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Finance & Development
A quarterly magazine of the IMF
September 2001, Volume 38, Number 3


New Senior Appointments at IMF

In an important series of appointments at senior levels in the IMF, Anne O. Krueger has been selected to serve as First Deputy Managing Director and three new department heads have been named.

Krueger, a U.S. national, is a distinguished international economist who served as a professor at Stanford University and a former vice-president and chief economist of the World Bank. She succeeds Stanley Fischer, who in May announced his decision to leave the IMF. The first woman to hold such a senior position at the IMF, Krueger is a past president of the American Economic Association, a member of the National Academy of Sciences, and a Research Associate of the National Bureau of Economic Research. She received her Ph.D. from the University of Wisconsin and has published extensively on issues related to financial institutions, economic development, international trade, and the role of multilateral institutions in the world economy.

As First Deputy Managing Director, Krueger will be a leading member of the IMF's senior management team, headed by Managing Director Horst Köhler and including Deputy Managing Directors Eduardo Aninat and Shigemitsu Sugisaki. Her wide-ranging responsibilities include chairing Executive Board meetings in the absence of the Managing Director and supervising country-specific and operational functions.

In appointments at the level of department director, Köhler named Gerd Häusler, a German national and former board member of Dresdner Bank, as Counsellor and Director of the IMF's newly created International Capital Markets Department; Kenneth S. Rogoff, a U.S. national who had been a professor of economics at Harvard University, as Economic Counsellor and Director of the Research Department; and Timothy Geithner, former undersecretary for international affairs at the U.S. Treasury, as Director of the Policy Development and Review Department.

The International Capital Markets Department was created in early 2001 to consolidate and develop further the capital markets functions hitherto carried out by three separate IMF departments. Kšhler explained that the consolidation of the work on capital markets issues is expected to deepen the IMF's understanding of financial market operations, support its surveillance and lending operations, and enhance the IMF's ability to address systemic issues arising from developments in international capital markets.

Köhler Endorses New Initiative for African Economic Development

In an address to the United Nations Economic and Social Council in Geneva on July 16, 2001, IMF Managing Director Horst Köhler expressed strong support for a coordinated international effort to tackle the pressing problems of poverty in Africa. Edited excerpts from his address follow. The full text is available on the IMF website (

Growth is slowing throughout the world. This may be uncomfortable for the advanced economies, but will be a real source of hardship for many emerging markets and developing countries, and a real setback in the fight against world poverty. Moreover, talk about economic stability and poverty reduction should ring hollow in the absence of a strategy to fight the HIV/AIDS pandemic, reflecting last month's UN Special Session.

These developments underscore the need for an integrated concept for answering critical questions about globalization—one that responds to the fact that all humanity shares one world and that lays the foundation for more broadly shared prosperity. Success in the fight against poverty is the key to stability and peace in the twenty-first century. And nowhere are the battle lines clearer than in Africa.

Today, we are presented with a window of opportunity. African leaders have been working together on the New African Initiative to accelerate economic growth and development and lead the continent out of poverty. It is anchored in the fundamental principles of African ownership, leadership, and accountability in eliminating the homegrown obstacles to sustained growth.

The New African Initiative focuses on four core elements:

  • a clear awareness that peace, democracy, and good governance are preconditions for reducing poverty;

  • action plans to develop health care and education systems, infrastructure, and agriculture;

  • reliance on the private sector and on economic integration at the regional and global levels; and

  • more productive partnerships between Africa and its bilateral, multilateral, and private sector development partners.

The IMF stands ready to provide strong support for this African vision and work program.

The New African Initiative recognizes that the Poverty Reduction Strategy Paper (PRSP) process—with its emphasis on country ownership, broad participation, and the economic and social fundamentals—is a core vehicle for building continent-wide priorities into national poverty reduction programs and for coordinating international support. There are already signs that the PRSP process will bear fruit, and Jim Wolfensohn and I are committed to working with our partners in Africa and the donor community to realize its full potential.

African leaders have underscored the severe demands that this process is placing on their limited administrative capacities. The IMF is planning a well-targeted extra effort at capacity building in Africa, in its core areas of responsibility, and will be in touch with major donors in the coming weeks to discuss ways in which they could support this effort.

Respect for country ownership and priorities also underlies our effort to streamline the IMF's conditionality. Conditionality remains essential, but it needs to focus on the measures that are critical to the macroeconomic objectives of country programs and leave scope for countries to make choices consistent with their political and cultural traditions. I am pleased that African leaders have chosen to make good governance a central element of the New African Initiative, because it is essential for attracting private investment and making efficient use of scarce public resources.

Implementation of the target for the industrial countries to provide 0.7 percent of GNP in official development assistance (ODA) should be seen as an investment in peace and prosperity throughout the world. An increase by 0.1 percent from today's average level of 0.24 percent of GNP would amount to over $10 billion, the magnitude Kofi Annan has identified as needed to begin a comprehensive program of HIV/AIDS prevention and treatment.

Debt relief is also an integral part of a comprehensive concept for poverty reduction. The IMF and the World Bank have spearheaded an effort under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative that has already provided $25 billion of debt relief to 19 countries in Africa, and we are doing our utmost to extend the benefits of this initiative to the remaining eligible countries. But debt relief is not a panacea. Credit is indispensable for economic development, and, in the longer run, it will be crucial for poor countries to win the trust of investors in their ability and willingness to repay what they borrow. That is why the IMF will continue working closely with the World Bank and other partners in helping African countries create sound domestic financial sectors and, eventually, integrate into international financial markets.

More than anything else, Africa needs better opportunities for trade. It is time to provide African nations with free access to the markets of industrial countries, in particular in those areas that matter most to poor countries, such as agricultural products, textiles, and clothing. These areas should also be an important focus for a new round of multilateral trade negotiations in the context of the World Trade Organization.

IMF Releases Report on International Capital Markets

Deteriorating global economic conditions and prospects and their effect on corporate earnings during the 12 months ending May 2001 have led to a reappraisal of financial risk, a rebalancing of portfolios, and asset repricing in a wide range of financial markets, according to the IMF's latest International Capital Markets report, released on July 12.

There was a dramatic shift in market sentiment during the year, the report notes. In early 2000, market participants were mainly concerned about a possible overheating of the U.S. economy and a pickup in inflationary pressures. By the end of the year, and in early 2001, market participants became concerned about the extent of the slowdown in the U.S. and global economies.

Global capital flows

A striking feature during the year was the dominant position of the United States as a recipient of international capital flows, according to the report. In 2000, the United States attracted 64 percent of world net capital exports, compared with 60 percent in 1999 and an average of about 35 percent during 1992-97 (Chart 1). Net inflows to the United States exceeded $400 billion, including a record level of foreign portfolio investment that could have nearly financed the U.S. current account deficit on its own.

Chart 1: United States current account deficit as share of global surpluses

As in previous years, overseas investors (particularly in Europe) bought large quantities of U.S. equities and corporate bonds and cut back on purchases of U.S. treasury securities. Gross foreign purchases of U.S. equities were particularly strong, rising to $3,600 billion—a sixfold increase since 1996. This international appetite for private U.S. assets was maintained despite the deterioration in the U.S. economy and financial markets, the report states, owing to investors' optimism (at least initially) about the U.S. economy's future prospects. In addition, many investors apparently believed that the current correction in U.S. financial markets would be short-lived.

There was a net international capital outflow from Europe, as euro-area investors increased their net purchases of foreign portfolio assets, particularly equities. At the same time, foreign investors sold significant amounts of European shares received through cross-border mergers and acquisitions.

Emerging markets

In 2000, emerging market issuance of international bonds, equities, and syndicated loans rose to its highest level since 1997 (Chart 2), but the emerging markets' access to the international capital markets was marked by its "on-off" character. The report states that increased asset price volatility in mature markets and the prospects of a global slowdown in growth, combined with turbulence in key emerging markets, made it difficult for emerging markets to achieve sustained access.

Chart 2: Net private capital flows and gross private issuance to emerging markets

There was also in 2000 a sharp break in the high positive correlation between gross and net flows to emerging markets that had been a feature of the 1990s. While gross issuance of international bonds, equities, and syndicated loans rose for the third year in a row, to reach $216 billion, a rise of 32 percent—the largest increase since 1997, just before the Asian crisis—net capital flows actually fell from $72 billion to $32.2 billion, a decline of 55 percent. The report attributes this divergence primarily to oil price increases, which led fuel-exporting countries to accumulate claims (mainly deposits) on international banks.

The complete text of International Capital Markets: Developments, Prospects, and Key Policy Issues is available on the IMF's website: The published version of the report is available from IMF Publication Services for $25 a copy (academic rate, $20.00).

Conference Reviews Trends in Emerging Market Finance
Elizabeth R. Forsyth

One of the more noteworthy financial developments in developing countries during the past decade is the enormous growth of foreign direct investment (FDI): from $36 billion a year in 1991 to $173 billion in 1997, according to the World Bank's 2001 Global Development Finance report. Although the growth in FDI flows cooled off somewhat after the Asian, Russian, and Brazilian financial crises of 1997-98, in 2000 they stood at an estimated $178 billion, not only higher than before these crises, but well above where they were at the beginning of the decade.

Given the importance of finance to economic growth, it is natural to ask how important FDI has become in the financial sector in emerging market countries, what benefits and costs have been associated with it, and what changes in policy toward foreign financial firms would be in the economic interests of developing countries in the years ahead. Another important issue facing these countries is how to avoid being left behind by the coming wave of e-finance that some say will revolutionize financial sectors in advanced countries and potentially increase their comparative advantage in developing country markets.

These questions were posed at the third annual conference on emerging markets finance conducted by the World Bank, the International Monetary Fund, and the Brookings Institution in April 2001 and attended by 170 financial experts and policymakers from around the world. The papers presented at the conference are to be published in Open Doors: Foreign Participation in Financial Systems in Developing Countries, which also summarizes two discussion panels—one composed of representatives of various large foreign financial institutions with operations in emerging markets and the other of experts in e-finance.

The papers confirm the rising presence of foreign firms in financial sectors in key parts of the developing world, although Asia and Africa still lag far behind other emerging markets in this respect. In a number of countries, the foreign presence has increased from less than 10 percent to 50 percent or more within the past decade. The papers also document the important benefits that foreign firms bring: added investment, cutting-edge technologies and managerial practices (especially risk management), and more financial stability (because they tend to be more diversified than local firms). At the same time, the globalization of finance raises new policy issues that must be addressed—most prominently, the coordination of regulation and supervision across national borders.

On balance, however, foreign financial institutions provide net benefits to the countries in which they invest. For this reason alone, it is in the interest of countries that now restrict foreign entry in some form to drop those limitations, either unilaterally or through multilateral negotiations. The issue of how best to sequence that liberalization, however, is crucial. What regulatory practices need to be put in place? Should domestic financial institutions be made solvent first? This has been a problem in particular in many former centrally planned economies, where state-owned banks held a large portfolio of nonperforming loans. Although the conference did not settle the sequencing issues, several of the papers generated animated discussion. Many participants believed that waiting until the problems of domestic institutions were settled before opening up was a recipe for endless delay.

In conclusion, developments in emerging financial markets are creating tremendous opportunities for domestic and foreign firms and posing challenges for regulators. Most of the papers presented at the conference recommend relaxing restrictions and attracting foreign competitors in the financial field to increase efficiency and encourage growth. At the same time, entry of foreign firms and the development of new technologies (such as e-finance) may increase the level of financial sector risk and make best-practice financial supervision all the more important.

Open Doors: Foreign Participation in Financial Systems in Developing Countries, edited by Robert E. Litan, Paul Masson, and Michael Pomerleano, will be published by the Brookings Institution Press, Washington, in October 2001, paper; price: $29.95/£21.95.