Speech by Rodrigo de Rato, Managing Director of the International Monetary Fund, at the Peterson Institute for International Economics
April 9, 2007At the Peterson Institute for International Economics
Washington D.C., April 9, 2007
As Prepared for Delivery
1. Good morning. It is a pleasure to be back here at the Peterson Institute. I came here 18 months ago to announce and explain my proposals under the International Monetary Fund's Medium-Term Strategy. I returned a year ago to talk about plans for implementation. Today, I would like to update you briefly on the progress we have made since the last time I was here, and on our plans for the coming weeks and months.
2. We are living in interesting and sometimes paradoxical times. The world economy grew by 5 percent last year, but financial markets fell by 4 percent during a single day. Financial globalization has given billions of people access to the world's capital markets, and given investors opportunities that they have never had before. But imbalances between the major economies remain large, and an increased willingness to take risks has produced some questionable lending and borrowing. Central banks around the world have established credibility in taming inflation, and their task has been made easier over the last six months by lower oil prices. But the risk that political events could disrupt the global economy remains. Businesspeople and financiers criss-cross the globe with ease, but every time any of us go through an airport we must take off our shoes.
3. Where is the global economy now? I do not think that the risks are greater than they were six months ago. Actually, I think they are a little lower. But some of the risks are different, and there is greater consciousness of the uncertainties and paradoxes that lie behind our current prosperity.
4. What does this mean for the International Monetary Fund? I think the striking combination of opportunities and risks that globalization brings with it means this: we need a Fund that is attentive to the challenges our members face; a Fund that has the resources to help them meet these challenges; and a Fund that is trusted to give evenhanded advice and fair representation to all of our members.
5. Over the last six months, we have taken steps forward in a number of areas, which address some of the challenges and paradoxes that I have just talked about.
6. We are increasing our attentiveness by strengthening the foundations of Fund surveillance. Let me mention three aspects of this work today.
7. The first is our surveillance of exchange rates. We have received much advice on exchange rate surveillance and we continue to receive advice. Three weeks ago the Peterson Institute held a seminar on global imbalances which focused heavily on exchange rate issues. In the next few weeks our Board will discuss an analysis by the Fund's Independent Evaluation Office on our exchange rate policy advice during the 1999-2005 period. We have listened to advice, and we will continue to listen.
8. We are also acting. One very important part of the Medium-Term Strategy is a review of the legal basis for our surveillance, embodied in the Board's 1977 Decision on Surveillance Over Exchange Rate Policies. My goal in proposing that we update this decision is not to create new obligations for our members but that the decision should correspond to our current best practice. There are still some decisions to be made on precisely how to do this, but I am confident that we will take it forward. Another part of the strategy is to improve our practice, for example by deepening our analysis of exchange rates and of spillovers between countries and markets, including in our Consultative Group on Exchange Rate Issues. My objective is that the Fund should give evenhanded advice, based on comprehensive technical analysis, to all of its members.
9. But I want to underline again the limits to what we can do. I said here 18 months ago, that the Fund must persuade, it cannot dictate. The Fund can advise, but we cannot and should not dictate to our members on the choice of their exchange rate regimes, their intervention policies, or their exchange rate levels. Indeed, in a world of globalized financial markets, there are limits to what countries can do to influence exchange rate levels. The days when a group of finance ministers could sit in a hotel room and decide currency values are over.
10. What ministers can do is work together on policies. This brings me to the second issue that I want to talk about, which is Multilateral Consultations. As you know, a year ago we initiated a Multilateral Consultation on global imbalances. The goals that we have in this process are to bring key players together for discussions, to increase mutual understanding of the issues involved, and to help build resolve towards implementing an agreed strategy. The discussions were not intended to produce a rapid adjustment of global imbalances: indeed an overly rapid adjustment was exactly what we were trying to avoid. What we did aim to do was to solidify agreement on an approach that will tend to produce a gradual reduction of global imbalances. I am pleased to tell you that the participants have been actively engaged and this work is now well advanced. I think that the Multilateral Consultation process will prove to be a useful exercise, not just for the present but for the future. I will have more to say after we report on our progress to the IMFC next weekend.
11. The third aspect of our surveillance work that I would like to discuss is our progress on integrating our work on financial markets and financial sectors with our work on macroeconomic issues. The increased importance of financial markets for growth and development in 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 taken the lead in 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, together with the World Bank. Now we are advancing this work further. In our monitoring 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 our monitoring of the global economy, we are devoting more attention to the linkages between the financial sector and real economy.
12. You can see the fruits of these efforts in several ways. I have spoken several times over the last few weeks and months about risks in the financial sector, ranging from the Yen carry trade to the U.S. mortgage market to the growth of leveraged buyouts. What I have said has been informed by a body of analytical work, also reflected in the Global Financial Stability Report, which will be published tomorrow. I don't see my role or the Fund's role as being to offer market commentary. There are plenty of others who can do that. But there are risks to financial stability which stem from economic developments, and risks to economic growth which stem from financial market developments. The Fund can assess these risks and help formulate policy responses to them. Some of our members have expressed interest in a second Multilateral Consultation to foster dialogue on how financial globalization and innovation influence growth and economic stability. The Consultation might cover, for example, how macroeconomic and prudential policies in all countries affect emerging and developing economies' ability to benefit from globalization, and how all participants can limit the risk of a crisis. Again, the IMFC meeting will be an opportunity for Ministers to give us their views on how we should take this forward.
13. There are other areas on which we are making progress, but still have some way to travel. We are still assessing whether our tools for crisis prevention and response are the right ones, and whether we can agree on a new instrument that would be both useful and used by emerging markets, and would have broad support. I believe that such a mechanism would be helpful. However, I don't—so far—see the same sense of urgency in our membership that I have. So we are moving more slowly on this.
14. We are also making progressive changes in our work on low-income countries. My central proposition on this is that the Fund can be most effective in working with low-income countries if we focus on what we do best, and on tasks where we can make the greatest contribution. The recently issued report by the Malan Committee on Fund/Bank Collaboration also points in this direction, and our Executive Board has already met twice with Pedro Malan to discuss this important report. The Fund will certainly continue to be engaged with low-income countries. I expect that the Fund will experience a growing interest among members in our Policy Support Initiative, which is designed for low-income country members who do not need or want Fund financial support. And the balance of payments needs of other low-income countries have not gone away. In many countries they are long-term and intractable. So the longer-term concessional financing provided under the Poverty Reduction and Growth Facility will remain important for these members. This support will also need to be complemented by economic analysis and by work on capacity building, through technical assistance and training.
15. I said earlier that the Fund must have the resources to help members meet the challenges they face. We are making changes in the way the Fund operates, streamlining our work and reducing our expenditure in real terms. We are also considering changes to our income model, because the Fund needs to be adequately financed. Reform of the Fund's finances is a key part of the Medium-Term Strategy and the broader reforms of operational work and governance that we are making. Earlier this year, I received a very important report by the Group of Eminent Persons which studied the financing of the Fund's operations. I appointed this Committee because it was clear to me that our current income model, which relies on the margin charged on our lending, is no longer adequate to meet the needs of the institution or the interests of our members. We are not a bank, whose raison d'être is to lend at a profit. Our job is to prevent crises and to help countries emerge from them as quickly as possible when they occur. And it is hard to justify a financing model where the better the Fund does its job of preventing crises, the lower its income base is. Therefore, I asked the committee to consider to look at ways in which we can ensure that the Fund has a sustainable and durable income base that finances all of our activities, including surveillance and technical assistance. The Committee, which was chaired by Andrew Crockett, the former head of the BIS, and included Mohammed El-Erian, Alan Greenspan, Tito Mboweni, Guillermo Ortiz, Hamad Al-Sayari, Jean-Claude Trichet, and Zhou Xiaochuan, produced a report which I believe is very strong.
16. The Committee recommends that the Fund adopt a new income model to sustain its activities for the long term. They recommend a package of measures to diversify the Fund's income. These include: broadening the range of the Fund's investments, in line with the policy of the World Bank, so as to raise our average returns; investing a small portion of the Fund's quota resources, which currently can only be used to finance lending; and selling a small proportion of the Fund's gold reserves—400 metric tons, which is equivalent to one-eighth of total Fund holdings of gold—and investing the proceeds. The Committee also suggests that we consider charging for services, such as technical assistance, provided to individual members; and reestablish the practice of the PRGF Trust reimbursing the Fund for the administrative costs of concessional lending.
17. We have had three productive informal discussions on the report in the Fund's Executive Board. I have invited Andrew Crockett to talk to Ministers next weekend. When I have heard their views, I will make some proposals based on the recommendations in the report and my sense of what is feasible and acceptable to our membership.
18. The Fund must be attentive, it must be equipped, and it must be trusted. This raises the issue of legitimacy—of quotas and voice. We took an essential step at our Annual Meetings last year in Singapore, where our Governors agreed to a two year program of change, starting with increases in the quotas of China, Korea, Mexico, and Turkey. Our Governors also agreed that the next stage must involve further increases in quotas for the Fund's most dynamic members, while making sure that the representation of low-income countries is protected, and their voice strengthened. We are now discussing with our Executive Board proposals for a new quota formula, and we have made some progress in agreeing on a set of underlying principles for the new quota formula. We agree that the formula should be simple and transparent, be consistent with the multiple roles of quotas in the Fund, capture members' relative positions in the global economy, and result in calculated quota shares broadly acceptable to the membership. We have also set in train the legal work necessary for an increase in basic votes, which will safeguard the position of low-income countries. And the Board is discussing increases in administrative resources for Executive Directors who represent large constituencies, including the two African Executive Directors. We will report on progress in this work to the IMFC next weekend. Our objective remains to come back to the IMFC with proposals on a new quota formula by the Annual Meetings later this year, if possible.
19. On this issue, and on others, I think we have made good progress since our Ministers met in Singapore, and I hope we will make further progress this weekend. But I want to conclude by injecting a note of caution. The more comfortable people are with the current situation, and with the progress being made, the less willing they will be to make the compromises necessary to sustain that progress. If political leaders don't think that global imbalances are important, or are complacent about financial market developments, it is more difficult to persuade them to take the actions needed to sustain global prosperity. I am also concerned that there may be insufficient appreciation of the need for action on financial markets. We are living in a dry forest. If market developments produce increased awareness of the dangers of playing with fire, that is no bad thing. But it is important to translate that awareness into constructive action. The Fund, among others, will continue to work on this over the coming months.
20. Complacency is also a potential hurdle to other major policy initiatives, including reform of the Fund's finances and reform of the Fund's governance. There are 185 members of the Fund, all with their own, sometimes conflicting, objectives. Almost all of the changes that we are considering to the Fund's financing model and to quotas require very large majorities. It is essential that members or groups of members do not treat this as an opportunity to press for their own preferred approaches, at the expense of the consensus that is needed to make any changes at all.
21. As we go forward, I hope that we will see again the spirit of multilateralism that we saw in Singapore. The changes we need won't be easy. We will need all of the skills of our Executive Board members and of our Ministers in generating consensus around reforms. Fortunately this is something that they are very skilled at. President Lincoln, in his second inaugural, said "With high hope for the future, no prediction in regard to it is ventured." Well, I am certainly not braver than Abraham Lincoln. So I have high hopes, but I will also make no further predictions.
22. Thank you very much.