Anne O. Krueger
Anne O. Krueger

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IMF Surveillance -- A Factsheet

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At the Service of the Nations:
The Role of the IMF in the Modern Global Economy

Keynote Address by Anne O. Krueger
First Deputy Managing Director, IMF
18th Australasian Finance and Banking Conference
December 16, 2005

Good afternoon and thank you for that kind introduction. I'm very pleased to be with you today.

The principal focus of this conference is on finance and banking issues: and today I want to examine some of these issues in the context of the IMF's work. The Fund serves 184 members today, making our task in some ways rather more complicated than it was when the Bretton Woods institutions were founded at the end of the Second World War: 29 countries originally signed the Bretton Woods agreement.

Our principal responsibility remains unchanged, of course—a tribute to the vision of those who met at Bretton Woods in 1944. Now, as then, our mandate is for the maintenance of international financial stability; and now, as then, this is primarily a means to an end. Those who drew up the postwar economic framework at the Bretton Woods conference wanted to promote economic growth through the expansion of trade: and international financial stability is as crucial for those aims now as it was sixty years ago.

But as our members have grown in number, so they have grown more disparate. The world is no longer made up of rich countries and poor countries. Among our membership in the twenty-first century are the advanced industrial economies—richer and economically more sophisticated than most people could have envisaged in the 1940s. There are also emerging market economies: countries that, by and large, are growing rapidly and often facing enormous challenges as economic policies and structures struggle to keep pace with that growth. Then there are the so-called transition economies, although many of these are coming increasingly to resemble "normal countries".

And there are what we now refer to as low income countries (LICs). In some cases these are countries where growth has started to accelerate in recent years, after years of poor performance, or worse. But even among these, many have lower incomes per capita than they had fifty years ago, and most are growing at too slow a pace to permit much in the way of poverty reduction. Most worrying of all, perhaps, is the group of low income countries that have yet to exhibit signs of economic growth; where poverty is increasing or at least stubbornly high; and where governments have yet to demonstrate an understanding of the policy requirements that can set these countries on a path to growth.

There has been a great deal of emphasis placed on the desperate plight of the millions of citizens in low income countries who live in poverty from which there seems little chance of escape. In this context it is worth noting how rapid economic growth can transform the prospects of the poor: in China and India in the 1990s alone, some two hundred million people were lifted out of poverty as a result of sustained and rapid growth in those countries.

The Millennium Development Goals (MDGs) were agreed in September 2000 precisely in order to address the plight of the world's poor—and rightly so. Much of the Fund's work on LICs is directed towards helping low income countries set in place the appropriate economic framework that can foster the sustained rapid growth that has already benefited citizens of so many countries during the postwar period.

The Fund continues to address the needs of all its members, rich, middle income, transition and poor. Globalization makes our task of maintaining international financial stability more important than ever. And it is a task which I believe we have discharged better than many realize. The absence of financial crises during the last global downturn in 2001-2002 is significant, though rarely remarked on.

Today, my main focus will be on how the Fund discharges its responsibilities in the twenty first century. I will examine how experience has shaped our work; and I will say something about the close links between financial sector health and macroeconomic stability.

The changing global environment

Adaptability, and the readiness to learn from experience, have been key to the Fund's ability to discharge its task effectively over the years. The multilateral framework set up at Bretton Woods has underpinned the remarkable economic growth that the world has experienced since 1945. The wisdom and foresight of the Bretton Woods founders enabled dramatic rises in living standards across the globe: and, in the process, enabled many to escape from poverty.

A key element of the multilateral framework that the Bretton Woods founders designed was the principle of an open multilateral trading system. The expansion of world trade since 1945 has been a key driver of economic growth. World trade has consistently grown more rapidly than global GDP, and continues to do so. According to the WTO, the volume of world trade in 2000 was 22 times that of 1950. Merchandise exports have grown by 6 per cent a year on average for the past 50 years. Last year, global growth was 5 percent; global trade grew by 8.5 percent.

The Fund's role in the maintenance of international financial stability has helped make possible rapid economic growth—and our Articles of Agreement make clear that was the intention of the founders of the Bretton Woods system. And providing a stable international framework that makes possible sustained and rapid growth has thus helped countries realize the benefits of globalization.

But how the Fund seeks to achieve financial stability has, of necessity, changed over time. The world economy is constantly evolving, and the Fund had to evolve with it. Remember, at the time of Bretton Woods, no-one seriously believed that private official capital flows would ever again be significant in size; for much of the postwar period that assumption continued to hold. It was only in the 1990s that private capital flows started to assume the dominant role they have today, a development that had significant implications for the way the Fund operates.

In the early years of the postwar system, the fixed exchange regime established under Bretton Woods provided a stable environment that enabled the industrial countries in particular to grow rapidly, at a pace that was at the time without historical precedent. America saw per capita income growth averaging 2.4 percent a year between 1950 and 1973: in Germany per capita incomes grew on average by 5 percent a year, and in Japan by more than 8 percent.

By the 1960s those rates of growth came to seem rather tame, as several developing countries started to experience even more rapid growth. Korea achieved rapid growth over a remarkably sustained period, averaging real GDP growth of more than 8 per cent a year for more than three decades. Many other countries followed a similar pattern.

The period up to 1973 came to be known as a golden age, and many feared that the collapse of the Bretton Woods system of exchange rates in the early 1970s would bring that period of rapid growth to an end. In fact, the transition to floating exchange rates [triggered by the decision of the United States to close the gold window to which the fixed exchange rate system was pegged] was relatively smooth and timely: flexible exchange rate regimes helped economies adjust to the oil price shocks of the 1970s, disruptive though those rises undoubtedly were; and floating rates have facilitated smoother adjustment ever since.

But the 1970s marked an important turning point for the Fund in other ways. This marked the end of the period during which the industrial countries had been the Fund's largest borrowers. Britain in 1977 was the last major industrial country to borrow on a large scale from the Fund—indeed, the loan advanced to Britain that year was, at that time, the largest ever made by the Fund.

The Fund had provided financial assistance to help developing countries adjust to higher oil prices. But the so-called third world debt crisis led to large-scale Fund lending to these countries in the 1980s. This crisis has its origin in the surplus revenues accumulated by the oil producers after the sharp rises in the oil price in the mid and late 1970s. These revenues had been "recycled" by the international banks who lent funds aggressively to developing economies, usually on floating rate terms. With hindsight the result of this large scale lending was predictable. Debt sustainability—regarded as a crucial element of macroeconomic policy today—was at that time an alien concept. As interest rates rose in the early 1980s, reflecting the efforts of industrial countries to reduce inflation, economic policy weaknesses were exposed and many developing country borrowers found themselves unable voluntarily to service their large debts. The Fund played a significant role in helping to resolve the problems developing countries faced, both in helping them make policy adjustments and in the provision of temporary financial support.

The experience of the 1980s brought a sharp reminder of the importance of economic policies in helping foster economic growth. This is now so widely accepted that it is hard to remember a time when it was less obvious. Policymakers in Asia implemented policies that created a growth-friendly environment—low inflation, outward oriented policies that enabled Asia to grow even though many countries were heavily dependent on oil imports. By contrast, in the 1980s many Latin American countries experienced soaring inflation, fuelled by inappropriate economic policies. In addition, higher barriers to trade hampered growth in Latin America over a long period. And oil exporting countries, in spite of their high oil revenues, experienced lower growth rates because of weak macroeconomic policies.

For the Fund, though, the 1990s brought our biggest challenges. In the early part of the decade, of course, the Fund was heavily involved in assisting the countries of the former Soviet bloc to cope with a dramatic change in their circumstances. These countries needed Fund help both in the form of financial assistance but, more important in the long term, in managing the transition to become normally functioning market economies. This was an economic transformation of a kind that had never before been attempted, and there was a steep and sometimes painful learning curve for those involved. Yet, as I noted at the outset, most of these countries are increasingly regarded as normal, with normal problems: indeed, several are now members of the European Union.

A more far-reaching development for the Fund during this period, however, was the rise in private international capital flows to which I referred earlier. A series of financial crises during the 1990s, triggered by sharp changes in the direction of capital flows, underlined the extent to which sound economic policies both foster growth and help prevent crises from occurring. It became clear, as the decade progressed, that these crises were fundamentally different from those to which we had grown accustomed.

There were crises in Mexico in 1994-95; in Asia in 1997-98; in Russia in 1998; and elsewhere. All were capital account crises, large in scale, and involving enormous upheaval for the countries involved.

Take the Asian crises as an example. Only a relatively small number of countries were directly affected: Korea, Thailand and Indonesia were the worst hit. For those countries years of spectacular growth ended in a dramatic series of national financial crises. But they had an impact well beyond the countries involved, in part because it was shocking to see economies that had experienced such rapid growth over such long periods suddenly appear so vulnerable and in part because there were, for a time, fears that the crises would spread further.

The proximate cause of the crises in Asia was the sharp reversal of capital flows to the region. Net inflows to the Asian crisis countries were over 6 percent of their GDP in 1995, and just under 6 percent in 1996. In 1997, net outflows were 2 percent of GDP, a figure which rose above 5 percent the following year. The economic dislocation caused by reversals of this magnitude was huge, and would have been so for any country.

But the turnaround in investor sentiment was not, as some have argued, wholly capricious. There had been a huge expansion of credit over a relatively short period of time. Rapid credit growth is almost always indiscriminate and, therefore, dangerous. The result had been a sharp rise in the number of bad loans. The rate of return on capital had fallen and, in consequence, non-performing loans (NPLs) started to rise. As international creditors saw countries whose fundamentals were less sound than had previously appeared to be the case, a rapid reassessment of the creditworthiness of debtors and loan exposure was inevitable.

Several factors conspired to make the consequences of this shift in investor sentiment extremely painful. Fixed exchange rates prevented a more rapid adjustment to the shift in capital flows—and gave speculators the chance to make a one-sided bet. Government assurances that exchange rate pegs would be maintained had left currency mismatches unrecognized until governments were forced to devalue. Banks had built up liabilities in one currency and assets in others. Devaluation then left financial institutions and businesses facing massive losses, or insolvency. The weaknesses of domestic banking systems were revealed—as was the impact on economic performance.

The contraction in GDP that most crisis countries experienced made things even worse, of course, because the number, and size, of non-performing loans grew rapidly. The further weakening of the financial sector inevitably had adverse consequences for the economy as a whole. In short, the crisis economies found themselves in a vicious downward spiral.

The capital account crises in Asia and elsewhere had several common features: they occurred rapidly; they occurred because holders of a country's debt were concerned about its ability and/or willingness to service; and because there were doubts about underlying macroeconomic policies to service that debt.

The speed with which capital account crises erupted meant that financial support from the Fund for countries affected was often urgently needed—often in days rather than the weeks or months which Fund programs for current account crises had usually taken to put together. And the support needed was usually on a much larger scale than the Fund usually provided because of the scale of the outflows experienced by crisis countries. No country can sustain the outflows experienced by the Asian crisis countries for any length of time.

Fund programs with financial support were far-reaching. They included the commitment to rapid fiscal rebalancing; addressing underlying weaknesses in banking systems; a switch to floating rates or at least more flexible exchange rate regimes; and programs of longer-term structural reforms aimed at removing structural rigidities and improving growth potential.

Lessons of the 1990s

We—economists, policymakers and the Fund—learned a great deal from the experience of the 1990s. We came to appreciate just how vital a sound macroeconomic framework is—one that delivers macroeconomic stability and growth over the long run. In a globalized world, economies must have in place monetary and fiscal policies that deliver falling or low inflation, budgetary prudence and sustainable debt levels. And we learned to look at the sustainability of fiscal policy in the context of debt dynamics.

Most economists also concluded that countries need an exchange rate regime that enables an economy to be sufficiently flexible to respond to shocks. Fixed exchange rates pose significant challenges because they require much greater reliance on fiscal, monetary and structural policies to provide the flexibility needed in the economy.

Another important lesson is the closeness of the link between the financial sector and economic stability and growth. Let me say a little more about that, because it has assumed increasing importance in the Fund's work.

The world's economic growth has gone hand in hand with the development of the financial sector. Even the most basic economies, when activity is confined to a few rudimentary activities in a small geographical area, use some medium of exchange. As economic activities expand and become more differentiated, demands on the financial system increase. Small, localized banks develop as mechanisms for more effectively enabling the owners of capital to lend it to those who can use it more productively.

But to be effective in helping to underpin economic growth, banks, even small ones, must develop the ability to assess creditworthiness, risk and returns. Without these skills, even in a relatively underdeveloped economy, the role of banks as financial intermediaries is less than optimal and thus hampers growth. Resources need to be allocated according to productive potential and banks have an important role to play in directing resources to high-return investments—and reducing the resources wasted on low-return or unprofitable investments. But this, in turn, requires adequate means of assessing the likely returns from competing borrowers.

As economies grow, they become more complex and interdependent; and the demands placed on the financial sector grow commensurately. Banks grow bigger: they need to in order to meet the demand for investment capital. Economic complexity also means that banks must grow more complex, and become more diversified in terms of the risks they assume. Continued expansion brings increasing demands for geographical diversity—firms need banks that can serve their needs across national boundaries and they also need banks than provide specialized financing services.

But breadth and depth are important for the financial sector as a whole. Healthy and sustained growth of firms and economies requires the development of new financing modes for investment capital. The financial sector—in which I include banks, equity and bond markets, insurance providers and other financial intermediaries—has to meet the needs of the range of economic activity.

Experience has repeatedly shown that high growth rates are sustainable only as the financial sector develops in parallel with the economy as a whole. A weak financial sector can undermine growth. Resources are misallocated, and average returns fall. We all knew that a healthy financial sector was an important ingredient of macroeconomic stability. But the role of that weak financial sectors played in the crises of the 1990s made us appreciate even more than before quite how central the financial sector's role is. This had a profound impact on the Fund's work as I shall outline shortly.

The work of the Fund

As I said at the outset, the Fund's principal mandate remains the maintenance of international financial stability. Let me say something about how we seek to carry out or duties in the modern global economy. That part of our work that tends to attract the most attention—crisis management and resolution—is important, of course: but it is only a small part of what we do. Much of our work is aimed at preventing crises and at helping our members to achieve sustained rapid growth through the implementation of sound macro and other economic policies.

Central to this is what we call our surveillance work. In essence this means monitoring and assessing global and national economic developments and providing advice and guidance to our members. Sometimes we seek to persuade member countries to modify policies to avert trouble down the line or to improve their growth prospects; sometimes we warn about risks to national or international financial and macroeconomic stability.

Our surveillance work is carried out both at the global and at the national level. Twice a year we publish our World Economic Outlook: this contains the Fund staff's latest projections for global and national growth and a series of other economic indicators. These projections are also qualified, to reflect potential risks that could undermine the central forecast.

Currently, we at the Fund expect the world economy to continue to grow at a healthy pace next year—indeed, we currently expect global growth to be higher than our September WEO forecast. But we have repeatedly warned that further rises in the oil price might lead to slower growth that we currently expect. And we remain concerned about the global imbalances as a source of potential instability—in particular, high current account and fiscal deficits in the United States, current account surpluses and low consumption in Asia and elsewhere, and sluggish growth in Europe.

Fund surveillance also functions at the national level. Each year, we are obliged under Article Four of our Articles of Agreement, to conduct what we call Article IV consultations with each of our member countries. Each country has assigned to it a team of Fund officials, which conducts in-depth discussions with the authorities of that country. The team analyzes the country's economic prospects and policies. It cautions the authorities about potential risks to the outlook and of potential weaknesses in the economic policy framework, and discusses ways in which prospects could be improved. Fund staff also draw attention to policies that are effective in promoting growth and stability.

The Fund's surveillance work gives the institution a unique cross-country perspective. We are, after all, the only institution that has such a broad membership and that has access to the relevant information about national economic policies. Our surveillance work, and the work of our research department, permits comparative insights into economies and economic policies. So highlighting successful policies is actually as important a part of our work as sounding a note of caution when there are doubts about national economic policy choices.

Surveillance is important for all categories of our membership. The dialogue we have with our industrial country members focuses on issues that affect their prospects for growth and stability and that, because of the size of these economies, might also have implications for the world economy as a whole. The Fund has repeatedly expressed concern about the slow growth and structural rigidities of the euro-area economies, for example: slow growth means more slowly rising living standards for European citizens and lower European demand for third country exports. But the contrast between the rate of growth in the euro area and in the United States and Asia also means global growth is unbalanced and is a contributing factor to the problem of global imbalances I mentioned earlier.

For several years, the Fund expressed concern in Article IV consultations with Japan about that country's slow or non-existent growth, and the problem of deflation in the Japanese economy. Policy reforms there have led to a significant and welcome improvement in Japan's growth performance.

The Fund is currently drawing attention to the economic and fiscal challenges posed by rapid demographic change, which will affect the industrial countries first. We work with national authorities to try to find ways of addressing these issues.

In our surveillance work with emerging market countries and most transition economies, the emphasis is on reducing vulnerabilities and raising potential long-term growth rates. The two go hand in hand, of course: the stronger the macroeconomic framework, the better the long-term growth performance of the economy will be. I noted earlier the importance of low, or falling, inflation; sound fiscal and monetary policies; and sustainable debt levels.

It is clear that macroeconomic stability is just as important for our low income members. Most of those countries that have, often with Fund help and encouragement, put in place policies to reduce inflation and create the conditions for growth, have experienced higher growth rates. Many low income countries are also hostile to business, have property rights that are difficult to enforce and weak judicial systems that make contract enforcement in some cases virtually impossible.

Our low income members need significant help if they are to have a chance of meeting the Millennium Development Goals. Many of their citizens live in poverty and have little access to education and basic health services.

In recent years, however, we have also come to realize that a sound macroeconomic framework needs to address institutional issues. Businesses are stifled and foreign investment discouraged if a country does not have an effective judiciary that makes contract enforcement possible. Businesses simply relocate to somewhere that offers them greater legal protection. Similarly, countries that do not offer legally, and easily enforceable, property rights will find it hard to attract and retain investment. Such shortcomings have always undermined business activity and, in consequence, economic growth: but as the world economy becomes more integrated, business has become more mobile and a climate hostile to business even more damaging. The Fund, in co-operation with our sister institution, the World Bank, now works actively to promote institutional reform among our members as a vital ingredient in promoting sustained and rapid economic growth. Institutional shortcomings are an issue in some of our emerging market members; but they are far more serious, and widespread, in low income countries.

We aim, as part of our surveillance work, to assess financial sector robustness in a variety of ways. We pay close attention to banks' balance sheets and to the extent of NPLs. We also examine the extent to which risk is clearly defined in the financial system as a whole. And we look at the degree of competition within both the banking system and the financial sector as a whole: competition improves the efficiency of credit allocation, and can help diversify financial risk and cut borrowing costs. We examine issues such as the rate of credit expansion; and we look for mis-matched exposures since these are a potential source of instability.

As I asserted earlier the breadth of financial instruments is important; as is the transparency of the system which enables more accurate assessments to be made of the asset and risk position of individual institutions. And a strong, effective regulatory regime, following international best practice, is vital.

Much of our financial sector surveillance is done through the Financial Sector Assessment Program, or FSAP, introduced in 1999. This is a voluntary program, and is additional to our Article IV consultations which also address financial sector issues. Member countries request an FSAP: at which point the Fund undertakes a detailed examination of the framework for financial regulation and supervision. The work carried out under an FSAP program involves a broad range of financial experts, many of them from outside the Fund.

The FSAP program—which the Fund runs jointly with the World Bank when low-income countries are involved—aims to help member governments strengthen their financial systems by detecting vulnerabilities in financial supervision at an early stage; to identify where changes are needed; to set policy priorities; and to provide technical assistance when this is needed to strengthen supervisory and reporting frameworks. The end result is intended to ensure that the right processes and systems are in place for countries to make their own substantive assessments of individual institutions.

FSAPs don't examine the balance sheets of individual banks, or even the banking sector as a whole. Their purpose is to help our member countries ensure that an appropriate framework is in place so that domestic regulators and supervisors are able to make accurate judgments about the health of the banks and other financial institutions under their jurisdiction.

Well over 100 of our members have now had, or requested, an FSAP program. Australia is just completing an FSAP. The feedback we get is overwhelmingly positive, from both industrial countries with highly developed financial sectors as well as others. Countries as diverse as Britain, Iceland, Russia and Nigeria have all found the FSAP useful.

We have also worked with the World Bank to develop a system of Standards and Codes—using internationally-recognized standards—that result in Reports on Standards and Codes (ROSCs). These cover twelve areas, including banking supervision, securities regulation and insurance supervision. The financial sector ROSCs are an integral part of the Financial Sector Assessment program and are published by agreement with the member country. They are used to sharpen discussions between the Fund—and, where appropriate, the World Bank—and national authorities; and, in the private sector, including rating agencies, for risk assessment purposes.

Surveillance of financial sector issues has identified many vulnerabilities in many countries that have subsequently been rectified. As a result crises have been avoided: success in this area is best measured by the absence of crises. But some Fund research done a couple of years ago also suggests that there is another payoff—in the form of lower spreads—for member countries where the Fund has undertaken ROSCs and where the reports have been published in full. The markets take a favorable view of this transparency which can translate into lower borrowing costs.

Technical assistance

Another important element of our work with emerging market and low income members is our technical assistance, or TA. This accounts for about a third of our activities. It is a vital part of the work we do to help countries implement reforms that will strengthen their economies and raise their growth potential.

Our TA work covers a wide range of activities: from assistance in improving customs procedures or tax administration to the management of monetary policy. It can help countries increase the benefits from trade liberalization, both through customs reforms and through increasing other tax revenues through improved collection rates. Streamlining customs procedures can help governments create a more business-friendly environment and spur trade. We help countries to develop their foreign exchange markets and to improve public expenditure management—for poor countries keeping track of where the money goes can be as difficult as it is important.

Technical assistance can help countries make their public sector more efficient. Helping countries to improve tax collection procedures, for example, can significantly raise the revenue stream from any given tax rate; lowering tax rates can also raise revenues by acting as a disincentive for people to participate in the informal sector of the economy. And by providing help with pension reforms, TA can help countries manage fiscal policy more effectively, helping them to free up resources for infrastructure and more targeted spending without increasing deficits.

The Fund now has several technical assistance centers around the world, including two in Africa. We also can provide economists on long term secondment to finance and other government agencies to work on particular issues, such as public expenditure management and tax reforms.

Financial assistance

When needed, the Fund can also provide financial assistance to its members. In the case of emerging market countries, we can provide temporary assistance to deal with balance of payments crises, or to help countries avert them. Such help is provided in the context of what is always called a Fund-supported program. The aim is to help countries undertake the reforms needed in response to a crisis. Two recent examples have been remarkably successful.

As you know, Brazil experienced a major crisis in early 1999 when the government was forced to abandon its fixed exchange rate regime and introduce wide-ranging reforms. Yet by the middle of 2002, Brazil was widely seen as being on the brink of another crisis, brought about not by policy changes but by speculation about the economic policies that might follow the 2002 presidential election. There was concern that a new President might not follow the prudent macroeconomic policies that had helped the Brazilian economy recover from aftermath of the 1999 crisis.

Electoral uncertainty led to concerns in particular about the sustainability of Brazil's large public debt.

A Fund-supported program was agreed during this pre-election period, committing the new government to maintenance of the existing fiscal and monetary framework, along with a longer term program of structural reforms. All three major Presidential candidates undertook to maintain the policy framework should they be elected. In the context of the Fund program, the financial markets were rapidly reassured.

The result has been a remarkable transformation in Brazil's economic fortunes. The floating exchange rate regime, which had already been introduced, has undoubtedly helped smooth the adjustment process. And prudent fiscal policies—including a primary surplus of 4.6 percent of GDP in 2004, and a projected surplus of 4.75 percent this year—have paved the way for more rapid growth and falling inflation. Growth accelerated last year to almost 5 percent and is expected to come in at around 2.6 percent this year, while inflation has fallen from almost 15 percent in 2003 to 6.6 percent at the end of 2004, and is projected to be at 5.5 percent by the end of this year. Interest rates have been lowered and are now back to the levels prevailing before the market turbulence of 2002.

The country's external financing needs have fallen sharply, and the debt position has improved markedly. Debt as a percentage of exports is already well below mid-1990s levels: in 1995, debt was more than 300 percent of exports; it is projected to be around 125 percent by the end of this year. And the risk premium on Brazil's bonds has fallen sharply—the latest number I have for this week is a spread of 311 basis points over US Treasuries, compared with a spread of around 2400 points at the height of the trouble in 2002.

This significant improvement in the macroeconomic picture has resulted in a marked improvement in Brazilian living standards and significant progress on poverty reduction: in 2004 there were about four and a half million fewer Brazilians living on less than a dollar a day than there had been only three years earlier.

A great deal has been achieved in Brazil; and we can already see the rewards of a sound macroeconomic framework in terms of growth and the scope for poverty reduction. There is still a way to go and the government is working on further structural reforms. The Brazilian government this week announced that it is repaying early all of its outstanding debt to the Fund.

There are many similarities with the situation in Turkey where crisis erupted at the end of the 1990s. Inflation was a chronic problem, having been above 60 percent a year from the late 1980s, in large part because successive governments had failed to achieve fiscal control. Reforms that had been implemented earlier—such as the trade liberalization of the early 1980s—delivered less than they might otherwise have because of macro instability. The consequence was an economy that lurched from crisis to crisis. Short-lived booms were followed by busts.

The economic crisis that started in 1999 and came to a head with the banking crisis of 2000-1 led to wholesale economic reforms. Here, too, reforms were supported by a Fund program; here, too, a floating exchange rate has been an important factor in making rapid adjustment possible; and here, too, successive governments have displayed impressive commitment to the reform program. As a result, recent progress has been remarkable—especially given Turkey's long record of prematurely-abandoned reforms.

Strengthened fiscal policy has been a cornerstone of Turkey's macroeconomic framework, just as it has of Brazil's. In both cases, strong fiscal controls play a critical role in creating the conditions for rapid growth and falling inflation. In addition, the Turkish government has undertaken a number of critical structural reforms, especially in the banking sector, that strengthen the domestic financial system and which helped lay the groundwork for recovery.

As I noted inflation had been a chronic problem for decades in Turkey. Yet is has now fallen from more than 70 percent just three years ago to below 8 percent—the first time since the 1960s that inflation has been in single digits. Growth last year was close to 8 percent, the third consecutive year of rapid expansion and is expected to be 5 per cent or higher this year.

And this at a time when the government has been meeting its primary surplus target of 6.5 percent of GNP. The primary surplus is expected to be on target this year. And tightening fiscal policy was accompanied by accelerating growth, as it was in Brazil.

So Turkey, too, has achieved much and reforms continue. Earlier this year, the Fund agreed a new $10 billion standby arrangement was agreed, in support of a program aimed at sustaining growth, delivering price stability and continuing with structural reforms.

Emerging market countries are currently the Fund's largest borrowers. But we also provide considerable financial support to low income countries, much of it on concessional terms. Indeed, we have recently extended the range of facilities available to these countries. Just a couple of weeks ago, the Executive Board approved a new facility, the Exogenous Shocks Facility, which will provide financial support for countries facing shocks, such as commodity price shocks, or abrupt changes in their terms of trade. We also have the Trade Integration Mechanism designed to give financial assistance to countries facing temporary adjustment problems following trade reforms in other countries.

All the aspects of the Fund's work—surveillance, technical assistance and financial support—have a common goal. It is to enable our member countries to ensure that they have in place the policies that will deliver macroeconomic and financial stability and so lay the foundations for the more rapid and sustained growth that is the prerequisite for poverty reduction. It is by helping countries achieve stability and growth at the national level that enables us to fulfill our mandate of international financial stability and the promotion of growth through the expansion of trade.

Conclusion

Let me briefly conclude.

The Fund's mandate is as relevant today as it was when the Fund was established more than 60 years ago. Globalization means that the maintenance of international financial stability is, if anything, even more important than it was in those early days, as all economies are more closely interlinked than ever before. Over the past 60 years our membership has grown, and it has become much more diversified.

Yet all countries still need a strong macroeconomic framework if they are to experience sustained rapid growth, raise living standards and reduce poverty. All countries benefit from a stable, growing global economy. All countries can benefit from the multilateral trade framework that has made possible the rapid expansion of world trade: and trade growth has been a key driver of the rapid growth of the world economy since 1945.

Financial sector reform is a crucial part of the framework that makes growth possible. A well-functioning and healthy financial sector is central to economic success: but what makes for a well-functioning financial sector changes over time, as an economy grows. A banking system that doesn't adapt, a financial sector that doesn't continue to broaden and deepen will not serve the needs of a growing economy. Growth will slow, as returns fall and resources are allocated inefficiently.

The Fund's unique cross-country perspective has significant advantages when helping countries address their economic policy needs. We are able to assess what policies are most effective and what means of implementation are likely to work best. And we can look at the reform process in a global context. It is this which equips us to address the needs of all our members.

The world economy has changed enormously over the past sixty years. Along the way we have all learned a great deal about how economies function and about how best to achieve sustained rapid growth, rising living standards and poverty reduction. The Fund has been at the centre of this evolutionary process. We have provided support, financial and otherwise, to our growing membership throughout the period.

The international economy will continue to evolve, though we do not yet know how. One of the few certain consequences of globalization is that the world is constantly changing. The Fund will continue to be at the centre of the changes ahead. We are uniquely placed to help our members realize the benefits of globalization: that is one of the few constants in today's world.

Thank you.




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