Press Release: Statement by Josef Tosovský to IMF Executive Board

September 19, 2007

Press Release No.07/195

Mr. Josef Tošovský, a candidate for the position of the Managing Director of the International Monetary Fund (IMF), issued the following statement to the IMF Executive Board on September 18, 2007:


All of us who have lived in the midst of extraordinary political and economic changes of the last few decades cannot fail to feel our pulses quicken in this building. The IMF is the principal forum for the exchange of ideas on the great macroeconomic issues of our age. This institution—the staff, management, and the Board —is where potential problems and opportunities are diagnosed, ideas tested in discussion and debate, experiences shared, and policies formulated. It would be an immense privilege to be part of this process.

The IMF mission is to promote international financial stability and growth. Within this mandate, the IMF should continue to promote an open and liberal economic order, and resist any protectionism, formulate and oversee rules that govern the international monetary system, and foster cooperation and coordination of national macroeconomic policies. The IMF's preeminence relies on the imaginative and foresighted leadership of its Management and Board, the talent and professionalism of its staff, and the near-universal breadth of its membership. Safeguarding this position requires a fair role for all members in the governance of the Fund.

In my own career, I have come to be a great fan of the Fund. For many years I sat across from Fund missions—in both program negotiations and Article IV Surveillance discussions, in easy times and in crises. I have always been impressed. The missions had thought deeply about our particular circumstances and had an excellent grasp of the real political and economic problems we faced. They did not hesitate to shatter our complacency when this was needed or to deliver messages about unpalatable policy choices. But, I always felt they were on our side and were prepared to work very hard to find solutions. No matter how difficult the discussions, we were left believing we had real friends and allies in the Fund. That is how surveillance and program discussions should work.

As countries open to trade and international finance and become more closely interconnected, they need the Fund more than ever. With some degree of exaggeration, one can say that we live in a world where, on the one hand, economic and financial activities do not have any borders and, on the other hand, many jurisdictions exist with their own national policies, rules, currencies, etc. One implication is that national policies, problems, shocks and disturbances initially affecting markets and institutions in one country, can spread rapidly to other countries, sectors and regions with potentially undesirable effects for both monetary and financial stability worldwide. The recent troubles in the US subprime mortgage market are just the latest example.

Given its universal membership and the richness of accumulated knowledge and experience, the IMF is well positioned to play an important role in dealing with such spillovers. But knowledge, experience and skilful staff are not enough. In order to be able to play this pivotal role, the IMF must also enjoy the full trust of its members, big and small, rich and poor. Otherwise, its potential will not be realized.

What are the major issues confronting the Fund?

Maintaining its intellectual capacity to address effectively the challenges of the rapidly changing world economy and international financial system, and the trust of its members in its professionalism, objectivity and impartiality, requires constant hard work. Much has been done recently: the Fund's Medium-Term Strategy lays out the main issues. But in all areas there is still extensive work to be done. Let me address them in what may seem an unconventional order, starting with the Fund's budget and its income model.

The Fund's Budget

Clearly, there needs to be a new income model: any model that relies on crises for revenue punishes the institution for success in avoiding or forestalling crises. There also needs to be an appropriate degree of austerity on spending. The Crockett report provides useful and interesting suggestions. But the reason I start with budgetary issues is this: a sensible budget for the Fund needs first to determine what the core activities of the institution should be and then only second how to finance them. My experience of fiscal austerity programs is that across-the-board cuts do not deliver sustainable results. Real choices have to be made about what to do and what not to do. Forging a consensus on this issue within the membership is the essential task for Management. A very concrete strategy is urgent in the current circumstances, and not only because of the financial constraints the institution is facing.

What I have seen of the work on the new income model seems eminently sensible—a better deployment of Fund resources. But, of course, it will require near consensus and it will be essential for Management to make the case to all members (i) that the Fund delivers valuable services, (ii) that it does so in a cost-effective way, and (iii) that it, therefore, deserves support.


Surveillance is the bread-and-butter work of the Fund and strengthening surveillance—both bilateral surveillance with individual members, as well as regional and global surveillance—is central to the medium-term strategy. But reform requires careful assessment: there is a great deal of excellent work done under the surveillance rubric that needs to be preserved—though, perhaps, better marketed.

The recent revision of the 1977 Surveillance Decision seems to me to bring the formal decision into closer alignment with what mission teams actually do and what they should do. But more analytical work on exchange rates needs to be coupled with a degree of humility about the Fund's ability to come to robust conclusions. Management also needs to be absolutely certain that surveillance is a level playing field where all members are treated uniformly and where the Fund staff listens carefully to their views. In the rare circumstances where clear and robust conclusions on serious exchange rate misalignments are reached, the Fund needs to be compelling in its arguments. There will always be a tension between the role of the Fund as "confidential advisor" and that of a public advocate for reform. I have no special wisdom on how to solve this problem aside from ensuring that the Fund proceeds carefully in assessing how to be most effective in preventing crises within countries and negative spillovers to others.

Multilateral Consultations with a group of countries—along the lines of that done recently on global imbalances—is a very interesting new idea. As John Lipsky has said, it is, in a sense, a reform of the G-system: rather than having the G-7 or the G-24 or any of the other predetermined groups discuss an issue, it allows the most interested countries to engage in the discussion. It seems to me essential, however, to keep the rest of the Fund membership fully appraised of developments and to take on board the views of other member countries. I will be very interested to see an ex post assessment of the effectiveness of this new mechanism.

Delimiting the coverage of surveillance becomes more important in times of budget austerity. Some years ago I read one of the periodic reviews of surveillance and was struck by a conclusion: coverage should be limited to issues and analysis that are critical to a sound assessment of the macroeconomic circumstances of the country and it is incumbent on the mission team in their report and their presentation to the Board to explain why the issues they have covered are indeed "macro-critical." This seems eminently sensible to me. At the same time, it is important not to put a straightjacket on the analytical work of the staff.

Financial analysis and assessment of the financial sector are, these days, very often macro-critical. Given my background as a central banker and head of the Financial Stability Institute at the BIS, this is an area that is especially close to my heart. The Fund should be ahead of the game in these areas: it has deep experience of individual country financial sectors through its FSAP work and it has a department that brings together expertise on both banking systems and financial markets. I was interested to learn of the recent work of the taskforce with mandate to investigate how best to integrate financial analysis into surveillance. I can see the Fund being especially useful to many countries by bringing its finance expertise to bear on both the domestic circumstances of the country and the global financial pressures that will likely impinge on the country and influence or constrain its policy options.

The Fund's multilateral surveillance products—both the WEO and the GSFR—are highly regarded. In our current circumstances of instantaneous information, global capital markets, and rapid spillovers, the need to integrate bilateral, regional and global surveillance is ever more important—and only the Fund can do this.

Lending to Member Countries

In the other core area of the Fund's work—financial assistance to member countries—I believe it is premature to think that the current absence of demand for Fund resources is a new permanent reality. Nevertheless, and even though the Fund has a useful array of facilities available, it makes sense to keep re-examining whether these facilities meet the needs of members in the rapidly evolving global economy.

I welcome the discussion of the Reserve Augmentation Line (RAL), which, I suppose, could be particularly useful to emerging market economies. If it is successful, it should help to reassure countries that they will have access to this common insurance mechanism so that they do not need to hold excessive levels of reserves as a mechanism of self insurance. I am not yet fully familiar with the discussion and debate on this mechanism, but I suppose that the difficult aspect will be to marry a degree of automaticity of drawings with the need to safeguard the Fund's resources. On the one hand, the amounts available need to be large enough to matter; on the other, safeguarding the Fund's resources will require that policies in recipient countries are adjusted appropriately to changing circumstances. Another important dilemma is how to set qualification criteria: if they are set too tight, then there may be no demand for the facility; if they are set too loose, then weaker performers would have access to the facility. I hope that discussions have found a way to solve some of the difficulties that beset the old Contingent Credit Lines mechanism.

Low Income Countries

The work of the Fund in Low Income Countries is an essential part of its mandate—I do not at all subscribe to the view that this should be principally the mandate of the World Bank. PRGF programs have made a difference: both economic performance and governance in much of Africa, as well as many other PRGF-eligible countries, is improving rapidly. And, in the absence of borrowing needs, the PSI has already become a useful mechanism for helping to keep markets and donors informed about the quality of a country's macroeconomic policies.

The work of the Fund and the Bank must be complementary. The two institutions should not be treading on one another's toes, but a degree of debate on countries where both are engaged is both necessary and useful. It is natural for the Bank to be focused on long-term development perspective, on the microeconomics of aid delivery in particular sectors—what is needed and how it can best be delivered. It is natural for the Fund to be focused on the short- to medium-term stability issues, on macroeconomic constraints and concerns about aggregate debt, fiscal capacity, and financial sustainability.

Clearly new borrowing or transfers of other sorts that impinge on macro sustainability should register as a concern in the Fund—debt reduction initiatives should not elicit an accumulation of new debt that again threatens sustainability—and a sensible common framework for analysis should foster coordination between the Fund and the Bank in this area. While both institutions share a commitment to development, there is a healthy difference in perspectives. I will be very interested to follow the responses to the work of the Malan Committee on the cooperative relationship between the two institutions.

Technical Assistance and Training

The capacity-building work of the Fund—technical assistance and training—has the potential to be transformative for countries. I know, from my experience as Governor of the Czech National Bank, that the training my colleagues received in Washington and at the Joint Vienna Institute was enormously important for our ability to handle the challenges of transition from communism to market economics. My work at the FSI has focused on outreach to the financial sector supervisory community and, indeed, we have had the opportunity for a very fruitful collaboration with the Fund.

But in this aspect of the Fund's work a situation of budget austerity also demands a reappraisal of what should be done and what should not be done. I have always thought that the Fund has a unique advantage in certain areas of economics—that is, it can deliver technical assistance and training that differ from what is available anywhere else—and it is in these areas that the Fund should focus its resources. Other aspects of capacity building can be left to other institutions, both public and private. I am sure, however, that these views of mine would be considerably refined and would evolve in discussions with all of you if I were to join the institution.


Finally, let me say something about governance. In some respects I think the Fund has been the victim of bad press, but perhaps it has brought this upon itself. As the representative of an emerging market transition economy in negotiations with the Fund, I had never felt that the discussions were being distorted by the particular governance structure of the Fund. But, it is clear that this view is not universally shared. And, if the Fund wants to do more robust surveillance and to play a larger role in the great global issues of the day, it will only be possible if there is - and there is generally perceived to be - a truly level playing field. Countries must be confident that they will be treated uniformly, that differences in prescriptions will be due only to differences in circumstances, not to differences in influence within the institution.

Perceptions are as important as facts. It is difficult to argue that the Fund treats all countries equally when voice and representation in the institution is so out of date with the economic realities of the global economy. The Fund needs to find a formula that is better representative of the facts on the ground and that, at the same time, reassures all countries that their voice will be heard.

The downpayment on quota reform agreed upon in Singapore was no more than that—a downpayment. Moreover, for many member countries, it was palatable only because it was seen to be a first step in a bigger process. That process must now be completed.

I hope that my comments have clarified my views on a range of issues critical to the management of the Fund.


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