Adapting to New Global RealitiesRemarks by Mr. Takatoshi Kato, Deputy Managing Director
International Monetary Fund
Seminar at the Asian Institute of Management
Manila, July 13, 2006
July 13, 2006
As prepared for delivery
1. It is a pleasure to be here in Manila, and to have this opportunity to take part in this important discussion. My visit comes at a time when there is increased optimism about the Philippines' economic prospects, reflecting the significant progress that has recently been made with fiscal reforms. The economy is already growing at 5 percent, and if reforms can be advanced and sustained, the prospects are for even higher growth, as well as significant poverty reduction, in the years ahead. But this is also a time of change for the International Monetary Fund, and what I would like to do is talk about the changing role of the IMF in Asia and in the world economy. I am sure you also have important views to share on the subject, and I look forward to a good discussion.
Challenges of Globalization
2. All countries are dealing with the various challenges of globalization. This is as true in the Philippines, and for Asia generally, as it is elsewhere. This region has been closely engaged with the world economy, and globalization has served it well with its wide-ranging impact on trade, production processes and employment opportunities. But Asia faces the risks and costs of financial globalization; the events of the past decade highlight those risks very clearly. The accelerating pace of change and integration in financial markets continues to present new challenges. Let me highlight some of these, and suggest some ideas that might be useful to our membership.
3. One challenge is to avoid future crises by reducing domestic vulnerabilities, especially in the face of large and potentially volatile capital flows. Capital market integration has helped allocate savings and investment more efficiently. But it has also increased the risks because of capital flows and, in the worst-case scenario, the threat of financial contagion.
4. Other potentially serious challenges stem from the globalization of production, notwithstanding the many opportunities it brings. Also, as Asia's populations get older, governments need to adjust their budget policies to adapt to this reality.
Overcoming the Challenges
5. Asian governments can surmount these challenges. Countries can make fuller use of flexible exchange rate arrangements to enhance their ability to absorb external shocks. Some may also need to further strengthen financial sector supervision to safeguard against systemic risk, and to improve risk management skills. Enhancing corporate governance and improving the efficiency of bankruptcy systems would also make economies more resilient.
6. To help with the challenge of global competition in production, countries should promote the development of capital markets and try and improve labor market flexibility. Also, a more business friendly environment will encourage new investment and innovation. Of course, education, including skills upgrading to prepare children and adults for a changing world, remains equally important.
7. Countries with aging populations can prepare budgets that reduce public debt levels. The current period of strong growth provides a golden opportunity to further strengthen fiscal positions, and prepare for the fiscal costs of aging populations, as well as reduce vulnerabilities.
8. The IMF will remain a reliable partner. One exciting process that is going on in Asia is regional integration. This encompasses trade agreements, regional economic cooperation, and financial integration. Asia's financial integration is important, and the IMF supports it enthusiastically.
A Changing Role for the IMF
9. And now, let me say a few words about the changing role of the International Monetary Fund in the global economy. As our members face new challenges, we must stay in step with their needs.
10. We presented a report on our Medium-Term Strategy to the IMF Spring Meetings in Washington just this past April. Our members enthusiastically welcomed the strategy, opening the way for implementation. I would like to concentrate my remarks on highlighting the most relevant aspects of the agreed path forward.
Supporting emerging markets
11. Emerging market countries, like those in Asia, have become major players in the world economy. They are in increasingly good shape. They have sound macroeconomic policies in place, and more resilient financial systems. In managing their debt, many countries have already pre-funded their 2006 operations, and more and more countries are receiving investment grade ratings. Clearly, therefore, with the world changing by the day, the IMF's funding instruments also need to change to stay in step.
12. Today's benign situation in global financial markets should not lull us into thinking that the risk of financial crises is past. The IMF's capacity to lend substantial amounts under appropriate safeguards is central to its ability to help emerging market members deal with the risks associated with large and volatile capital flows. But a central lesson from the past decade is that it is far preferable to prevent a crisis from developing in the first place than to try to cure it after the fact. Therefore, the IMF needs a financial instrument to help prevent crises. We are discussing with our membership a new contingent financing instrument for countries that have strong macroeconomic policies, sustainable debt, and transparent reporting, but which remain vulnerable to shocks. Such an instrument would also provide a framework to support and reinforce good economic policies, and, thus, help to further lower vulnerabilities. It would tackle the problems that have made previous approaches to contingent financing unattractive to emerging markets countries by providing for automatic drawings for programs that are on track, and providing more finance up front.
13. Our new surveillance framework encompasses several key elements. The first is an increased focus onmultilateral issues, including global financial issues. As a universal institution, we are well placed to be a catalyst for multilateral debate and action. Already, through global surveillance instruments like our World Economic Outlook and Global Financial Stability Report, we are able to present in-depth analysis of systemically important issues. This is certainly the case with the looming problems posed by global imbalances. Our global surveillance increasingly enables us to discuss the implications of potential spillovers in bilateral consultations with our members. The next step is to catalyze action. That is where a new approach involving multilateral consultations could play a key role.
14. Multilateral consultations are intended to allow us to take up issues comprehensively and collectively with several members at once and, where relevant, with entities formed by groups of members. Over time, these consultations could potentially be an important vehicle for building a common vision for action, something that would lessen risks for countries all over the world. That is one purpose of the upcoming consultations on global imbalances, which will involve the U.S., Japan, China, the euro area and Saudi Arabia.
15. We shall also pay close attention to enhancing the effectiveness of individual country surveillance. Here we aim to promote greater awareness of regional contexts and cross-country experiences. We envisage a major push to integrate financial sector analysis with the macroeconomic analysis that has traditionally been the focus of our surveillance. This will require some organizational changes within the Fund, but also the active participation of our members in this endeavor. The point here is to focus our surveillance on the crucial issues.
16. We are placing particular emphasis on exchange rate policies. A challenge for Fund surveillance in the face of financial globalization is the potential for larger and longer-lasting departures from equilibrium exchange rates, which in turn risk crises and disruption when reversals occur. While judgments about equilibrium values are technically difficult and politically and market sensitive, the thinking of policy-makers must be informed by an analysis based on a consistent multilateral framework. Our internal work on estimating equilibrium exchange rates for industrial countries will be expanded to cover major emerging-market currencies. The analysis should also become a point of reference for Article IV surveillance discussions with members.
17. In sum, our surveillance is adapting to new realities in the world. It will include strengthened analysis and monitoring of the exchange rate policies, risks and spillovers in our member countries. Our focus will be sharper and our outreach enhanced.
Quota and Voice
18. As a cooperative institution, the effectiveness and credibility of the IMF must be safeguarded, and its governance enhanced. As such, it is important for all our members to have a fair voice in the organization. We are examining how a change in the structure of quotas would better reflect important changes in the world economy that have taken place, especially the increasing weight of emerging market economies. In a number of countries, IMF quotas have got increasingly out of line with economic weight. Asia's share of world GDP was about 22 percent in 2003. This is about one third higher than its share in IMF quotas. In other respects too, Asia has become more important in the world economy. Its share of world exports is over 27 percent. And Asia continues to grow rapidly: last year, economic growth in Asia was about 7 percent; we expect the same again this year.
19. A lot of work will go on in this area in the coming months, and we hope to present concrete proposals for consideration at our September Annual Meetings in Singapore. Early progress will require a two-stage approach. Such a strategy could involve ad hoc quota increases for some of the most underrepresented emerging market members in the near term, followed by further steps at a later stage. Agreement on an increase in what are called basic votes will be key for strengthening the voice of the smallest members.
20. It is no longer tenable to rely on the IMF's interest income to finance its many roles in the international financial system. This is especially true at a time of relative global prosperity, where our lending is declining. The IMF produces valuable public goods—like the prevention of financial crises—that need to be financed, irrespective of its lending activities. What we must do is find the right formula; our Managing Director has appointed a committee of eminent persons to examine alternatives. At the same time, of course, we need to remain efficient, and we are re-examining opportunities for further cost-savings in the delivery of our services.
21. To conclude, let me say that the IMF emerged from the recent Spring Meetings with a strong and renewed mandate to address the world's financial imbalances and to help our membership adapt to the new realities being shaped by globalization. Our 184 shareholders have enjoined us to proceed with reform measures that will make our 61-year-old organization better able to prevent and resolve crises. We intend to pursue these reforms wholeheartedly, making the IMF more fit for purpose in this 21st century global economy.
22. Thank you for your attention, and I look forward to your thoughts and questions.