are capable of ensuring that globalized strategies are adopted and followed when it appears that problems can be dealt with effectively only at the global level. Clearly, we need to be imaginative enough to visualize the institutions that would best serve the global common good or, at least, to make the necessary changes in the institutions created in San Francisco and Bretton Woods.
The task is certainly monumental. We are the first generation in history to be called upon to organize and manage the world, not from a position of power such as Alexander's or Caesar's or the Allies' at the end of World War II, but through a recognition of the universal responsibilities of all peoples, of the equal right to sustainable development, and of a universal duty of solidarity.
The 21st century must be one of gradual strengthening of the global institutions, but also one of decentralization and strengthening of all the echelons of responsibility. Affirming this does not take anything away from the need to better structure the world architecture, to create regional organizations where they are still lacking, and to strengthen the political dimension of the regional economic organizations already in place, such as the European Union. The more we see the need to consolidate or vest new responsibilities in world bodies, the more it is necessary to ensure that they are accepted by public opinion, and the more it is necessary, as well, to let them know that their contribution can only be subsidiary and ensure that everyone understands that nothing can be accomplished at the global level unless it is taken up at the grassroots level and supported by initiatives up the entire institutional chain. Citizenship at all levels must be one of the key values of the 21st century.
* * * * *
I have used the words "key values," and that is indeed what is needed: to identify the values that men and women today can use to make sense of our history and participate in it. Our history has not yet been written -- it is still in our hands. Notwithstanding its risks, globalization is an opportunity to move toward a world economy that is more worthy of the human race. This is a new chance given to humanity. It is also an opportunity to take action on the three values that many of you will certainly have detected behind my comments and with which many around the world identify: responsibility, solidarity, and this new kind of global citizenship. It is these three values that must guide us as the new millennium unfolds before us.
1 Extensive elaboration of these issues may be found in the Communiqué of the Interim Committee of the Board of Governors of the International Monetary Fund and Report of the Managing Director to the Interim Committee on Progress in Strengthening the Architecture of the International Financial System [http://www.imf.org/external/np/omd/1999/092499.htm].
- more than 1.3 billion individuals live on less than $1 a day;
- more than 1.4 billion do not have direct access to drinking water;
- 0.9 billion are illiterate;
- 0.8 billion suffer from hunger or malnutrition.