Positioning the Fund to Meet Global ChallengesStatement by Rodrigo de Rato, Managing Director of the International Monetary Fund, to Members of the Treasury and International Development Select Committees of the House of Commons of the UK Parliament
May 14, 2007, in London, England
As Prepared for Delivery
1. I very much welcome this opportunity today to continue the dialogue with the Select and International Development Committees—a dialogue that began under my predecessor, Horst Köhler, who gave public evidence before the Treasury Select Committee in 2002 here in London, and that has continued over the years with our regular meetings in Washington. I understand that members of the Treasury Select Committee will be visiting Washington again next week and I look forward to welcoming them at the IMF.
2. At the outset, let me thank you for the constructive role that Committee members have played in furthering the debate on the role of the IMF in today's world. The 2006 parliamentary inquiry on "Globalization: The Role of the IMF" was important and timely, and contained a number of useful findings—one being that the Fund needs to be better equipped to be able to deal with today's unique challenges.
3. The rationale for the changes we are trying to make at the IMF is that the world is changing, and the Fund needs to change with it. 21st century globalization is creating new opportunities and new challenges for our members. Interactions between economies and financial sectors are becoming more important. There is a pressing need to engage the emerging economies that are increasingly important in the global economy. Global problems, from poverty to climate change, increasingly need global solutions. The Medium-Term Strategy for the Fund, which I launched 18 months ago, and which was endorsed by the IMFC under Gordon Brown's leadership, is designed to position the Fund to help its members meet all of these challenges. Let me provide you with a quick overview of the changes we are making at the Fund.
4. Some of the most important changes we are making concern surveillance—our monitoring of the global economy and of the economies of individual countries, which is the core business of the Fund as crises—thankfully—have become less common. The central insight here is that we need to pay more attention to spillovers—between countries, and between the real and financial sectors. One conclusion that flows from this is that it will sometimes be necessary to bring different countries and people to the table in different ways. This insight led us to adopt Multilateral Consultations last year to complement our other forms of surveillance.
5. Our first Multilateral Consultation focused on how to reduce global imbalances while sustaining strong global growth. The approach we took is bearing fruit. During the last Spring Meetings in Washington, the five participants in the Multilateral Consultation—China, the euro area, Japan, Saudi Arabia, and the United States—jointly set out their policies in a document circulated to ministers representing the Fund's 185 members. This is a very significant development, which would not have happened without the Multilateral Consultation. The participants made some important commitments which could reduce global imbalances significantly. And the fact that the participating countries agreed to put forward these policies and discuss them in a multilateral setting is a recognition of the global nature of the problem, and shows their commitment to multilateralism.
6. Another element of change is to modernize the framework for surveillance to make sure it corresponds to our current best practice, and to set a bar for our practice going forward. The key element is the 1977 Decision on Surveillance over Exchange Rate Policies. Our aim is that a revised Decision should reflect the best practice of surveillance and also set out a coherent vision of our core activity.
7. We are also improving our implementation of surveillance on a day-to-day basis. One important aspect of this is that we are better integrating our work on financial sectors with our work on macroeconomic issues, to reflect the immediacy and extent to which financial market developments can affect people's lives. For similar reasons we are also deepening our analysis of spillovers between countries and markets and our analysis of exchange rates.
8. With regard to climate change—another subject that I know is of interest to the Committee—we are building up our capacity to assess the macroeconomic significance of climate change and of policy efforts to mitigate it. This work will be important for our efforts to understand long-term macroeconomic challenges to the global economy, and will provide a basis for our policy advice to member countries, helping us contribute to the international efforts to deal with this challenge.
9. We are assessing whether our tools for crisis prevention and response are the right ones. We are currently exploring whether we can agree on a new instrument that would provide a mechanism for countries to commit to sound policies, while making high-access financing available during adverse shocks. A critical issue is developing the specific design features that will meet the needs of emerging markets and foster potential demand while providing adequate safeguards to Fund resources.
10. The Fund remains fully committed to supporting low-income countries. The question we are trying to address in the Medium-term Strategy is not whether we should be engaged in low-income countries but how. My answer is that the Fund can be most effective in working with low-income countries if we focus on critical macroeconomic and financial areas, which are both what we do best and where we can make the greatest contribution. Therefore, first and foremost, we are working with our low-income country members to put in place the right macroeconomic policies to allow them to utilize aid fully and effectively. And we are putting emphasis on helping these members maintain sustainable debt burdens. It is in the interests of both creditors and debtors not to repeat the mistakes of the past.
11. In all of this work, we understand very well that the fight against poverty can only be won if all involved—developing countries, donor countries, NGOs, the World Bank, other development agencies, and the International Monetary Fund—work in partnership. From the perspective of the IMF, let me raise two concerns with you, as representatives of a major donor country.
12. First, I am concerned that the promises of higher aid made at the Gleneagles Summit and the UN World Summit which followed it have not so far been turned into a reality, at least in most countries. As you know, donor countries at the 2005 U.N. World Summit pledged to increase aid to poor countries by US$50 billion by 2010. So far, however we have not seen much of this promised higher aid, especially in sub-Saharan Africa. Moreover, this higher aid needs to be disbursed in a more predictable way and harmonized across different donors.
13. Second, the economic development of many developing countries depends crucially on trade. Therefore, it is very important that we secure a successful conclusion of the Doha Round to create a level playing field for low-income countries that will allow them to achieve the economic growth needed to reduce poverty. Europe has a particular role to play in this, because market access for agricultural products is crucial for the prospects of many developing countries.
14. Let me also say a little about one particular partnership, that between Fund and the World Bank, and talk in more detail about the recent report of the External Review Committee, chaired by Pedro Malan, on enhancing collaboration between the Fund and the Bank. This is a very useful report, which contains important recommendations. We will need to discuss them with our Boards, but let me offer a few observations.
15. First, the report recommended that the Fund and the Bank be clearer about what each institution will do, and also establish a culture of collaboration and trust. I strongly support both of these recommendations. Second, some have read the external committee's report as recommending that the Fund withdraw from lending to low-income countries under the Poverty Reduction and Growth Facility. I think this is actually a misreading of the report, and I certainly do not think that the Fund should stop lending under the PRGF.
16. The Fund has a mandate to assist all of our members—rich and poor—when they are facing balance of payments difficulties and the concessional lending provided under the PRGF remains an important instrument to do this. There are still many countries where a continued financial contribution from the Fund is needed. We have other facilities tailored to specific circumstances, but the PRGF is likely to remain the tool of choice for work in most countries where financial support is needed. Where the Fund's financial support is no longer necessary, we have the option of the Policy Support Instrument (PSI). And in all countries, the Fund will continue to be a major provider of much-needed technical assistance and capacity building effort.
17. Committee members may also be familiar with the report by our Independent Evaluation Office on the IMF and Aid to Sub-Saharan Africa. The report covers the period before we developed the Medium-Term Strategy but contains many useful insights that will help us implement the strategy. It talks about some things that the Fund does well, and some that we could do better. In particular, it tells us that we should ensure that what we say in our published reports and at public events corresponds to what we do. I agree with this conclusion. I have consistently made the point that the Fund must be focused in its work on low-income countries. We cannot meet everyone's hopes or solve everyone's problems. But we can and we should be excellent in the work for which we are responsible. And we should constantly try to improve what we do.
18. If the Fund is to be effective it must be representative, and must be seen to be representative. This in my view is key for the legitimacy of the institution: if we are going to keep the emerging economies engaged in the Fund, they must feel that they are adequately represented. Similarly, the voice of low-income countries must be clearly heard, and the governance and institutional structure must facilitate this. Therefore, one of the most important reforms that we are trying to make is to update the Fund's governance structure, with the aim of increasing the representation of countries whose role in the global economy has increased in recent years, while also protecting the voice and representation of low-income countries. I know that this emphasis also appeared in the recommendations of the Select Committee's recent report.
19. We are continuing to make progress in implementing this reform, which began last year in Singapore, when we agreed quota increases for four dynamic emerging markets—China, Mexico, Korea, and Turkey. We are now discussing proposals for a new quota formula which would form the basis for further quota changes. There is broad consensus among our membership that the new formula should be simple and transparent, consistent with the roles of quotas, and appropriately capture the relative positions of members in the global economy. Last month, the IMFC also agreed that the reform should result in higher shares for dynamic economies, many of which are emerging market economies, whose weight and role in the global economy have increased. Our objective remains to agree on a new formula before the 2007 Annual Meetings, and no later than the 2008 Spring Meetings.
20. 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. We are also looking at ways in which we can help the voice of low-income countries in Africa be heard more clearly, by increasing staff working for the Executive Directors who represent African countries.
21. If the Fund is to remain effective and legitimate, it must be properly financed. Our current financing model, which relies heavily on income from loans, does not adequately reflect the many different jobs that the IMF does—in the areas of surveillance and technical assistance as well as lending. These public goods must be financed, and financing through loan income alone is likely to be neither sufficient nor appropriate. Even if there were to be large new loans from the Fund, as a result of new crises, the Fund's legitimacy would be undermined if the borrowers were relied on to pay the costs of all of the institution's work.
22. Putting the Fund's finances on a sustainable footing is therefore a central element of the Medium-Term Strategy. Last year I appointed a committee of persons with high standing in the international financial system to study this important issue. Andrew Crockett, a former head of the BIS, chaired this committee, and the other committee members were Alan Greenspan, Mohamed El-Erian (President and CEO of Harvard Management Company), and Tito Mboweni, Guillermo Ortiz, Hamad Al-Sayari, Jean-Claude Trichet, and Zhou Xiaochuan (Governors of the central banks of South Africa, Mexico, Saudi Arabia, the euro area, and China, respectively).
23. The committee examined this issue very carefully, and they have produced a strong report. Their central recommendation is 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, including:
• broadening the range of the Fund's investments, and investing a portion of the Fund's quota resources, which currently can only be used to finance lending;
• selling a fraction 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;
• consider charging for services, such as technical assistance, provided to individual members; and
• reestablishing the practice of the PRGF Trust reimbursing the Fund for the administrative costs of concessional lending.
This report has now been considered by the Board and by the IMFC, and reflecting members' views I will make specific proposals based on the report over the next few months.
24. Thank you very much.