Reforms — IMF Sixth Jacques Polak Annual Research Conference
November 3-4, 2005
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Luncheon Remarks by Rodrigo de Rato|
Managing Director of the International Monetary Fund
At the Sixth Jacques Polak Annual Research Conference
Washington DC, November 3, 2005
As Prepared for Delivery
1. Good afternoon. It's a pleasure to be here with you today, and to honor once again Jacques Polak, one of the founding fathers of the Fund. Mr. Polak celebrated his 90th birthday shortly before I joined the Fund, and his career in the Fund spanned a third of a century, and encompassed many roles: Director of the Research Department, Executive Director, and always tireless and provocative thinker. I'm very glad that you could join us today, Jacques.
2. The theme of this year's conference is reform, and it takes place at an exciting time, when the IMF is itself debating its strategy for the medium-term, which will involve some internal reform. In a few minutes I'll go over some of the highlights of the strategy that we're working on, but first I'd like to talk a little about some of the thinking that has gone into the fascinating papers prepared for this conference. I found the analysis in these papers both impressive and important for the Fund.
3. You have already listened today to several presentations based around the question of what makes reforms happen. Several papers stress that the political consequences of reform, and especially the actual and prospective distribution of costs and benefits of reform, will affect whether reform efforts are likely to be sustained. I think there are important lessons in these papers, not least that the effects of reforms on poverty and income inequality must be taken into account. The significance of the constitutional and legal framework and of good institutions for reform are also important conclusions.
4. Of course, there are limits to the freedom that the Fund has to act on this analysis. The IMF cannot choose the forms of government or the constitutional systems with which we must interact. The Fund works with capitalist regimes in some countries, and with avowedly communist regimes in others. In some countries we deal with governments where a commitment from the executive will reliably be translated into law. In others we deal with countries that have powerful and independent legislatures.
5. Similarly, with regard to the institutional framework, even when we recognize limitations imposed by poor institutions there is a limited amount we can do about it. Take the example given in one of the papers of the judiciary. A competent and independent judiciary is crucial to the development of business and financial systems. For example, if there are not honest and competent judges to administer bankruptcy procedures, then credit culture will be undermined, and financial sector development will be impeded. But Fund staff are not experts on judicial procedures or national legal systems, and we need help from others to be able to give good advice on this.
6. What can we do about these issues? Well first, we can try to understand them better. It is certainly important to be aware of the potential political consequences of reform, and the political constraints on it. The papers prepared for this conference and the discussion that is taking place here make an important contribution to that understanding. Financial globalization is encouraging reform of institutions in many countries, and we need to be aware of that and respond. And, as the papers point out, we need to consider the effects of the way in which we frame conditionality on the politics of reform.
7. We can also keep pressing for good policies even in cases where we recognize that there are major obstacles to implementing them. In doing so, we should avoid excessive pessimism abut what it is possible to accomplish. One of the papers for tomorrow morning's session rightly points out that when Eastern Europe began its transition there was an assumption that early reform would be very difficult, until a sufficiently large constituency which enjoyed the benefits of reform had been established, but that afterwards reform would become easier. In fact almost the reverse has been the case. Very rapid reform was possible, and the emergence of a constituency of beneficiaries from that reform has led to new problems which require new solutions.
8. We can also help to lessen the political obstacles to reform by better communication. In many cases where reform stalls and where the Fund's advice is not followed, there is agreement on the Fund's analysis but a reluctance to act on that analysis, for political reasons. In these cases I would like the Fund to be more forthright in making the case for the policies we support, including to the public. In globalized democracies public opinion can be changed by persuasive arguments, and changes in public opinion can make it easier for policy makers to pursue reform. We should certainly make sure that the Fund's views are clear. And in the best cases, we can help generate public support for good policies by making the case for reform in a clear and forthright way.
9. Finally, we can focus on institutional reform in areas where we do have expertise. For example, we can work to strengthen monetary authorities' capacity to regulate banks, promote the independence of central banks, and improve tax administration and budgetary procedures. All of these are crucial institutional aspects of the reform process, and areas in which technical assistance and training offered by the Fund make an important contribution. And where we do not have sufficient expertise ourselves—as is sometimes the case for example in judiciary reform—we can get help from others, including the World Bank.
10. Communication and capacity building are two important aspects of the medium-term strategy that the Fund is discussing at the moment. But let me give you a broader overview of the way in which I see the Fund moving forward.
11. I believe that the Fund must intensify its focus on helping countries come to grips with globalization. This is the most important force at work in the world economy today. We have seen huge changes in real sector conditions—the global transfer of goods, services, technology and jobs—and in recent decades we have been experiencing financial globalization, the creation of a global savings pool. This has allowed the allocation of world savings to more productive and diversified investments, but it has also allowed countries to build up larger current account imbalances, and has increased risks to advanced economies as well as emerging market economies. The challenges that advanced economies will face—in macroeconomic policy, in financial sector policy, challenges of international economic integration—are too little recognized and too often misjudged by decision-makers.
12. This has important implications for the Fund. In our country, regional and global surveillance, we need to be able to give all of our members concrete advice on the consequences of increasing integration. This will involve understanding the issues more deeply ourselves, and especially the benefits, imbalances and fragilities caused by cross-border flows of goods, capital, and people. We also need better surveillance of financial markets. Understanding capital flows is more difficult in an increasingly globalized capital market, but it is also more important. And our country surveillance work needs to be more focused and more pointed, to anticipate upcoming problems and give candid advice on them.
13. Emerging-market economies are the countries most at risk from volatile capital flows. The Fund has made significant improvements in its work on crisis prevention over the past few years, but much remains to be done. On crisis prevention I would like to see more work on the underlying vulnerabilities in emerging market countries and on the risks from supply-side disturbances in advanced country financial markets. On crisis resolution, we need to review the effectiveness of the Fund's instruments, including the lending into arrears policy. We also need to consider further the possible ways in which the Fund's instruments can provide a quick and adequate reaction when its members face crises, for example by offering large contingent or precautionary credit lines to members with strong policies. The challenge is to balance the member's need for assurances that it can draw on the Fund's resources quickly if needed, and the institution's need for assurances that the Fund's support will enable the member to both get out of trouble and eventually repay the Fund. We need to keep looking for a solution that achieves this balance.
14. We need to improve the focus of the Fund's work on low-income countries. This will probably involve doing different things in some areas. Over the coming months we will revisiting with our colleagues in the World Bank the allocation of work between the two institutions. The Fund's work on low-income countries is also overloaded with procedures that absorb substantial resources but yield questionable gains, and I would like to streamline these. But there are also areas where we need to do more. Low-income countries need macroeconomic advice from the Fund and they often need financial support from us, which we provide through the PRGF. In addition, we are close to creating a new shocks facility, through which we will be able to provide concessional support to meet temporary balance of payments needs arising from exogenous shocks, and we have created the Policy Support Instrument, for members that may not need Fund financial support, but still want close involvement with the IMF with regard to policy advice, monitoring, and endorsement. We will also need to deepen the Fund's involvement in advising countries on how to deal with the macroeconomic effects of higher aid flows. And the kind of institutional development that I've already talked about is especially important in low-income countries, where capacity is often low.
15. At a forum tomorrow, many of you will discuss governance and the Executive Board. This is a crucial issue. The Fund's perceived legitimacy suffers if we do not adequately represent countries of growing economic importance. To improve the situation, we are going to need, in particular, increases in voting power for some of the emerging-market economies, especially in Asia. We must also ensure that our members in Africa, where so many people are profoundly affected by the Fund's decisions, are adequately represented.
16. How should we take this forward? To help with the process, and as part of our work on the strategic review, I have asked a small group of senior staff to look at quotas and voice issues and to report to me by the end of this year. But changes in quotas are a matter on which the IMF's members are going to have to come to a political consensus, and that is going to take a lot of work not only by us but also by our members in the period ahead.
17. Finally, in planning reform, we must keep in mind the Fund's institutional strengths. One of those strengths is our staff, which combines technical ability with passionate engagement with the problems of our members. Another is our Executive Board, which has shown itself able to take crucial decisions swiftly and wisely, and to reach difficult compromises. As you discuss Governance and the Board tomorrow, and as we in the Fund consider our medium-term strategy, we will need to balance reform with continuity, to improve what can be made better, while conserving that which is good.
18. Thank you very much.
IMF EXTERNAL RELATIONS DEPARTMENT