On the IMF's Role and Activities in Africa, Speech by Thomas C. Dawson, Director of External Relations, IMF
April 28, 2003
Thomas C. Dawson
Director of External Relations
International Monetary Fund
Seminars for Parliamentarians, Civil Society and the Media
April 28-29, 2003
Ladies and Gentlemen: It is a privilege to address you today. Seminars such as these are part of the effort to transform the IMF into an open institution. By an open institution, I mean one that shows willingness to learn from experience. And one that takes into account views from many quarters in developing its policy advice and in carrying out reforms of the institution itself.
While the IMF's interactions with civil society and the media have been a part of our outreach for several years now, meetings with parliamentarians are a more recent feature. This reflects the spread of democracy among the Fund's member countries. Today, nearly 120 of the IMF's members have some form of electoral democracy. These countries represent nearly 60 percent of the world's population. Winston Churchill famously observed that "democracy is the worst system of government—except for all the others that have been tried ..." So, despite democracy's many imperfections, it is cause for celebration that more and more people across the globe are getting a voice in shaping their political and economic destinies.
In my talk today, I'll begin with a review of the IMF's role; then quickly go over our key activities; and conclude with a look at two of the many reforms we've put in place in recent years to better serve our member countries.
II. IMF's Role and its Policy Framework
The IMF and the World Bank came into existence following a conference held at Bretton Woods in July 1944. The IMF's goals are two-fold: first, to provide global financial stability; and second, to assist in the global war on poverty.
Many of the IMF's Articles of Agreement—our marching orders if you will—elaborate on how the institution should go about achieving the first goal. Our former Managing Director, Michel Camdessus, used to carry in his pocket a little plastic-coated page that had Article I inscribed on it as a constant reminder of the basic mission of the Fund. In essence, it calls upon the IMF to promote financial stability by promoting good economic performance; helping our members in times of difficulty; and providing a forum for international cooperation.
Our former chief economist, Mike Mussa, used to say that Article IV, which asks countries to direct their policies to "fostering orderly economic growth with reasonable price stability" deserves equal billing with Article I.
What about the second goal, that of assisting in the global war on poverty? At the Bretton Woods conference in 1944, the economic challenges facing poor countries were not at the forefront of the agenda. But with the breakup of colonial regimes and the spread of independence, the number of developing country members in the IMF increased. And, over time, the concerns of these members have become an important part of the IMF's policy agenda.
To be frank, not everyone has been happy to see the IMF get involved in the global war on poverty. Calls for the IMF to get out of what is crudely derided as "the poverty business" are still made with some regularity. For instance, a commission appointed in 1998 by the United States Congress—the so-called Meltzer Commission—recommended that the IMF should cease lending to countries for long-term development assistance. Similar sentiments have been expressed by many others from time to time.
Quite simply, we disagree with this view. Indeed even some members of the Meltzer Commission filed a minority view disagreeing with the majority's recommendation that the IMF should not be involved in the war on poverty.
The IMF must be active in all of its 184 member countries. Much of the strength and cohesion of the institution derive from the fact that it is a universal institution in which the concerns of all member countries are taken seriously. In many of the IMF's member countries, the problem of poverty reduction is crucial to the entire policy discussion. It would make no sense for the IMF to operate in these countries without taking on board the central concern of policymakers there.
There are also pragmatic reasons for the IMF to be involved in the war on poverty. Policies recommended by the IMF—in all countries, rich or poor—will not be sustained if they are not perceived as broadly equitable. So the IMF needs to show great awareness of the distributional impact of the policies that it supports. Our Managing Director Horst Kohler made this point quite bluntly once when he said: "There cannot be a good future for the rich if there isn't a better future for the poor."
Those are the political and pragmatic reasons for the IMF's involvement in the war on poverty. But there is a simpler reason: from a moral standpoint, it is the right thing to do.
Of course, none of this is to deny that the World Bank has the lead role among international institutions in the global war on poverty. The energies of the Bank are clearly focused on winning this war, as is evident from its chosen motto: "Our dream is a world free of poverty." Several other UN agencies, notably the UNDP, have also been centrally involved in the effort to reduce poverty.
So many institutions—national and international—are involved in fighting poverty, that we need to ensure that they do not simply end up getting in one another's way and canceling out one another's efforts. U.S. President Ronald Reagan used to say about his country's attempts to reduce poverty that `the United States declared war on poverty, and poverty won.' The global war on poverty must not meet with the same fate. Far too much is at stake.
Last year, the international community got together in Monterrey, Mexico, to impart some coherence to the efforts to reduce global poverty and achieve other socio-economics goals. A UN-sponsored conference brought together leaders from several countries and the heads of the major international institutions, including the IMF. The common policy framework that was agreed to at Monterrey—the so-called "Monterrey Consensus"—marks an important landmark in the partnership on global development. Developed countries recognized their responsibility to proving a helping hand through increased trade and aid. Developing countries acknowledged that they must help themselves through good governance and sound policies as African leaders are doing under NEPAD. If both stick to their promises, we have the makings of a new framework of mutual accountability between developed and developing countries. The Monterrey Consensus now forms the policy framework that underlies the IMF's activities in the war on poverty.
III. IMF's activities
Let me now turn to those specific activities—the nitty-gritty of what the IMF does to fulfill its twin goals. There are three main activities: (i) surveillance and provision of policy advice; (ii) lending; (iii) technical assistance and research.
The main task of the IMF is to maintain a dialogue with and among its member countries on the national and international implications of their economic and financial policies. This process of monitoring and consultation is referred to as surveillance. And it is important to be clear on who, legally and really, does the surveillance—not just IMF staff and management, but the member countries of the IMF, all of whom are represented on its Executive Board.
Thus surveillance is a process whereby each member country is accountable to the rest of the global community for its economic policies and their international repercussions. It is a key element of international economic cooperation. In recent years, increasing efforts have been made to make IMF surveillance more effective—in particular, by having it take greater account of expanding capital flows, of financial sector issues, and of the variety of exchange rate arrangements that countries have chosen.
The second main activity of the IMF is to provide loans of foreign exchange to countries experiencing balance-of-payments problems undertake the necessary adjustment and restore conditions for sustainable economic growth. The financial assistance provided by the IMF enables countries to rebuild their international reserves, stabilize their currencies, and continue paying for imports without having to impose trade restrictions or capital controls, or take other measures `destructive of international prosperity', which is the phrase used in our Articles of Agreement.
From the 1970s onward, low-income and emerging market countries started to become the main borrowers from the IMF. It soon became clear that the IMF's traditional 12-month stand-by loan requiring repayment within 3 to 5 years would not serve many of these countries. The balance-of-payments problems faced by many of these countries could only be addressed in a medium-term context and through structural as well as macroeconomic policies. The IMF also became conscious that the policy programs supported by its loans would be inadequate if they aimed only for the correction of a balance-of-payments problem: 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 our Articles of Agreement.
With this in mind, extended arrangements were introduced in 1974 to provide financing for medium-term economic programs, generally with disbursements over 3 years, with repayments over 4½ to 10 years. The SAF and ESAF, 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.
The Poverty Reduction and Growth Facility is the latest step of these adaptations toward medium-term financing on concessional terms. It now accounts for the majority of IMF lending arrangements, though the dollar amounts are small relative to those disbursed through our other arrangements.
The IMF's third major activity is to provide technical assistance in its areas of expertise. This helps countries strengthen the institutional capacity that provides the basis for their policy-making, and also leads to the provision of advice on how to design and implement effective policies.
Mr. Kohler has said that it is not lack of political will but lack of capacity that often blocks progress in economic reform in Africa. And so, responding to the request made by African heads of state two years ago, the IMF launched a new IMF Africa Capacity-Building Initiative. As part of this effort, a regional technical assistance center—AFRITAC East—was opened in Dar es Salaam in October last year. Another center—AFRITAC West—is scheduled to open at end-May in Bamako. Based on an independent evaluation of these two centers, the Fund will consider establishing three additional centers to cover the rest of sub-Saharan Africa. This effort is being carried out in close cooperation with the World Bank and other donors, and will concentrate in the IMF's core areas of expertise.
In addition to the AFRITACs and other technical assistance efforts, the IMF has been helping capacity-building in Africa through its support for the African Economic Research Consortium (AERC). Based in Nairobi, the AERC is an organization that supports researchers from universities all over Africa. Since 1995, the IMF has had an arrangement with AERC through which a few African researchers could to the Fund every year to interact with Fund staff and to take advantage of the IMF's facilities to further their research projects. So far nearly a 100 African researchers have visited the Fund under this arrangement.
The program helps both Africa and the Fund. It improves the capacity for research and economic analysis in the region. And it helps the Fund make some friends and gives IMF staff a better sense of what research would best serve the needs of our African members.
As part of its research agenda, the IMF is trying to understand better the linkages between macroeconomic policies and poverty reduction. While growth is necessary to reduce poverty, it may often not be sufficient. So we are trying to understand better the kinds of macroeconomic policies that deliver both growth and poverty reduction in low-income countries. In this context, special emphasis is being given to understanding the nature of shocks, such as shocks to commodity prices, that low-income countries are confronted with and the appropriate macroeconomic policy responses. Emphasis is also being given to understanding what kinds of safety nets are the most effective in protecting the poor and the vulnerable during economic downturns or fiscal contractions.
V. IMF in the Process of Change: Two examples
That is a review of the role and main activities of the IMF, both of which have displayed a fair bit of constancy over time. But this very constancy of its purposes has required the Fund to evolve in response to changes—especially changes in the structure of the world economy and the IMF's own membership—and also in response to lessons we have learned from our mistakes.
Let me give you a couple of examples of areas where we have changed. The first concerns our efforts to re-design IMF conditionality and the second our efforts to become a more transparent institution.
A. Streamlining conditionality
Let's begin with conditionality. The number and scope of the structural policy conditions attached to IMF loans increased significantly over the 1980s and 1990s. The expansion was driven by two factors. First, as I noted earlier, there were concerns—both at the IMF and among our critics—that in dealing with balance of payments crises the Fund had not sufficiently concerned itself with returning the economy to growth. The Fund responded to this concern by paying increased attention to the need for structural reforms to promote growth. Second, the Fund got involved in helping the transition economies, where comprehensive structural reforms were needed.
But though the expansion of structural conditionality was a largely appropriate response to changing circumstances, there is a sense that we may have gone a bit too far. The conditions attached by the IMF to the loans made during the Asian crisis were criticized as being too extensive. They asked for "too much, too soon" and ventured into areas far outside the Fund's mandate and expertise.
So we are trying to focus our conditionality on the Fund's key areas of responsibility, namely macroeconomic policies, and to those structural measures that are critical to achieving the macroeconomic objectives of the program. The intent is not to weaken conditionality, but to make it more effective.
Summary statistics on the scope of conditionality under recent PRGF arrangements provide some indication of the streamlining that is underway. The average number of structural policy conditions under new PRGF arrangements and reviews conducted in 2002 is lower than earlier experience, with a particularly significant decline in the incidence of structural conditionality on matters that are not within the Fund's core areas of competence. So the charge—never particularly true—that the IMF traps countries in a web of conditionality is starting to lose some of its force.
Nevertheless, the new approach to conditionality raises important questions that will need to be resolved as we gain experience.
· For instance, how do we ensure that key measures that are not in the Fund's area of expertise—including those that are critical for growth—are nevertheless implemented? This will require close collaboration with the World Bank and the regional development banks.
· Another big question: How do we deal with problems of governance? Shouldn't measures to ensure the transparency of government operations and eliminate corruption be covered by conditionality? There is a consensus in the international community that lending programs will not achieve their intended results in an environment of poor governance and corruption. It is for this reason that the IMF has raised governance issues in a number of program cases and also in the context of its surveillance activities.
· And how do we reconcile streamlined conditionality with ownership? Should the Fund say no to the government of a borrowing country when it asks for the inclusion of many structural conditions in a Fund arrangement? How broad should the support for certain conditions be, and from what segments of society, before the Fund accepts their inclusion?
These are complex and delicate questions that we and member countries will have to wrestle with in the years to come. Some of them have already come up in the context of Ghana's water privatization plans. Some civil society groups point to this an example of an onerous condition placed by the IMF on Ghana and an encroachment into an area outside the Fund's expertise. But the privatization plans are part of the country's own home-grown Ghana Poverty Reduction Strategy, their PRSP. And while the modalities of privatization are indeed outside the IMF's areas of expertise, in many countries state-owned enterprises can present a major drain of the budget without providing services or goods efficiently—in such cases privatization may be an appropriate focus of IMF conditionality.
The second example I want to offer of a "new IMF" is the increased transparency of the institution and its member countries.
The move to greater openness began following the Mexican tequila crisis of 1994 and was accelerated during the Asian crisis of 1997-98. In reporting their financial positions some of these crisis countries had been, shall we say, `economical with the truth'. The IMF therefore launched initiatives to increase the transparency of the data—particularly on international reserves and external debt—provided by its members to the IMF and to financial markets.
But not only were countries under pressure to come clean, but the IMF itself came in under pressure to reveal its policy advice to countries, that is, to be less secretive. In response, the IMF started to urge countries to publish documents that had been kept outside the public eye.
The financial crises of the last decade led to a demand to know what advice the Fund was giving, but a public debate on whether it was the right advice. That is, the Fund's competence came into question. So great was the clamor that the Fund had to defend its actions not just to its member countries but to a variety of audiences—the media, academics, civil society organizations and, indeed, the public at large. The steps taken in response are part of the ongoing transformation of the Fund into an open institution, one that `listens and learns'.
Consider some of the changes that have come about in the last five years. We used to publish virtually nothing, now we publish virtually everything—nearly all letters of intent; summaries of Board discussions in 80 percent of cases; full staff reports in 60 percent of cases; publication of nearly every paper on policy issues. The rate of publication varies across countries and regions—African countries are among the leaders in the transparency revolution at the IMF.
Not only are we being more open about the financial situation of our member countries, we are being more open about the Fund's own financial position and accounting practices. The IMF should certainly lead in this area and fully practice what we advise others to do. In short, information once guarded closely as state secrets is now routinely published.
The IMF has been doing more than telling the world what is doing, it has been listening to what others think of what we're doing. There are several examples by now that illustrate this learning culture at the IMF:
· The review of IMF conditionality was carried out with public involvement through the Internet and organized seminars around the globe with wide participation of academics, policymakers, and civil society organizations.
· The IMF's proposal for a Sovereign Debt Restructuring Mechanism (SDRM) has from its very first launching in November 2001 been adapted in response to comments from officials, private market participants, and the public.
But no matter how honest the attempt at self-criticism, we all have a tendency to end up being a tad generous to ourselves. So a very crucial element of the attempt to build an open institution is the establishment of an Independent Evaluation Office (IEO), which started operations in July 2001.
Studies by an independent office can take care of the problem of excessive generosity of internal assessments, and therefore also carry more credibility with the public at large. The IEO has the freedom not only to decide how it will carry out its investigations but what topics it will investigate. The first three topics it has chosen show that the office is taking the `bull by the horns':
· Its first study is on the prolonged use of IMF resources by some countries. `Evergreening' of loans is of course a problem as it goes against the principle that IMF financing is meant to deal with short-term problems and should be temporary.
· Second, the IEO is studying the effectiveness of the IMF's response in capital account crisis cases, using Indonesia, Korea and Brazil as examples. Once again, this is a critical area, as capital account crises represent the new phenomenon that the IMF has had to deal with since the Mexican crisis.
· Third, the IEO will study fiscal adjustment in IMF programs. There is a widespread concern among academics and many observers in developing countries that IMF programs tend to be overly contractionary, with adverse effects on output and employment. There is also concern that the full implications of the fiscal stance, especially its possible adverse effects on poverty, are not factored in fully.
With its first study, the one on prolonged use of IMF resources, the IEO has established its credibility as an office that is truly independent. According to the study, 44 countries are what it considers prolonged users of IMF resources. The study pulls no punches, which is of course a bit hard on IMF staff, who are at the receiving end. But we can improve future performance only if we are willing to accept that we could have done better in the past.
Anyone who has worked at the IMF for a number of years, or has had substantive interaction with the institution over a period of time, recognizes the quantum leap in IMF transparency over the last few years. But, as with internal assessment of other policies, it is better not to rely solely on one's own opinion or the opinions of friends. We know we have been successful because outside observers, including prominent critics of the institution, have also applauded the increased transparency of the institution.
· Ann Pettifor of Jubilee Research, a vociferous critic of the IMF, praised the Fund's "intellectual confidence" in using an "open and transparent " process in the development of the SDRM proposal.
· The members of the Meltzer Commission, even though they disagreed with one another on many matters, were unanimous in recognizing the increased transparency of the Fund.
· In December last year, the World Bank decided to start reporting data on how much countries owe it and when those payments are due. A Bloomberg reporter noted that the provision of this information "brings the World Bank up to the level of disclosure of the International Monetary Fund ... The IMF has been making repayment data public for five years."
What has been achieved in the space of only a few years is impressive. But harder reforms lie ahead.
With respect to publication, it is true that the bulk of IMF documents are now posted on the website. But most of the Fund's output is prepared for the officials of member countries or for internal deliberation, often in specialist language; outsiders find it difficult to absorb it or draw the essence from it. Much of it needs to be summarized and explained for outside audiences. As the Fund's transparency policy has prompted the release of more documents and data, this need for explanation has become larger and more urgent. Even journalists who specialize in monitoring the Fund say that the Fund's policy advice and program conditions are often difficult to understand and, consequently, not reported as accurately or as widely as they might be.
One interesting example of this occurred when the PIN summarizing the Board's discussion on the Fund's transparency initiatives was itself the subject of jokes in the media over its use of nontransparent language.
So more needs to be done to make such material understandable―including by presenting it in plain language and reducing jargon. I should note, by the way, that it's not only the IMF that is fighting to avoid the use of jargon; there are indications that even the CSOs have to be on the guard against it.. One CSO speaker told a World Bank audience recently that his staff had warned him against using too much civil society jargon during his speech at the Bank.
As we move forward with transparency, the IMF will also have to grapple with an overarching issue, namely, the trade-off between further progress on transparency and maintaining the institution's effectiveness in doing what it was set up to do. There is a doctor-patient or lawyer-client element to the relationship between the Fund and its members, and the effectiveness of the relationship depends to some degree on confidentiality, particularly at the initial stages of the dialogue or the negotiation. Disclosing prematurely details of ongoing loan negotiations could be disruptive and detrimental to the country's interest.
There are also limits on the extent to which the internal communications of the Fund can be made public. Fund officials need to be able to communicate with IMF management in confidence. Likewise, Fund staff need to have the liberty of having a frank and confidential exchange of views among themselves before a final decision on an issue is made. Of course, our decisions should be reviewed at a later time, reviewed honestly, independently, and openly. But the work of the organization would grind to a halt if every communication among the staff and every internal memorandum had to be explained and defended in real time.
The IMF will stay engaged in Africa—Mr. Kohler's three trips to the region during his term so far as Managing Director reflect the institution's deep commitment to the region. During the MD's trips, there have been many meetings with heads of state, public officials, business and labor representatives, and civil society. The message we have heard is that the IMF needs to do many things differently. But the people we meet also tell us that they want us to stay engaged, because they understand that whatever its faults, the IMF does truly want to help African countries achieve sustained growth and fight poverty.