Modernizing the IMF for the 21st CenturyRemarks by Mr. Masood Ahmed
Director, External Relations Department, IMF
at the International Policy Workshop
Organized by InWent and the German Federal Ministry for Economic Cooperation and Development
Europahaus, Stresemannstrasse 94, 10963 Berlin, Germany
October 18, 2006
Guten Abend, ladies and gentlemen. I am delighted to have the opportunity to address such a distinguished audience here in Berlin this evening. At the outset, let me congratulate InWent and the German Federal Ministry for Economic Cooperation and Development for organizing this conference on the important topic of financial market stability and crises prevention. This is particularly opportune in view of the increasing scope and pace of global financial market integration, the opportunities and challenges it brings with it, and the importance of international financial stability for sustainable economic growth and development.
As you know, a few weeks ago, we concluded the Annual Meetings of the World Bank and IMF in Singapore. And the issue of how to further strengthen the Fund's crises prevention tools was very much at the heart of the agenda. While one prominent journalist of the London Times said that the Annual Meetings were 'usually the most boring international summit of the year', he begged to differ this year - and naturally, I could not agree more. The most notable feature of this year's Annual Meetings is the broad based endorsement by the membership of the IMF of the program to modernize both the institution's governance - the reform of quotas and voice- and also its tools and functions to respond to the new challenges facing member countries in a globalized economy.
Before I delve into these issues in more detail, let me take a step back and talk about the rationale for the reforms underway at the institution. The past decade or so has been a particularly challenging one for the Fund and for the 184 countries which are its members. A period of rapid and far-reaching change for the global economy, as the process of globalization accelerated. National and international policymakers, including the IMF, have had to adapt to keep pace with these changes. Financial crises in Asia, Russia and Latin America from the mid-1990s onwards taught us all important lessons about the impact of globalization on economic policy and about the significance of the sharp rise in private international capital flows. Some rapid reassessments were required. As a consequence of what we learned, the Fund has already made some important and far-reaching adjustments to the way it works. Among them are a revolution in transparency and a much stronger focus and belief in the value of country ownership of economic programs.
Twenty-first century style globalization, with massive movements of capital and abrupt shifts in comparative advantage, is presenting all countries and the global institutions with new challenges. The IMF has an important role to play in fostering international economic cooperation and helping individual countries meet these challenges. But to do so, the IMF must remain in step with a rapidly changing world. To this end, in September 2005, the Fund's Managing Director launched a review of the Fund's medium-term strategy aimed at formulating an agreed vision of the institution's future role and priorities. The overall goal of our review is to equip the Fund to assist our member countries cope with the challenges presented by globalization. Since its launch in 2005, the IMF has moved well into the implementation phase of its medium-term strategy with important progress made at the Annual Meetings.
Implementing the Medium-Term Strategy - Singapore and Beyond
Let me now talk about the issues that were at the forefront in Singapore in more detail. In the context of our reform strategy we are concentrating on the following key areas: (i) IMF governance and issues of voice and participation; (ii) enhancing the effectiveness of IMF surveillance, including the multilateral consultation framework; and deepening our work on financial sector and capital account issues (iii), policies to better assist our emerging market members' crises prevention efforts; and (iv) refocusing our assistance to low-income countries.
Quota and voice. In Singapore, the IMF won overwhelming endorsement of a package of measures designed to better align members' quotas with changes in the world economy and to protect the participation and voice of its low-income member countries where so many people are profoundly affected by the Fund's decisions. The issue of voice and representation is at the heart of the Fund's credibility and its perceived legitimacy as an international organization representative of its members. Our legitimacy suffers if we do not adequately represent countries of growing economic importance.
IMF quotas are not immutable. But in recent years, there have been only gradual changes in IMF quotas, and a rebalancing is needed to bring the quota structure more into line with today's world. The two-year reform program launched at Singapore begins with an ad hoc quota increase for the four most underrepresented countries: China, Korea, Mexico, and Turkey. It also includes a plan of action for a further round of increases for underrepresented economies, based on a simpler and more transparent quota formula. And it includes a proposed amendment of the Fund's articles to at least double basic votes that would, at a minimum, protect the existing voting share of low-income countries as a group. We will also work on how to strengthen the offices of the Executive Directors that represent those countries. The IMF was asked to report on its progress at the April 2007 IMFC meeting and to complete the reforms by the 2008 Annual Meetings.
IMFC Chair Gordon Brown, the U.K. Chancellor of the Exchequer noted that these steps, when implemented, would constitute "the biggest reform" of the IMF's governance structure since its inception after World War II. At the same time, we have to acknowledge the concerns by other members who voted against the resolution about the ad hoc quota increases and the thorny issue of revising the quota formula which remains to be worked out. Much work remains to be done, in particular regarding the design of a new formula, with many opinions among our shareholders about the relative weights of the different variables that could determine quotas, such as GDP, openness, or reserves. Therefore, it will be crucial-and it is the Managing Director's intention-to engage in a wide-ranging consultation process over the months to come to build the necessary broad consensus among our shareholders. In considering this issue, our members will need to consider the interests of the institution as well as their national interests. Indeed, I think the two are consistent. Decisions on quotas are not a zero-sum game. If there is broad acceptance of the IMF's legitimacy, the institution and all of its members will benefit.
Modernizing the Surveillance Tool Kit. Another major outcome of the Singapore meetings was the IMFC's strong backing of the Fund's ongoing efforts to strengthen the IMF surveillance framework. The monitoring of the global economy, advising member countries on their economies and assessing their policies, is perhaps the greatest single service that the Fund provides. To improve this service, the Fund is modernizing its toolkit to improve the quality of our analysis, including of exchange rates. For example, we are in the process of extending to the currencies of the major emerging economies the analysis that the Fund currently conducts on industrial countries' economies to assess, within a cross-country framework, whether exchange rates are broadly in line with fundamentals. We also received support for reviewing the principles-formulated almost 30 years ago-that guide our surveillance over exchange rate policies.
We also received strong backing to step up the focus of IMF surveillance on financial and capital market issues. The Fund is actively following capital market developments, continuing to sharpen its tools for assessing vulnerabilities, including through a systematic assessment of debt sustainability, a strengthened focus on national balance sheets, and sound debt management. One of the lessons of the Asian crises was that effective financial sector surveillance is critical if governments are to avoid such surprises in the future. We will be looking at ways to reinforce the IMF's research, analysis, and policy advice on capital account issues, and our monitoring of global capital markets. It will be particularly important to consolidate our ability to advise countries on ways to strengthen financial sectors, reduce vulnerability to shocks, and prepare for orderly access to international capital markets.
Another important step towards improving surveillance is a new tool, Multilateral Consultations (MC). The IMF is the natural forum for multilateral cooperation to promote stability and growth in the global economy. With increased trade and financial linkages among nations, and connections between economic performance, poverty, and security, cooperation to address global imbalances that threaten stability and growth is now more important than ever. The first MC focuses on narrowing global current account imbalances while maintaining robust growth. It has brought together the Euro Area, Japan, the Peoples Republic of China, Saudi Arabia and the US for constructive discussions that are facilitated by the staff of the Fund. We hope that the consultation will produce a shared analysis of the nature and consequences of global imbalances; a common understanding on policies designed to make things happen in several countries together; and understandings on the role the Fund can play as a forum for implementing the common approach.
Better Assist Emerging Market Members. Another key area of our reform program is centered on crises prevention, especially for emerging markets. At the moment times are good in financial markets. But financial crises have not disappeared from the face of the earth. The time to prepare for them is now. The best defense against financial crises is good policies at home and many emerging market economies are taking steps to lower public debt, strengthen financial systems, and increase their resilience. But the world community, through the Fund, should also be in a position to provide support, including financing that is sufficiently predictable, flexible, and substantial to allow emerging market countries to meet the challenges they could face.
This is why the Fund responded to the call by a number of members for a Fund-based liquidity instrument specifically designed to support crisis prevention efforts by members active in capital markets. Such an instrument would aim to reduce the likelihood of crises by providing a way for countries to commit to policies directed at reducing vulnerabilities, sending strong signals to markets regarding policy momentum, and reinforcing confidence that substantial financing is available, if needed. An Executive board seminar in August focused on options for addressing design challenges inherent in such an instrument, recognizing the lessons from experience with the Contingent Credit Line (CCL), which expired in 2003. Specifically, a successful instrument would need to find an appropriate balance between the desirability of strong predictability of access and the need for adequate safeguards for the Fund's resources. In Singapore, the Fund's Executive Board was asked to continue its work on the necessary design features of such new instrument and we will report back with concrete ideas at the April 2007 IMFC meeting.
Better Focus Low-income Country Work. We also need to improve the focus of the Fund's work in low-income countries. There is a body of opinion which thinks that the Fund ought to get out of the "poverty business." The Managing Director has made clear that he completely disagrees with that view. LICs need macroeconomic advice from the Fund and they often need financial support. Moreover, we are now at a critical juncture, in trying to help countries achieve the MDGs, and we have an opportunity arising from the growing consensus in wealthy countries that aid must be increased and debt reduced.
In Singapore, Ministers renewed their commitment to assist our low-income country members to reach the MDGs, and the Fund will be most effective if we focus on what we do best, which is to focus on sustainable growth, critical macroeconomic areas, and on areas where we can make the greatest contribution. The IMF is part of the international work-force, and will work in partnership with the World Bank and other development agencies.
Last year, both the Fund and the Bank took an important step, in implementing the Multilateral Debt Relief Initiative. Under the initiative, the Fund alone provided 100 percent debt relief on debt owed by 22 poor countries. It is crucial now to help countries reap the benefits of higher aid and debt relief, and avoid a new buildup of unsustainable debt. I believe that creditors share with debtors not only a responsibility but also an interest in this. The Fund can help both creditors and debtors by assessing debt sustainability. In this context, the joint IMF-World Bank debt sustainability framework is the primary tool that borrowers and creditors should use to assess alternative financing strategies, identify emerging debt-related vulnerabilities, and develop coherent lending practices. All creditors need to work with the IMF and the World Bank to practice responsible lending to avoid that history repeats itself.
For their part, low-income countries must continue to implement good policies and structural reforms. Advising countries to avoid expensive debt is likely to be most effective if we can offer them alternative sources of finance. Therefore, donors must turn the promise of higher aid into a reality, and make their aid more predictable, and less subject to an array of different conditions. At the Fund, we need to deepen our involvement in advising countries on how to deal with macroeconomic effects of higher aid flows. For example, there is a need to improve public expenditure management to ensure that additional aid does not lead to wasteful and inefficient spending. There is also scope to better coordinate the allocation of work between the Bank and the Fund, and we are looking forward to a forthcoming report by the External Review Committee on World Bank-IMF cooperation, due in spring 2007.
As you see, we have our work very much cut out for the next 18 months, and work on the different elements that I just laid out to you has already begun. Our expectations are that we will have made enough progress on all those fronts with a view to taking some decisions already at the Annual Meetings of 2007. In going forward, let me emphasize again, the key is not only to do the technical work but, as we did in the six months preceding Singapore, but to undertake broad-based consultations with the whole membership, so that whatever proposals we develop are proposals that have the broad support needed to move forward in the same way as we did in Singapore.
Ladies and gentlemen, the IMF's mandate has evolved considerably since it was set up after World War II and the Great Depression. This evolution has been guided by the needs of an international community committed to multilateral cooperation. The meetings in Singapore have shown that the spirit of multilateralism is very much alive. With the commitment of our membership, the IMF embarked also on a program to help its members meet the challenges of the 21st century.