Transcript: IMF Managing Director Dominique Strauss-Kahn and First Deputy Managing Director John Lipksy at the conclusion of the G20 Finance Ministers and Central Bank Governors’ Meeting in Gyeongju, Korea
October 23, 2010
Saturday, October 23, 2010
MR. STRAUSS-KAHN: Thanks you for coming. You have been hurried because there are many press conferences so I’m not going to take too much of your time.
Let’s just start saying that this is Korea day and it’s also IMF day. It’s obviously a Korea day because a lot has been achieved during this G20 ministerial, and it paved the way for the fruitful summit of the leaders in two weeks or so. But it’s also clearly an IMF day because most of the topics which have been discussed are within the mandate, or the concern, of the IMF, and I would like to highlight three of them.
The first one has to do with the MAP (Mutual Assessment Process). And clearly the G20 ministerial has supported the process of the MAP, which as you know, was launched in Pittsburgh, had a first run in Toronto, and became only a normal part of the G20 at this meeting. It was clear during the meeting that the MAP, the way it assessed the economic situation around the world, was what the Ministers and the Governors expected. But more than that, all of the discussion about the exit rate, about the current account surpluses and deficits, about external sustainability, finally ended in the G20 calling on the IMF to provide within the MAP an assessment of external sustainability on the monetary and the fiscal policy, and finally providing the G20 with advice and policies so that the different questions the global economy is facing can be addressed.
The main question now--which was already a big question before the crisis and which has been a little forgotten or hidden during the crisis, but which comes back very strongly--is the question of global imbalances. And this question has been fairly and straightforwardly discussed during the day with, I think, rather strong language in the Communiqué and the will by all parties--and I emphasize this, by all parties--to put in place policies that may converge and limit excessive risk in terms of external sustainability.
So as you know, I was in Beijing just two days before coming here. I had a lot of discussions with the Americans in Washington and also with the European and the Japanese, and clearly all the partners want to do their best even if they may have somewhat different views, want to do their best to try to keep the recovery on track, understanding that the main threat to this recovery would be to enter an endless fight on current account surpluses and exchange rates. I don’t like to use the term “war” because it has been too much used, but let’s say a confrontation.
So the first point is the importance of the MAP, recognized by everybody as a guideline for economic policy. The IMF was asked to assess and monitor what’s going on with external and internal sustainability. That’s the first resolve of the day.
That would have been my day. That would have been enough for the IMF today if there wasn’t a second topic, which was also very important, and which is the recognition of the building of the financial safety net. That is something which the Korean authorities were really interested. We have been discussing with Minister Yoon--and I even discussed this yesterday with President Lee--this question of building something new. And the Communiqué commands the IMF-- you have it in front of you, I don’t need to reread it --for having created new facilities, after the FCL, the PCL, the precautionary credit line, which are the two bricks which allow us to create this safety net. And I think it’s very important that this has been almost completed, and it will be totally completed by the leader’s summit in Asia.
Because it is the sign, even more the proof, of what has been discussed in July here in Korea in Daejeon, when we had this big conference with all Asian countries, where the idea was how can the IMF and Asian countries renew their relationship. And one of the answers given by a participant was, “You need to build something that will be useful for Asian countries, or that can be useful for Asian countries.” And what was this? It was this financial safety net likely to be used by a group of countries together either at the level of the flexible credit line, which already has been used by three countries as you know, or at the level of the precautionary credit line, which is brand new and still not in use by any country.
So that’s the second thing, which is very important, too, because it is a way for the IMF to begin to change the international monetary system. There are two elements that put the institution not only as a fire fighter that provides resources when you have a crisis, but to try to prevent the crisis and have the financial teeth to try to avoid crises. In the past we already worked a lot on trying to avoid crises with technical assistance and policy advice, but we didn’t have the financial teeth to help countries avoid crises. The FCL and the PCL have this capacity to limit reserve accumulation and to prevent countries from accumulating too large reserves are part of this change in the international monetary system. So this is the second thing, which is also a big change in the view we may have on the role of the IMF. So, that also would have been enough to make my day.
But then we have the third thing, which was completed today, which is the governance reform. I don’t know how many who arrived here in Gyeongju for this meeting believed that it would be done. As you know, this reform is not totally completed because it has to be done by the Board of the IMF, not by the G20. But it was initiated in Pittsburgh by the G20 so it was just fair that the decision would be made by the G20.
What is the decision? The decision is a decision of increasing the flexible resources of the Fund, which is to pool our resources by 100 percent, so by doubling the size of the Fund, to do it in a way that will exceed the expectation from Pittsburgh. The Pittsburgh expectation was a shift to dynamic emerging economies, and also a shift from overrepresented to underrepresented countries by 5 percent. We do more than 6 percent in both cases.
And on top of that, which is for me probably the most important thing, the ten biggest members of the Fund in terms of quota will be those who deserve to be the biggest members. So we will recreate the normal order with the U.S. and Japan, the four BRICs, and four Europeans. And that’s the leading group of the institution, at least in terms of quota which now represents the reality of the global economy. From this point of view, a lot of criticism has been made in the past, which was fair, saying well, the institution is not totally legitimate because the shareholders are not really represented--shareholders is not the right word--but the membership and the quota of the membership are not really representing the importance and the weight of the countries in the global economy. Now it’s done. Now it’s done. You can always argue that this country may deserve 0.1 point more or 0.1 point less, which is a question of metric, but the reality is that the ten biggest shareholders are the ten most systemic countries in the global economy.
But this is a huge change, a huge change, and this change has as a companion different other changes, one which is that we will move to an all elected board. You know that the Board of the IMF was partly appointed--five of them, and partly elected. It was a bit old-fashioned. It is clearly more democratic to have a totally elected Board so we will move to a totally elected Board. And at the same time, the governance reform includes a reform of the composition of the Board, which has been triggered by a decision by the United States in the beginning of August to stop the ongoing process and to ask for a reform.
I must pay tribute to the United States for having triggered the system and to the Europeans for having answered positively to this. The Europeans committed themselves to reducing their presence on the Board by two chairs, which is a huge effort, permitting two emerging countries to be new members of the board, which also increases the legitimacy of the institution.
So when you take this all around, the shifts of rebalancing the power in the IMF is bigger than expected. The change in the composition of the Board was not expected at all three months ago. The decision to move to a more realistic formula to compute or to assess the size of the countries is a very important decision, too, because everybody understands that this formula is a bit complicated. So we achieved today the most important reform in the governance of the institution since its creation, but it doesn’t mean that there won’t be any reform going forward. The world is changing. There will be other reforms. But certainly today we put an end to a discussion which has been in the headlines for decades about the legitimacy of the institution. Today, or more precisely when the decision will be voted on by the Board, but today it has been decided by the G20 to propose to the IMF Board a reform, both of the quota and of the Board, which is a historic decision which recreates the total legitimacy of the institution.
So the role of the IMF and the MAP in assessing what has to be done on the currency side, and the creation of the financial safety net as a beginning of a change in the international monetary system, and the renewal of the legitimacy of the institution makes this day clearly an IMF day in Asia. Now if you have some questions, I will be happy to answer them.
QUESTIONER: I was wondering if you could tell us what two European countries will renounce their seats and how this will be done? If it will be done by redrawing the constituencies, or they will just give up their seats to members…
MR. STRAUSS-KAHN: Well, I myself am very much interested in having the answer, but there is no answer. What has been decided is that the Europeans will do it, and they have some time to do it. It will be done no later than the implementation of the quota reform. You know that the quota reform will be voted on by the Board and by the Governors. This will take a couple of weeks. But then the implementation has to wait for most countries, not all of them, but most countries going to their parliaments. So this may take one year, one year and a half, it depends. It’s always rather long. And that’s the time the Europeans have to rebuild their own system and to decide how they want to give up these two chairs. So there’s no immediate answer. What President Lee said when he was here was that he’s going to--you know, he made a joke--saying he’s going to close the airports until we have a solution. So probably people were afraid about that and that’s why we got a solution.
QUESTIONER: So they thought he wanted to keep the airport closed for a year and a half.
MR. STRAUSS-KAHN: Exactly, that’s my point. He’s not going to close the airport for one year and a half. He closed it only to get the solution and the commitments. And the implementation of this, the way to do it, the Europeans will have about one year or one year and a half--I don’t know how long it will take, depends upon the members who have to go to their parliaments and get the decision voted on by their parliaments. In some countries it will be done very rapidly and in some others it may last a little longer. And, of course, the whole implementation of the reform can only take place when it will be adopted by--as you know, that’s our rules--85 percent of the voting power, and since it’s a double majority, 85 percent of the voting power and two-thirds of our members, which means 111 members. So until the reform has been adopted by 85 percent of the voting power and 111 of the members, it’s not yet implemented, and during that delay the Europeans have to do what they committed to do.
QUESTIONER: I have a question on the new role for the IMF just to monitor the current account. Do you think the IMF has now pulled off enough political backing to --this a very sensitive, it’s very political--when are you going to talk to big countries like China where it’s very sensitive to set the level? Do you think today you have enough backing to face those countries?
MR. STRAUSS-KAHN: That’s a very good question. What is IMF? The IMF is a multilateral institutional, but we don’t have real teeth. We cannot oblige a country to do something, but what we can do is to notice that a country has commitment and fulfills or not a commitment. Until now, the commitment of the country was about their current account and their domestic policy, and that’s the agreement. If we want the IMF not to have very strong teeth, but nevertheless to have some teeth, and to be able to say to a country publicly “What you’re doing is wrong,” we probably need to extend the mandate of the IMF. And to be clear for those of you who are specialists, and I know some are, what we do until now is follow the Article IV of our treaty, the Bretton Woods Treaty. What we need is certainly to enhance the Article VI, which will give us more strength to do what you say.
But, you know, those are the formal parts. Your question was a good question because you were talking about political strength, and you’re right. The formal thing is important, and as I said, it will probably be useful in the coming years. It will take time to change the Articles of Agreement, to extend the mandate of the Fund. But we’re not going to wait for years, so we need to work now. And then it’s not a formal question, but a political question. I think that the answer to your question is yes, we have now the political strength to do it, and the proof of that is the agreement by the five major systemic countries of our new spillover reports.
What are the spillover reports? What we are doing in the IMF with the membership since the beginning is mostly bilateral surveillance. It means that the IMF is working with country X, assessing the economic policy of the country and seeing in which respect this economic policy is likely to deliver what the government is expecting in terms of fiscal sustainability, monetary policy, and so on. But there were very little analyses of the consequences of what this country is doing not for itself, but the consequences of what the country is doing for others. That’s what we call the spillover report, and we now have the agreement. It hasn’t been so easy to get it, but the fact that we have it answers your question. The agreement of the five big currencies--the dollar, the euro, the renminbi, the yen, and the sterling--to make this five spillover reports where we will look at the consequences of the domestic economic policy on the rest of the world. For example to be clear, the U.S. monetary policy is done in the interest of the U.S. economy, that’s normal. What are the consequences of this U.S. monetary policy on the rest of the world? Many say it has its problems. Another example, the renminbi and the value of the renminbi is managed by the Chinese authority in the interest of China. What are the consequences on the rest of the world? And many say it creates a problem. So this kind of spillover report is exactly what is needed for what we have been asked to do. And the answer to your question is that the fact that these five countries--well, not five countries because the euro is a lot of countries --these five currencies have accepted the spillover report despite the fact that they understand that sometimes it will be a bit problematic for them because we will say things they don’t like. The fact that they have accepted it answers your question about the political weight that we have to do it.
QUESTIONER: When will you start?
MR. STRAUSS-KAHN: Oh, momentarily. The idea was that the spillover report will be discussed at the same time as the Article IV for the countries. But for the U.S. and for China as well as for U.K., the Article IV is in July, so it’s late. On the other hand, for the European Union, the Article IV is in a couple of weeks. It’s too soon. So it means that if we don’t do it now and we don’t have time to do the spillover report for the end of November for the European Union, we’ll have to wait one more year. So finally we will have a discussion with the Board to know if we have to do it exactly at the same time as the Article IV. My view is that the sooner, the better. Of course it takes time. It’s not a report that you can write overnight. It’s a lot of work. It will use a lot of resources--human resources, financial resources--in the Fund, and we need several months to do it, but we will start immediately.
I know you have more questions. You just don’t dare. I can’t believe that you understand the quota reform as quickly while the Minister took so long.
QUESTIONER: The emerging market countries are very keen for this formula review to be done in 2013. What do you expect could be achieved? What do you think could happen? How can the quotas be changed again?
MR. STRAUSS-KAHN: What has been decided is that we will by the beginning of 2013, January 2013, we will have changed the formula, reviewed the formula, and that the next round to take into account new data will be for 2014, and three years from now probably a review of the formula because it will have been done in between. My wish is that we will obtain something which is simpler than the formula we have today, which will present more clearly the GDP of the countries, and will be more directly linked to the economic weight of the countries. But this will be the discussion of the coming two years, so I cannot anticipate too much. I guess that everybody will agree with a simpler formula. You know, it’s a difficult exercise. So the more it will be the formative, the more it will be just running with the new data and just seeing what the changes are, the better it is. The less it will be a negotiation. I will be better because this bargaining is very difficult to manage. You have to take into account the interests of all the countries. Everyone has good arguments to explain why it shouldn’t go down and why it should go up. So take in all the arguments together, you may finally have no possible solution, and I was worried during the summer that maybe there was no possible solution. Finally we find one and we were able to convince the Ministers to accept the solution, and I’m very grateful that they did, and grateful to the Korean Presidency for its help. But it’s better to have something which will be simpler and more formative. That’s the direction in which I hope we can go to maintain in the future the legitimacy of the Fund, which has been renewed with this reform.
QUESTIONER: Just a question on the goal of financial safety net--it says “We call on the IMF to continue to work to improve the global scale.” So does that mean we can expect something to be done by this also maybe in terms of extending it? And I have a second question, which is that if you think so, do you think the extended financial goal to scale will help countries to feel that they would have less stigma, in fact, than easy on the scale?
MR. STRAUSS-KAHN: The main point, concerning Asia at least, is the one you mentioned, which is the so-called stigma. The idea that a set of countries facing the same problem could at the same time ask the IMF for some help in using its facilities will be one way to avoid a stigma. When a country comes alone, it means the country has a problem so the country is hesitating to come even if it’s the right time to come to avoid problems. So when finally the country asks the help of the IMF, it’s too late and we haven’t been able together to avoid the problem. So the idea is that if a set of countries is likely to move together, the stigma will be less, maybe totally disappear.
Now to the beginning of your question, “Can you expect something for the summit?” I can’t answer you now because if I answer you now, it won’t be new for the summit. So you will have to wait for the summit.
QUESTIONER: Can I ask another question? The Japanese Finance Minister told us that the target of 4 percent had been floated for the current account, so the deficit is seen as 4 percent. Now we’re talking about guidelines. Do you think that by sooner or later a precise target will include a directive for a range or is that now ruled out completely?
MR. STRAUSS-KAHN: Well, it’s possible. There are advantages and drawbacks to this idea of a target. The advantages are obvious. It’s simple and so you may assess very simply if a country’s fulfilling its commitment or not. If everybody can commit itself to have a surplus, for instance, or a deficit, same thing, assessed below 4 percent, it’s easy to say if the 4 percent is reached or not. The problem is that 4 percent doesn’t mean the same thing for different countries. Look at countries like oil exporters. They have a big surplus, just normal. It’s not the same kind of surplus of other countries. So finally when you dig a little into the problem, you see that it’s not that obvious.
Look at the deficit side. Some countries have big deficits, but maybe very different deficits. When you’re a developing country, an emerging country, it’s just fine to have a deficit in the current account, which is financed by capital inflows. When you’re a developed economy, you should have less of a deficit. So the same figure doesn’t mean the same thing for a different situation in a different country. That’s why there are merits in a band like minus four plus four, but there are also drawbacks. And wisely, the Communiqué this time decided to say that we are going to work very seriously and have other countries commit themselves to restrain the surplus or the deficit. But we’re going to work more to see if it’s possible to define a target that has taken into account the different kind of countries that are concerned.
QUESTIONER: Coming back on this 4 percent, could you tell us who actually put forward this figure in the discussion?
MR. STRAUSS-KAHN: Oh, yes, it is no secret. As to the four, the figure for the percentage, it was an idea by Tim Geithner. And I discussed this figure with many members, those who are concerned, and most find it a rather good idea. But then we realized that small countries, some small countries, having very special situations or--I shouldn’t say small--but some countries which are not considered as the big systemic countries, may have good reasons--I mentioned oil exporters, for instance--to have figures that will be over the 4 percent. Some other countries, like Australia, have for a very long time a rather big deficit in the current account just because it was developing very rapidly, and there’s no reason to ask them to reduce it. That’s why after the first moment whereas this idea of 4 percent has been launched by Tim, the discussion focused more on finding something more appropriate and more sophisticated.
QUESTIONER: So the Chinese were okay with 4 percent?
MR. STRAUSS-KAHN: Well, you better ask them. But you have two ways to do it. Either you ask them, that’s fine, or you look into the MAP and you will see that they can make it.
MR. LIPSKY: Maybe it’s even worth mentioning, in the MAP, the mutual assessment process, was created in Pittsburgh. After Toronto it was taken to a country-by-country level so there are specific forecasts and policy commitments by all the participants of the G20 countries. You’ll notice in the Communiqué the intention to extend the MAP process beyond the Seoul summit. So there will have been in this process developed an individual country that set a medium-term forecast that will together imply changes and improvements in global imbalances. So take this all in the spirit of in this brand new process--after all, it was first initiated in Pittsburgh--some way in which the G20 membership can check to see their progress against the goals, their individual goals, within the MAP.
QUESTIONER: I’d like to follow up with this 4 percent. Could you do that in the eurozone? I mean, is the eurozone one whole country then? You cannot separate the countries; otherwise you would have to separate Arizona and California.
MR. STRAUSS-KAHN: Well, the question cannot be, “How will you do that?” because it hasn’t been decided to do it. But if there was a decision about a simple figure like this, one of the problems would be exactly the one you mentioned. If you’re looking at a difference of surpluses and deficits and the exchange rate, then the eurozone has to be considered as one for obvious reasons. On the other hand, if you’re looking at imbalances in the economic policy put in place by the different countries, then you may say that Germany within the eurozone should correct that policy. That’s why the question is a little more complicated than just giving a figure, and that’s why as I said even if this idea of the figure has been floated in the beginning, finally the Ministers decided rather than giving a figure like this, to commit themselves to a policy and to ask the IMF to make a more sophisticated assessment because your example is a very good example. You cannot just say the surplus of Germany is more than 4 percent so it’s a problem because the currency by itself has almost no surplus, and the eurozone is more or less balanced.
Good, you had another point?
QUESTIONER: Are you happy with the language that was agreed on currencies or would you like to have seen a tougher line?
MR. STRAUSS-KAHN: My problem is not to have tough lines or weak lines in Communiqué. My problem is to be helpful and in the national community to make it so that the policy put in place will limit the imbalances. And I think that the IMF is playing an increasing role in being the honest broker between the different stakeholders, the big stakeholders, to try to achieve as much as possible cooperation, the spirit of which was very strong here in Korea this time. So I won’t say that Communiqués are not important. Of course, Communiqués are important, but there are other things than Communiqués that are important, too.
Fine, thank you very much. Don’t forget, it’s a big day for Korea and a big day for the IMF. We won’t have a day like this every time. We won’t have a reform of the IMF every time. So if you want, by chance, to write a paper on this historic change of the IMF, you have to do it now because you won’t be able to do it next time. Thank you.
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