The IMF: The Way Forward, Remarks by Rodrigo de Rato, Managing Director, IMF
November 24, 2004
Remarks by Rodrigo de Rato
Managing Director of the International Monetary Fund
The University of Oviedo
Oviedo, Spain, November 24, 2004
As Prepared for Delivery
1. I greatly appreciate this invitation to participate in this event at the University of Oviedo. I would like to take this opportunity to offer some thoughts on the way forward for the IMF. As we mark the Fund's 60th anniversary this year, it is timely to reflect on what the institution has achieved and how it can adapt to challenges in the future.
A Dramatically Changed Landscape
2. Dramatic changes have occurred in the world economy since the IMF's creation in 1944. Let me note three:
• First, over the last 60 years, economic power has slowly but steadily shifted from the United States to Western Europe, Japan, and many East Asian countries. More recently, emerging market economies—Brazil, Chile, China and India, to name but a few—have gained economic power.
• Second, world trade has expanded at unprecedented rates and restrictions on private capital movements have been reduced dramatically. The "globalization" of capital flows is perhaps the defining feature of the last decade.
• The third major change since 1944 has been the expansion of the IMF's membership so that it is now a universal institution. In the wake of independence, most African countries joined the IMF, while the end of the Cold War saw the arrival of many countries in central and eastern Europe and the former Soviet Union.
3. Has the IMF adapted to these seismic changes in the landscape? I think so. The fundamental strength of the Fund has been its ability to adapt its instruments in response to each of the three major changes in the global economy that I described:
• First, with the shift of economic power away from the United States, it became difficult to sustain the system of fixed exchange rates centered on the U.S. dollar. The collapse of this fixed exchange rate system in the 1970s led to a key change in the IMF's agenda. Our role became one of exercising "firm surveillance" over countries' macroeconomic policies to help ensure the orderly operation of the international monetary system.
• Second, over the last decade, a large group of middle-income "emerging market" countries has benefited from access to private foreign capital. But many have also faced the cost of becoming exposed to the risk of capital account crises. The IMF was called in to resolve many of these crises, and in the process developed—and refined—crisis management and lending tools to help countries deal with capital account shocks. The IMF 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.
• Third, the IMF has always recognized the diverse circumstances and needs of its members, including the special needs of low-income countries. So the IMF has, over time, become more involved in issues of development, poverty reduction, and structural transformation. It has used concessional lending to promote growth and reduce poverty in low-income countries.
4. We are not at the end of the road in this process of adaptation and change. Challenges lie ahead, and we are trying to improve in all three areas I mentioned: in our surveillance, in our crisis resolution efforts, and in our work in low-income countries.
Increasing the Effectiveness of Surveillance
5. Let me begin with the steps we are taking to increase the effectiveness of the IMF's surveillance.
6. First, a good deal is being done to strengthen the quality and persuasiveness of the analytical work reflected in IMF surveillance. And going forward, there will be sharper focus on some key issues, such as exchange rate policies, fiscal and external debt sustainability, and the health of the domestic financial sector.
7. A second step to increase effectiveness is through increased transparency. Over 75 percent of our member countries now make public the results of the surveillance—the annual health check-up—conducted by the Fund. And this transparency has been achieved without compromising the quality and candor of the reports. (You can find these reports on the IMF's website.) This welcome trend toward transparency will be maintained and strengthened: it informs both markets and the public about a country's economic policies and thus reinforces the incentives for policy makers to adopt sound policies.
8. Third, we are devoting more attention in our surveillance work to the spillover effects of one country's policies on others. Through our reports on the major advanced countries, and our World Economic Outlook, we highlight economic challenges that require a cooperative global approach. Our reports do not shy away from urging major industrial countries, including the United States, Japan, and the EU membership, to address issues of importance to the world as a whole, such as global current account imbalances. It is sometimes said that the IMF's ability to influence policies of these countries, which do not borrow from us, is seriously constrained. But I think the fact that their policymakers have sometimes publicly indicated disagreement with some of our conclusions is a sign of the strength and influence of our work. And sometimes our advice can result in gradual change rather than dramatic policy reversals, and our influence can be exerted in many subtle, but nonetheless important (and not necessarily publicized), ways.
9. And fourth, globalization of capital flows and heightened cross-border financial risks call for special attention to financial markets. We know that vulnerabilities in this area, in conjunction with weak domestic economic performance, can contribute to crises. The Fund's Global Financial Stability report and our Financial Sector Assessment Program, which examines the health of domestic financial sectors, can help policymakers and market participants make informed decisions, thus lessening the risk of financial crises.
10. While these steps are improving our surveillance work, we will have to be careful not to spread our resources too thinly by engaging in too wide a coverage of topics. If the IMF is pulled into engagement with all of the problems in the world economy, the quality of its surveillance will suffer. So the focus of our surveillance must remain that of identifying key macroeconomic issues that face a country, and preparing as authoritative an assessment and set of recommendations as possible.
Lending by the IMF
11. Despite best efforts on surveillance, we know that crises can and will happen. Thus, the IMF needs to continue do everything it can—by way of policy advice and financial support—to assist in crisis resolution. This is perhaps the most publicly known and often controversial feature of our activities.
12. But despite the heated debate at times, the basic thrust of IMF policy advice is not seriously in question. Prudent fiscal and monetary policies provide the macroeconomic stability that is essential for investment and sustained growth. Thus, in the event of a crisis an essential priority is to ensure that such policies are firmly in place. At the same time, large exceptional financing by the IMF and others can help cushion the impact of the adjustment while international confidence is being restored. This approach can, and has, yielded many positive results: Korea, Brazil, and Turkey are good examples in recent years. A balanced assessment of the IMF's role should recognize that there have been many successful cases of crisis resolution.
13. However, it is inevitable that in a risky situation—and the IMF often has had to step in when risks were high—not all the outcomes will be positive. Judgments made often in the presence of great economic and political uncertainty may, in hindsight, turn out not to have been appropriate. We all know of such instances. But the challenge is to learn from these experiences so as to do better the next time. And in this context, a very welcome step is the work in recent years of the Independent Evaluation Office (IEO) of the Fund, whose published reports have drawn important lessons for the future. This office has already produced detailed assessments of the IMF's performance in Argentina, Brazil, Indonesia and Korea. (These assessments are also available on our website.)
IMF and Low-Income Countries
14. Let me now turn to our work with low income countries. Working to achieve the Millennium Development Goals has helped to unify domestic and international efforts in the global war on poverty. Under current trends and policies, the goal of cutting extreme income poverty in half between 1990 and 2015 will be met at the global level. However, many countries, especially in sub-Saharan Africa, will fail to meet this goal. In addition, most of the critical goals for improving health and education will not be met even globally. More forceful and effective efforts are thus needed from both developed and developing countries, as well as from international institutions.
15. In partnership with the World Bank and other agencies, the IMF can play a key role in helping ensuring macroeconomic stability—which is crucial to foster durable growth and poverty reduction. Faced with a constrained and difficult environment, rapid progress is not always easy to achieve. But where governments have established stable macroeconomic frameworks and pushed ahead with structural reforms we have begun to see encouraging results. Growth rates have picked up in countries that have curbed inflation and established better control of the public finances. The median inflation rate in low-income countries has declined to well below 10 percent. In turn, higher economic growth and low inflation have had a positive impact on the incomes of the poor. Mozambique, Tanzania, and Uganda, for instance, have experienced a very substantial improvement in overall economic performance in recent years.
16. But this progress—while most welcome—remains modest in comparison with the challenge of raising a large part of the IMF's membership out of poverty. Meeting it will require a future with more growth and job creation. Increasing and sustaining economic growth depends, in turn, on a vibrant private sector, with high levels of investment from domestic as well as foreign sources. The gains achieved in macroeconomic stability need to be entrenched in policy-making processes and institutions, such as medium-term fiscal frameworks and independent central banks.
17. In addition, business and private investors need to be confident that they can operate in a predictable legal and regulatory framework. The IMF is not the key institution for promoting economic development and poverty reduction—that is the responsibility of development lenders such as the World Bank. But the IMF has actively contributed to these efforts through its policy advice, technical assistance and in many cases, concessional loans from the Poverty Reduction and Growth Facility. And we are fully committed to continue this support in the future.
18. While low-income countries have the primary responsibility for adopting sound policies and institutions, developed countries must also live up to their side of the bargain by providing more aid and increased opportunities for trade. More and better international aid is essential. Despite an upturn in recent years, aid remains in real terms well below both the levels seen in the early 1990s and the commitments made at the Monterrey Summit. With political support, traditional forms of aid can be mobilized immediately to help to achieve the Millennium Development Goals. There have also been interesting new proposals for innovative ways of financing an increase in aid, through such mechanisms as global taxes or an international financing facility to frontload aid inflows. Together with our colleagues in the World Bank we are studying these ideas to assess their technical and legal feasibility, and whether they can gain the political support necessary for implementation.
19. In choosing any of these possible paths to increased aid, the international community should ensure that, at the end of the day, aid flows are more predictable and less dependent on complex donor budgetary processes and procedures. So donors must continue efforts to harmonize their aid agendas and reduce the transaction costs of aid disbursements. The IMF will continue to advise countries to help create a policy environment that not only attracts aid but utilizes it effectively.
20. Debt relief under the HIPC Initiative continues to be the cornerstone of international effort to help reduce the debt burden of the world's poorest countries. Twenty-seven HIPCs, or more than two-thirds of the 38 potentially eligible countries have reached their HIPC decision points. This is the point at which, based on a country's good track record, the IMF and the World Bank commit to reducing the country's debt to a sustainable level. Of these, 14 countries have already reached their completion points—the point where the debt write-off becomes irrevocable.
21. The Initiative has made a major difference. HIPC, together with other debt relief initiatives, is expected to lower by two-thirds (or by about $32 billion in net present value terms) the debt stocks of the countries concerned. Furthermore, compared to 1998-99, debt-service-to-exports ratios have been substantially reduced by almost 40 percent to an average of 10 percent. This is turn has allowed a considerable increase in expenditures geared towards reducing poverty.
22. A major goal is to try to ensure that as many of the remaining HIPC-eligible countries fulfill the necessary conditions as soon as possible. For some this will require overcoming the effects of recent or ongoing conflicts. And for all, it will require steadfast implementation of their economic reform programs and their Poverty Reduction Strategies (PRSPs). In some particularly difficult cases—largely those ravaged by long periods of conflict and economic mismanagement—special additional efforts will be needed from donors to provide the resources for debt relief at the appropriate point. I welcome the recent extension by the Fund and the World Bank of the time limit whereby HIPC-eligible countries who have not yet benefited from the Initiative may do so.
23. Various proposals have been aired recently aimed at providing additional debt relief to the poorest countries to help them achieve the Millennium Development Goals. I welcome such discussions because it is clear that additional resources are needed. That said, we need to make sure that higher resource flows for countries under the HIPC Initiative do not come at the expense of reduced aid for other low-income countries. And it will be essential to ensure broad-based political support among developed economies for providing increased assistance, including larger aid volumes, on a sustained basis.
24. All these efforts to reduce poverty through improved policies, institutions, and aid flows need to be underpinned by major progress on international trade issues. Trade is a powerful tool for helping people to help themselves, rather than relying on the generosity of the prosperous. Moreover, trade is not a zero-sum game: increasing trade benefits all. Ensuring that the poor have every possible chance to participate in the global trading system is not only morally right but makes economic sense.
25. The protectionism that rich countries still engage in, particularly in their agricultural sectors and in some light manufactures, has become increasingly indefensible. It closes off an avenue of progress for nations and also hurts the socially disadvantaged disproportionately in the rich countries themselves. Eliminating them is not charity—it is in each country's own best interest to do so.
26. A clear commitment to the spirit of the rules-based multilateral trading system, and to liberalized trade regimes on the part of all countries—poor and rich alike, is needed. Economic development and poverty reduction are served not only by better market access abroad, but also—and perhaps above all—by a willingness to embrace more open trade as a part of a domestic development agenda.
27. This larger vision has doubtless inspired the initiation of the Doha trade round. Yet bringing the round to a satisfactory conclusion requires determined political leadership. There must be a readiness to move beyond the modest exchange of concessions that has driven negotiations to date so as to overcome domestic political resistance and make real progress in key areas.
28. Finally, I believe that a major strength of the IMF is that it is a cooperative institution, bringing together 184 countries with diverse circumstances and needs. Members need to be assured that their voice is heard and that they have a appropriate weight in decision-making. Legitimate concerns have been raised on this score in various parts of the developing country membership and we are continuing to work toward practical solutions. A number of possibilities have been put on the table, but reaching an acceptable outcome will require political decisions by our shareholders. In my view, addressing this issue satisfactorily is vital to the future effectiveness of the Fund.
29. Over the past 60 years, the IMF has evolved with the many changes in the global economy, and continuing shifts in the international economic order will require adjustments in future. I am confident that the IMF will continue to show the resilience and adaptability it has in the past. Thank you.