The Role of the IMF in a Globalizing World Economy, Remarks by Horst Köhler, Managing Director of the IMF
March 9, 2003
As prepared for deliveryThe Role of the IMF in a Globalizing World Economy
Remarks by Horst Köhler
Managing Director of the International Monetary Fund
At the Fourth Annual Conference of the Parliamentary Network on the World Bank
Athens, March 9, 2003
It is an honor to address such a distinguished gathering of parliamentarians. Since I have become Managing Director, I have met with various parliamentarians from around the world—including members of the Chilean Senate, the Dutch parliament, members of the parliament of Tanzania, and the Treasury Select Committee of the UK House of Commons—but it is a rare privilege to address parliamentarians from such diverse countries in a joint gathering. And it is a particular pleasure to do so in Athens, the birth place of democracy, and in Greece, which currently holds the presidency of the European Union — itself probably the boldest endeavor in spreading democracy in human history.
The Outlook for the Global Economy
The world is facing great uncertainty at present. Consumers and investors remain cautious, and the economic recovery is weaker than earlier anticipated. But I do not expect a global recession. In the short term, the economic policies of the larger advanced economies remain broadly supportive, and there is some further scope for further monetary easing should that prove necessary. However, significant risks and uncertainties remain, first and foremost as a result of the fragile geopolitical situation. Full confidence is unlikely to return until this situation has been resolved.
The Debate on Globalization
As we are gathered here today, the critical debate on globalization continues in capitals and in the streets around the world. I believe the world needs sustainable growth to reduce poverty. And globalization is a crucial engine of growth, through the spread of knowledge, expansion of choices, better division of labor, increased productivity, and access to foreign direct investment. 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, including disruptive volatility in international capital flows, which has destabilized domestic economies, threatening to undo the gains from openness. Such volatility has been particularly detrimental to poor countries, and within countries to the poor and vulnerable.
As parliamentarians, you are familiar with many of the concerns your constituents have expressed. The debate on globalization is healthy and one we should welcome. And we should not confuse ourselves: the people of the world need more globalization, not less. But we need a better globalization. Integration into the global economy must be accompanied by investments to make it more inclusive and to better balance risks and benefits—at the national level, investments in people, in better policies, and in regulatory frameworks, to take advantage of the opportunities that the global marketplace offers; and at the international level, investments in more effective cooperation, to guide and shape the process of globalization.
Tackling the challenges ahead in a spirit of self-responsibility and solidarity
Globalization has many facets. Allow me today to focus on two challenges for ensuring a better globalization, in particular: First, achieving significant progress in poverty alleviation, and second, strengthening our ability to prevent and resolve financial crises.
The conference on Financing for Development in Monterrey/Mexico one year ago reached a remarkable consensus in the fight against poverty in the world. Let me join Jim Wolfensohn in expressing my full support for its conclusions. The principle of solidarity and partnership underlies the commitment by the international community to strive to achieve the Millennium Development Goals by 2015. The IMF is part of this process, and we are working with the World Bank, in our areas of expertise, to complement the World Bank's lead role in poverty reduction.
The Monterrey Consensus, re-affirmed in Johannesburg, defined two equally strong pillars: on the one hand, self-responsibility in developing countries to pursue sound policies and good governance, matched on the other hand by solidarity on the part of the international community to provide stronger and more comprehensive support.
Self-responsibility means country ownership, and ownership is a cornerstone of the Poverty Reduction and Strategy approach that underpins our relationship with developing countries. But it also means taking individual responsibility: responsibility for sound policies and institutions and good governance and ethical leadership. Without these critical home-grown values, sustainable growth and durable poverty reduction cannot be achieved.
- Solidarity is embodied in the UN target of 0.7 percent of GNP for official development assistance. Achieving this target is a concrete expression of support for the world's poorest citizens. But, the average level of official development assistance in the OECD countries is only 0.22 percent of GNP—an unacceptably low figure. I urge the parliamentarians from the advanced economies to do more to increase their development assistance.
While aid is important, I believe that trade holds the key to durable poverty alleviation. The experiences of China and India illustrate the potential of trade to contribute to economic growth and poverty alleviation. But the international trading system remains distorted and, especially, biased against developing countries. Markets in which developing countries enjoy a comparative advantage, such as agricultural products, are among those most protected. Moreover, developing countries often face severe tariff escalation, whereby its raw material exports enjoy relatively easy access while any processing immediately faces significant tariff or nontariff barriers. OECD countries' support to their agricultural sectors alone reached about US$300 billion in 2001 —about six times the level of official development assistance. This discrepancy is widely acknowledged but, so far, action has not matched rhetoric. The Doha trade round is entering a critical phase. I urge you parliamentarians to encourage your governments to ensure that it truly becomes a development round.
Preventing and Resolving Crises
A second critical challenge for the world is to improve the way in which we deal with financial crises. The experience of the 1990s revealed that while the rapid growth in international capital flows brought many benefits, not least by boosting investment in emerging market economies, it also carried risks. Surges in capital inflows placed severe strain on macroeconomic policy frameworks, while sudden reversals exposed, sometimes brutally, how vulnerable some countries had become.
We have worked intensively with our member countries and other international financial institutions to strengthen the framework of the international financial system and make it more resilient to crisis. I would mention seven key elements of this reform:
- There has been a near-revolution in transparency at the IMF, and steady improvement in the release of economic information by our member countries. More than two-thirds of IMF country reports are now public, and virtually all of the economic programs agreed with us are released by our members. This has strengthened accountability and given markets better tools for assessing risk.
- We have been actively involved in developing "rules of the game" for the global economy, through our work on international standards and codes. Among other initiatives, we have developed a Code of Good Practices in Fiscal Transparency, which is playing a valuable role in spreading good budgetary practices and thus strengthening oversight by legislators such as you.
- We are streamlining IMF program conditionality, focusing it on the policies that are critical to meet economic objectives. This will improve the effectiveness of programs and make room for true national ownership of reforms.
- In our ongoing dialogue with member countries, we have paid much more attention to key elements of vulnerability. To promote financial stability and growth, the IMF and World Bank are helping member countries to build sound financial sectors. We are also developing better debt sustainability analysis, to ensure that debt burdens are kept in check at an early stage.
- We are working with the World Bank and other international bodies to promote the integrity of the international financial system, through a comprehensive and intensified effort to fight money laundering and to combat the financing of terrorism.
- And in addition to improving crisis prevention, we are strengthening our ability to assist members in resolving crises if they do occur. We are in the process of clarifying our policy on exceptional access to IMF resources in those truly exceptional circumstances where high levels of access may be required. And we have been working closely with our members, with parliaments, with civil society, and with the private sector on ways to improve the process of debt restructuring in those cases where that may be necessary. We are working on a sovereign debt restructuring mechanism, as well as proposals to include collective action clauses in bond contracts and a voluntary code of good conduct.
- As part of a culture of greater openness, the IMF now has an Independent Evaluation Office. The IEO has published its first evaluation on the prolonged use of Fund resources. We welcome this work and other assessments that are in the pipeline.
As the elected representatives of the people, parliamentarians have a key role to play. The legal framework, which you construct and maintain, lies at the essence of a democracy. Property rights, the rule of law, and efficient public institutions that provide guidance and oversight are pre-requisites for a functioning market economy. The importance of sound institutions was eloquently expressed by Jean Monnet, one of the founding fathers of the European Community, and I quote:
"A European Union cannot be founded on good will alone. It requires rules. [...] Our legacy is not our personal experience, but the institutions that we have established. Institutions outlive us, and if they are well-constructed they can accumulate and transfer wisdom to successive generations".
Experience clearly points to the importance of the quality of institutions for economic performance. Moreover, strong institutions promote social cohesion and equity, providing necessary stability for economic reform. Hernando de Soto argues powerfully that in many developing countries, there is no lack of capital: what is lacking is the legal and judicial infrastructure that allows that capital to be used productively. There is no template of institutions that will work in every country: national traditions will dictate individual solutions. But I have no doubt that promoting a culture of stability and trust is a critical element in ensuring sustainable long-term growth.
And it is Parliaments that play a critical role in building that trust, as forums where citizens can make themselves heard to ensure that laws take full account of their impact on all parts of society.
The last twenty years have seen an unprecedented spread of democracy around the world. This is an historical time that carries tremendous promise for mankind. I agree with Jim Wolfensohn that both our international financial institutions, born in the spirit of cooperation and solidarity over 50 years ago, must play an active role in supporting the democratic process. International financial stability is a global public good; its preservation should be our common goal. IMF country teams and resident representatives are in regular contact with parliaments; our training programs include seminars for parliamentarians; and occasions such as these allow us to reach out to parliamentary representatives from around the world. We value this dialogue: it enables us to listen directly to the concerns of citizens in member countries and, we hope, it enables you to better understand our role and objectives.