Transcript of a Briefing by Horst Köhler, Managing Director of the International Monetary Fund at the Council of Foreign Relations, Washington, D.C.
September 19, 2002Briefing by IMF Managing Director Horst Köhler
Council on Foreign Relations
"Investing In Better Globalization"
Moderator: Richard Fisher, Managing Partner, Kissinger McLarty Associates
Thursday, September 19, 2002
MR. ORR: Good afternoon, ladies and gentlemen. I'd like to please ask you to take your seats. We'll be ready to begin.
Good afternoon. My name is Bob Orr, the Director of the Council on Foreign Relations here in Washington, D.C. It is my distinct pleasure today to welcome you to the kick-off of our Peter McCullough Series on International Economics.
As we began to think about how we wanted to do our economic programming this year and this fall in particular, we tried to think of what figure would be best to begin with. And it is no surprise to many of you, I think, that we decided that the person we would like to kick off our International Economics Series with is, in fact, Horst Köhler.
I will introduce Dick Fisher to preside over this meeting. One quick note about Dick, a long-time member of the Council on Foreign Relations, known to many of you here in Washington. He's a managing partner at Kissinger McLarty Associates, but I think most of you in this room would know him from his days at USTR, though I see some of you who know him from his private sector activities as well.
I just want to welcome you to the Council and to promise you all that you will see a lot of high-quality economic-related programming this fall, and I can't think of a better way to start it than with Horst Köhler.
MR. FISHER: Thank you. I'm Richard Fisher, and it's a pleasure to introduce Horst Köhler, who's a terrific public servant and the eighth Managing Director in IMF history to speak to the Council.
This is a moment, as we were just discussing upstairs, in time when every institution and almost everything that we've taken for granted for so long has been stood on its head. Consider today's headlines. The United States is a hyper-power, but it is under siege by terrorists. The German Chancellor thumbs his nose at the President of the United States. Moscow's an ally and not a mortal enemy. Japan having risen to be number one, according to some of our academic friends, now struggles with a credit rating on par with Nigeria. China is the hottest magnet in the world for foreign direct investment. The euro is not just a reality but is now an expensive currency. Debt funds trade at 1 percent range plus. The ten-year bond is trading below 4 percent. Stock markets are under the worst downside selling pressure since 1929.
So different and so turbulent is the world we now live in that National Public Radio airs ads that utter the words "Britney Spears" and "foreign affairs" in the same sentence.
MR. FISHER: Yet while almost every institution and operating assumption we have grown used to since the Second World War has changed, the Bretton Woods institutions still stand like formidable piers in a turbulent sea. The GATT has evolved into the WTO, something I spent many years working with at USTR, plays a critical role in the globalization process. The World Bank continues to play an important albeit challenging role in the development process. And the IMF, headed by our distinguished speaker, is about to hold its 57th Annual Meeting where it will thrash out international solvency procedures and other issues vital to the balance-of-payments process and international financial stability.
Some 57 years ago, when John Maynard Keynes was negotiating the preconditions for the Bretton Woods institutions with Lord Halifax, the British Ambassador, at his side, he grew increasingly exasperated at what he described as then "the cowboy attitudes and nouveau riche tactics" of the United States.
Halifax slipped him a piece of paper with a little ditty inscribed on it, which said, "In Washington," Lord Halifax whispered to Lord Keynes, "the Americans have the money, but we have all the brains."
MR. FISHER: Well, the IMF has money and brains. And yet just last week our distinguished guest did something utterly uncharacteristic of power institutions and almost completely unprecedented in Washington, D.C. In an article in September 11th's Financial Times titled "The IMF Is More Humble, Says Its Chief," it was reported that Horst Köhler said yesterday that the IMF "has a lot to learn."
So it sounds like a perfect luncheon date, someone who's rich and who's brainy and humble, and how privileged we are to rendezvous with this person in a session where we can set aside the usual rules, we can actually discuss it in public, and the meeting will be on the record. What I call the O'Neill rules no longer apply.
Mr. Köhler, we're delighted to have you here. Welcome. Horst Köhler.
MR. Köhler: Thank you.Text of speech
MR. FISHER: It's usually the Chairman's privilege or the presider's privilege to ask the first question. I'm going to ask the last question. We will conclude promptly at 2 o'clock. I already see some hands being raised in the audience.
Let me remind you, by the way, those of you that have cell phones, or what Laura Bush calls "hell phones," please turn them off for the remainder of the session. It is [inaudible] if they go off.
So let us start right there, and then perhaps the best procedure would be for you to call on our questioners.
Also, by the way, let me ask you to keep your questions short, not to make speeches. Ask a question and let him make the speech. Thank you.
QUESTION: Isn't there an underlying structural problem which itself increases moral hazard in cases like Argentina in the IMF being a public sector monopoly and, indeed, the World Bank, too? In Latin America, the economic performance was quite a lot better in the 50 years up to 1914 when you had the IMF's role being carried out by the London merchant banks, which were private sector and there were lots of them. So, you know, there was a certain amount of choice among which economic path you followed.
MR. Köhler: Well, I do think that at the end it is crucial that the private sector has an environment, has a judicial, political environment where it is attractive to invest. That is crucial. And we have to work all together that this environment, good investment climate, is preserved.
On the other hand, there are issues where there is a need for defining some role for the public sector. For instance, when a country comes into a balance-of-payment crisis, you need to have someone who steps in.
I also do think that the economy in the early 21st century is different from the economy in the '50s and '60s, and the difference is indeed this huge increase in global private capital flows. On the other hand, the volatility in this context, markets by themselves don't say, or do everything this is good by itself. There is a need also to give markets guidance, to have rules, regulation, and in our view, it is also on the whole demonstrated by the success of democracy, market economies in the global world. Early 21st century is much better than in the '50s where we had a lot of, say, centrally planned economies, where we had a lot more dictatorships and authoritative regimes.
So all this together is improved, and I do think that the Fund has a fair share in this improvement.
QUESTION: You mentioned briefly the need for a social safety net, and yet the fiscal resources that it takes to develop a social safety net are typically the first thing to go when an austerity program is put in place.
I wonder if you could say a little more about how you think countries facing a financial crisis can preserve a social safety net and what the Fund's role is in doing this.
MR. Köhler: First, they have to work as early as possible--and that means before any crisis--on establishing social safety nets. I myself come from a country, Germany, Second World War, everything was destroyed. And then Ludwig Erhardt, people like this, defined the so-called social market economy. That means that you need to be aware that if there is no social peace so that everybody in principle has access to some improvement in living standards, then there is not a good investment climate. And, therefore, you need to work as early as possible on this social safety net.
In case there is a crisis, we have to face tough choices. And, of course, the issue is how to come back to sustained growth, because growth makes it much more easy also to finance a social safety net.
My idea is not to cut back social safety nets if they are well established, but if you want so, Argentina is not cutting back a social safety net because all over these decades of good development, they ignored really working consistently on building up a social safety net. And then in time of crisis, where there is a need to balance again liabilities and assets, you have no choice but to come back to fiscal discipline. Then people cry out and say that is cutting on social safety nets. That's neither fair nor helpful.
At the end, the social safety net should be established early. It should be the last, say, source for regaining fiscal solidity. But I can't avoid to tell you, in crisis situations there is neither a quick fix nor someone who gives you everything which is smooth. Therefore, early decisions and early consistent reform is the answer.
QUESTION: Joseph Stiglitz and George Soros, among others, have criticized the Fund for pressing capital account convertibility in Hong Kong, I guess, five years ago and attribute to that part of the cause of the Asian financial crisis. I'd be interested to know your reaction to that. And perhaps even more relevant, what is the IMF's policy today on capital account convertibility?
MR. Köhler: Clearly, the Asian crisis, one of the causes for the Asian crisis was that the opening of capital accounts was in some cases done too quickly. It was done before the domestic infrastructures--sound banks, sound regulatory banking and supervisory frameworks--had been in place. That was clearly a mistake, and we have drawn out of this the lesson or the conclusion there's no need to rush to open the capital account. There is a need for a sequenced opening of the capital account. That is, if you want so, parallel process regarding internal structures, I would today even say regarding also the building up of local capital markets. Don't just rely on external finance. Also try to build up local financial markets, capital markets, and on this basis build it up.
But I would also like to say in this context the people who criticize the IMF in this context are sometimes the people who have been partly in charge of this what we call institution building, because the regulatory supervisory framework, building up sound banks, central banks, is not just an issue for the IMF.
QUESTION: You spoke about the increased transparency of the IMF. I'm wondering what the reaction of some member governments has been to the publication of formerly sensitive information and also whether there have been any negative impacts on the way in which the IMF works now.
MR. Köhler: Well, I mean, this is a kind of work in progress -- [tape ends].
-- who are less open to openness than others. But I recognize today they are more open to openness and transparency than some years ago. And this has two major reasons.
First, markets itself, investors ask for transparent, reliable data and openness, and we are moving in this direction.
And, secondly, the policy environment is today different in the world and in our countries. People, parliaments ask for more transparency, and, therefore, this all works in the direction of more transparency.
There is a debate about market-sensitive information where people don't want to see that in the market, and I think this is understandable. We always have to find the right balance not to disclose things where really it could damage countries.
We have also to find the right balance between, on the one hand, candid advice, be open, be very clear in your advice; but, on the other hand, not damaging a country publicly in its reputation, in its own self-responsibility and ownership.
My line is that, in principle, I rely a lot on voluntary approaches and continuation and progress in transparency. And we have, for instance, made considerable progress, for instance, not least with China, who joined the IMF's Special Data Dissemination System, which discloses in the area of financial data whatever country is joining this instrument. We are making progress and this is promising.
QUESTION: The Fund these days--I guess I don't have to tell you--lends almost entirely to developing countries and emerging markets in particular, in contrast to the early years of the IMF and probably to the expectations of Keynes and White who thought it would probably be lending to industrial countries as well.
I just wondered what your attitude is, what you would have to say about the relationship of the Fund to the industrial countries and what influence the Fund might have on the policies of industrial countries in the situation where they aren't dependent on the Fund for borrowing.
MR. Köhler: Well, the first very concrete answer is if you have no access in terms that a member wants to get your money, then you have less leverage. That's clear. So we have more leverage on countries who ask for money than those who don't want to have our money.
But, second--and this is at least my line--I think we have to work on creating a climate of awareness that globalization means in substance inter-connectiveness. And financial markets, environment issues, even migration problems, all demonstrate that advanced countries, industrialized countries, can't anymore cut off their policy environment, their room for, say, consideration and reform from the rest of the world. And this awareness of inter-connectiveness should create a climate of cooperation and mutual interest.
In financial market issues, it is clear and demonstrated, unfortunately, through the scandals now here in the U.S. that there is an impact from financial markets' problems here on, for instance, Latin America or other countries. People are getting now much more risk averse after the bubble burst, and they are now all a bit shaky what will be the next balance sheet disclosure.
So I think through awareness creating, through openness, what is my line to our major shareholders? Like current account deficit discussion, like fiscal deficit discussion here in the U.S., but also like in Europe, there are a lack of structural reforms, and, of course, Japan also where we are actively working with them. It is very difficult because the political system is very slow in Japan. But we have to try.
On the other hand, the Fund is not an institution which has all the ammunition to tell Japan now or never, so we need to convince them, persuade them.
QUESTION: I was thrilled to hear you talk about making the integration of the globalization pay off for the poor through investments and better policy and regulation. What will the IMF be doing to help national governments develop a financial system that actually delivers financial services to the poor?
MR. Köhler: Well, we have an approach--and here the leading institution is the World Bank, but we have a joint approach. It's called Poverty Reduction Strategy Paper/Process. That is, we define the elements or the fundamentals for long-term growth in poor countries, and then have a division of labor, who is in charge of what. The IMF is working on macroeconomic stability and also in case of advanced developing countries, to support them building up financial sectors.
I myself initiated two things in the last year: so-called Private Investor Advisory Councils, and we set them up in Tanzania and in Ghana. The private business people meet with the President or high officials and talk about the investment climate in Tanzania and in Ghana, not bureaucrats, not academics everywhere, but business people to official legislators and governments so that governments and legislators know how a businessman is thinking. And on this basis, I hope that the investment climate effort will gain--will make progress.
A second element is we need to be aware. Often it is not so much lack of political will in developing countries that prevents things from improving. Often it is a pure lack of capacity, of administrative capacity, of intellectual capacity, of skills. And, therefore, we, the Fund, decided to set up Regional Technical Assistance Centers in our core areas of expertise. And all this fits together to help them, to pay the way at the end, how I see it, to get access to private capital markets, because all improvements in official development aid never will do the job. It has to be private money, and we have to work to create the conditions for that. The IMF has a targeted role in this, and I think we should be active in this.
QUESTION: Turkey has been a problem country in the last two years. How do you evaluate its progress in implementing its IMF-backed program recently? And how would the upcoming parliamentary elections affect that?
MR. Köhler: You are talking about Turkey?
Question: Yes, Turkey.
MR. Köhler: Well, as you know, with Turkey the Fund is highly exposed with lending, but more important is that this country embarked and implemented a reform program which is nearly unprecedented in terms of that they have taken tough choices, for instance, regarding fiscal consolidation, that they are in a very ambitious and successful process of cleaning up their banking system; that they are in the business of decoupling politics from economics. And this all happened in just one or two years. Remarkable progress. The inflation rate comes down more than we expected in the program. The exchange rate now is stable. Interest rates came down, and growth is recovering. So all this is good.
I do think that the election, which should take place as scheduled in November, will create further clarity of the course of this country, and I expect at the end that this election will also endorse, if you want so, the continuation of the economic program which worked up to now successfully, and I am looking forward to further progress in Turkey.
There are uncertainties, but the progress is clearly visible.
QUESTION: One of the criticisms you hear frequently of the Fund in developing countries is that your conditionality, as often as not, forces a pro-cyclical policy, that is, if their economy is declining, you force it to go down further by the current fiscal and monetary discipline you ask for. Your argument generally is, yes, this has to be done, but this improves the conditions in the medium term.
How would you judge your record on improving the conditions in the medium term in a lot of the major programs that you've run in recent years?
MR. Köhler: When I came into the Fund two years ago, two and a half years ago, one of my first decisions was to travel to Latin America, Africa, and Asia. It was done in the spring, summer, and fall 2000. And the outcome of this traveling exercise was that I heard a lot of criticism, and one criticism was, for instance, I spell IMF as SAD, meaning--what is SAD? Secretive, Arrogant, and Dominant. But at the end, this person who told me so, very intelligent person, at the end said, but, nevertheless, we want you to stay engaged in Africa. First thing.
Second thing, there are clear success stories in Africa now, for instance, Tanzania, Mozambique, Uganda, Cameroon, Benin, Ghana, good progress. Everything is not bad. And if you talk to these people who have embarked with the IMF on poverty reduction strategies, including to build up the environment for sound fiscal policy--for fiscal budgets and low inflation, they are telling you now, `It's right that we went with you this path.' That is what I heard in Mozambique. And the recognition is that at the end, high inflation hurts most the poor; and corruption hurts the poor.
The Africans themselves have now developed a program, and the big point is they themselves set up this agenda called NEPAD, New Economic Partnership for Africa's Development of Africa. And this NEPAD--I couldn't have said it better--is built on two pillars, if you want so: first, self-responsibility. They are saying we are in charge for good governance, the respect for the rule of law, fight--tackling the issue of armed conflict in Africa, and corruption. They know that's their job. They have to deliver on good governance.
But based on that, they are asking for more--better, more rapid support from the outside community, and I think this approach is right. And in the context of this approach, the Fund has reviewed its conditionality concept. I do think not only from the Asia experience but also from the experience in Africa, we have partly been too ambitious to ask structural reforms nearly overnight, the universe of everything. We need to tailor better and sequence better what we ask as conditionality so that we know it is built into their political process. It makes no sense that the Fund sets up fiscal guidelines after the budget is just a week ago agreed in parliament.
We need to reduce the set of conditionalities, but where we feel conditionality is indispensable, we should be clear they have to implement it. That is our approach, and on this basis, I do think we have a good chance to see more progress. But I also want to say you can define the IMF as the scapegoat for everything. But if there is no change in the attitude of advanced countries, for instance, in their trade policies--and you look what happens with cotton in Africa, sugar in Africa, and in the Caribbean, and the subsidies, highest in Europe, but also very high in the U.S. and in Japan. If there is not a substantial change, I can't see how these countries will grow out of their misery with growth.
And, therefore, more important than any criticism of IMF is open your markets, phase out trade-distorting subsidies in the advanced--this may help, and then also criticize the IMF.
QUESTION: It was striking how much of your agenda really focuses on political issues: governance, civil society, transparency. Even poverty alleviation is as much a political issue as it is an economic issue. So I'd like to ask if you could tell us how much expertise the Fund has in the fields of international relations or political science or governance, let's say, and if you think the Fund is really equipped to tackle what are really very complex and difficult political issues as distinct from economic and finance issues.
MR. Köhler: Certainly we have not enough experience, and also equipment in terms of resources, and, therefore, one of the confusions out of this is that we reduce, streamline, focus our conditionality on areas where we have the expertise. And that is in macroeconomic issues, financial sector issues, exchange rate policy, and monetary policy and all of this.
Institution building, that's mainly an issue for the World Bank. Therefore, we are in the process, have already made progress to agree how we cooperate better so that IMF and World Bank are complementary to each other.
We also need to work together with the United Nations. We are not the institution which knows everything. But I think you don't need to be neither a politician nor, say, an academic trained in political science to understand, and I think economists are able to understand it, that if this degree of income inequality continues, you will not for long have a safe place even in the advanced countries, because the negative things spill over via--I said it already--migration, via diseases, via violence. Therefore, an economist should stick to its training, but it should have--he should also have open eyes.
MR. FISHER: Let me, since we're out of time here, about to be out of time, remind the last questioner that our speaker played a critical role in the reunification of Germany, in the Maastricht Treaty, in the European Central Bank, and also in financing--negotiating and financing the Gulf War for his government. So certainly the person of our speaker has considerable political experience, so let me ask you this, Horst, in conclusion: Which of those jobs is the most difficult, and which is the most fun?
MR. FISHER: We're out of time.
MR. Köhler: I must say the IMF job is the most fascinating one. You need to have a very comprehensive eyes-open attitude. It's a lot of pressure. You are surrounded--at least with the world today is six billion people, so you have 5.99 billion people who know everything better. In this environment, you need to find the line. It is fascinating. It's difficult, but it's possible. It's fun. So I like the job.
MR. FISHER: Thank you very much.