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The IMF in the Process of Change|
Remarks by Horst Köhler
International Monetary Fund
before the Treasury Select Committee, House of Commons
London, July 4, 2002
1. Ladies and gentlemen, the United Kingdom was one of the founding members of the IMF, and has long played an important role in the assessment and evolution of its policies. It is therefore a great pleasure for me to meet with the Treasury Select Committee.
2. I would like for today's discussion to be seen in the spirit of the fundamental changes that are taking place at the IMF. In the aftermath of the Great Depression and the Second World War, the IMF was created to help restore and sustain the benefits of global integration, by promoting openness, trust, and international cooperation. Global integration is the product of forces that are deeply embedded in human nature—the desire for a better life, for new and better ways of doing things, and for expanded horizons and freedom of choice. During our lifetimes, this process has produced unprecedented gains in human welfare for most of the world—and it still holds huge potential for the future. Realizing this potential will require a concerted and collaborative effort of the entire international community to make globalization more inclusive, and to seek a better balancing of the risks and benefits.
3. The IMF is deeply committed to being a part of that process, by promoting international financial stability and sustained growth in our member countries. But nobody is perfect. The IMF has made mistakes, and it must learn from experience. The Asian crisis of 1998 stimulated an intensive debate about the reform of the international financial architecture and, in particular, the reform of the IMF. We have not reached the end of that debate, but there have been important results.
4. We can all be happy that the doomsday scenarios some predicted after the terrorist attacks of September 11 did not materialize. Most of the credit must go to the decisive interest rate cuts and tax reductions in the United States and the supportive policy response in Europe, as well as cooperation by central banks, regulators, and private financial institutions to safeguard the banking and payments systems in the aftermath of September 11. But I also believe that the architecture reforms introduced in recent years have increased the resiliency of the international financial system. And I think it was important for confidence that the membership of the IMF came together last November in Ottawa to define a collaborative approach to strengthen the global economy.
5. Today it appears that a recovery in the global economy is underway. But there are still uncertainties and risks, in particular related to the strength and durability of the upswing in the United States, financial market volatility, and political tensions in the Middle East and South Asia. Overcoming these challenges will require a shift in focus from short-term considerations, to tackling decisively the underlying economic and financial imbalances. This calls for strong leadership of the advanced industrial countries, by taking action to strengthen the prospects for sustained growth in their own economies and through leading by example in the effort to make globalization work for the benefit of all.
6. Strong US growth in the second half of the 1990s served the global economy well. But this has been accompanied by a widening current account deficit which raises concerns over the sustainability of capital inflows to the United States and the valuation of dollar assets. In this situation, it will be crucial for the US to ensure that the budget remains balanced over the medium term, as part of a strategy for increasing national savings. But this is not just an issue for the United States: what is also needed to strengthen the global economy is more robust, domestic demand-driven growth in other advanced economies. It is clear that it would be possible to raise potential growth rates in Europe to 3 percent a year or even more, if there would be more ambition for structural reforms. Similarly, in Japan the return to a growth performance that corresponds to the country's size and potential demands accelerated action to dispose of nonperforming loans, deregulate key industries, and restructure Japan's banking and corporate sectors. The recent improvement in business activity should not reduce incentives for action on these reforms.
7. Emerging markets and other developing countries should stay the course of sound fiscal and monetary policies and structural reform, which is indispensable to weather the ongoing storm. In this context, there also must be confidence that the international environment will hold opportunities for countries committed to reform.
8. In particular, trade is crucial for growth. There is no example of a developing country experiencing rapid growth without strong integration through trade into the world economy. Trade liberalization is also an important element in crisis avoidance—the experience of Latin America where trade links have lagged behind capital market links illustrates that vividly. To me, therefore, resisting pressures for protectionism is key to strengthening confidence about the future prospects for strong global growth and shared prosperity in the world. There would be very significant benefits to all if the Doha Round could duplicate the growth in trade that followed the Uruguay Round.
9. Improving further our capacities for crisis prevention and management will also be crucial for sustaining global growth. And despite all that has already been done to strengthen the international financial architecture, recent experience should make us even more humble: the fact that it was not possible to avoid the meltdown of the Argentine financial system, or to do a better job of limiting overshooting in equity and capital markets, suggests that we still have a lot to learn.
10. In particular, we must draw firmer conclusions about the indispensable role of sound institutions and good governance for sustained growth and financial stability. It is up to each country to ensure that such conditions exist. To resolve homegrown problems, no external advice, however sound, and no amount of outside money can substitute for self-responsibility and political cohesion in a society.
11. The Enron collapse and, even more, the WorldCom scandal have also made it clearer than ever that there is a need to give as much attention to risks and vulnerabilities arising in the advanced countries, as we do to problems in emerging markets and developing countries. I therefore welcome the broad discussion and legislative activities that are underway in the United States, in the aftermath of these revelations. But I also think that the international community as a whole should review issues related to accounting, disclosure, and corporate governance. Here I see an important role for the Financial Stability Forum.
12. But we should also be realistic. We need to combine ambition to prevent crises with realism about the extent to which this is possible. A market economy draws its lifeblood from competition, which leads to a continuous search for better results, better products, and higher productivity. Some degree of overshooting and correction—and hence, some risk of crises—will always be part of that process. But the objective must clearly be to work toward fewer and less severe crises.
13. Strengthening IMF surveillance and crisis prevention will always be our first line of defense in dealing with external shocks and vulnerabilities. But Argentina has also demonstrated that we must think about better ways to deal with unsustainable sovereign debt—i.e., to restructure more promptly and in a more orderly and less costly manner, while protecting asset values and creditors' rights. Therefore, as part of our work program on crisis resolution, IMF Management has proposed a new Sovereign Debt Restructuring Mechanism.
14. There can be no question that the foremost challenge facing the international community is poverty. The Financing for Development Conference in Monterrey produced an unprecedented common understanding about what it will take to overcome world poverty.
15. In my discussions with leaders, business persons, and civil society in low-income countries, I have been struck by the willingness to take responsibility for tackling the home-grown causes of poverty. It is particularly encouraging that African leaders have made good governance, sound policies, and increased trade and investment the cornerstones of the New Partnership for Africa's Development (NEPAD). Our global outreach and review has shown that the Poverty Reduction Strategy Paper (PRSP) process is broadly accepted as a practical way to put this approach into action. Most importantly, the PRSP process is country led, and designed to take on board the views of all parts of society. PRSPs recognize both social realities and the need for hard economic choices. And perhaps equally important, they provide a natural basis for coordination of activities by external donors and other development partners. I therefore trust that donors and civil society will continue to support this process and help to realize its full potential.
16. Leaders in low-income countries have underscored the severe demands that donor coordination and the design of poverty reduction strategies are placing on their limited administrative capacities. We have to recognize that slow progress in the reforms needed to fight poverty often reflects a lack of institutional capacity, rather than a lack of political will. As part of our support for NEPAD, we plan to establish five African Regional Technical Assistance Centers (AFRITACs), and I already signed agreements to establish the first such centers in Tanzania and Cote d'Ivoire later this year.
17. I am encouraged by the efforts of many countries to create the conditions for the mobilization of private domestic and foreign capital and for job creating growth. NEPAD rightly relies on the private sector as a major engine of growth, recognizing that development requires both a well-functioning state and a dynamic private sector. And in that context, Jim Wolfensohn and I have been helping African countries—beginning with Ghana—to establish Investment Advisory Councils, to identify practical ways to improve the investment climate and create new economic opportunities.
18. Debt relief is an essential element in a comprehensive strategy for fighting world poverty. The IMF and World Bank are working hard to make the enhanced Heavily Indebted Poor Countries Initiative (HIPC) a success. Today 26 countries are receiving debt relief under this initiative, with a total value of over $40 billion, and we want to help other eligible countries qualify for HIPC assistance. The resulting reduction in debt service payments is already permitting recipient countries to raise poverty related expenditure, on average, from about 6 percent to 9 percent of GDP. The bulk of this spending will go to much needed health care (particularly HIV-AIDS treatment and prevention), education, and basic infrastructure such as rural roads.
19. Full participation in the HIPC initiative by all external creditors and strong policy implementation are crucial for reaping the full benefits, including debt sustainability. In addition, however, it is clear that the IFI's need be very careful to ensure that the assumptions underlying debt sustainability analyses are realistic. Some countries' prospects have been adversely affected by declining commodity prices and global growth trends, following their HIPC decision points. We will continue to take advantage of the possibility of topping up HIPC relief in cases—like Burkina Faso—where exogenous factors have caused fundamental changes in a country's underlying economic circumstances.
20. To support countries that are trying to help themselves, I also believe that official development assistance must be increased. It is good that the United States and Europe have undertaken to do more on this score, and I welcome the indications from the G8 Summit about the plans for putting those commitments into action. But the target of 0.7 percent of GDP for official development assistance remains an important benchmark in the fight against world poverty. Discussions about so-called innovative sources of financing for development should not obscure the importance of official development assistance as a clear, transparent, and accountable measurement of solidarity between the rich and poor of this world. The IMF is working with the World Bank and other institutions to help countries use increased aid effectively. And I am convinced that citizens in the advanced countries will be willing to back increased aid, if they are aware of what is at stake and are shown evidence that recipient countries are putting external assistance to good use.
21. Finally, while it is crucial not to neglect any element of comprehensive support for poverty reduction, I would like to emphasize that trade is clearly the best form of help for self-help. It paves the way for greater self-sufficiency, and it is also a win-win proposition for developed and developing countries alike. The measures taken recently under the European Union's "Everything But Arms" initiative and the African Growth and Opportunity Act (AGOA) in the United States are welcome, but much more is needed—notably, the phasing out of the billions of dollars spent on agricultural subsidies in advanced economies. Real progress in cutting these subsidies and reducing tariffs for processed goods should be a benchmark for a successful conclusion of the Doha Round. But I would also stress that the evident case for market opening in the industrial countries would become even more credible if developing nations demonstrate their ambition to reduce the barriers to trade among themselves, which are often even higher than those with industrial countries.
22. Mr. Chairman, Members of the Treasury Select Committee, I hope these informal remarks have provided some insight into the work program that is underway in the IMF, and our vision for the future. I welcome your questions.
IMF EXTERNAL RELATIONS DEPARTMENT