Brazil and the IMF
IMF Quotas -- A Factsheet
Proposals for a Sovereign Debt Restructuring Mechanism (SDRM) -- A Factsheet
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Remarks by Horst Köhler
Managing Director of the International Monetary Fund
at the Council on Foreign Relations
Washington, D.C., September 19, 2002
1. Ambassador Fisher, ladies and gentlemen, it is a pleasure to meet today with the Council on Foreign Relations. I appreciate the contributions that the Council has made over the years, to the development of US foreign policy and to the broad debate on international economic and financial issues.
2. The Annual Meetings of the IMF and World Bank, which take place in less than two weeks, have been shortened as a result of legitimate security concerns of our hosts, the District of Columbia and the US government. I hope that Ministers and Governors from our 184 member countries will nevertheless take advantage of the restricted opportunities for personal encounters, discussion, and dialogue. This is essential for building trust and finding true common ground in responding to the challenges facing the global economy. In my remarks today, I would like to outline what I think the international community in general, and the IMF in particular, should do to address those challenges.
The Global Economic and Financial Outlook
3. The global economy has shown remarkable resilience in the face of multiple shocks over the past two years. Nevertheless, we need to be concerned about the strength and durability of the ongoing economic recovery, and the stability of the international financial system. Risks to the global economic outlook today are clearly tilted more to the downside than they were a few months ago. These include continuing fallout from the collapse of the equity price bubble and corporate scandals, difficulties in some emerging market economies, regional political tensions, and volatility in world oil prices. But on balance, we do still expect that the recovery will continue. The major industrial countries have on the whole reacted responsibly to the global slowdown, the effects of earlier relaxation of monetary policy are still in the pipeline, and improved technology holds the potential for new products, new services, and greater productivity. Moreover, I do have some trust in the forward-looking, optimistic way of life exemplified by the American people. Crucial at this moment for safeguarding and reinforcing global growth are continued vigilance, and action to build confidence:
4. A process of confidence-building requires, in particular, strong leadership from the advanced economies. This means that the United States should beware of falling back into chronic public sector deficits. It means that Europe and Japan have to be more serious about accelerating structural reforms, to unlock self-sustained growth. It means that Japan should act decisively to bring an end to deflation. And I also think that the advanced economies have a particular responsibility to work for a successful conclusion of the Doha Round.
The Critical Debate on Globalization
5. The world needs sustained and environmentally-sustainable growth. And globalization is a crucial engine of growth, through the spread of knowledge, better division of labor, increased productivity, and access to foreign direct investment. Indeed, over the past 50 years, the process of globalization has been the source of unprecedented gains in human welfare. But it has also brought risks and challenges, such as disruptive volatility in international capital flows and the depletion of natural resources.
6. I welcome the ongoing, critical debate about globalization, as an opportunity to clarify its costs and benefits, and as an antidote to complacency. Let us not confuse ourselves—the people of the world need more globalization, not less. But it is also clear that we need to work harder to make globalization more inclusive, and seek a better balancing of the risks and benefits. This means that integration into the global economy must be accompanied by investments in making integration pay off for the people of the world, and especially for the poor—investments in better policies and regulatory frameworks at the national level, to safely take advantage of the opportunities of the global marketplace; and investments in more effective international cooperation, to guide and shape the process of globalization.
The IMF in a Process of Change
7. I am strongly convinced that the IMF must play an active role in the search for a better globalization. There is clearly a need for an institution that—based on cooperation and mutual trust —encourages sound macroeconomic policies in its member countries and looks after the stability of the international financial system. We have a responsibility to speak out when countries live too long beyond their means, not least because the poor suffer most from disorderly adjustment, high inflation, and volatility. And we have a responsibility to help them restore the conditions for sustainable growth. While the IMF is far from perfect, we do try to learn from experience, and to adapt to the needs of a changing global economy. Since the Asian crisis, in particular, the IMF has been in a process of reform.
8. I believe it is also essential for the IMF, as a universal institution, to be actively engaged in meeting the special needs of our poorest member countries. And I am encouraged that a remarkable degree of agreement that has emerged on a "two-pillar" approach for overcoming world poverty. It means that the sense of self-responsibility and determination in low-income countries to pursue sound policies and good governance must be matched by stronger and more comprehensive support from the international community. This approach was the guiding principle for the Monterrey Consensus, which was reaffirmed at the Johannesburg Summit on Sustainable Development. The IMF is committed to act decisively in its own areas of competence, to complement the World Bank's lead role in poverty reduction. And I also think it is right for us to speak out on behalf of the poor—for stronger growth in the world, for better market access and a phasing-out of trade-distorting subsidies, for more aid, and for doing more to build local capacities.
9. The reforms introduced since the Asian crisis have made a difference for growth and stability in the global economy, at a particularly difficult time. But they have not prevented the emergence of new strains in a number of Latin American countries. Access to international financing has been closed for all but the most creditworthy borrowers in the region, and some have also faced capital flight and problems in rolling over domestic liabilities. To an extent this reflects a generalized increase in risk aversion around the world. Rising public debt burdens, institutional weaknesses, and extreme inequalities in income distribution have also raised doubts in some cases about the political sustainability of reforms. But these current difficulties should not obscure the progress in promoting democracy and economic stability over the past decade. And we should never forget that each country has its own unique situation, strengths, and weaknesses.
10. As the former President of Mexico, Ernesto Zedillo, recently wrote in Forbes magazine, the main problem in Latin America has not been too much reform, but too little. We have seen in Argentina that it is dangerous to stop halfway. It is clearer than ever that strong institutions and good governance are indispensable for sustained growth and financial stability. Reducing glaring inequalities in income should also be an essential part of any economic reform strategy. The IMF is strongly engaged with our members in Latin America. Our strategy is to tailor our advice and financial support to the particular circumstances of each country. And our mandate obliges the IMF to take reasonable risks. Where there are governments that are living up to their own responsibilities and committed to working with the international community, our members can count on the Fund's assistance in restoring the conditions for sustainable growth.
The Agenda for Further Reform
11. The latest experience in Latin America should also make us more humble about our own performance. The IMF, too, has a lot of unfinished business. We clearly need to implement forcefully the initiatives that are already underway. And I am absolutely convinced that, over time, these will pay off in greater financial stability and stronger global growth. In addition, however, I believe that further reform is required in four crucial areas.
12. First, we must do more to improve the IMF's capacities for crisis prevention. Here we must combine ambition to prevent crises with a recognition that some degree of overshooting and correction—and thus some risk of crises—is inevitable in a market economy, as part of the competitive search for better results, better products, and higher productivity. Strengthening our continuous policy dialogue with member countries, or IMF surveillance, is key for crisis prevention. We must help member countries put in place "shock absorbers" to cope with risks-including better debt and reserve management; more flexible exchange rate regimes; sound budgets that leave some room to maneuver in difficult times; efficient and diversified financial systems; and more effective social safety nets. Beyond improving the quality and coverage of our advice, we should also become more effective in convincing member countries to take early, preemptive action. In addition, where a country has established a good track record, the IMF should have the capacity for a rapid and flexible response, to help sustain a sound policy framework against turbulence in the global economy. While the IMF's Contingent Credit Lines have not so far been utilized, I still believe that the underlying concept of using IMF financing to reward good policies and help countries to stay the course is right.
13. Recent developments have made it clearer than ever that efforts at crisis prevention must pay as much attention to risks and vulnerabilities arising in the advanced economies, as they do to problems in emerging markets and developing countries. We need to think creatively about ways to deal with excessive volatility in international capital flows, including ways to strengthen self-correcting forces in markets and the role of regulation. And in the context of the Enron collapse and WorldCom scandal, the broad discussion and legislative response in the areas of accounting and corporate governance now underway in the United States is welcome. But I also think that the international community as a whole—especially standard-setting bodies and the Financial Stability Forum, with the cooperation of the IMF and World Bank—should take up these issues, as a natural extension of our work on financial stability and internationally-recognized standards and codes. Thus, for instance, I would suggest that the responsible institutions concentrate on refining and harmonizing accounting standards; enhancing corporate disclosure; and ways to align management incentives better with shareholder objectives, to reduce the potential for conflicts of interest.
14. As a second major element in our reform agenda, the IMF must continue working to strengthen the framework for crisis resolution. We are working toward an integrated approach, combining access policy, systematic debt sustainability analysis, greater selectivity in IMF lending, and better debt restructuring mechanisms. As a natural counterpart to an emphasis on self-responsibility, and to improve the pricing of risk and minimize moral hazard, we intend to make our policy on access to the IMF's resources clearer and more predictable. While there may still be cases in which exceptionally large financial support is warranted, we need to ensure that exceptional access is truly exceptional. In parallel, we are working to improve the basis for inherently difficult judgments about debt sustainability. My strong advice to our members is that they work as much as possible, and as long as possible, with voluntary, market-oriented solutions. And I would expect that private creditors in turn will act responsibly, in recognition of their own interest in stability and growth in the global economy. On the basis of these principles, there is also broad agreement within the public and private sectors that, as a truly last resort, we need better ways to deal with cases in which sovereign debt burdens have become unsustainable—to restructure debt more promptly and in a more orderly manner, while protecting asset values and creditors' rights.
15. The IMFC has asked the Fund to pursue two tracks, to improve the tools for dealing with the most difficult cases of unsustainable sovereign debt and, in particular, to help coordinate action among diffuse and diverse groups of creditors. We are seeking to promote the use of collective action clauses in debt contracts. And we are also working on some for of statutory Sovereign Debt Restructuring Mechanism, which would enable a sovereign debtor and a super-majority of its creditors to reach agreements binding on all affected creditors. We understand these approaches as being complementary. I expect, based on the progress already made, that the Annual Meetings will give further impetus to our efforts to resolve these issues by the time of the IMFC meeting next spring.
16. A clearer, more predictable role for the IMF in the resolution of crises will strengthen incentives for proper risk management by borrowers and lenders. And I am confident that improvements in IMF surveillance will also help to make crises less frequent and less severe. At the same time, however, the case of Brazil demonstrates that the international community must have the firepower to provide wholehearted support for good performers. Brazil has invested in globalization by working to establish a strong track record of monetary, fiscal, and exchange rate management. Recently Brazil has faced renewed pressures, due to the deterioration in global economic conditions and concerns that the upcoming Presidential elections might lead to a change of course in economic policy. In my opinion, the electoral debate is part of a healthy long-term process in Brazil. The authorities have demonstrated continued responsibility and maturity through a credible reinforcement of their policy framework. And the Fund has shown its readiness to work with any government committed to sound economic policies, while avoiding outside interference in the democratic process. On the basis of Brazil's strong track record and policy program, our exceptionally large financial support for Brazil was justified. And I am confident that Brazil will stay the course of sound policies in the period ahead, regain the full confidence of international financial markets, and resume a strong growth path.
17. The broader lesson is that, in an integrated global economy with large and volatile capital flows, both self-responsibility and international cooperation take on added significance. Countries seeking access to international capital markets thus need to bend over backwards to follow sound policies and address actual or potential sources of vulnerability. If a country is not committed to working with the international community, we must be prepared to say "no" to its request for financial support. But where a country has been doing all it reasonably can to cope with a risky global environment, the international community should have the capacity to provide effective support. Failure to have any kind of "safety net" could undermine trust among nations and confidence in the global system, which would have implications going well beyond the economic sphere.
18. The IMF is not a lender of last resort, because it does not—and should not—have access to unlimited liquidity. But the international community looks to the IMF for crisis management, and our ability to protect good performers from circumstances beyond their control is a confidence-building anchor for the international financial system. This does not mean that the Fund should seek to match the scale of private financial flows. Indeed, the Fund has adequate liquidity for the immediate future. But markets and political processes are forward-looking, and it would not be prudent to allow the size of the Fund to shrink in relation to the size of the global economy. Thus, a crucial third element in our reform agenda should be openness to an increase in IMF quota resources at the appropriate time, as an investment in better globalization.
19. A final area for further reform is our work to enhance governance and accountability in the IMF. This should include consideration of a more open and transparent process for selecting the IMF's Managing Director, continuous review of the role and procedures of our Executive Board, and revisiting quota shares. I share the view that the current distribution of quotas in the IMF needs to be reconsidered—especially to correct the under-representation of a number of emerging market countries. We should also consider ways to strengthen the voice of African countries in the Fund. Addressing these issues would clearly serve the interests of developing countries. But it would also benefit the entire membership, by reinforcing the cooperative nature and perceived legitimacy of the IMF, which are crucial counterparts to the insistence of the international community on the Fund's central role in crisis prevention and management.
20. I hope we can count on the Council on Foreign Relations to help generate constructive discussion of these and other ideas for reform in the period ahead. And now I would welcome your questions.
IMF EXTERNAL RELATIONS DEPARTMENT