Japan and the IMF
United States and the IMF
IMF Surveillance -- A Factsheet
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Remarks by Rodrigo de Rato
Managing Director of the International Monetary Fund
At a panel on "The IMF's Evolution and the Challenges Ahead"
20th Anniversary Annual Meeting of the Bretton Woods Committee
Washington, D.C., September 30, 2004
1. Ladies and Gentlemen, good afternoon. On behalf of the IMF, let me express my gratitude to the Bretton Woods Committee for 20 years of support and constructive criticism. Congratulations on your anniversary and we wish you many, many more. Anniversaries are a good time for reflection. So I appreciate this invitation to look back at how the Fund has evolved and to discuss how to adapt to the challenges facing the institution.
The Evolution of the IMF
2. The changes in the world economy since 1944 have been dramatic. The IMF's instruments—surveillance, lending, and technical assistance—have been developed and constantly adapted in response to these changes.
3. The first major change was the rise in economic strength of countries outside North America. In 1944, the dominant position of the United States gave it a 33 percent quota share in the IMF. Slowly but steadily, economic power has become more dispersed. Western Europe, and then Japan and much of East Asia, achieved strong growth and income levels approaching those of the United States.
4. While welcome, the rise of multiple centers of economic power also created some problems. In particular, it made it difficult to sustain a fixed exchange rate system centered on the U.S. dollar, one of the tasks for which the Fund had been created. When the system collapsed in the early 1970s, it was replaced by one in which countries were free to choose their exchange rate regimes. The IMF was given the new role of exercising "firm surveillance" over countries' macroeconomic policies to ensure the effective operation of the new international monetary system. Since then, much work has gone into strengthening Fund surveillance, and it is still a work in progress.
5. The second major change has been the growth and globalization of private financial markets. Over the past two decades, a large group of middle-income "emerging market" countries has benefited from access to private foreign capital. But they have also faced the cost of becoming exposed to the risk of capital account crises. In response to these crises of the last decade, the Fund in many cases offered large loans to countries in Asia and Latin America to help restore confidence, stem the outflow of capital, and prevent contagion. Of course, the Fund and other agencies have also put a lot of effort into strengthening the international financial architecture so that there are fewer crises in the first place. Many of you in this room have been intimately involved in these efforts.
6. The third major change since 1944 has been the expansion of the IMF's membership so that it is now a universal institution. Most African countries joined the Fund as they gained independence between the late 1950s and early 1970s. Their membership transformed the IMF in profound ways. The Fund had to adapt its financing and policy advice to support growth-oriented structural reforms. And since many of these countries could not afford to borrow on standard terms, the IMF established arrangements for loans on concessional terms. This was first done through a Trust Fund in 1974 which, over time, evolved into the Poverty Reduction and Growth Facility in 1999.
7. The Cold War's end led to another wave of new IMF members. The Fund supported programs in many countries in central and eastern Europe and the former Soviet Union. These programs, and the Fund's technical assistance, helped many of these countries to carry out the transition from centrally planned to market-based economic systems.
8. In short, the Fund has constantly adapted its instruments to meet the three major changes in the global economy that I have described.
• First, the IMF's surveillance mandate was amended to keep up with changes in the international monetary system.
• Second, the Fund developed new crisis management and lending tools to help emerging market countries deal with capital account shocks.
• And, third, it developed concessional lending to promote growth and reduce poverty in low-income countries.
9. I do not want to suggest that we are at the end of the road in this process of adaptation and change. Many challenges lie ahead in all three areas that I have mentioned, and we will need to keep working to improve our surveillance, our crisis resolution efforts, and our work in low-income countries.
Some Challenges Ahead
10. Let's begin with surveillance. Over the last decade, there has been significant progress in strengthening IMF surveillance to improve countries' economic policies and to help prevent financial crises. But improving the analytical content and timeliness of our surveillance is not enough. The challenge is: how can we improve the effectiveness of surveillance in influencing policies?
11. One way is by maintaining the focus of the last decade on increased transparency. While the Fund is still sometimes called upon to play its traditional role of a confidential policy advisor, increasingly our members are choosing to make public the results of Fund surveillance. Indeed the percentage of country reports that is published is now above 75 percent. This is promoting greater accountability and helping markets assess risks more accurately. Communicating the IMF's views about a country's economic policies clearly to policymakers and markets reinforces incentives to take corrective policy actions.
12. Another way is by paying greater attention to how one country's policies affect other countries and the stability of the global economy as a whole. Even if a country is not itself at risk, its policies may be contributing to global imbalances and placing the rest of the world at risk. The IMF, as a universal institution and as the impartial voice of the international community, is uniquely positioned to highlight economic challenges that require a cooperative global approach.
• This is why the IMF's surveillance of the major advanced economies is so important. In our recent surveillance reports, and in our World Economic Outlook that was released yesterday, we have called on the United States, Europe and Japan to take policy actions to address global current account imbalances. This means active efforts by the United States to reduce its fiscal deficits, and by the European Union and Japan to promote more vigorous growth through structural reforms.
• Equally important is our Global Financial Stability Report, which presents the findings of our surveillance of global capital markets, including of the major players in these markets.
• And we are conducting intensive health check-ups of the financial sectors of member countries through our Financial Sector Assessment Program. Over ninety countries have thus far taken advantage of this program. In a world of contagion, a clean bill of health for a country's financial sector is good news not only for the country itself but for its trading and financial partners.
Better Crisis Resolution
13. But however good our surveillance, crises will occur, and the Fund's role must then be to help resolve them through policy advice and financial support. In the last decade, these crisis resolution efforts have often required large loans from the IMF. In most cases, this investment has paid off: it has supported strong stabilization and 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. 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 in Brazil and Turkey in recent years. These cases show that exceptional steps to resolve exceptional situations can work.
14. That said, we also need an IMF that can say "No". The prospect of the Fund declining to provide financial support would strengthen the incentives to implement sound policies, thus avoiding the need for Fund support in the first place.
15. The international community also needs crisis resolution instruments other than conditional lending by the IMF. Ad hoc attempts to manage crises by coordinating private lenders, which had some success in the 1980s, have become more difficult with the greater importance of bond finance. The introduction of collective action clauses in bonds issued under New York law is a welcome step. So is the work by sovereign debtors and private creditors to develop a voluntary Code of Conduct. Over time these steps could address some the collective action problems that stand in the way of efficient and timely debt restructurings; but we should assess in the light of experience whether they are enough.
Winning the Global War on Poverty
16. Let me turn now to our work with low-income countries to win the global war on poverty. 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. Home-grown initiatives such as the New Partnership for Africa's Development, put together by African leaders themselves, are a good example of such efforts. Developed countries in turn recognized their responsibility to help through increased trade and aid.
17. Among the external agencies, the World Bank and other international institutions clearly have a much broader development mandate than the IMF. But the Fund too has an important role because macroeconomic stability is crucial to foster durable growth and poverty reduction. 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. Mozambique, 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.
18. Developed economies must now live up to their end of the bargain and help countries that are improving their policy environments with the promised aid and trade. This will not only encourage these countries to keep to the reforms but encourage other countries to start down that path.
19. Quite simply, developing countries need more and better aid. Despite an upturn in recent years, aid remains in real terms well below the levels seen in the early 1990's and well below the commitments made in Monterrey. Traditional forms of aid can be mobilized immediately to take action against hunger and poverty. But the IMF also welcomes the discussions, such as those organized recently at the United Nations by President Lula and others, on innovative ways of financing an increase in aid flows. Other ideas for providing increased aid, including deeper debt relief and increased grant financing, are needed and welcome. Increased aid should be considered not just for the countries under the HIPC Initiative but for others as well.
20. Donors must also do better with the aid they already disburse. They must continue their efforts to harmonize their aid agendas, make aid more predictable, and reduce the transaction costs of aid disbursements. Working within its areas of expertise, the Fund will continue to help countries create an environment that attracts aid and utilizes that aid effectively.
21. There is, of course, an important role too for Fund financial assistance, provided on concessional terms for limited periods. This can help low-income countries deal with the effects of external shocks and also help countries emerging from conflict restore their prosperity. The IMF's Executive Board met yesterday to consider Iraq's request for Emergency Post-Conflict Assistance. The approval of this financial assistance marks an important step toward Iraq's re-entry into the international financial community.
22. Ladies and gentlemen: The IMF has a track record of adapting to changes in the past 60 years while continuing to pursue its original mission. This gives us hope that, with your help, it will surmount the challenges I have described and others that it may face with the years ahead. Thank you.
IMF EXTERNAL RELATIONS DEPARTMENT