Interview with IMF Managing Director Dominique Strauss-Kahn, Published in Caijing Magazine, November 8, 2008
November 12, 2008Published in Caijing Magazine, November 8, 2008
Q: We are now in an unprecedented global crisis, what kind of international collaborative mechanism is needed to prevent a similar crisis in the future?
A: I have my view, although I don't know if it will be shared by the members of the G20. Obviously we need better regulation and better supervision in the financial sector. But financial stability is not only a question of regulating the financial sector. It is also regulating the related macroprudential policies that can create imbalances. So we need to reinforce this capacity of early warning and the surveillance carried about by the IMF. This is the first pillar of the reform effort.
We also need to increase the resources of the Fund, because the growth of our resources has not followed the growth of international capital flows. As a result, the related size of the Fund has shrunk compared to the global economy. So we need to increase the sources of funding. Also, we are facing a global crisis, so you need more resources to be able to face the crisis in all parts of the world. Therefore, the second pillar of the reform effort is that we need more resources.
The third pillar, in my view, is that we need to have more effective multilateral consultations, which means that the G8 may no longer be able to address and resolve the important economic problems when they meet. The Gs should be extended to include big countries like China. However, extension is not enough. If the Gs are not effective enough, that perhaps will be because there has not been enough preparatory work and followup to what has been decided when the ministers or the heads of the states meet. So we need a more organized way to conduct multilateral consultations.
All these things have to be addressed, and I hope it will be done in this fashion at the G20 meeting on November 15th. What I am hoping is that it could be the launching of a process which after a few months will be likely to produce a new system.
Q: Then what do you expect from the November 15 G20 meeting?
A: I think it is very good that this meeting is taking place. In my view, we have two main topics to discuss. One is how to get out of the crisis. We are still deeply in the crisis, and the outlook is really not good. So what kinds of policies should be put in place to exit from the crisis as fast as possible? The second topic is: even as we are still in the crisis, we need to organize a work program to get our institutions moving. That is the work program I've talked about before. It may take 6 months to discuss the different questions. So there are two topics, getting out of the crisis, and organizing the future.
Q: You have mentioned that the IMF could play the role of an architect for a period of time, rather than simply being a firefighter
A: Well, we are certainly a firefighter. We have to play this role. We are doing this now with Hungary, Ukraine, Iceland, and other countries are lining up. We also provide technical assistance to different countries. That you can say is the role of a builder. But in between, I think there is a place now to provide new ideas, and these new ideas are the ones I have just explained to you. That's the role of an architect, which is to define a new way to work between governments and multilateral institutions, including the IMF.
Q: Some EU countries including the U.K. and France are lobbying oil exporters and China that have huge foreign reserves, to inject capital into the IMF. Do you think this is a good idea?
A: Yes. But I don't think it depends on whether they are oil producers or exporters. The point is that we are talking about countries with huge reserves. They include the oil producers and China, and maybe also Europe, because some European countries have big reserves. The countries that have big reserves are probably the ones that are likely to increase the Fund's resources. And I expect China will answer positively to this kind of proposal.
Q: That means you agree that China should maybe inject some capital?
A: Yes. I think China is becoming more and more of a big player in the global economy. And being a big player means there will always be some problems with trading partners. We know the issues that China faces. In fact, they include the dispute over the undervaluation of the RMB. But that's part of the normal discussion among big players. Being a big player means that China is likely to take responsibility as a member of the multilateral institutions. That's why I'm expecting China, among others, will answer positively on this matter of increasing our resources.
Q: If China injects capital to the fund, will China has more say or more votes?
A: No. It's not a question of more votes. The quotas are changing over time under a very complex formula and reform process. But of course, the strength of your voice depends on your involvement in this institution. The more you're involved in the institution, the more you're present, the more you take care of the institution, of how it is working.
It's not a question of quota. The quota will evolve following the formula we have established. It's a dynamic reform and in the coming years the share of the emerging market countries will increase at the IMF. It will be OK. But the question is not exactly the quota. When you're talking at the Executive Board of the IMF, the strength of your voice is more dependent on your involvement in the institution than the quota itself.
So if China is part of the new agreement to provide resources to the Fund, of course the strength of the voice of China will increase.
Q: You have introduced The Short-Term Liquidity Facility (SLF) on October 29, and to what extent do you think the SLF can help the emerging markets out of a liquidity shortage?
A: Many emerging markets are suffering today, or under pressure at least, because most of the channels which financed the emerging markets in the past have dried up. Over the last decade the emerging markets have treated as normal the important inflow of capital, including direct investments and banks providing trade credit. We are now living through a period of capital repatriation: those banks and investors have problems at home, so they are cutting the credit lines and taking the capital back. So many countries are just unable to find the financing they used to rely on. So we have to provide them some sort of support, and that's the idea of the short-term liquidity facility.
Q: The terms you agreed to lend to Iceland, Ukraine and Hungry before the SLF was out were actually different from those of the SLF, with amount of loans exceeding 500% of their quotas and terms longer. Why are they treated differently? Does this mean in the future you have two kinds of loan agreements, the traditional and the SLF?
A: For Iceland, Hungry and Ukraine, the SLF is not appropriate. For these countries, changes in policy are necessary. They're not included under the SLF, which, as I said, does not require in change of policy. For Hungry, Ukraine, Iceland, and now Pakistan, we are asking for policy changes to address the crisis. So that's perhaps the traditional approach, but what is different is that the program is targeting the problem.
The SLF is not for all the countries.
Q: So in the future, what if a country applies for the SLF, but is rejected, what can it do next?
A: First, it will be done in a totally confidential way. So you won't know whether a certain country is unable to receive a loan under the SLF. Then they can go to the standard Fund agreement. If they already have a standard program, it can be renewed. But the standard programs need to take into account concerns about social safety nets, targeted conditionality, and related issues. And in this sense, the standard tools will be used in Hungry, the Ukraine and other countries that do not qualify for the SLF.
Q: What's your perspective for the emerging markets now? Do you think there is a threat of significant capital outflow?
A: Well there is a related crisis everywhere. We don't believe in any kind of decoupling between the advanced economies and the emerging economies. Of course the emerging economies still have positive and sometimes high rates of growth, but their growth rates are moving in the same way as the rates of growth of advanced economies. They're linked together, at different levels. The decreasing growth in the United States and Europe is of the same magnitude as the decreasing growth in China, India, and Brazil. So this world is really a globalized world, where everybody is moving at the same pace.
Q: What do you think the emerging markets could learn from this crisis?
A: They also have to learn. It's understandable for emerging markets to seek capital inflows, but they have to limit that inflow to something appropriate to the size of their economy. Another point is that the financial sector cannot increase in size without limits. For instance, take the case of Iceland, whose banks developed in such a way that the total assets of the banking system were 12 times the country's GDP. Obviously, that can't work. And that's why we need more global regulations to avoid this kind of situation.