Remarks by Agustín Carstens, Deputy Managing Director, IMF
October 22, 2004
Remarks by Agustín Carstens
Deputy Managing Director
International Monetary Fund
at the WCC-World Bank-IMF High-Level Encounter
October 22, 2004
Good afternoon, Ladies and Gentlemen. First of all, let me express on behalf of Mr. de Rato his deepest regret for not being here today. As you know, official commitments in the Middle East prevented him from participating in this forum. Nevertheless, he had the opportunity to meet early this morning with Dr. Samuel Kobia and Dr. Agnes Abuom, in an encounter that was both productive and enlightening. I am honored to be here in his stead, alongside Jim Wolfensohn. Let me assure you that my IMF colleagues attending this session and I will faithfully convey to our Managing Director and the Executive Board the outcome of today's discussions.
There is no doubt that the IMF welcomes this opportunity to deepen the dialogue between our organizations. I appreciate the hard work of our staffs that has made this meeting possible, and I know that a lot of ground has been covered in the meetings that have taken place over the past couple of years.
I would like to start my presentation by briefly setting out the IMF's mandate and its role in low-income countries, given that these countries and poverty reduction form the main focus of our discussions.
The IMF's mandate is to promote stability in the international financial system and openness of economies to international trade and payments. Specifically, the IMF's purposes are to promote international monetary cooperation; to facilitate the balanced expansion of world trade, and to contribute thereby to high employment and rising living standards; to promote stable exchange rates and assist in the establishment of an open multilateral system of payments; and to help countries correct balance of payments problems in an orderly manner by providing temporary loans, under adequate safeguards.
In the context of the wide array of economic, political, social, cultural, and spiritual dimensions of human wellbeing, this seems a fairly narrow mandate. Yet, it can have far-reaching implications. Fundamental tenets held by our member countries—and these are ratified by our experience of over 60 years operating with an almost universal membership—are that macroeconomic and financial stability and open economies are critical for sustainable economic growth—by which I mean sustainable growth of average real incomes per head. Growth, in turn, is essential for poverty reduction. Macroeconomic and financial stability is our core mandate. But "high levels of real income" are among our purposes and raising living standards and reducing poverty across our near-global membership must be our ultimate goal.
There is substantial evidence to back up the links between stability, openness, growth, and poverty reduction. Let me give you some concrete examples: Korea was a very poor country in 1960, lacking in natural resources and heavily dependent on foreign aid. Over the next 40 years, the government's commitment to sound macroeconomic policies, reforms to remove bottlenecks and improve infrastructure, and liberalization of trade and financial sectors transformed Korea into a wealthy, prosperous, and dynamic nation. Real GDP per capita increased tenfold, infant mortality plummeted, and life expectancy rose by more than 20 years. China's experience also tells a growth story: over the last two decades, some 400 million people emerged from poverty. In some other low-income countries, particularly in Africa, many challenges have made rapid progress difficult to achieve. But where governments have established stable macroeconomic frameworks and pushed ahead with structural reforms—such as in Mozambique, Tanzania, and Uganda—we have begun to see encouraging results. I would like to note that the poverty rate in Uganda has declined by more than 20 percentage points in just eight years.
All these success stories have several elements in common: a commitment to sound macroeconomic policies, efforts to address structural shortcomings, and an embrace of integration with the rest of the world. Yet, we acknowledge that, while stability and growth are necessary for poverty reduction, progress must also be made on a broader front. Improvements in equity are critical. So too are policies that help the poor to withstand shocks better and improve their access to essential services. But these policies can only be designed and implemented by the countries themselves with the assistance of other development partners, like the regional development banks, the World Bank, and United Nations agencies. It is the role of the Fund to help countries establish a platform of macroeconomic stability, which is essential for such policies to have sustained success.
Another way of thinking about the Fund's mandate is that we are charged with helping countries to take difficult decisions in the macroeconomic arena. We do this through all three of our main functions: the regular policy dialogue that we maintain with member countries (which we call surveillance), technical assistance, and lending. It is sometimes claimed—especially with regard to our lending function—that the IMF inflicts economic pain, rather than alleviates it. This is a grave misconception. Often, the IMF lends when no one else will, and at interest rates lower than could be expected even in the best of times. IMF loans thus relieve austerity by helping governments to limit the amount of budgetary belt-tightening that may be required during a crisis, thereby softening the impact on national prosperity and the poor.
Moreover, the conditionality that is associated with IMF lending helps to ensure that a country does not just postpone hard choices and accumulate more debt. Rather, it strengthens its economy and becomes able to repay the loan, so that the funds then become available for lending to other countries that need balance of payments financing. The "seal of approval" provided by IMF lending also reassures investors and donors that a country's economic policies are on the right track, and helps to generate additional financing from these sources. This means, of course, that the Fund has to be careful to maintain its credibility: if we lose that credibility, by lending in support of inadequate policies, such catalytic, complementary support would not be forthcoming.
Clearly, there are some tensions that the IMF faces in its support of low-income members. We were not set up as a development institution, and we do not have the resources to provide grants or the kind of long-term development assistance that many low-income countries need to address the severe challenges they face. But we nonetheless need to be relevant to all our members.
The IMF contributes in this process by helping our low-income members to establish and maintain the economic and policy environment that is critical for aid to be put to good use. The growing recognition of the importance of ownership in successful reform efforts led the Fund and Bank to make country-generated Poverty Reduction Strategies (PRS)—the so-called "PRS approach"—the basis of our work with our low-income members since 1999. As you know, the PRS process feeds into our concessional facility, the Poverty Reduction and Growth Facility (PRGF).
While it is too early to evaluate the success of an approach adopted just five years ago—given the long-term nature of its objectives—some progress has clearly been made. Participation in the formulation of policies has improved under the PRS in most countries. Policies are more focused on poverty reduction and long-term development needs. And IMF-supported programs under the PRGF include more pro-poor elements, such as specified levels of social or health spending, and have incorporated greater fiscal flexibility for accommodating increased aid flows.
It is appropriate to say that we have already identified areas where our support for low-income countries could be improved, and we are working to address them. We have been working to streamline conditionality in Fund-supported programs in order to promote greater country ownership of reforms. We are working to ensure that the poverty reduction strategies are better integrated into each country's domestic policy-making process, and to improve the link between the poverty reduction strategy papers and the PRGF. In particular, we are improving our analysis of the impact of economic policies on poverty and social factors, and also are looking for ways to ensure a better reconciliation between long-term development needs and relatively short-term stabilization measures. We have recently extended the HIPC debt relief initiative for two more years, and at the same time are working with the World Bank to make better assessments of debt sustainability. We welcome other initiatives for deeper debt relief in low-income countries, although it is imperative that these include realistic proposals for financing.
Before I close, let me turn to the issue of governance of the IMF, which I know is of concern to you. In many respects, we have made great strides in recent years. There has been a near revolution in transparency over the last decade, as we have increasingly sought ways to explain what we do and why we do it. Publication of IMF reports, on both country and policy issues, has expanded rapidly, and we are also publishing in more languages. Public Information Notices are routinely issued following board discussions. Outreach to civil society―NGOs, faith-based and labor organizations―as well as parliamentarians, has broadened. And the Independent Evaluation Office, established in 2001, has generated objective and independent assessments on a wide range of our operations.
It is true that the system of quotas and voting power in the IMF has, over the years, become distorted and lacks equity. Similarly, representation at the Executive Board has become skewed. On the one hand, it must be emphasized that the Fund operates by consensus—our Executive Board rarely makes decisions based on formal voting. But on the other hand, we realize that such distortions hurt the institution's political credibility and legitimacy. There is recognition—among management, staff, and our Board—that fundamental reforms are needed to ensure that the voices of all countries and regions are represented and heard. Certainly, countries' roles in today's world economy matters, but the smallest and neediest countries must also be adequately represented. There are strong arguments for a revision of IMF quotas, for an increase in basic votes, and for reform of representation in our Board. But these are reforms that must be agreed upon by our member governments, and they require the willingness of many countries that currently hold power to embrace a more equitable system of sharing it. I am afraid that these are not simple issues.
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To conclude, I would emphasize that the management of the IMF very much welcomes the dialogue that we and the World Bank have developed with the WCC. Civil society and faith-based organizations have been strong advocates for the poor and have made valuable contributions in the global effort to reduce poverty. We value the information and perspectives you can provide, and particularly welcome your active participation in the PRS process—including in the context of the comprehensive review of the PRS process that the Fund and Bank are undertaking ahead of our 2005 Annual Meetings. I also understand that our staffs will be conducting a number of joint country-level case studies, which I think will be especially helpful in improving our understanding of each others' work and each others' concerns. I look forward to further developing our already productive relationship.