For most of the first 50 years of their existence, the Bretton Woods institutions operated in relative obscurity. For the most part, the activities of finance ministers and central bank governors at the biannual meetings of these institutions have been of interest primarily to the ministers, bureaucrats and a few curious onlookers.
But the last few years have brought an unprecedented degree of scrutiny to the institutions. The intensifying interest reflects the impact that the institutions have on the well-being of individuals and families worldwide, both directly and indirectly. What this weekend in particular has shown is that the period of benign neglect by the broader public has likely disappeared forever.
As governments and shareholders, we are increasingly being called upon to demonstrate that these institutions are effective in carrying out their mandates of fostering global prosperity and poverty reduction. Where past efforts have fallen short of these goals, the call for reform of both the institutions and the environment in which they operate is being heard loudly and clearly.
The starting point for any effort to show that these institutions are part of the solution rather than contributors to the world's problems is a demonstration of our understanding that countries are made up of people and are not merely collections of economic indicators and statistics.
Our challenge is therefore to show that not only are global markets essential to improved standards of living, but that national governments acting multilaterally through international institutions like the World Bank and International Monetary Fund (IMF) have an important role to play in promoting that well-being. Quite simply, global integration, if managed responsibly and sensitively, represents the clearest and most direct path out of poverty for hundreds of millions of people.
Our task is to make this happen and to see to it that the combination of new technologies and open markets translates into higher incomes, better opportunities and increased security for people in all parts of the world.
Whether that happens depends on how successful we are in reforming and adapting the international financial system to the needs of all the world's people.
Clearly, this will require that the mandate and the tools of these institutions change along with a changing global economic system. The virulent financial crises of the late 1990s, characterized by volatile swings in private capital flows, were the catalyst for significant efforts by policy makers to reduce vulnerabilities in domestic economies and strengthen the international financial system as a whole.
Given the IMF's central role in this system, reforms to the Fund will be critical to ensuring economic stability and prosperity in the period ahead. The key objective in this regard is to ensure that the IMF is effective in helping to create a world of relative stability in private capital flows.Global Economic Environment
The world economy has now clearly emerged from the trauma of the financial crises of the 1990s. We now have more stable and improving economic conditions, which can provide an ideal backdrop for our efforts to strengthen the international financial system in general and the IMF in particular.
But the improvement in the outlook notwithstanding, we cannot become complacent. Indeed, the experience of the past few years has demonstrated the importance of maintaining prudent and forward-looking macroeconomic policies and reinforcing sound structural policies at all stages of the economic cycle.
In this context, it is instructive to note that the potential downside risks to the world economic outlook are increasingly emanating from rising economic imbalances in the industrialized economies, rather than from risks of further financial market turmoil in the emerging market economies.
As IMF staff correctly point out, the extremely strong growth in the United States has led to high and rising trade imbalances, low personal savings rates and potentially overvalued asset prices that might eventually culminate in a disruptive adjustment process. The key challenge for policy makers in the U.S. will be to facilitate a slower and therefore more stable rate of economic expansion.
At the same time, other countries, particularly Japan and the major countries in the Euro area, must sustain a faster rate of growth than they have managed in recent years. In Japan, the recovery is still tentative and narrowly based. The right mix of economic policies is required to nurture it.
This underscores the importance of implementing structural measures that open up markets and make them more flexible, and foster faster growth. The Government of Japan should proceed as quickly as possible with structural reforms on a broad front including the financial sector, the corporate sector and the labour market.
In Europe as well, structural reforms that improve the functioning of the economy are urgently needed to boost sustainable growth. In addition, the larger members of the European Economic and Monetary Union in particular should take advantage of the increasingly favourable conjuncture to put the public finances on a sustainable footing and to reduce the high tax burden, especially on labour. It is also encouraging to note that the recovery in world growth has been quite broad-based. The Asian emerging market economies are, for the most part, in the midst of strong "V-shaped" recoveries. There are nascent recoveries underway in most of Latin America and the transition economies. Russia posted its strongest growth rate last year since it began its transition from a centrally planned to a market economy.
The recent strength in oil prices, while boosting revenues for some economies, also poses some risks to the global outlook. Admittedly, high oil prices pose much less of a risk today than they did in the early 1970s. But high oil prices are adding to inflation pressures in some economies.Economic Performance and Prospects in the Constituency
Since 1993, the federal government has followed a consistent strategy to achieve sustainable growth and job creation. This strategy is based on a commitment to sound public finances and low and stable inflation. Relative to gross domestic product (GDP), Canada's fiscal situation has improved faster than that of other Group of Seven (G-7) countries. Inflation continues to be low and consistent with the inflation control target. This ensured that the economy remained on a firm footing throughout the international financial turbulence associated with the Asian crisis.
Indeed, the Canadian economy grew strongly in 1999 as our commitment to sound economic and financial policies enabled us to take advantage of improving international economic conditions in late 1998 and 1999. Real GDP growth accelerated to 4.2 per cent, more than a full percentage point faster than in 1998, tying the U.S. for fastest growth among the G-7 countries in 1999. The fourth quarter of 1999 marked the 18th consecutive quarter of growth, the longest uninterrupted run since the mid 1960s.
Canada also led the G-7 countries in employment growth in 1999. As a result of the strong pace of job creation, the unemployment rate dropped more than 1 percentage point through 1999, reaching 6.8 per cent in December and remaining there through March—its lowest level since April 1976.
Inflation remains subdued, although it picked up somewhat over the course of 1999, mainly reflecting the strong increase in world oil prices. Underlying inflation (excluding food and energy) remains in the bottom half of the 1-to-3 per cent target band.
The solid growth momentum established last year is expected to continue this year and next. Growth is expected to moderate somewhat, however, in line with an expected slowing in U.S. growth. In December 1999, the average private sector forecast expected real GDP growth of 3.5 per cent in 2000. Growth in 2001 is expected to be 2.9 per cent.
To help sustain Canada's strong economic performance and improve the quality of Canadians' lives, the 2000 budget set out a strategy based on four foundations: sound financial management, providing more tax relief, building an innovative economy, and investing in skills and knowledge.
The Government is committed to balanced budgets or better in the next two years. This would be the first time in 50 years that the budget has been in balance for five consecutive years.
The improvement in the Government's finances meant that it was possible to introduce a multi-year tax reduction plan in the 2000 budget. Personal income taxes will be reduced by 15 per cent annually by 2004–05. A key element of the tax reduction plan was the restoration of full inflation indexation of the personal income tax system. Further, the tax plan included corporate tax reductions aimed at making Canada more competitive internationally.
The budget also proposed important new investments to make the Canadian economy more innovative. These include investment in: leading-edge research and innovation in universities, research hospitals and the private sector; development of new environmental technologies and improvement of environmental practices; and federal, provincial and municipal infrastructure.
In addition, the budget also introduced measures directly aimed at improving the quality of life of Canadians. These included measures to help families with children, to strengthen post-secondary education and to boost health care.
The remarkable performance of the Irish economy continued in 1999, with real GDP growing by an estimated 8.5 per cent and employment by 6 per cent.
Notwithstanding six consecutive years of strong growth, consumer price inflation (on a harmonized European Union basis) remained relatively subdued, at 2.5 per cent. The fiscal surplus improved to 2 per cent of GDP last year, even after setting aside 1 per cent of GDP to provide for future pension liabilities. Latest indications are that the economy continues to grow strongly. GDP is expected to rise by 7.5 per cent this year.
Emerging infrastructural and labour supply constraints—unemployment is now below 5 percent—are being addressed through a multi-annual investment plan announced late last year and through ongoing reform of the tax system.
Although inflation has edged upwards recently, an easing is in prospect as the impact of Euro weakness and sharply rising oil prices wanes in the months ahead.
Looking to the medium term, a new three-year national agreement on wages, taxation and social policy (Programme for Prosperity and Fairness) has been agreed, which should maintain Ireland's competitiveness through the first years of the new millennium.
c) Caribbean Nations
In 1999, economic developments in the Caribbean were generally positive as well, although major risks in the small, export-based economies persist; and we again witnessed the vulnerability of these countries to hurricanes—most recently in the Bahamas and in the Leeward Islands. While there were some exceptions, most economies registered positive real growth, low to moderate levels of inflation and reduced fiscal imbalances. Unemployment was reduced on average but major pockets of joblessness persist, leaving many facing poverty.
Caribbean governments have generally been doing their part to contribute to strengthening the international financial architecture, in particular by improving transparency in fiscal and financial operations. Most of the Caribbean members of the constituency participated in the Fund's pilot project on transparency and published their Article IV Reports, and practically all have put in place mechanisms to adhere to best practices in fiscal and monetary policy. Room for improvement remains, however, in building more robust tax systems and statistical capacities, and in programming and managing public expenditure. And the region is in need of the Fund's continued support for technical assistance in these areas.
Some members of our constituency, whose economies still rely on export earnings from commodities including bananas, are attempting to adjust to the harsh realities of a new global trade regime. Part of the adjustment strategy includes diversification into services, including tourism and offshore financial services, as supplements to agriculture. With respect to offshore financial services, these governments are committed to ensuring that this sector continues to develop within the framework of a rigorous regulatory system.
The adjustment difficulties facing Caribbean countries and other small states have recently been highlighted by the work of a joint World Bank and Commonwealth Secretariat task force on small states, and we support their recommendations. There is a clear need for the Bank, the Fund and other donors to take a close look at the way their actions and approaches affect small states if they are to have a chance of achieving their objectives of sustained poverty reduction and development. Continued support for small states is essential.The Institutional Context—The Agenda Ahead
It is against this backdrop, and with the memory of global financial turmoil still fresh in our minds, that we approach the issue of IMF reform. At the same time, the Fund is preparing to welcome new leadership.
Dr. Köhler is eminently qualified to head the Fund at such a key juncture in the institution's history and I look forward to working with him in the period ahead.
The Fund is also fortunate that it continues to have Stanley Fischer as its First Deputy Managing Director, whose efforts as Acting Managing Director warrant a special expression of our appreciation.
At the same time as we can be proud and confident in the quality of Fund management, there is a widespread sense that the process by which the heads of international institutions like the IMF are selected needs to be reformed to increase transparency and accountability.
We therefore welcome the intention of the Fund's Executive Board to review this process and set out principles to guide us in the future selection process.
The range of issues that will need to be addressed in the period ahead in order to adapt the Fund to the evolving environment and ensure that it is equipped to carry out its mandate is extensive. Management and the Executive Board clearly have their work cut out for them.
That being said, their efforts will be greatly enhanced by the Fund's recent decision to establish an internal, independent evaluation unit, as recommended by the Evaluation Group of Executive Directors chaired by Mr. Tom Bernes. This office will prove instrumental in bringing fresh perspectives to bear on Fund programs and policies, and in building the external credibility and support that the Fund requires to ensure its effectiveness. We are therefore keen to see the proposal for an independent evaluation unit made operational in the period between now and the 2000 Annual Meetings.
In addition, any effort to bolster the Fund's credibility and effectiveness is linked to the extent to which its representational structure is perceived to be a legitimate representation of the relative significance of its members to the international monetary system.
In this regard, the upcoming review of the Fund's quota formula—by which the relative voting power of individual members is determined—will be a crucial exercise. A satisfactory outcome to these discussions will be an important step which will need to be followed by a review of the Fund's constituency system.
The Recent Debate
In the period since the 1999 Annual Meetings, discussions on reforming the IMF have focused on a range of issues, including the conduct and content of surveillance, safeguarding Fund resources, the adequacy of the current configuration of non-concessional financing facilities and the role of the private sector in preventing and resolving international financial crises. These discussions, in turn, have raised fundamental issues about the role of the Fund and its relationship with private markets and other international financial institutions.
The 1999 External Evaluation of Surveillance raised important questions about the scope and appropriate focus of Fund surveillance. In both surveillance and program design, the IMF should focus on issues that affect a member's macroeconomic situation and policy prospects. These include exchange rate policy, monetary and fiscal policies, and vulnerability assessments of the financial sector and the capital account.
At the same time, the appropriate scope for IMF surveillance must extend to other factors relevant to a particular country's macroeconomic situation and outlook. Where factors affecting an economy's macroeconomic prospects lie in areas where the comparative advantage rests outside the Fund, Fund staff should draw upon the expertise of other institutions such as the World Bank.
One of the key issues in this regard has been how best to integrate relevant internationally accepted codes and standards into Fund surveillance. Clearly, the IMF has a key role to play in encouraging "best practices" and monitoring compliance in relevant areas. Important steps, such as Financial System Stability Assessments and Reports on the Observance of Standards and Codes, have already been taken.
Questions related to safeguarding IMF resources are a subset of the Fund's broader interest in fostering good governance in member countries. While the vast majority of the membership accessing Fund resources have followed appropriate guidelines, there have been a few occasions when concerns over particular practices have been raised.
This has underlined the importance of ensuring that all member countries—developing or industrial, borrowing or non-borrowing—have in place the appropriate degree of transparency and accountability to ensure that public resources are managed in such a way as to give the official community, the private sector and broad civil society confidence in economic management.
Where we have seen good progress has been in the review of Fund facilities. Here, we welcome the agreement to "clean house" by eliminating those facilities that are not being used and that no longer serve the needs of the Fund's members.
The next step is to streamline and adapt the remaining facilities to ensure that they serve the membership in the most efficient manner possible. To do this, however, we need a clear sense of the Fund's role, as well as how Fund operations and policies interact with markets and other institutions.
We also need to understand that international financial stability is an essential "public good"—something that private markets will not necessarily achieve without the involvement of the official sector.
The starting point here is a clear understanding that the bulk of Fund activity—even in the context of making its resources available to members—is preventative. Indeed, virtually all regular programming—through its associated reform requirements—is intended to lay the foundation for a more stable economy and one that is best positioned to weather external shocks.
Crisis resolution, which receives the bulk of media attention, represents only a small part of Fund activity. To the extent that regular Fund programs are successful, the number and frequency of financial crises will be reduced and, if and when they do occur, their severity will be much diminished.
What this suggests is the need to ensure that we get the content of Fund programs right. Recent experience has taught us much—from ensuring that we integrate consideration of all relevant and potential vulnerabilities, including the essential requirement of quality governance, to the importance of adequate implementation capacity and strong domestic ownership of the reform agenda. It is therefore time that the Fund undertake its much delayed review of conditionality in an effort to draw together the many lessons it has learned in recent years.
But as we know, the enormous benefits of the free flow of capital are moderated somewhat by the risks associated with possible financial volatility. When crises occur, the official sector has a key role to play in restoring stability, keeping in mind that the way in which it responds has an influence on the frequency and magnitude of such occurrences. Much has been said about moral hazard, particularly on the part of private creditors and investors, and an awareness of this problem is essential to any effort by the public sector—including the IMF—to restore stability.
Considerable attention has been focused on what the IMF should—and should not—do in the context of a financial crisis. While there remains a range of views on the appropriate mechanisms for IMF engagement, there appears to be general agreement that the availability of official financing from the IMF should not unduly heighten moral hazard. This requires that investors bear the costs of the decisions they take.
It also means that official financing should not be provided in greater quantities or longer than is required to re-establish more stable relations with capital markets. The pricing, quantity and maturity structure of Fund lending are key determinants here.
At the same time, the Fund membership is diverse, and different mechanisms and responses will be required in the pursuit of the guiding principles. The Fund's ability to effectively and flexibly adapt to this reality is evident in the success of the Supplemental Reserve Facility in responding to the needs of some of the Fund's largest and most systemically important emerging market members.
The flip side of the question of how the Fund should respond to the financial tribulations of its members is the issue of how best to engender broad capital market stability, and thereby reduce the frequency and severity of financial crises when they do occur. Here, scope exists to develop the tools needed to implement a strong framework for private sector involvement in crisis prevention and resolution.
Simply altering the size of IMF programs without providing other mechanisms to help contain capital outflows in the event of a crisis will often not be enough to stem the damage that can arise from a financial crisis and prevent countries from resorting to measures that are detrimental to a well-functioning international system.
Progress is already being made in this respect.
Building on the tools and principles outlined in the G-7 finance ministers' report to the Köln Summit, the IMF staff have developed a set of guidelines for the application of private sector involvement in crisis situations. But additional mechanisms should also be explored to ensure that creditors have appropriate incentives to avoid a rush for the exits.
Such mechanisms would need to address the collective action problems facing creditors and debtors during crises and promote the timely and least disruptive restructuring of private claims. For example, debtors must be encouraged to maintain regular communications with their private sector creditors in good times. We need to proceed to make collective action clauses (CACs) a regular feature in sovereign debt instruments.
In this regard, it should be noted that on Thursday, Canada announced that it will adopt CACs in its future foreign currency bond and note issues. I hope that other industrial and emerging market countries will follow this example. The introduction of CACs in sovereign debt instruments could also be encouraged within the context of IMF programs, perhaps as a precondition for Contingent Credit Line eligibility.
These types of measures are important complements to the guidelines developed by the staff, as they have the ability to alter incentives in the international financial system so that the framework for private sector involvement plays a preventative role, as well as a role in resolving crises.Conclusion
Over 50 years ago, the Bretton Woods architects designed a set of institutions that were essential for the times. In forging the institutions, they wanted to develop a system that would discourage isolationism and encourage multilateralism.
Today, we face a similar challenge. In order to prevent a backlash against globalization, we need to develop an international framework that will preserve and enhance the benefits of international capital mobility and ensure that the these benefits arewidely shared. At the same time, we must continue to find ways to minimize the potential risks to individual countries and to the international financial system as a whole and take advantage of the current calm in international financial markets to press forward on this very important agenda.