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International Monetary Fund: Getting the Job DoneEduardo Aninat
Deputy Managing Director, IMF
Miami Herald Americas Conference
Miami, September 15, 2000
Mr. Chairman, ladies and gentlemen, I am honored to participate in the Miami Herald's 4th annual conference on the Americas. My topic today is the future role of the international financial institutions--in particular, the IMF. But before we go forward in time, I would like to take you back in time. The setting is Bretton Woods, New Hampshire, July 1944, where delegates from 44 nations have gathered.
The Permanent President of the Conference, U.S. Treasury Secretary Henry Morgenthau tells the assembly: "We know now that economic conflict must develop when nations endeavor separately to deal with economic ills which are international in scope. To deal with the problems of international exchange and of international investment is beyond the capacity of any one country, or of any two or three countries. These are multilateral problems, to be solved only by multilateral cooperation." He urges the delegates to remember two axioms: first, "prosperity has no fixed limits . . . the more of it that other nations enjoy, the more each nation will have for itself"; and second, "prosperity, like peace, is indivisible . . . poverty, wherever it exists, is menacing to us all and undermines the well-being of each of us."
Out of this conference, the Bretton Woods Institutions--the IMF and World Bank--were born, the brainchild of two men with great vision, Harry Dexter White of the United States, and John Maynard Keynes of Great Britain. The hope was that through international cooperation and openness to foreign trade, the world could avoid the kinds of destructive economic policies that had contributed to the Great Depression and the outbreak of war.
Over the years, the IMF has grown from an initial 40 member countries to 182 today, and the world has enjoyed a half century of unparalleled prosperity. We at the IMF think we have contributed. During this time, the economic landscape has undergone major changes: the breakdown of fixed exchange rates and oil price shocks in the `70s; the Latin American debt crisis in the `80s; the collapse of the Soviet Union with its legacy of central planning in the early `90s; and financial crises in Asia, Russia, and Latin America in the second half of the `90s.
Throughout, the strength of the IMF has been its ability to evolve and adjust to the changing times in order to continue fulfilling its purposes and its growing membership. We are now drawing on this strength as we adapt to a world of increasingly integrated global markets and increasing--at times, volatile--capital flows. Globalization offers unprecedented opportunities to boost growth and living standards, but it also brings with it two key challenges: (1) finding ways to better prevent financial crises and resolve those that inevitably occur; and (2) finding ways to better spread the benefits of growth, as the gap between rich and poor countries continues to widen. In addition, our leadership capabilities and our ability to devise approaches for a more inclusive global community are being tested, as never before, by the social, political, and ethical dimensions of globalization.
What worries me, however, is that the momentum for reform of the international monetary system, so evident only last year is waning in major economic powers as the global economy enjoys a return to calm with healthy economic growth. Do we really need another crisis to grab again the attention of policymakers? The developing economies, in particular, hope not, for it was they who bore the brunt of the 1997-98 financial crises, and it is they who most need the international community's help to integrate into the global economy. In my remarks today, I would like to focus on the role the IMF can play in our new global economic environment. I'll start with our present core tasks and end with a glimpse of where we are headed.
What the IMF does
What does the IMF do? This is where I would like to begin, for our critics often show very little understanding of our purposes and how we get the job done. Basically, we have three main tasks. The first and no doubt most important is policy advice--known as "surveillance"--which is at the heart of all our work. This entails the Fund analyzing and assessing economic and financial conditions in member countries, and advising on policies, including through regular staff visits, and addressing the global issues that are of concern to all members.
The primary focus of our advice has always been on the balance of payments and exchange rates, and fiscal and monetary policies. One of the reasons the IMF was established was to prevent a recurrence of the competitive currency devaluations and currency controls that had caused so much trouble in the 1930s. As founding father Harry Dexter White once commented: "The Fund is essential to winning and preserving peace. Currency warfare is the most destructive form of economic warfare. Economic warfare eventually brings war."
But over time, the focus has broadened beyond macroeconomic management to structural policies, such as labor market policies; and financial sector policies, such as capital account issues and banking stability. This evolution has been driven partly by the need to use such policies to tackle the deep-seated problems of low-income countries and formerly centrally planned economies; the growth of capital movements and market economic systems; and the need to resolve crises that originated partly in structural weaknesses in the financial sector.
Our second main task is providing temporary financial support to countries with balance of payments problems. The idea is that by having access to the IMF's pool of currencies, countries will take steps to efficiently correct their problems on a timely basis, rather than drastic measures that are more damaging both for the country in difficulties and its trading partners. The money comes from other member countries, who pay in capital to the IMF in proportion to the importance of their economies. This means we operate much like a credit union, with revolving funds deposited by and lent to its members. To ensure that members can be repaid, and that the problems of the borrowing country are addressed, the IMF stipulates certain conditions that the borrower must meet--what is known as "conditionality."
Over time, our facilities for lending out the money have evolved, reflecting the changing needs of our members. Until the mid-1970s, the main, but infrequent, borrowers were industrial countries. But following the leap in the number of independent developing countries in the IMF, we have become extensively involved in helping them cope with debt crises, financial crises, and poverty. Just last year, we revamped our concessional loan facility to focus explicitly on the objectives of poverty reduction and growth. We are also working closely with the World Bank to dramatically reduce--as quickly as possible--the debts of the heavily indebted poor countries (HIPCs).1 This is being done in a way that ensures that debt reduction contributes to poverty reduction and that future debt service is sustainable. Work is well underway to have agreements in place for a total of about 20 countries by the end of the year, totaling debt relief of more than $30 billion.2 Not many more countries can qualify at this point due to conflict, civil unrest, and corruption.
Our third main task is technical assistance. This involves providing countries with advice in several broad areas: the design and implementation of fiscal, monetary, and exchange rate policy; and institution building (such as the development of central banks). A related area is the training of government officials. Our technical assistance agenda has also evolved. In the early 1990s, we sharply stepped up technical assistance to help the centrally planned economies build the institutions needed for market-based economies. Now we are responding to the growing demands for help with meeting the challenges posed by increasing globalization.
How should the Fund adapt to reflect these challenges? We have not suffered from a shortage of suggestions. Some critics would like us to "go back to the basics"--that is, macroeconomic policies but not structural issues--while others would like us to expand into new areas. Some would like us to focus on crisis resolution, as a sort of quasi-lender of last resort, while others would like us to stick to crisis prevention. Some would like us to end surveillance of the industrial economies, while others would like us to exert more influence over these economies. Some would like us to expand the conditionality on our loans, while others would like us to narrow it, and still others would prefer we drop it altogether. Some would even like us to eliminate all of the IMF's medium-term lending, including concessional lending--meaning, in practice, essentially ending our support for policy programs in Africa.
These proposals cover quite a wide spectrum! Clearly, we could never satisfy all of our critics. Moreover, the calls for a much-diminished IMF appear myopic and very out of step with the growing international calls for a greater IMF presence in helping to stabilize the global economy. The financial crises of the past decade have all revealed domestic policy failings that made these countries vulnerable to crisis. But they have also underscored the need to strengthen the international financial system and better manage the risks associated with globalization. As globalization increases, so does the scope for strengthening global institutions, such as the IMF.
We now look to our shareholders--our member countries--to chart our future path. This is essential to ensure that the reform process is credible and operationally strong. Our shareholders assemble in two weeks in Prague for the Annual Meetings of the IMF and World Bank. The IMF's new Managing Director, Horst Köhler, has been particularly keen to ensure the voices of the developing countries are heard. This summer he traveled to Africa, Asia, and Latin America to hear first-hand--from government officials and civil society--their concerns and aspirations. The message came back loud and clear that they want the IMF to stay involved in their countries, and that the IMF has a vital role to play in safeguarding the global economy and spreading the benefits of globalization.
Now is a fortuitous time for the international community to act on the reform agenda! The near-term global economic outlook is bright, with global growth projected at about 4 ¾ percent, the best performance in over a decade. The strong U.S. economy has led the way, along with a pickup in growth since last year in Europe, a consolidation of the recovery in Asia, a nascent--albeit fragile--recovery in Japan, and a rebound from last year's slowdowns in several emerging markets in Latin America, Europe, and the Middle East. Even so, economic and financial imbalances in the three main currency areas remain large, posing a continued risk to the global expansion.
The outlook for Latin America and the Caribbean has improved, with growth expected to reach around 4 percent this year, accelerating slightly next year, after being basically flat last year. Inflation is holding in single digits in most countries, and should continue to do so. Indeed, the region has weathered the recent period of financial turbulence much better than initially feared--in large part thanks to extensive policy reforms implemented by most countries since the 1980s, and to the swift and resolute policy response of most national authorities in the face of crisis in the 1990s.
However, a word of caution, as economic results so far this year have been very mixed across countries, with growth surging in some countries while remaining very weak in others. Indeed, we see something like a 6-percentage-point gap in growth rates between the strongest performer (Mexico) and the weakest in Latin America, with more than half of the countries in the region growing below the average. The wide dispersion stems partly from different institutional and political pictures. But it also reflects different trade positions (the high price of oil, in particular, has benefited some countries but severely hurt others) and diverging degrees of advance with policy reforms. The important thing here is that countries stay the course with reforms: fiscal consolidation, prudent financial management, market flexibility, better social policies, and openness to trade are essential for restoring confidence and long-term growth in all economies.
The overall brighter world economic picture is due in part to the reforms introduced in the wake of the financial crises that began in Asia three years ago. Since then, the international community has undertaken many new initiatives, often referred to as reform of the international financial architecture. These initiatives are directed at improving many of the institutions, markets, and practices that governments, businesses, and individuals use when they carry out economic and financial activities. The initiatives basically fall into two groups--crisis prevention and crisis resolution. At this point, many have been implemented, some are being tested in pilot programs, and others still pose policy design challenges.
Beginning with crisis prevention, the emphasis is on adapting IMF monitoring to the new global realities. This includes paying greater attention at the country level to policy interdependence and the risks of contagion. It also involves more sharply focusing on the following five key areas:
First, external vulnerability. This entails improving the early detection and management of vulnerability to external shocks--including helping and encouraging members to provide better and more timely data on foreign exchange reserves and external debt.
Second, financial system stability. This entails helping countries develop and enhance the stability of their domestic financial systems. One initiative--a particularly innovative one--is the Financial Sector Assessment Program, begun last year as a pilot project in cooperation with the World Bank. It is aimed at identifying strengths and vulnerabilities in financial systems that could have important macroeconomic effects, including through the assessment of relevant financial sector standards. It is also aimed at helping countries in identifying and sequencing necessary financial sector reforms and related technical assistance needs.
Third, international standards. These are internationally recognized codes of conduct to promote the efficient functioning of financial markets and improved national governance. The IMF has developed standards for data dissemination, and codes of good practice for the transparency of fiscal, monetary, and financial policies. Other agencies have developed, or are developing--with our cooperation--standards for banking supervision and regulation, securities and insurance regulation, payment and settlement systems, accounting and auditing, corporate governance, and insolvency regimes. In recent months, the IMF and World Bank have been experimenting with reports on the observance of standards and codes (ROSCs), but opinions vary on whether the results of these should be published. Some countries believe publishing would send a positive signal to markets, even if the findings are critical, while others worry about unforgiving markets in the present context of development.
Fourth, capital account liberalization. The emphasis is on carefully managing and sequencing liberalization--especially with regards to financial sector policies and reforms. We know that we need to better understand the dynamics of international capital markets, and we will be conducting further research and comparing views with the private sector.
Fifth, exchange rate regimes. This entails better assessing exchange rate policies--particularly the consistency of exchange rate arrangements with members' macroeconomic policies and economic circumstances.
Sixth, transparency. In the past two years, we have begun releasing a huge and growing volume of information, as part of our commitment to greater openness and accountability, both for ourselves and our member countries. The aim is to stimulate informed debate, help promote consensus-building on domestic policy choices, and improve the functioning of markets (i.e., through transparency, well-informed decisions, and unbridled competition). Just visit our website--www.imf.org--if you need convincing. This past Tuesday, for example, our home page featured: Bulgaria's Letter of Intent, status reports on the HIPC (heavily indebted poor countries) debt initiative, the Pricewaterhouse-Coopers Report on Ukraine, and the transcript of Monday's press conference on the IMF's key Capital Markets Report.
How about the initiatives on crisis resolution? Here, the bulk of our work falls into two main categories. The first is the "constructive engagement" of the private sector--cooperation among the borrowing countries, the private sector, and the official international sector, in good times as well as in crises. We have begun a permanent dialogue through the recently created Capital Markets Consultative Group, which includes representatives of the private financial sector. That group held its first, highly productive, meeting in London a few days ago, centering on an exchange of views on IMF crisis prevention and resolution initiatives. We plan to continue such meetings semi-annually, plus hold regional meetings on occasion with active senior management presence. More broadly, the IMF's approach is to rely as much as possible on voluntary, market-based mechanisms to avoid long-term damage to the involved country's market access and to minimize risks of contagion. But we do have to hold open the possibility of other solutions in extreme cases.
Finally, we are streamlining our lending facilities to ensure that they are sufficiently agile and effective to meet the new global realities. This includes exploring ways of streamlining the conditions we attach to loans (to focus on key macro policy measures and take into account the country's unique cultural and political traditions). The intention is to continue to foster broad-based ownership of the reforms by the countries themselves, for this offers the best chance of political acceptance, successful implementation, and endurance of reforms. After all, it is the 182 countries that form our membership, those who have the say on how the IMF should best be structured.
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In closing, please join me once again at the Bretton Woods conference of 1944 and listen to the words of Harry Dexter White: "For some countries suffering from tremendous dislocations caused by the war, destructive monetary devices might appear to provide an easy way out. But we know from experience that when countries resort to such measures they only provoke retaliatory action by other countries. This necessarily leads to a contraction of world trade and forces each country to fight more fiercely for its share of the world market. The smaller the size of the pie, the more a country will struggle to maintain the size of its slice."
At the start of a new millennium, the international community now has a valuable opportunity to develop new rules of the game so that the pie can expand forcefully and continuously, and we can all enjoy larger slices over time. Paralysis stemming from endless discussions is the real enemy. Let us together focus on the numerous tasks at hand and let us get the job done!
IMF EXTERNAL RELATIONS DEPARTMENT