Key Steps in IMF Reform: Taking Stock on the Eve of the Annual Meetings in SingaporeSpeech by Rodrigo de Rato, Managing Director of the International Monetary Fund
at the Brookings Institution
September 5, 2006
As Prepared for Delivery
1. Good morning. I would like to thank the Brookings Institution for hosting this occasion, Strobe Talbott for that very kind introduction, and, in advance, Susan Collins for moderating the discussion that will follow. The first day after Labor Day is when many children in America go back to school after the summer: an exciting time for them—and for some of us, us parents. It is a good day for taking stock, for fresh starts, and for recommitment to work, as the temperature drops and the pulse quickens. It is also an exciting time for the International Monetary Fund. In a little over a week our Governors will gather in Singapore for our Annual Meetings, held together with the World Bank.
2. This is the first time since 1997 that the Annual Meetings will be held in Asia, and it is a good time to do so. Asian countries' commitment to openness, trade, and private sector development have made the region the most dynamic in the world. The two principal items on our agenda in Singapore are a discussion of developments in the global economy and a stock taking—and some decisions—on implementation of the Medium-Term Strategy for the Fund, our plan for adapting the Fund to help our members meet the challenges of 21st century globalization. Today, I want to focus mostly on two aspects of the Medium-Term Strategy—proposals for reform of the Fund's governance structure, and the changes we are making in the way we conduct surveillance. Before doing so, though, let me say a few words about the global economy.
3. The global economy has been resilient in the past year, and growth prospects are still very good. Here in the United States, the speed of the expansion is moderating to a more sustainable pace, largely reflecting the slowdown in the housing market and the effect of higher interest rates. But elsewhere in the world, growth prospects are encouraging. Japan appears to have put deflation behind it. China and India continue to be engines of growth, and many other countries, including in sub-Saharan Africa, are enjoying a continuation of the strong growth that we saw last year. We expect next year to be another year of solid growth, with expansions in Europe and Japan supporting global demand, even if the U.S. economy cools. Nonetheless, there are more clouds on the horizon than there were a year ago: inflation risks are a concern as output gaps narrow, high oil prices could adversely affect both inflation and growth, and there has been a major setback in the Doha Round. And of course, the risk of a disorderly adjustment of global economic imbalances have not gone away, and could be exacerbated by the other risks. So policy makers around the world are facing an increasingly challenging environment, and should be proactive in addressing the risks.
4. Let me now move on to my central theme, which is progress in implementing two particular aspects of the Medium-Term Strategy, relating to Fund governance and surveillance.
5. The Medium-Term Strategy is motivated by the central insight that the world is changing fast, and that the Fund needs to adapt to reflect the changes we are seeing in the wider world. New economic powers are rising, especially among the emerging market economies. Financial globalization creates tremendous economic opportunities and commensurately increased risks. How then should the Fund adapt to these changes?
6. I believe that the changed distribution of economic weight in the world demands that we reform our governance structure. The distribution of quotas, which largely determine voting power in the Fund and also influence the amount that members can borrow from the Fund, has changed only gradually over time, and has not kept up with changes in the relative position of countries in the global economy. I see a clear need for a rebalancing of quotas to reflect changed economic realities, especially the increased economic weight of major emerging markets.
7. I also see a need to protect the voice and representation of low-income countries. Their voting power has been eroded over time, in part because other countries' relative importance in the global economy has increased, and in part because "basic votes"—an equal allocation of votes based on the principle of equality of states that was made when the Fund was founded—have become relatively less significant with each new increase in quotas. This gives rise to concerns about the adequacy of voice and representation for a number of countries that continue to borrow from the Fund but that have only a limited share in Fund voting.
8. Why are these issues important? The Fund has a global membership and a global scope of responsibilities. It is the most important and sometimes the only forum for collective action on complex economic problems. Increasingly, the Fund is also a vehicle for promoting cooperation between groups of members: most recently through the initiative on Multilateral Consultations, which I will talk about in more detail later. The Fund has legitimacy and a record of effectiveness. But if it is to retain its legitimacy and maintain its effectiveness, and be a useful vehicle for promoting international cooperation, all of the Fund's members must be confident that they have a fair share in its decision making and that their voice will be heard.
9. It is a challenging process to revise the structure of Fund quotas. There are many interests at stake and almost as many principles that can be invoked to defend those interests. I am thankful for the attitude of many, many countries and governments. They have taken a broad view of the institution's interests, and not just looked at their own interests, legitimate as they are. As a result, I can report that the members of our Executive Board have risen to the challenge and have agreed on a package of measures that they will recommend to the Fund's Board of Governors in Singapore.
10. One element of the package will be implemented very quickly. This is an increase in quotas for four countries that are clearly underrepresented—China, Korea, Mexico, and Turkey. This increase would be designed in part to rectify the most extreme distortions in representation, but its greater significance is as an initial action in a broader process of reform. This would take place over the next two years, with discussions beginning very soon on a new quota formula, designed to capture more accurately members' positions in the global economy, so that—if possible by the 2007 Annual Meetings, and at the latest by the 2008 Annual Meetings—the Board would agree on a new formula, and recommend further ad hoc increases in quotas for a broader range of members based on this. There is also agreement that we should ensure that quota shares continue to evolve in line with changes in members' positions in the global economy, while continuing to ensure that the Fund has enough liquidity to achieve its purposes.
11. The Board will also ask Governors in Singapore to agree in principle to an amendment to the Fund's Articles of Agreement to at least double basic votes—so that the existing voting share of low-income countries as a group is protected—and to add a provision in the Articles that the share of basic votes in total voting power should remain constant in the event of any future change in total voting power. It takes time to amend the Articles—in many countries, legislative approval is needed—but the plan is that these changes would be made at the same time as the second round of quota increases. In addition, right away, I will ask the Board to increase staff in the offices of Executive Directors from Africa, who represent large numbers of countries, to help them continue to make their voices heard effectively.
12. I have explained the package in some detail—and I apologize if some elements that I am describing seem arcane. But the principles behind the package are not arcane—they are based on fairness. And their impact will be large. They will allow the Fund to remain an effective and credible participant in global economic discussions. They underpin all of the other elements of Fund reform.
13. One of the most important functions the Fund performs is its surveillance of the international monetary system and of the global economy. By surveillance, I mean both monitoring of the global economy and the Fund's discussions—consultations—with individual members on their economies. In proposing changes in this area we are building on reforms that have been underway for many years, especially the increased emphasis we have placed since the late 1990's on promoting internationally agreed standards and codes and on greater transparency in our operations and assessments. But the Medium-Term Strategy goes further, with the aim of adapting Fund surveillance to a new world of financial globalization, with all of its attendant opportunities and risks.
14. One change that we have already begun to implement is the introduction of a new tool, Multilateral Consultations, in which particular issues of global or regional significance will be taken up collectively with some members and, where relevant, with entities formed by groups of members. Multilateral Consultations are an example of the Fund's increasingly important role as a vehicle for international cooperation. The aim is to provide a vehicle for analysis and consensus-building and a framework that helps our members overcome some of the hurdles to individual action by emphasizing the benefits of joint action for all.
15. Our first Multilateral Consultation has already begun, and focuses on narrowing global current account imbalances while maintaining robust global growth. Fund staff have already held bilateral discussions with the participants in the consultation—China, the euro area, Japan, Saudi Arabia, and the United States—and over the coming months, we will hold roundtable meetings with all of the participants together. The consultation is focusing on the spillovers and linkages among these and other economies, and on actions that could sustain growth and promote an orderly unwinding of the imbalances. I don't want to go into too much detail on these discussions, as the consultation is still at an early stage. It will also take time, both to complete the consultation, and for actions taken to produce effects on global imbalances: these have been built up over a number of years and will not be reduced to sustainable levels quickly. However, I hope that the consultation will produce: (a) a shared analysis of the nature and consequences of global imbalances; (b) a common understanding on policies designed to make things happen in several countries together, and (c) understandings on the role the Fund can play as a forum for implementing the common approach.
16. Another part of the reform of Fund surveillance is a review of the foundations of our surveillance, embodied in past Executive Board decisions, to ensure that they are clear and relevant. We are sharpening our focus on exchange rates. A recent study we made of our staff reports on 30 large economies revealed that most provided assessments of the adequacy of exchange rate regimes and exchange rate levels. But we can improve our analysis further. We are in the process of extending to the currencies of the major emerging economies the analysis that the Fund currently does to assess whether exchange rates are broadly in line with fundamentals. This is something that needs to be handled with caution, given methodological difficulties and sensitivities, but it is an important step.
17. We are also intensifying our efforts to integrate our financial sector work, including on capital and financial markets, in our regular surveillance activities. The increased importance of financial markets for growth and development for all countries is a major feature of the new world of globalization. It is of particular importance for emerging market countries, which have a lot to gain from financial integration but may also become more vulnerable in integrated global markets. The Fund has been placing increased emphasis on identifying strengths and vulnerabilities in the financial sector for many years, including through the launch of the Financial Sector Assessment Program in the late 1990's.
18. But we are now advancing it further. In our surveillance of the global economy, we have already begun to devote more attention to the linkages between the financial sector and real economy. The linkages work both ways. We are examining the implications of financial sector changes for countries' economies—including in a chapter of the World Economic Outlook that will be released tomorrow. Risks to financial stability are addressed in the Global Financial Stability Report that will be released on September 12.
19. In our surveillance of individual countries' economies, we are enhancing the analysis of financial sector vulnerabilities and ensuring that this is reflected in our macroeconomic analysis and policy advice. In Article IV consultation reports we will increasingly cover the implications of such vulnerabilities for macroeconomic aggregates and capital flows, and for domestic and external spillovers. The bottom line is that in the past, nasty surprises in the financial sector have had even nastier effects on the real economy. To avoid such surprises, we are devoting increased resources to financial sector surveillance.
20. I have focused particularly on surveillance work today, because it benefits all of our members, and it is at the heart of the Fund's responsibilities. But the Medium-Term Strategy covers many other aspects of the Fund's work besides surveillance. Let me mention briefly two areas where I expect some changes over the coming year.
21. I think we need to improve the usefulness of IMF support for emerging market economies. After very heavy borrowing for a period of years, not many of our emerging market country members borrow from the Fund. This is partly a reflection of good conditions in financial markets, and of improved economic management in emerging market countries themselves. But I want to make sure that if financial market conditions worsen, the services we offer to our members are sufficiently useful that they will come to us for support if they need to. For this reason, I have proposed that we develop a new instrument to provide liquidity for emerging market countries that have strong fundamentals but remain vulnerable to shocks. The aim would be to provide assurances that substantial financing will be available in time of need, a framework for policy commitment and monitoring, and a signal to markets. Our Executive Board discussed this instrument for the first time last week. I look forward to further discussions on this issue in Singapore. Given members' support, we would work on these issues in the coming period with a view to making concrete progress before the next Spring Meetings.
22. We will continue to refocus our work on low-income countries. Over the past year, the Fund has moved quickly to implement the Multilateral Debt Relief Initiative, wiping out the debt owed to us by some 19 poor countries, and other international organizations have followed. We have put in place a new subsidized lending facility for low-income countries hit by shocks, and a new instrument to support policies in those countries that do not need Fund financing. But we need to do more. Mahatma Gandhi is reported to have advised, "Think of the poorest person you have ever seen and ask if your next act will be of any use to him." This is a high standard to meet, but we must try. I have proposed in the Medium-Term Strategy that the Fund renew its commitment and improve its effectiveness in helping low-income countries meet the Millennium Development Goals by focusing on what we do best, and on tasks where we can make the greatest contribution. These include helping countries reap the benefits of higher aid and debt relief, and avoid a new buildup of unsustainable debt; promoting macroeconomic stability, which is the prerequisite for sustainable growth; and providing support in policy areas where the Fund has expertise, and that are critical to growth: for example, trade policy and financial sector issues. In all of these areas we also need to work closely with others—the World Bank, donors, and most importantly low-income country governments and civil societies.
23. To sum up, we have an exciting agenda both for Singapore and beyond. The Fund has made good progress in the past year—on measures to improve surveillance, measures to help low-income countries, and other aspects of our Medium-Term Strategy. We have a clearer picture than we did a year ago of the direction that reforms should take and we have taken some steps along the way. I hope that in Singapore our Governors will support the planned changes in Fund quotas and endorse our plans for continued reform of surveillance. I also hope that they will indicate their support for the further work, including on crisis prevention and Fund income, that we are planning in the coming months. We have a long journey ahead of us. I am sure it will be exciting, and sometimes difficult. But we are approaching it with determination and with the conviction that the Fund can help our members meet the challenges of globalization, so that their people can enjoy its benefits.
24. With that, I now invite your comments and questions. Thank you very much.