The IMF in a Changing World -- Remarks by Horst Köhler
August 7, 200000/09
Given at the National Press Club
Washington, DC, August 7, 2000
Thank you, Mr. President. Three months after taking my post at the IMF, I am very pleased to have this opportunity to address the members of the National Press Club.
The outlook for the world economy is the best we have seen in over a decade. The IMF staff expects the global economy this year as a whole to grow by about 4 3/4 percent. A major engine driving this is undoubtedly the unprecedented non-inflationary growth in the U.S. economy. This performance is the historical proof that innovation, structural change, and flexibility are indispensable for prosperity and a better future for the people. There is some evidence that the buoyant U.S. economy is slowing down to a more sustainable pace and thus I trust in a soft landing. In Europe, too, the process of reforms and growth has picked up. It is my advice to the Europeans to be even more ambitious with reforms so that they can also reach a medium-term growth path well above 3 percent. Finally, it is remarkable that most of the emerging market countries hit by financial crises only two to three years ago are now also experiencing strong growth again.
But there should be no complacency. Many difficult problems remain to be solved. One risk of the relatively good global economic situation is that it could weaken the momentum and resolve for continued reform and structural change. It is also true, however, that the many pessimistic predictions for the world economy did not materialize. The strong rebound in several crisis countries also indicates that the IMF’s advice in crisis resolution could not have been all that bad. Ten years after the end of the Cold War I see more opportunities than ever to make life better in this world. And this includes not least the international financial system. It has shown a remarkable ability to absorb shocks and to adapt to ongoing technological changes.
I believe that the calls for a reform of the IMF are justified. Why must the Fund change?
- First because the environment in which it operates has changed dramatically. International financial markets have seen unprecedented growth in volume and sophistication, especially during the past decade. It is a matter of fact: private capital flows are now a major source for promoting growth and productivity. But it is also a fact that they can be a source of abrupt volatility and crisis. To contain the latter and to promote the former is the issue at stake.
And second, of course we need to draw lessons from experience. The Fund has made mistakes. In particular, the Fund was not attentive enough to the changes in global financial markets and their repercussions on exchange rate systems and domestic financial sectors. And the Fund has—like everyone—underestimated the importance of institution building which needs time and requires crucially ownership by the societies affected.
With this in mind, I felt it important to hear at first hand about the concerns and aspirations of the membership of the IMF, and in particular the countries with Fund programs. During the last three months I have visited 15 developing and emerging market countries in Latin America, Asia, and Africa. Let me share a few of the impressions and views that I formed during my travels.
First: the market economy and democracy are clearly in advance throughout the world. A fair judgement of the IMF should acknowledge that the Fund has contributed to this fundamental trend in the world. And there is continued commitment to stay the course of reform and structural change.
Second: overall there is a broad recognition that there are serious homemade problems including disregard for the rule of law, corruption and armed conflicts. That the main responsibility for tackling these problems lies with the countries themselves.
Third: I have had to listen to a lot of critical questions about the IMF. But on the whole there was no doubt that the emerging market and developing countries value the advice and support by the IMF and that they strongly wish to continue using it.
Fourth: developing countries almost to my surprise want the Fund to focus on its traditional functions and areas of responsibility—that is to promote macroeconomic stability and growth. They endorse the view that stability fosters growth, and that growth is indispensable to reduce poverty. They would like to see an effective cooperation between the two Bretton Woods institutions, but also a division of labor, with the World Bank taking the lead in the direct fight against poverty.
Undeniably globalization has provided enormous opportunities for growth, investment and transfer of know-how and technology. It has brought about unprecedented economic expansion and welfare gains in the global economy. But the extreme income inequalities between nations are threatening to become a major source of political instability in the world. That about half of the population of this world has to get by with less than two dollars per day must be taken by no one as an acceptable state of affairs.
Turning back the clock will not solve this problem. The issue is to make globalization work for the benefit of all. There will not be a good future for the rich if there is no prospect of a better future for the poor. This will not happen by itself. We need to work for it.
I see the IMF as a part of the work force to secure shared prosperity in the world. Indeed, the founders of the IMF 55 years ago recognized that there is an international common good. They called upon the IMF not least to contribute to "the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members." This, together with the objective of fostering international financial stability, makes the mandate of the IMF reach beyond the mere sum of national interests. And in this context the now nearly universal membership of the IMF—182 member countries—and its cooperative nature are invaluable assets.
At the Annual Meetings in Prague, I will outline my vision for the future role of the IMF. I understand this vision as a platform for the development of a new operational concept for the future role of the Fund. I consider it very important that the discussion about the reform of the IMF is conducted within the Fund itself. Outside contributions—be it from the academic world, from the G-groups, other institutions, or from NGOs—are valuable and welcome. In the end, however, it is crucial that the members of the Fund know what they want and decide how they wish to give the mandate and the operations of the Fund a new shape.
If any institution—private or public—loses sight of what is its core purpose, it risks losing efficiency and, in the case of public institutions, ultimately its legitimacy as well. I do think that the Fund has been overstretched in the past and needs to refocus. And the focus must clearly be to promote macroeconomic stability and growth by fostering sound monetary, fiscal and exchange rate policies in its member countries. In addition, according to the Articles of Agreement, the IMF is to "oversee the international monetary system in order to ensure its effective operation." Here in particular the mandate of the IMF is more relevant than ever. It obliges the Fund to concentrate its attention particularly on the financial markets, both domestic and international.
To implement this focus the Fund has to exercise two major roles:
crisis prevention through its surveillance and advice; and
crisis management including its catalytic lending.
A key lesson learned from the recent crises is to concentrate more than ever on crisis prevention. An essential ingredient for this is that the Fund must be candid in its advice to member countries. My ambition for the Fund is not to have more and more programs for more and more countries. Instead, the objective should be to identify problems early through better data transparency and prevent problems through the promotion of internationally agreed standards and codes for sound monetary and fiscal policy.
The Fund’s surveillance must in particular pay much closer attention to the financial sectors in member countries to identify vulnerabilities and provide advice on improving their soundness. Its oversight function for the international financial system should place the Fund quite naturally into the center of the discussion on strengthening the global financial architecture. This does not mean that I see the Fund as a kind of regulatory superpower. But it should have a coordinating role among the various fora and agencies such as the central banks, the Financial Stability Forum, and the supervisory authorities.
I also consider a regular direct exchange of information and dialogue between the IMF and the private financial sector as an important element of crisis prevention. Therefore, I have decided to establish a Capital Markets Consultative Group in the IMF. And we will have our first meeting in September before the Annual Meetings in Prague.
Taking stock today I think we can state that the international financial system is more stable thanks to lessons learned and various measures to increase transparency. But there is no guarantee that new crises will not occur again. We must live, to some extent, with the risk of crises as part of an open and innovative economy. And therefore, clearly there is a need for an official international agency to be able to mount a credible crisis response. But creditors and borrowers must know that the Fund’s resources are and should remain limited. So that there can be no doubt that they must assume responsibility for the risks they take and that taxpayers’ money will not be easily available to protect them against the consequences of misjudgment. Therefore, it is only logical that the private sector has to be involved in the orderly and timely resolution of crisis. In defining a framework for this my objective is not to work against the private sector but for a constructive engagement with them
The efficiency of the Fund also depends on the principle that the use of Fund resources is temporary and that it is granted on the basis that borrowers undertake the necessary and timely adjustments to correct their financial problems. This means that conditionality is indispensable for IMF lending. And Fund facilities should be designed to discourage countries from getting used to IMF loans. Such a review is currently underway in the IMF Board. I am confident that we will come to a reasonable conclusion on this because all members of the Fund are interested in preserving the revolving character of the Fund’s resources.
One other important lesson. Adjustment and reform programs are more likely to be successful on a lasting basis the more that countries identify themselves with these programs. To promote such ownership the Fund should limit its structural conditionality to priorities in content and timing of reform programs. And it should concentrate on working with authorities and civil society how best to implement these priorities. This also means that the IMF has to prioritize its technical assistance. Less can be more if it helps to break the ground for a sustained process of adjustment and reform. And we also have to have respect for the sovereignty of countries to define their own adjustment and reform paths. The Fund should on the other hand in its candid advice make clear to members the possible costs of alternatives.
In recent years, the Fund has clearly become more open. The IMF is not a secretive institution. Letters of intent are routinely published. Many countries have accepted to publish their Article IV reports. Our website has several million visitors a month. I see it as only natural that an institution which preaches transparency is transparent itself. But we have to strike a balance between openness and the members’ desire for candid and confidential advice.
The Fund must explain itself better, what it is, and what it does—particularly in program countries. We have learned that our effectiveness is greatest when there is broader understanding and support for our work. The IMF is of course, ultimately accountable to its member governments. But gaining support for country programs requires broader understanding of our work, including by parliaments and civil society. Therefore, the IMF should expand its dialogue with the public and reach out not least to the regional and local level.
The discussion about the role of the Fund in the poor countries is important. My conclusion is that the Fund should clearly stay engaged. Disengagement would deepen the division of the world not least because of its political/psychological repercussions. It would run counter to the ambitions of the people in the poor countries and neglect their talents and potential. A real breakthrough in combating poverty can only be achieved if these countries build up the fundamentals for growth and gain access to the investment capital of the international markets. To achieve this will inevitably be an arduous and often lengthy process. But I do not see a sensible alternative. Every day that passes unused is a lost day in the fight against poverty. This is where I see the main justification for the Fund also to stay engaged through the Poverty Reduction and Growth Facility (PRGF) in the poorest countries.
This concessional facility takes a new approach towards focused poverty reduction, help for self-help and ownership. My visit to Africa has confirmed that this approach is working and is having an impact there. It helps break the ground for a new culture of good governance, sound macroeconomic management and the building of the necessary institutions for this. But here, too, the Fund must concentrate on its core competencies and strongly rely on the World Bank to promote the necessary structural changes. And we must simplify and de-bureaucratize the requirements for the process of setting up the poverty reduction strategies by the countries themselves.
The PRGF is also an important vehicle to help make the initiative for enhanced debt relief for the poorest countries (HIPC) successful. Together with the World Bank the IMF is working to expedite the process of bringing half of the 41 eligible countries to the decision point by the end of this year. Debt relief is an important element for a comprehensive strategy to fight poverty. We have to recognize that there are countries which do not have the capacity to repay. They need forthcoming debt reduction. But there are others for which debt reduction would give the wrong signal because in principle they have the potential to repay if they conduct better policies. This means we have to differentiate. But there should be no confusion in one respect: debt relief will only contribute to lasting improvements if combined with better policies and better governance.
And we must not lose sight of the need to build and preserve an ethic of credit. "Credit" stems from the ancient Latin word credere. This means trust. And trust in creditor/debtor relations is indispensable for the long-term stability of financial systems.
I stick to the notion that in the end trade is better than aid. Estimates of the potential welfare gains for developing countries from a 50 percent worldwide reduction in barriers to trade generally fall in the range of US$110 to 140 billion per year. If the willingness of the developing countries to help themselves would be combined with bold debt relief and with a bold initiative of the industrial countries to open their markets, the objective of the United Nations to halve the number of people in poverty by 2015 could become reality.
I look forward to sharing my ideas with the Governors of the IMF at the Annual Meetings in Prague. At my preparatory meeting with President Havel last week, he pointed to Prague as having historically always been a spiritual crossroads. He is organizing an event on the eve of the Meetings to bring political leaders together with representatives of civil society and the financial world. And I hope that this will contribute to a message from Prague about a new culture of global partnership and cooperation.