International Conference on Dollars, Debt, and Deficits—60 Years After Bretton Woods
June 14-15, 2004
Republic of Korea and the IMF
IMF Surveillance -- A Factsheet
Bretton Woods 60th Anniversary
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Opening Remarks by Rodrigo de Rato y Figaredo
Managing Director, International Monetary Fund
At the Conference on "Dollars, Debts and Deficits—60 Years After Bretton Woods"
Madrid, Spain, June 14, 2004
Introduction: welcome and a few words on the IMF's mission
Ladies and Gentlemen: On behalf of the IMF, let me welcome you all to this conference, which has been organized jointly with the Bank of Spain. Thank you all very much for your presence here in Madrid, where 10 years ago we celebrated the 50th anniversary of the IMF and the World Bank.
This is of course a very timely conference from my personal point of view, and I look forward to hearing your ideas on how the IMF can do its job better. I see the IMF's main job as promoting financial stability and thereby improving the prospects for sustained growth. By doing so, the IMF also helps the international community in the global war on poverty.
An institution with a history of responding to challenges
Safeguarding financial stability has always been at the core of the IMF's mandate. It is why the institution was set up 60 years ago. But what it takes to promote financial stability has changed markedly over these 60 years because of global developments. The IMF's tools-surveillance, lending, and technical assistance-have been developed and constantly adapted in response to these changes.
The breakdown of the Bretton Woods system, and the adoption of floating exchange rates in many countries, marked a radical departure from the world of pegged exchange rates that the IMF was set up to monitor. The IMF's member countries amended the Articles of Agreement to give the institution a mandate to carry out a regular, comprehensive, analysis of the economic situation and policies of each member country. This remains the essence of the Fund's surveillance function.
Around the same time, the oil shocks of the 1970s, combined with macroeconomic instability in much of the industrialized world, created balance of payments problems of unprecedented severity for a large proportion of the IMF's membership. It was at this time that developing countries became significant borrowers from the IMF, and that it became clear that many balance of payments problems were structural rather than cyclical in nature. This led to the fashioning of new lending policies and instruments geared at helping developing countries with these problems.
Recent challenges to financial stability: promise and perils of global capital flows
Over the last decade or so, the major challenge to promoting financial stability has come from the growth in the size and sophistication of international capital markets. A large number of countries have gained access to these markets. In many ways, this financial globalization is a welcome development. It provides opportunities to channel large-scale private capital flows to finance investment and growth in countries where they can be used most productively. Capital market integration also, in principle, provides a way for countries to adjust to external shocks with reduced reliance on official funds.
But this promise of the gains from financial globalization has yet to be fully realized. In fact, in many emerging market countries, capital flows have themselves been a source of volatility. This has added a new breed of shocks—capital account shocks—which have proved much harder to manage than the current account imbalances with which the IMF traditionally dealt. Arresting a reversal of capital flows requires measures that restore investor confidence, supported in some cases by substantial financial help from the official sector.
Financial globalization has also raised the risks of contagion. It has added new channels—in addition to the traditional linkages through trade—through which one country's vulnerabilities can spread through the global economic system.
The IMF's response: improved surveillance, better crisis prevention & resolution
As in the past, the IMF has been adapting its tools to cope with these latest challenges to global financial stability. The lessons learned from the financial crises of the last decade are being used to improve the IMF's performance of its key task, namely, surveillance and crisis prevention.
Surveillance remains at the heart of the IMF's work. Imbalances and vulnerabilities must be identified and corrected before they can harm not only the country itself, but other countries and the global system. Surveillance should tell us when economies might be headed for trouble. It should cover the right issues for each country and the system as a whole. The findings of this surveillance, as reflected in the conclusions of our Executive Board, should be expressed clearly: they should signal potential problems with countries' economic policies both to its policymakers and to markets.
Under my predecessors, Michel Camdessus and Horst Köhler (now President Köhler), there has already been significant progress toward better crisis prevention. Transparency has taken a quantum leap in the last decade. The Fund and its members publish more and better information than ever before. This is promoting greater accountability and helping markets assess risks more accurately. Intensive health check-ups of financial sectors are being carried out through a new program, the Financial Sector Assessment Program. Active monitoring of international capital markets is now a big part of our surveillance. And the Fund has sharpened its analytical tools to assess vulnerabilities and risks faced by countries and regions. Assessments of balance sheet risk and debt sustainability figure more prominently in our surveillance than in the past.
But however good our surveillance, it is unrealistic to expect that crises will disappear. Indeed, a dynamic market economy will face occasional crises—and the Fund's role must then be to help mitigate their impact and shorten their duration through its policy advice and financial support. This sometimes requires the commitment of substantial amount of Fund resources. But in most cases, this investment has paid off: it has supported strong domestic reform programs and helped to limit or avoid contagion. The IMF's loan to Korea in December 1997—$21 billion—was a very large loan by any standards. But it helped restore financial stability by early 1998 and strong growth the following year. And Korea repaid the IMF ahead of schedule. That was a case where large-scale support was appropriate and successful. The Fund played a similar role in Mexico in 1995 and Brazil in 1998.
Of course, we do need guidelines for large-scale access to IMF resources, but these cases also show that exceptional situations can call for exceptional steps to resolve them.
In short, over the past 60 years, the IMF has risen to the challenges faced by its members. I do not mean to suggest that it has always been right. And the description of the reforms already undertaken by the Fund is not meant to suggest that we are at the end of the road. After all, ten years ago here in Madrid, Michel Camdessus spoke of "strengthening Fund surveillance" and "adapting the Fund's financing facilities to a world of globalized markets." So this is an ongoing process of adaptation and change, and many challenges lie ahead.
Promoting financial stability: dealing with the challenges ahead
In the area of surveillance, success cannot rely on early warning alone, it must also prompt early action. There is substantial room for improvement here. IMF surveillance still consists to some extent of confidential policy advice, coupled with peer pressure from other countries in the international community. But peer pressure can also mean peer protection, as know from Europe. There is a need to sharpen the incentives for countries to take IMF surveillance seriously.
Moreover, with increasing financial integration, surveillance must focus not just on crisis-prone countries but increasingly on the stability of the system as a whole. Even if a country is not itself at risk, it may be contributing to global imbalances and placing the rest of the world at risk. The Fund, as the impartial voice of the international community, has a particularly important role to play here in highlighting major economic challenges that the world has to tackle. This is why the IMF calls on the United States, Europe and Japan to contribute to more balanced and sustained global growth. This means active efforts by the United States to reduce its deficit, and by the European Union and Japan to promote sustained growth through structural reforms. Surveillance of the major industrial countries is critical, and multilateral surveillance, including of global capital markets, needs to be constantly strengthened.
We may also have to adapt our surveillance further in anticipation of some of the likely developments in the world economy in the coming decades. Current trends imply that financial globalization will intensify. Emerging markets will represent an even larger share of the world economy than they do today. The future emerging market giants, India and China, may pose particular systemic challenges. And the aging of industrial country populations may also imply higher cross-border capital flows, which will require monitoring.
Some large IMF-supported programs raise concerns because they appear to suggest that a country's geopolitical importance or other such factors play a role in IMF loan decisions. It is important that IMF lending decisions reflect the principle of uniformity of treatment of member countries in comparable circumstances. But the institution has an array of financial arrangements to take into account the specific situation facing each country. In most cases, our normal access policies leave room for the Fund to provide adequate financial support to ease the adjustment process. And, as in the case of Korea that I mentioned, in rare cases, exceptionally large access to Fund resources can be necessary to guard against risks to the global financial system. While such cases draw a lot of attention, the Fund has also given major support to countries whose situation does not pose systemic risks or which may not rank high on the geopolitical agenda of our largest shareholders. For example, our financial support to Uruguay has been quite substantial in relation to the country's GDP and to its IMF quota. In short, the Fund continues to be a lender that countries can turn to when they have balance of payments needs, and when other financing options are drying up.
That said, we also clearly need a Fund that can say "No" selectively, perhaps more assertively, and, above all, more predictably than has been the case in the past. The prospect of the Fund declining to provide financial support would help strengthen the incentives to implement sound policies, thus avoiding the need for Fund support in the first place. To do this, we may have to think of ways of linking access to Fund resources more explicitly to a country's policy efforts before the crisis, and perhaps to its responsiveness to the surveillance process and its adherence to standards and codes. The Fund's proposal for Contingent Credit Lines took some steps in this direction but it was not found useful by the membership. But the issues of the design of precautionary arrangements and contingent access to Fund credit remain on the agenda.
The IMF's role in the global war on poverty: progress and challenges
Let me turn now to our role in the global war on poverty, where of course we work closely with the World Bank. The IMF's mandate here has been shaped partly by the expansion in our membership over the past 60 years. In the 1950s and 1960s, newly independent countries in Asia, the Middle East, and Africa became members of the IMF. As a result, by 1970 there had been a four-fold increase in the IMF's membership. Then, in the 1990s, there was a further expansion to include countries of Eastern Europe and the former Soviet Union. The concerns of this expanded membership brought the issues of structural transformation and poverty reduction into the IMF's domain.
The UN conference in Monterrey in 2002 gave some coherence to global efforts to meet the challenge of reducing world poverty. Under the "Monterrey Consensus," developing countries acknowledged that they must help themselves through good governance and sound policies. Developed countries in turn recognized their responsibility to provide a helping hand through increased trade and aid. The Monterrey Consensus provides a common stage—and the Millennium Development Goals a common script—to enable the many actors involved in the fight against poverty to play their roles better.
Within this broad framework, the IMF has taken steps to ensure that while focused on its core responsibilities of macroeconomic stabilization, it is also actively helping our members achieve their development goals. The IMF is working to ensure that our financial support to low-income countries is based on a development and poverty reduction strategy devised by the country's policymakers after consultation with its stakeholders. The IMF is examining how its concessional lending window, the Poverty Reduction and Growth Facility, can help countries get started on the right track, and stay on it, without the need for prolonged or large-scale financial assistance from the Fund. And, working closely with the World Bank, the IMF is helping with the global monitoring effort to assess the progress countries are making toward achieving the MDG.
The many challenges that low-income countries face makes rapid progress difficult to achieve. But where governments have established stable macroeconomic frameworks and pushed ahead with structural reforms we have begun to see encouraging results. Tanzania and Uganda, for instance, have seen a sustained improvement in economic performance. Growth rates have also picked up in other African countries that have made progress in curbing inflation and establishing better control of the public finances.
But, as with our work on crisis prevention and resolution, we are not at the end of road in strengthening our work in low-income countries. We are just getting started. Many of the Fund's initiatives in this area are quite new. They need to be assessed and course corrections made as required. Our Independent Evaluation Office's forthcoming assessment of this new approach to helping low-income countries will be very useful in this regard.
Coming out of these assessments, I would hope to see greater clarity in what the role of the Fund should be in low-income countries. We need better coordination of our work with that of other institutions—the World Bank, the UN and its agencies, regional development banks, and the WTO—so we fulfill our core responsibilities while giving our member countries the full range of assistance they need. This challenge defining clearly what we are trying to achieve when we help a member country—and ensuring that we have the right tools to achieve it—is present in our work with all countries. But it is especially important for our work in low-income countries, where we are only one partner among many in helping them achieve their longer-run development goals.
I have only just begun as Managing Director of the IMF. I am proud to lead an institution that has strong traditions of successful international cooperation, of learning from research and from experience, and of constantly adapting its tools to meet the needs of a changing global environment. I am certain that the keys to an effective IMF response will be rigor in our analysis, even-handedness in our treatment, and a cooperative spirit among our member countries. I am confident these will continue to be the hallmarks of the IMF.
IMF EXTERNAL RELATIONS DEPARTMENT