The Evolving Role of the IMF and the Reduction of Poverty by Graham Hacche, Deputy Director, External Relations Department, IMF
February 13, 2003Graham Hacche
External Relations Department
International Monetary Fund
Speaking Notes Prepared for World Council of Churches — World Bank — IMF Meeting
Geneva, February 13-14, 2003
Let me first say how much we from the International Monetary Fund appreciate this opportunity for dialogue, and also your hospitality. I know that the Managing Director of the IMF attaches great importance to our dialogue, and I am sure that it will lead us to a better mutual understanding of our experience in our different spheres of work, and of our points of view. As the WCC representative, Rob van Drimmelen, said in his opening remarks, our dialogue calls for us to listen, to explain, to seek common ground, and also, if and when necessary, to agree to disagree. In fact, I heard in what he said much that was promising in terms of common ground. In the past, the IMF has probably had more dialogue and interaction with the Roman Catholic Church than with the Protestant churches, and the time is surely ripe for us to begin discussing our work with the World Council of Churches, the main international organization of Protestant churches.
2. The Constant Purposes and Evolving Role of the IMF
It is my pleasure to say a few words on the evolution of the work of the IMF, particularly in relation to poverty reduction.1 As you know, the Fund, like the Bank, was established as one of the institutions of global cooperation at the end of World War II, and after a period of destructive economic nationalism between the two World Wars—a disastrous experience, which showed the problems that can arise for the world if countries pursue inward-looking, protectionist, "beggar-my-neighbor" policies. This was an experience that should not be forgotten as we deal today with the challenges posed by globalization and open-economy policies that have brought prosperity to so many.
The Fund and Bank were born at a conference of allied governments at Bretton Woods, New Hampshire in July 1944. Forty-four countries were represented at the Conference, and they drew up Articles of Agreement that defined the purposes and functions of the IMF. The Fund's purposes, set out in Article I, are exactly the same now as they were then. They are:
· First, to promote international monetary cooperation, exchange rate stability, and orderly exchange arrangements. (This refers, in particular, to the need to avoid "beggar-my-neighbor" currency devaluations harmful to other countries, which had occurred in the 1930s.)
· Second, to assist in the elimination of exchange restrictions which hamper the growth of world trade. (Again, this refers in part to the need to avoid "beggar-my-neighbor" restrictions on foreign exchange transactions. Note that this refers to restrictions on current account—mainly trade—transactions, not capital flows: there has never been anything in the IMF's Articles to forbid or discourage controls on capital flows.)
· Third, by facilitating the balanced growth of world trade, to help promote, as primary objectives of economic policy, high levels of employment and real income, as well as economic development.
· Fourth, to help member countries with balance of payments problems solve them "without resorting to measures destructive of national or international prosperity", including through the temporary provision by the Fund of financial assistance. As Article I puts it, the IMF's purpose in this respect is to "give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity..."
These are still the statutory purposes of the IMF. And they have become increasingly vital over the past almost 60 years, not least because increasing international economic integration—"globalization"—has raised the importance of international economic cooperation. But the work of the Fund today is quite different from its early years. In fact, the constancy of its purposes has required the Fund to evolve, because of changes in the structure of the world economy and the IMF's own membership, and also in response to lessons we have learned about economic policy.
3. Changes in the structure of the world economy since Bretton Woods
I will mention just three:
(1) The emergence and growth of independent developing countries. Of the 44 countries at the Bretton Woods Conference, fewer than 30 were from the developing world, and only 8 were from Africa, Asia, and the Middle East combined. Today, there are 184 member countries virtually covering the globe, and 125 of them are developing countries, about 50 being in Africa.
(2) The increased international mobility of goods, capital, and labor, and greater international integration of markets—which we call "globalization." World trade growth has been roughly twice world output growth, on average, in the post-war period, after having been less than output growth in the inter-war period. And there has been a vast increase in capital flows; they have been a vital source of finance for productive investment, although they have also been a source of financial and economic instability in some circumstances, and I will talk about this later.
(3) There has been the reintegration of formerly centrally-planned economies into the world market economic system and into our institutions. Twenty-nine of our 184 member countries are counted as being "in transition" from central planning.
These changes have radically affected the work of the IMF, in ways that I'll come to in a minute. But the influence has not just been one way: the second change, in particular, can be partly attributed to the work of the Fund, in promoting an open, multilateral system of trade and payments, and policies of adjustment and reform, which have contributed to the international integration of markets, and to the prosperity of the post-war period. The economic growth experienced in the post-war period is unprecedented in recorded history, and associated with this there has been a major decline in the proportion of the world's people living in poverty. 2
4. Lessons about economic policy since Bretton Woods
The IMF's work has also evolved in response to lessons learned in the post-war period about economic policy. I will mention five:
- First, there was, especially during the period of inflation, stagflation, and increasing budgetary problems of the 1970s and 1980s an increased realization of the shortcomings and dangers of relying too much on short-term demand management policies, without a medium-term framework of fiscal discipline and monetary stability to anchor people's expectations and policy makers' plans. The need for a medium-term orientation in policy became clear.
- Second, there was at roughly the same time an increased recognition of the importance of policies to attend to the supply side of an economy, as well as demand. It was realized that even for the most basic macroeconomic objectives to be attained, macroeconomic policies, which form the core of the IMF's work—fiscal or budgetary policies; monetary policies, which refer to interest rates and the expansion of money and credit; exchange rate policies, and other policies that affect demand in the economy as a whole—have to be supported by structural policies, which aim to improve the working of individual markets or sectors. This applies in the industrial countries: for example, it became impossible some years ago to argue that the chronic problem of unemployment in Europe could be solved simply by expanding demand. But it applies also in the economies in transition and the developing countries, where distortions, in financial and enterprise systems, as well as in labor and other markets, have made it impossible for macroeconomic policies alone to attain desirable macroeconomic outcomes—for economic growth, poverty reduction, unemployment, and so on.
- Third, there was in the 1980s and early 1990s an increased recognition in the IMF of the importance of economic growth as an objective of its own operations and policy advice. The IMF became more aware that the policy programs supported by its loans would be inadequate if they aimed only for the correction of balance of payments problems: programs also needed to establish the foundations for sustainable economic growth if they were to promote effectively the "primary objectives" of high levels of employment and real income referred to in the Articles. I would add that the IMF has always emphasized that the kind of growth we promote is not growth in the size of economies for its own sake, but growth in real per capita incomes that increases human welfare and that is sustainable and equitable. Michel Camdessus, the IMF's Managing Director between January 1987 and February 2000, used to refer to this as "High-Quality Growth". It is the key to rising economic welfare and poverty reduction. There is no way of lifting the population of poor countries out of poverty, say on the scale that has actually been achieved in much of Asia in recent decades, without sustained economic growth. (This is not to say, however, that economic growth is all that is needed for the rapid poverty reduction we need.)
- A fourth lesson: whatever the merits of exchange rate stability (an objective clearly stated in Article I) for a growth-oriented policy strategy, we have learned and re-learned in a large number of currency crises how demanding are the requirements of maintaining pegged exchange rates, especially for countries open to the increasingly voluminous and agile flows of international capital. Such a crisis led to the collapse in the early 1970s of the global Bretton Woods system of fixed exchange rates, and subsequent crises have led to the more widespread adoption of flexible exchange rate regimes. Experience with currency crises has also highlighted the need for care in capital account liberalization. As I noted earlier, the IMF's Articles of Agreement allow restrictions on capital flows. Open capital markets were not seen as feasible at the end of World War II, in the context of a fixed exchange rate system and undeveloped capital markets in most countries: the danger was that with free capital flows countries would suffer chronic financial instability, with governments losing any ability to influence monetary conditions, including interest rates, in their countries. But with the collapse of the Bretton Woods exchange rate system, and with capital markets becoming deeper and more sophisticated, the benefits of capital account liberalization came more to the fore in the 1970s and 1980s. All industrial countries removed their restrictions on capital flows, and this has been a success: none of these countries has sought to reverse it. The IMF has viewed the liberalization of capital flows as a worthwhile objective for all countries because of the benefits they bring, but has emphasized the need for it to be done carefully and in an orderly way, when supporting policies and institutions are in place, to minimize the risks associated with volatile flows. It has never sought to make capital account liberalization an obligation of membership.
- Finally, in recent years, we have learned to appreciate more the importance, for the effectiveness of policy programs, of national ownership of them: ownership not only by national governments, but also by the broader community, including civil society.
These lessons about policy—and there have, of course, been other lessons, and we are continuing to learn—together with the changes in the world economy I mentioned earlier, help to explain how the Fund has adapted its methods and activities over the past half-century. In face of these developments, the Fund could not possibly have stood still and continued to serve its purposes effectively. There has been adaptation in each of the Fund's major lines of operation—surveillance, lending, and technical assistance.
5. IMF's role in the exchange rate system, and IMF Surveillance
Up to the early 1970s, the Fund was regulator of the "Bretton Woods" system of "fixed but adjustable" exchange rates. After the collapse of that system, during 1971-3—which was partly the result of growing capital flows—member countries became free to choose virtually any exchange rate regime—floating, or pegged, etc. And the Fund was given responsibility (in the Second Amendment of the Articles, which came into force in 1978) for exercising "firm surveillance" over the exchange rate policies of members, which was to involve surveillance over all policies impinging on exchange rates. This was based on a recognition that the key to exchange rate stability was provided by improvements in national policies that could be fostered by international cooperation, including the convergence of inflation rates at low levels, fiscal discipline, and structural policies to improve the efficient working of labor and other markets.
Surveillance is the central activity of the IMF. It applies to all member countries, year-in and year-out: every country has an obligation to subject its policies to the scrutiny of the international community represented in the Fund. IMF surveillance gives the world community a voice in policy advice to each member country, with the aims of avoiding or correcting policies damaging to the country itself or other countries, and of promoting policies that support sustainable economic growth and financial stability. Surveillance takes several forms: country surveillance (which involves usually annual formal consultations with each member, and other contacts as needed); global surveillance (including global economic projections and analysis of the policies needed to improve the outlook); and regional surveillance. It is the Executive Board, representing the entire membership of the Fund, that does the surveillance; and discussion of surveillance continues at ministerial level in the International Monetary and Financial Committee (IMFC), which meets usually twice a year.
In recent years, following crises in several emerging market countries, much attention has been paid to strengthening surveillance, including through more attention to exchange rates and financial sector soundness; the development of standards and codes of good practice in policy-making; and the promotion of transparency. A major objective is crisis prevention. And strong, sustainable growth has also become a recognized objective of surveillance, as I indicated earlier.
Surveillance touches on all policies that significantly affect economic performance and their international repercussions. But as we reach to areas at the margin of the IMF's mandate and expertise—which are in the macroeconomic/financial area—we rely increasingly on other institutions for assistance, particularly the World Bank. The current Managing Director, Horst Köhler, has emphasized, in particular, the need for the Fund to focus on its core responsibilities.
Finally, what has surveillance got to do with the reduction of poverty? First, financial and economic crises tend to hurt the poor disproportionately: crisis-prevention is pro-poor policy. Second, high inflation hurts the poor, since they are the least able to defend themselves against it; and the IMF promotes low inflation. It is strange that many who declare themselves to be defenders of the poor sometimes seem indifferent to inflation. But the idea that the IMF is always, in all circumstances, trying to push inflation down is a fallacy. There are many examples of the Fund recommending that countries ease their monetary conditions—prominent recent examples have been in the IMF's advice to the European Central Bank and the Bank of Japan3. This advice reflects the Fund's promotion of policies that support sustainable economic growth, and this promotion of growth is a third way in which IMF surveillance helps the poor.
6. Financial assistance
The changes in the world economy to which I referred earlier explain the shift in the Fund's lending operations, away from the industrial countries. No industrial country has borrowed from the Fund since the late 1970s, partly because of the increased availability for them of balance of payments financing from the world's greatly expanded private capital markets, and partly because of the preference of industrial countries for flexible exchange rates that can take the strain when pressures arise.
Meanwhile, the IMF's financing facilities have been adapted to the needs of other member countries. The needs of developing countries and countries in transition, and the recognition that the balance of payments problems they face can be addressed only in a medium-term context and through structural as well as macroeconomic policies, led to the introduction of new facilities operating alongside the traditional 12-month stand-by arrangement requiring repayment within 3-5 years. Extended arrangements, introduced in 1974, provide financing for medium-term economic programs, generally with disbursements over 3 years, with repayments over 4½ -10 years. The SAF (Structural Adjustment Facility) and ESAF (Extended Structural Adjustment Facility), created in 1986 and 1987, respectively, provided concessional loans to low-income countries—at 0.5 percent annual interest—again to support medium-term growth-oriented adjustment programs.
These adaptations—toward medium-term financing, on concessional terms for low-income countries—have been essential to enable the Fund to do its job of helping its developing country members address their balance of payments problems without adding to their already severe debt problems. They have been essential, in effect, to make the Fund relevant to these members.
The ESAF was enlarged in 1994, and replaced in 1999 by the PRGF (Poverty Reduction and Growth Facility). You may be interested to know, in the context of all these acronyms, that at one point Michel Camdessus suggested that this new facility might be called "AGAPE", the Greek word for brotherly love, and some thought was given to what this might be an acronym for (e.g. "Accelerated Growth And Poverty Eradication Facility"). Anyway, it became "PRGF" to indicate that poverty reduction is the central objective, and that economic growth is recognized as the essential way to achieve it. The current Managing Director, Horst Köhler, has reaffirmed the importance of the IMF's continuing to play its part actively in poverty reduction, although the World Bank has the lead institutional role. Also, in 1996 the HIPC (Heavily Indebted Poor Countries) Initiative was introduced to provide debt reduction, and it was enhanced in 1999.
How has the IMF been able to provide low-interest loans to its poorest members?
These are cheaper loans than could be provided from the IMF's "general resources," which come from member countries' "quotas" or capital subscriptions. The concessional facilities have been financed in two ways. First, from capital gains that the IMF has made on its gold holdings; but there have been limits to the extent to which the IMF's membership has been willing to agree to sales of the Fund's gold, because of its importance as a reserve and a basis for the Fund's financial strength and credibility. The second source of financing that has enabled the IMF to provide concessional loans is contributions and subsidies from its member countries. Thus in the late 1980s, the ESAF Trust was created to support programs of low-income developing countries designed "to strengthen substantially and in a sustainable manner the balance of payments position and to foster growth." There have also been contributions from member countries to help finance PRGF loans.
Finally, let me say a word on program design and conditionality.
As you know, the IMF attaches conditions to its loans, not only to ensure that the IMF is repaid, so that its resources become available to be drawn by other member countries in need, but also to ensure that the borrowing country implements policies to resolve the problems that are at the root of its need for balance of payments support. The degree of conditionality attached to IMF loans to poor countries has varied.
Before the introduction of the SAF, so-called "Trust Fund loans" were subject only to limited conditionality (the establishment of balance of payments need and a commitment to efforts to correct the problem) with no performance criteria. Under the SAF, a Policy Framework Paper was drawn up for each country jointly with the World Bank. There were again no performance criteria, but there were quantified policy benchmarks. Under the ESAF, conditionality was made stronger than under the SAF, both because weak conditionality was viewed by the Fund as having been partly responsible for limited progress toward program objectives under the SAF and because the financial contributions from member countries that made cheap loans possible could not have been raised without stronger conditionality. Thus semi-annual disbursements replaced the annual disbursements of the SAF, with performance criteria on both macroeconomic and structural policies.
Under the PRGF there is more emphasis not only on poverty reduction as the central objective of policy, but also on country ownership of the policy strategy, including through broad public participation in the strategy's design. Programs supported by the PRGF are based on comprehensive policy strategies set out in Poverty Reduction Strategy Papers (PRSPs). PRSPs are country-owned, each being prepared by the government of the country concerned in a participatory process involving domestic civil society organizations—including the poor—and external development partners. PRSPs are considered by the Boards of the IMF and World Bank for endorsement as the basis for concessional lending and debt relief. The targets and policy conditions in PRGF-supported policy programs are drawn directly from the country's PRSP, but are focused on the Fund's core areas of responsibility and limited to measures that have a direct and critical relevance to the program's macroeconomic objectives.
Close to 80 low-income countries are eligible for PRGF assistance, and as of the end of July 2003, 39 countries' policy programs were supported by PRGF arrangements, with loans outstanding amounting to $7.3 billion and undrawn balances of $3.8 billion. About 40 countries are eligible for debt relief under the HIPC Initiative, and as of the end of July, 2003 HIPC assistance of roughly $2.5 billion had been committed to 28 countries, of which $1.5 billion had been disbursed. For the countries benefiting from the HIPC Initiative, debt service payments are being reduced by about one half in relation to GDP, exports, and government fiscal revenue. And whereas before the HIPC Initiative eligible countries were on average spending slightly more on debt service than on health and education combined, all the countries benefiting from HIPC are now spending more on social services than debt service—on average almost four times as much; and all have shown marked increases in the share of health and education in their budgets under their recent IMF-supported programs.
7. Technical assistance
The third major activity of the IMF, after surveillance and financial assistance, is technical assistance. This consists of help for countries to strengthen their policymaking capacity—both advice on institutional organization and procedures, and the training of officials—and help with the design of particular policies, including reforms. Technical assistance, including training, in areas where the IMF has expertise, is a benefit of IMF membership, provided at no charge except for countries that can afford to reimburse the IMF.
Technical assistance became a formalized function of the IMF in the mid-1960s and grew steadily through the 1980s. In the early 1990s, requests for such assistance surged when countries in central and eastern Europe and the former Soviet Union began their shift from centrally planned to market economies. In recent years, the regional distribution of IMF technical assistance has gradually shifted from the transition economies to Africa, which now receives more than a quarter of the total. This is part of the increased efforts of the international community to reduce poverty in low-income countries, including by helping countries improve governance through capacity building.
8. The Millennium Development Goals and Monterrey Consensus
The IMF's instruments of surveillance, financial assistance, and technical assistance are thus being applied today in all of the Fund's low-income member countries to the objective of poverty reduction. This objective has been made more specific by the Millennium Development Goals set out in the UN Millennium Declaration of September 2000. These goals, which grew out of agreements and resolutions of world conferences organized by the UN in the past decade, have been widely accepted as a framework for measuring development progress. They aim, in particular, to achieve a halving of world poverty by 2015, relative to 1990.
The goals were reaffirmed at the UN Conference on Financing for Development held in Monterrey, Mexico, in March 2002, where a "two-pillar" strategy for achieving the goals was endorsed by the international community. The first essential pillar recognized by the "Monterrey Consensus" is the responsibility and determination of low-income countries themselves to pursue sound policies and good governance. The second essential pillar is stronger international support for low income countries' efforts. The Managing Director of the IMF has emphasized that "The Monterrey Consensus is our framework for the development partnership"4 and that the IMF is determined to play its full part in helping low-income countries establish and strengthen the first pillar, as well as in contributing to the second pillar, international support. But the Managing Director has also emphasized that the advanced economies must do more, especially in living up to their pledges to meet the long-standing target for aid of 0.7 percent of donor countries' GNP, and in improving market access for developing countries' exports and reducing trade-distorting subsidies, particularly for the agricultural sectors of advanced economies.
To conclude, there is no question that today, work aimed at the goal of poverty reduction in the low-income countries is one of the IMF's main preoccupations. But the IMF's role more broadly—in guarding macroeconomic and financial stability, working to prevent financial crisis, seeking ways of resolving more effectively the crises that do occur, and promoting durable and equitable growth in the world economy—is also, more than incidentally, pro-poor. No doubt the work of the IMF will evolve further in the years ahead as the needs of our member countries continue to develop and the Fund continues to learn new lessons of experience. But for the foreseeable future, at least, it seems clear that the international community will continue to call on the IMF to do what it can for the poor, within its mandate.
1 For further information on the issues discussed here, see the IMF's website, www.imf.org.
2 For example, the proportion of the world's population living on less than $1 a day (at 1993 prices) is estimated to have dropped from 55 percent in 1950 to 24 percent in 1992. (F. Bourguignon and C. Morrison, "Inequality Among World Citizens, 1820-1992.", American Economic Review, Sept. 2002). The proportion has declined further in the past decade.