A Call for Cooperation: What the IMF and its Members Can Do to Solve Global Economic ProblemsSpeech by Rodrigo de Rato
Managing Director, International Monetary Fund
At the Institute for International Economics Lunch Meeting to Discuss Reform of the IMF
April 20, 2006
As Prepared for Delivery
1. Thank you very much for inviting me back here. When I last visited the Institute for International Economics, on the eve of the 2005 Annual Meetings, I outlined a vision for the medium-term strategy for the IMF, based on the need for the Fund to help all of our members meet the challenges of globalization. In the six months since then, the staff of the IMF have done a great deal of work to turn this vision into a set of specific proposals. And my colleagues around the world have made many comments and suggestions, which I have listened to carefully. I'm very pleased that the discussion on the medium-term strategy has generated so much attention. I've discussed the strategy in visits to Rome, Mexico City, Equatorial Guinea and Zambia, and I've listened to the comments of my audiences and to other commentators around the world, including some of the people on the panel today. I would especially like to thank Fred Bergsten, Ted Truman and others associated with the IIE for their work on IMF reform. I'm sorry that Tim Adams could not be with us today. I've greatly appreciated his thoughtful and constructive comments on IMF reform.
2. Let me begin with by taking up a suggestion made by some commentators on IMF reform, that the IMF should play the role of "umpire" in the international system. Mervyn King, Governor of the Bank of England, speaking in India, said that the IMF should be "not so much the referee brandishing the yellow and red cards of the football pitch, more the cricket umpire warning the players not to attack each other verbally and making it clear publicly when they believe the players are not abiding with the spirit of the game." David Dodge, Governor of the Bank of Canada, compared the Fund to a tennis umpire. He urged the IMF to "make tough calls about the rules of the game" and whether countries are playing by them.
3. I have some problems with these analogies. One is that it's well known that the rules of cricket are impossible to explain. Another is that any response I give to them is likely to generate the headline, "The umpire strikes back."
4. A more serious issue is that the analogy treats the Fund as being in some sense outside of the game being played. In fact, what is distinctive about the Fund's role in international economic discussions is that we do not just stand on the sideline and point, or make calls. We are engaged in discussions with the players. This is at the very heart of the process of consultation.
5. We also have to recognize that neither the players nor the rules of the game are static. The days when G7 finance ministers could sit in a hotel room and make decisions about exchange rates are gone. There are new players in the global economy: at the moment China and some of the major oil producers have a significance in the global economy that they didn't have even ten years ago. As the global economy changes further, other players will become prominent. And all of the countries engaged in global economic policy making have to be aware of the awesome and unpredictable power of the financial markets. This is a whole new ball game.
6. So where is the IMF in this? We have a global membership, a mandate to engage with our members, a talented staff to carry out that mandate, and well-established relationships with global economic policy makers. As the players and the ground rules in the global economy change, we have the capacity to reflect these changes, and to be the place where policy makers can come together to shape the forces of globalization and make it work for us. As I travel around the world, I sense a great desire for international cooperation and an awareness of the risks of failure to cooperate effectively. The question is how to translate this desire and awareness into action. I think that the IMF, if its analysis is sound and if it is persuasive, can help to encourage constructive action. Many of my proposals for implementing the Fund's medium-term strategy aim to achieve this. But support from the international community will also be essential. So I would like to focus today on some elements of the medium-term strategy where the support of the international community will be particularly important, and where I hope to enlist your influence and persuasive powers.
7. Let me begin with the issue of surveillance and the problem of global imbalances. I have made the case many times that a disorderly unwinding of global imbalances would be very damaging, and that such an outcome becomes more likely as time passes and imbalances are left unaddressed. I have also made the case that coordinated action would be both politically easier and economically more effective than governments in systemically important countries acting alone. The IMF obviously has an important role to play in generating this: multilateral surveillance is at the core of the Fund's mandate. And several of the proposals in the medium-term strategy are designed to improve our capacity to generate collective action:
I have proposed that the Fund complement its existing arrangements for consultations with individual countries with multilateral consultations, which would allow the Fund to take up issues comprehensively and collectively with systemically important members and, where relevant, with entities formed by groups of members, such as the European Union and the Gulf Cooperation Council. This is not a modest proposal. Multilateral consultations would be something new for the IMF and for our member countries, and they would be an important vehicle for analysis and consensus building. They would enable the Fund and members to propose action to address spillovers and linkages that affect individual members and the global financial system. And they would have added force if, as I propose, the analysis that emerges from them is discussed by both the IMF's Executive Board and the IMFC.
I have proposed a more systematic assessment of the consistency of exchange rate policies with national and international stability and an extension of the IMF's multilateral framework for assessing equilibrium exchange rates, which currently covers industrial countries, to the major emerging market currencies. But in looking at global imbalances, we must focus not only on exchange rates: consideration of exchange rate policy must go hand in hand with consideration of supporting policies, for example fiscal adjustment in the United States and structural reforms that boost consumption in China.
I have proposed that the Fund have more focused reports on individual countries and that we strengthen the coverage of financial sector issues and better integrate analysis of them into the overall assessment. More attention should also be paid in the analysis of each country to global and regional spillovers of countries' economic policies.
I have also proposed that the Fund conduct more active outreach. We have made great strides in increased transparency and communications in the past decade, partly because we recognize that bringing about policy change involves engaging people and civil society as well as governments. Ownership is essential not only in countries that borrow from the Fund but in all of the Fund's members. Economic policies have their foundation in people's basic ideas about how they want their societies to function, and if we want to convince people that changes are needed we need to engage with them. The process will take time, but it must be done if we are to be effective. To start with, I would like to see press conferences at the end of missions become more routine, more regional outreach, and more communication by the senior staff and Management of the Fund.
8. I think that collectively these steps can make a great contribution to tackling the economic issues the world faces now, and the issues it will face in the future. Multilateral consultations will provide a forum for participants to listen to others and engage with them, and will set discussion of domestic policies in the context of identification of the international public good. Exchange rate analysis can inform the decisions of policy makers if they heed its messages. More outreach can raise the quality of public discussion.
9. Turning to Fund support for crisis prevention and management. If the Fund is to continue to be relevant for tomorrow's as well as today's emerging market economies, we must be responsive to the new situation that our members are in. Increasingly, our emerging market members are telling us that our existing financing instruments do not meet their needs, especially their needs for predictability and flexibility. To respond, I have proposed to the Fund's Executive Board that we develop a new type of arrangement that would offer high-access contingent financing. The instrument would be designed for members with strong macroeconomic polices, sustainable debt, transparent reporting, and a good track record, which nevertheless still face balance sheet weaknesses and vulnerabilities. Normal access would be high—perhaps 300 percent of quota—with the recognition that further financing could be provided based on need and the authorities' policy response if a crisis materialized. Conditionality would be focused on policies to maintain macroeconomic stability and reduce vulnerabilities. These are the outlines of the proposal: many questions remain to be worked out, in discussions among members and with our Executive Board.
10. Let me try to rebut a couple of potential objections to this proposal. First, some people argue that Fund lending may no longer be necessary as capital markets have become more important. This view reminds me of George Santayana's comment that "Those who cannot remember the past are condemned to repeat it." Global growth is high, and financial markets are relatively tranquil now. But these conditions will not last forever, and while many emerging markets have strengthened their policies, some vulnerabilities remain. There will be financial crises in the future, in current emerging markets or in those that have yet to emerge. We face a choice: prepare for them now or react in haste to them later. I would rather prepare now. Other people would say that this proposal is just Contingent Credit Lines revisited. It is not. The new proposal would tackle some of the major problems which made the CCL unattractive to members. It provides for automatic drawings for programs that are on track; it provides for more finance up front; and it addresses some of the problems of exit which concerned potential users of the CCL. Finally, it is aimed at a broader set of members: those who have vulnerabilities, but who are making strong progress to improve their positions.
11. Introducing high access contingent financing arrangements would have advantages for both emerging market economies and the broader Fund membership. Emerging markets would benefit from an added level of protection against crises, and would need less in the way of precautionary holdings of reserves, which have a substantial opportunity cost. Other members would also benefit, as a framework that supports good policies in member countries would reduce risk and improve stability, which benefits not only the countries concerned but their trade and investment partners and the system as a whole.
12. Let me now discuss the Fund's engagement with low-income countries. The international community's work on low-income countries is now at a critical point. Much progress has been made in addressing the debt issue, including through the Multilateral Debt Relief Initiative. And there is a renewed commitment by donors to increase aid significantly to help low-income countries achieve the Millennium Development Goals. But for many countries, achievement of the MDGs remains a long way off. This is certainly not the time for the Fund to disengage from work on the reduction of poverty in low-income countries. Rather, we need more focused engagement by the Fund, including new understandings with the World Bank and other agencies and donors on the division of labor, and we need to strengthen our work in some areas. Specifically, we should be ready to advise on the macroeconomic impact of aid flows and how to design macroeconomic policies consistent with expected aid flows. We should also help the beneficiaries of debt relief to avoid accumulating excessive debt again.
13. I have spoken several times about the need for increases in voting power for some countries, including a number of emerging-market economies, to ensure that they have a role in the Fund's decision-making process that accords with their increased importance in the world economy. The voting power of small, low-income countries has also been eroded over time due to a decline in the relative importance of the "basic votes" to which each member is entitled. It is essential for the IMF's relevance that we make early progress on this issue, and I am very pleased by the increasing awareness of it among our leading shareholders. I hope that the IMFC will give me a mandate at the Spring meetings to make some proposals based around a two stage process, beginning with ad hoc quota increases for the most underrepresented members, followed by further steps that cover other issues, including the formula for quota distribution and the needs of small countries. I would then plan on taking some proposals on the first stage for discussion by our Governors at the Annual Meetings in Singapore.
14. Let me say a few words about the IMF's finances. We have plentiful cash reserves—several billion dollars—that we can draw on to finance the running of the Fund. But over the longer-term we do need to make some changes in the way the IMF is financed. Essentially, for the last 30 years, the IMF's surveillance and technical assistance, as well as operational expenses associated with lending, have been financed by margins on adjustment lending. One result of this is that the more successful the Fund is in helping to prevent crises and persuading members to adopt good policies, the less its income is likely to be because borrowing falls. And the limitations of this financing mechanism have been revealed by the recent repayments by two of our largest borrowers. There are some things we can do, including restraint in our operational budget and setting user fees for some of our technical assistance. But if members want the Fund to continue the work that we have been doing in many areas—and they tell me repeatedly that they do—we will need to broaden the Fund's income base. I have some ideas on this, and I also propose to establish an external committee to make recommendations and to help me secure the support of governments for measures that will ensure that the Fund remains on a sound financial footing over the long term.
15. The decision taken at Bretton Woods to create the Fund is testimony to the ambition and willingness of its members to work together. This continues to be exemplified in the day to day work of a dedicated multinational staff and Board. And the continued interest of the global community in collaborative solutions to common problems finds expression in institutions like the Institute of International Economics and in the thoughtful and constructive speeches of the leaders who have commented on IMF reform. There are many differences of view in this gathering, many proposals. I don't expect everyone to agree with the proposals I've articulated in the medium-term strategy. I hope that by rational debate I will persuade my critics that they are worth adopting. I expect that others—including some of today's participants—will persuade me that some of them can be made better. But I also see a common perspective in this gathering, a commitment to international cooperation. I hope that this spirit of cooperation will also inspire the participants in this week's meetings. With it, I think that we can make great progress. I promise you I will do my part. I hope I can count on your support.
16. Thank you very much.