Promoting Stability and Prosperity in a Globalized World -- Remarks by Horst Köhler
May 7, 2001Remarks by IMF Managing Director, Horst Köhler
Council of the Americas
Washington, DC, May 7, 2001
1. Thank you, Bill Rhodes, for your kind introduction. I am pleased to be here today, because we have important goals in common. The Council of the Americas has a long tradition of encouraging dialogue and cooperation in this hemisphere. And it is the mission of the IMF to provide a permanent mechanism for international cooperation, through which its truly universal membership works together to seize the opportunities and minimize the risks of today's integrated, global economy.
2. The IMF has a special relationship with Latin America and the Caribbean. The outcome of our involvement is not a story of unmixed success. But on balance I assess the situation in Latin America and the Caribbean as being fundamentally better today than it was 10 or 20 years ago—and I do think this difference is due, not least, to the work of the IMF. Countries throughout the region have clearly embraced democracy, open markets, and macroeconomic stability. This has laid the foundation for a good future.
3. It is clear that Latin America and the Caribbean still face difficult challenges. In particular, too many people still live in poverty. Steps to strengthen governance and fight corruption have often lagged behind other reforms, undermining credibility and investor confidence. And because many countries are major borrowers in international capital markets, they are particularly vulnerable to volatility in the markets. A strategy to meet these challenges is to promote transparency, competitiveness, and sound democratic institutions. Because the people in this region—as in the rest of the world—strive for a better future, this will pay off in more investment, stronger economic growth, and better social development. This will also pave the way for better access to capital markets. In this regard, efforts to strengthen the soundness of banking sectors have already put many Latin American economies in a better position to withstand external shocks. On the whole I think that, three years after the Asian crisis, the international financial system has become more resilient.
4. The United States has been an engine of growth for the region, and for the world, throughout the past decade. Some moderation in the pace of this expansion was clearly warranted. The IMF's best guess is that the slowdown in the US and global economies will be relatively short-lived. But we do not think that this will happen by itself. The international community must be proactive to ensure a good outcome.
5. Discussions at last week's meeting of the IMF's International Monetary and Financial Committee (IMFC) showed more awareness about the interdependencies in the world economy. And from this we expect that a better sense of shared responsibility will emerge. Our members recognized that the United States has shown strong economic leadership. The decisive moves by the Federal Reserve to lower interest rates have clearly demonstrated its determination to help prevent a further weakening of growth, and the emerging tax cut will also help to shore up consumer and investor confidence in this country.
6. Japan has rightly adopted a new monetary framework to fight the risk of deflation. Even more encouraging is that the new Prime Minister has recognized the importance of accelerating reforms of the banking and corporate sectors. We all hope that he will act decisively. Fortunately Europe, with a projected growth rate of 2½ percent this year, is demonstrating a robust economic expansion. But stronger growth would not only be desirable, but also possible. The IMFC encouraged our European friends to adopt more ambitious structural reforms, in order to raise potential growth to 3 percent and hopefully more. And I am sure that after last week's meetings, the European Central Bank is even more vigilant. The IMFC discussion also reflected a common understanding that forceful action to open markets and liberalize trade would be of benefit to all members, and that emerging market and developing countries should stay the course of structural reform and sound macroeconomic policies. On that basis I see no reason for pessimism about the near-term outlook for the global economy, and the long-term potential to improve living standards for people throughout the world.
7. Recent developments in international financial markets have clearly demonstrated that the IMF, for its part, needs to work even harder to put crisis prevention at the heart of all its activities. Last week's IMFC meeting confirmed our strategy and work program in this area.
- We are concentrating on macroeconomic and financial stability in member countries.
- We are promoting the stability and integrity of the international financial system.
- And we are helping our members to develop sound financial sectors, in order to protect them against vulnerability, mobilize financing for productive investment, and help them take advantage of the opportunities of global financial markets.
Highest on our agenda for the coming months will be further work on early warning of potential crises. For this, we need to combine quantitative indicators of vulnerability with judgment from the field and from the markets. This should involve cooperation with the private sector. To ensure the maximum beneficial impact, it will be important for this work to move forward with the full participation of the IMF's membership, and with due care that our warnings about potential crises do not become self-fulfilling prophecies.
8. As part of this effort, the IMF also needs to do a better job of keeping up with developments in international capital markets. A new International Capital Markets Department will help the IMF to deepen its understanding of, and judgment on, capital market issues. Our informal but regular dialogue with senior representatives of private financial institutions, through the Capital Markets Consultative Group (CMCG), will further strengthen our work on crisis prevention and resolution. The next meeting of the CMCG, later this month in Hong Kong, will focus on financial market vulnerabilities, as well as specific preventive measures. We will review ways in which borrowing countries can develop strong investor relations programs—here Brazil, Chile and Mexico are good examples. We will consider how the private sector can make better use of standards and codes, as a way to promote stronger institutions, transparency, and improved risk assessment and decision-making in markets. And we will also discuss the role of the IMF's Contingent Credit Lines (CCL) in crisis prevention.
9. The philosophy behind the CCL is that good policies are still the best precaution that our members can take against crises. This IMF lending facility is designed to reward countries that have established a strong track record of good policies in normal times and help them to resist contagion. Mexico could be one of the first countries to make use of the CCL.
10. No matter how much effort goes into crisis prevention, we must recognize that economic disruptions and crises cannot be ruled out in an open and dynamic global economy. Therefore, our objective should not be to have more and bigger rescue packages, but to reduce the frequency and severity of crises.
11. But I also want to emphasize that the IMF's track record in crisis management has not been all that bad. In this region, for instance, the IMF played an important part in Chile's successful transition from economic and institutional disaster to democracy and sustained growth. More recently, the IMF's contribution was crucial to enable Mexico and Brazil to overcome their crises and resume strong economic growth. Since then Mexico has repaid all, and Brazil almost all, of their borrowings from the Fund, and both are sticking to good policies. Sometimes I think it would help to promote reform and structural change in some advanced economies if some of the committed reformers, for example, from Mexico, were in charge of their economic policies!
12. I am also confident that Argentina and Turkey will weather the storm. Both of them have taken strong ownership of measures to address their problems, and both have chosen a market-oriented approach. Minister Cavallo made clear to the IMFC that his approach is guided by fiscal discipline, respect for property rights, and creating a sound climate for investment and growth. In the same way, Minister Dervis made clear that he is concentrating on building strong institutions and cleaning up the banking sector—a root cause of the crisis in Turkey. These approaches deserve strong support. And let me make clear that the IMF stands ready to help any member country that is willing to adopt the right policies.
13. Private capital flows to developing countries peaked at about $250 billion a year before the Asian crisis, while total official flows—grants and loans, bilateral and multilateral—are less than one-third of that amount. Because private flows are an indispensable source of financing for development, another crucial function of the IMF's new Capital Markets Department will be to strengthen our ability to help countries gain access to international capital markets.
14. Only by getting access to investment capital from the rest of the world will the IMF's poorest member countries be able to make a real breakthrough in poverty reduction. The IMF should therefore be ambitious to assist them in this process. This is one of the reasons why the IMF must stay engaged with poor countries. In a globalized world, poverty is an issue that affects everyone, and the poor must be full participants in the process of international cooperation. At the same time, it is clear that the IMF must remain focused on its mandate—promoting sound macroeconomic policies and domestic and international financial stability, as preconditions for sustained growth. What is really needed to make this work is a good division of labor with other international organizations, especially the World Bank, to make sure that careful attention is paid to all issues that are crucial to growth and poverty reduction. We are engaged in this process, and I am sure that the outcome will strengthen the effectiveness of both the Fund and the Bank.
15. Four countries from the Americas—Bolivia, Guyana, Honduras, and Nicaragua—are benefiting from debt relief under the Initiative for Heavily-Indebted Poor Countries (HIPC Initiative). But the most important thing we can do to help fight poverty is to empower poor countries to help themselves. Crucial for this is increased access to markets in the industrial countries, in particular for products that matter the most to them, such as agricultural products, textiles, and other manufactured goods. And here, no industrial country—neither Europe, nor Japan, nor the United States—is free from sin. Last week's IMF meetings underscored the crucial role that a new round of multilateral trade negotiations can play in promoting growth and poverty reduction. In this region, NAFTA has demonstrated that opening markets can be a win-win proposition for all participants. And certainly therefore the establishment of a Free Trade Area of the Americas makes a lot of sense. But in my view this should not exclude sub-regional cooperation and integration.
16. The expansion of international trade has been one of the channels through which globalization has contributed to unprecedented world prosperity in our lifetimes. Other channels have included technological innovation—especially in transportation, communications, and medicine—rising standards of education, the spread of democracy and free markets, and the growth of international capital markets. Of course, each of these phenomena poses both opportunities and risks. Indeed, ten years after the end of the Cold War, a plethora of new challenges is confronting us, and there is a vigorous debate about the advantages and disadvantages of globalization. In my view, the opportunities clearly outweigh the risks. And I would much rather face these challenges than the problems of the Cold War.
17. The task before us now is to strengthen national commitment and international cooperation, to ensure that markets continue to expand, harness the benefits of technological change, and educate our citizens so that they can grasp the opportunities of a globalized world. The Americas are well-placed to lead by example, and to demonstrate how to secure a good future for all people of the world. The IMF looks forward to supporting them in this effort.