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Globalization—All together or not at all
Will the new self-confidence of the Third World cause a split at the IMF?
IMF Managing Director Horst Köhler is ready to make concessions
Interview by Wilfried Herz
DIE ZEIT (40/2003), September 25, 2003

[Translation prepared by the IMF's Bureau of Language Services at the request of the External Relations Department.]

DIE ZEIT: Will the developing countries gain more influence at the International Monetary Fund (IMF) and at the World Bank as well, now that they have taken a united stand against the industrial countries' demands for the first time at the World Trade Organization talks?

Horst Köhler: The developing countries already had influence before this. For a long time now, most decisions at the Fund have been taken by consensus and not by the industrial countries using their voting majority to impose their will. However, the trade talks in Cancun may turn out to be a brief hiatus—if in the end the realization prevails on both sides that the world's economies rely on each other and are mutually dependent. Workable solutions are only possible through cooperation and balancing of interests. I hope that Cancun will be seen as a wake-up call that shakes up both sides.

DIE ZEIT: That sounds nice and peaceable. However, for the time being the round of talks has collapsed under this conflict. If the Third World rebels, could it cause a split at the IMF and the World Bank as well?

Horst Köhler: I cannot rule that out. But I am not expecting a mega-conflict. The sensible leaders of the developing countries will not be bent on confrontation. The Brazilians, who have taken on a role as a sort of spokesman, are not ideologues reverting to the North-South conflict scenarios of previous decades. In their country they are pursuing what is basically a conservative economic policy, yet one linked to strong social objectives. I think this is the right approach.

DIE ZEIT: For the poor countries, the IMF is and always has been the one cracking the whip.

Horst Köhler: That is often the way it is presented. However, looked at fairly and objectively, it is after all the IMF's job to say what does and does not work from the economic point of view. The real problem is not so much that the IMF is made into a scapegoat by developing countries, but rather that voters in the developed countries have still not properly recognized that prosperity in Germany or the United States also depends on whether people's standard of living is improving in Africa or Brazil.

DIE ZEIT: For years now you have been appealing to the rich countries finally to keep their promise to raise development aid to 0.7 percent of GDP. However, unlike the situation with the poor debtor countries, you do not have any means of exerting pressure over the rich countries.

Horst Köhler: The rich are not asking the Fund for money, to which it could attach any conditions. But it is possible to try to raise public awareness about real existing interdependencies. It takes time and that is why progress is at a snail's pace. Nevertheless, I do see progress.

DIE ZEIT: Although the IMF has agreed to measure poor and rich countries alike using the same yardsticks, the worst you can do to the rich nations is to give them a public reprimand.

Horst Köhler: I believe in the power of sound arguments. Besides, perseverance pays.

DIE ZEIT: The United States appears not to be particularly impressed by the criticism of their huge double budget and current account deficit.

Horst Köhler: US Treasury Secretary John Snow acknowledges that the double deficit is a problem, and Alan Greenspan certainly does too. To my mind, they are just pinning a little too much hope on the problem basically being resolved by economic growth. The international community is rightly calling for a concrete plan for reducing the budget deficit in the medium term. Above all this requires cuts in spending.

DIE ZEIT: Would the IMF have forced Germany to bring about reforms in the past if it could have?

Horst Köhler: I would have liked the Fund's advice to have been taken seriously a little earlier. However, Federal Chancellor Schröder has now shown great courage by introducing Agenda 2010. It must be implemented, but it is still not enough.

DIE ZEIT: Will the IMF and World Bank now have to bow to the developing countries' new confidence in their own strength and allow them more voting rights? After all, if most things are decided by consensus, there can be no objection to sharing out the votes between the developing and industrial nations on a more equitable basis.

Horst Köhler: I would like to make this perfectly clear: a financial institution that lends money that it cannot print itself, must handle that money carefully, and make sure that what is lent is also returned. Alongside any willingness to give the developing countries more voting rights, the principle of linking voting rights to the level of capital share must be firmly respected. However, in fact we are currently in the process of reviewing the formula for calculating the capital and voting share quotas. I am in favor of allocating a minimum voting share quota to the developing countries.

DIE ZEIT: If the poor countries demand more votes, will the industrial countries have to give up their dominant position? In particular will the United States have to give up its right of veto?

Horst Köhler: In total, the Europeans have almost double the voting rights of the United States. The de facto right of veto of the United States is always subject to criticism. But I cannot see that it is politically productive to change this in the foreseeable future. In my experience, I can also say that the Americans' right of veto is not a critical impediment to establishing a development policy that is in the interest of the poor countries.

DIE ZEIT: Nevertheless, surely it must encourage the debtor countries in the Third World to rebel, when the Americans block a reform single-handedly as they did with the planned insolvency law for countries?

Horst Köhler: Many developing countries and almost all emerging countries were also opposed to our proposal of an international debt restructuring mechanism. The US Congress was clearly not prepared to approve the plan. Clinging to it regardless would thus have done more harm than good. In any case, I am not dissatisfied with the outcome, as with the breakthrough of Collective Action Clauses, as they are known,...

DIE ZEIT: Which will force all debtors to take a haircut, if necessary.

Horst Köhler: ...we have made great progress in international loan agreements.

DIE ZEIT: The degree to which the Third World now trusts in its own strength shows that many countries are doing without cheap loans from the World Bank, because they no longer want to accept the conditionality. And through sheer stubbornness, Argentina has just managed to prevent unpopular conditions being imposed for new standby credits from the IMF.

Horst Köhler: This was not just due to stubbornness of the Argentine government. One also has to weigh what is politically feasible. As a result of the crises, 50 to 60 percent of the population has been reduced to poverty. Explaining to these Argentineans that it is essential to tighten their belt even further to get out of the crisis is a major challenge. President Kirchner said that he would only put his name to what he can deliver. In some points we wanted to be certain that reforms were more precisely established from the very beginning. However, all important areas of reform are included in the agreement, and I was impressed that President Kirchner made a personal commitment to implementing the program.

DIE ZEIT: The IMF had to admit to one of its greatest critics from the Third World, Malaysia's President Mahathir, that it had been wrong. Thanks to the capital controls that Malaysia introduced, against the advice the IMF gave at the time, Malaysia weathered the Asian crisis better than other countries. Are the lessons the IMF has learned also being reflected in the conditionality for debtors?

Horst Köhler: I think they are. And after all we have already also introduced far-reaching reforms in IMF policy. I am also trying to bring the ideas of Ludwig Erhard on market and social balance into the work of the IMF. As part of this, we want to give greater emphasis to the domestic factors for economic growth, that is the social conditions and the small and medium-sized enterprises that create jobs. In addition, we must see that excessive income disparities, such as those in Latin America, create unrest and instability. It is the role of policy to work to counter that. The motto of "More market, less government" is also too simplistic. There are some countries, for example in Africa, with too little government. Markets that operate smoothly need a government with a light touch, but above all one that works. They therefore need a government that can organize public services, such as law and order or a properly functioning fiscal administration.


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