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The IMF at 60: Evolving Role, Current Challenges
Remarks by Rodrigo de Rato
Managing Director of the International Monetary Fund
At the Breakfast Meeting with the Council on Foreign Relations
New York, September 20, 2004
1. It is a pleasure to be here with you this morning, to see so many friends, and to have this opportunity to discuss with you issues we are considering at the IMF. These are, of course, early days in my tenure at the IMF—days of listening and learning for me, and I look forward to hearing your views.
2. I have been quite fortunate in that the sixtieth anniversary of the IMF has energized a broad examination—inside the Fund, as well as among member governments and outside observers—of the strategic directions of the institution. These insights will be invaluable as the Fund looks to address the challenges created by an ongoing evolution of the global economy and financial system, by the demand for balanced development, and by the related need for critical thinking on how to shape new opportunities for low-income countries.
Responding to Change in the Global Economy
3. Change is not new to the Fund—indeed, the institution has evolved in some quite radical ways since 1944, while remaining faithful to its mission in support of financial stability and global prosperity.
· The Fund evolved with the breakdown of the dollar-centered Bretton Woods system. The shift to a system in which member countries choose their own exchange rate regimes brought a new mandate for the Fund to exercise firm surveillance over members' exchange rate policies, and their macroeconomic policies more broadly, in order to ensure the effective operation of the international monetary system.
· The Fund has also evolved with the expansion in membership arising from the birth of new nations in the developing world and the breakdown of the Soviet bloc. This expansion has brought new imperatives for the Fund, related to the structural impediments to external viability and sustainable growth suffered by many economies—including economies in transition to market-based systems from central planning. At the same time, the Fund met the need for concessional lending to members who could not afford to borrow on standard terms.
· And, the Fund has been adapting to the fundamental transformation in the scale and nature of international capital flows in recent decades. These shifts have required a sharper focus on crises prevention and capital account risks, and have demanded new thinking about the objectives and design of the Fund's lending operations for members confronting capital account crises.
4. Looking forward, there are, of course, many things we cannot foresee, but there are also some things we can anticipate. Continued expansion in linkages among economies and financial systems will provide important benefits in terms of more efficient allocation of global savings, but also will continue to increase systemic risks and risks related to spillovers. Broader economic changes—including the expanding share of emerging markets in the international economy and the challenges of the ageing of populations, particularly in many industrial countries, will also have important implications for the Fund's work. And, we will need to continue working with the broader international community to support low-income countries' efforts to set in place the basis for sustained, rapid growth and poverty reduction. These are all, of course, significant challenges.
5. As we look to address these challenges, we do so in the context of a period of relatively robust growth and low inflation, albeit with some significant risks and vulnerabilities.
· In many emerging market economies, there has been important progress in addressing vulnerabilities that contributed to the crises of the last decade. Reserve levels have increased, providing deeper cushions against external shocks; current account positions have strengthened; and, in many cases, the flexibility of exchange rates has been increased. We are also seeing progress by many emerging market countries in reducing fiscal imbalances, with a greater recognition of the risks inherent in large public and external debt stocks. As a result, notwithstanding the recent tightening of U.S. interest rate policy and movements in oil prices, spreads on emerging market instruments have remained moderate, with increased sophistication and differentiation in market assessments.
· In many low-income countries, we are seeing improvements in the macroeconomic foundations for broader development efforts to achieve sustainable growth and poverty reduction, with debt relief efforts creating space for more productive expenditures and stronger economic growth. Particularly welcome is the fact that growth in Africa this year seems likely to be the strongest since the mid-1990s.
6. This relatively benign global outlook provides an important window of opportunity for further progress in addressing global imbalances and reinforcing the basis for more balanced and sustainable global growth.
· This requires active efforts by the United States to reduce its fiscal and external deficits, and by the European Union and Japan to promote more vigorous growth through structural reforms.
· In middle income countries, continuing efforts are needed to deepen progress in reducing vulnerabilities and to set the stage for sustained growth in output, job creation and poverty reduction.
· And, in low-income countries, all of us—the international community and the countries themselves—should work for faster progress in reinforcing the framework for growth and poverty reduction.
7. Progress in all of these areas must be driven by countries' own policy efforts. But the Fund must also continue to ensure that our policy advice, our technical assistance, and our financial operations are as effective as possible in supporting the efforts of all of our members. In next week's annual meetings of the Fund's Governors from its member countries, there will be discussion of all these issues. Let me touch upon some of the key themes.
8. Increased interdependence of economies and stronger dependence on capital markets mean that it is more important than ever for the Fund to help countries implement policies that will reinforce domestic and global prosperity.
9. To be effective, the Fund needs to provide objective advice built upon the best analytical tools possible, based upon a clear understanding of the specific circumstances of each country as well as the linkages across economies implied by financial integration. We need to identify imbalances and vulnerabilities to allow for corrections before they can create harm. And, we need to communicate our positions clearly, both to policymakers and to markets, and reinforce incentives for countries to undertake pre-emptive corrective actions.
10. The Fund is continuing what has already been an important transformation of its crisis prevention efforts over the past decade. We are working to ensure our advice is focused on the issues most central to the Fund's mandate — including candid discussions of exchange rate policy and a strong focus on financial sector vulnerabilities, as well as balance of payments and fiscal sustainability. We are working to integrate more fully our advice at the global, regional and country levels, recognizing that 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. We are actively monitoring capital market developments and are continuing to sharpen our tools for assessing vulnerabilities, including through an increasingly systematic assessment of debt sustainability and a strengthened focus on national balance sheets and sound debt management. And, we are undertaking, in collaboration with the World Bank and other international bodies, more rigorous assessments of the health of financial systems.
11. But strong advice is not in itself sufficient — it also must be effective in influencing policy. Increased transparency—with over 75 percent of the IMF's country documents now published—is reinforcing accountability and supporting better risk assessment by both policy makers and markets. Broader efforts to reinforce the Fund's policy dialogue with its member countries, to enhance outreach to parliaments, media, and civil society, are also important. And, we are looking at how best to reinforce countries' reform efforts outside the context of a Fund financial arrangement through mechanisms to signal policy commitment.
12. We will also continue to consider the role for precautionary arrangements in promoting incentives for actions to address vulnerabilities. In this context we should explore how linkages between access to Fund resource and performance, including in the context of responsiveness to surveillance and adherence to standards and codes, can reinforce such incentives.
Crisis Management and Resolution
13. But, no matter how strong our crisis prevention efforts are, we will continue to confront crises and must ensure that the design of our assistance is appropriate to the full range of challenges that Fund members face.
14. Over the past decade, we have gained a stronger appreciation of the importance of a clear understanding of the complex political factors that shape a country's willingness and capacity to implement necessary reforms in context of Fund programs. It has become increasingly clear that success depends not only on the design of sufficiently strong policies, but also upon the underlying reforms being owned by the borrower. In this context, by providing an objective, well-articulated outside view, the Fund may be able to help muster the domestic political consensus required to push forward changes that are necessary and desirable.
15. And over the past decade, we have also recognized that the nature of capital account crises, including the important questions raised by confidence effects and the response of capital flows, create specific challenges for designing effective support. Ongoing work reinforce the analytical basis for programs through a better understanding of the potential effects of crisis on macroeconomic developments and on domestic financial systems is essential in this regard.
16. Clarity and predictability regarding whether and when the Fund should provide large-scale assistance are also critical. Exceptional access must be constrained but we also need to recognize that large support packages cannot, and indeed should not, be ruled out. In countries like Mexico and Korea, the Fund's assistance supported the rapid turnaround in confidence and economic performance. We are also seeing important progress in the more recent case of Brazil. But the Fund must also be prepared to say no, on the basis of clear and objective judgments grounded in a clear understanding of government decisions.
17. The expanded volume of private capital and increased diversity of private creditors has also created new challenges in the orderly resolution of capital account difficulties. The recent introduction of collective action clauses for sovereign bonds issued under New York law and work toward a Code of Conduct — aimed at improved dialogue between sovereign debtors and creditors — are important and over time will contribute to addressing collective action issues critical to efficient and timely debt restructurings. The Fund also has an important role to play in helping members seeking to reestablish macroeconomic stability and growth in context of a debt crisis, recognizing the need to ensure that its policies provide a predictable guide to decisions of the Fund as well as the responsibilities of debtors.
The Fund's Role in Low Income Countries
18. Let me turn to the Fund's role in low-income countries. I am very much looking forward to the meetings this afternoon at the United Nations organized by President Lula in cooperation with the governments of Chile, France and Spain where important issues related to fighting poverty and hunger will be discussed. While it is important to recognize the much broader development mandate of other international institutions, the Fund has an important role in low-income countries, focused on supporting the macroeconomic policy reforms and financial stability needed to achieve high growth and poverty reduction.
19. The Fund's efforts are most effective when they focus on issues central to its mandate—through the provision of macroeconomic and financial policy advice and technical assistance. There is, of course, an important role for Fund financial assistance, provided on concessional terms for limited periods, for low-income members facing shocks, including from natural disasters or conflict, or macroeconomic imbalances rooted either in weak policies or in reform efforts. And, for countries moving away from a need for Fund financing, the Fund has a role to play through signaling to the donor community the quality of macroeconomic policies.
20. We are also continuing to work in partnership with other official creditors to support low-income countries' efforts to achieve and maintain robust debt sustainability, including through continued implementation of the HIPC Initiative. The Fund itself will also need to play an active role in providing aid recipients and providers the information they need to help ensure that these countries achieve and are able to maintain sustainability.
21. I welcome your questions and comments.
IMF EXTERNAL RELATIONS DEPARTMENT