The IMF and Good Governance--Address by Michel Camdessus

January 21, 1998

Original: French


Address by Michel Camdessus
Managing Director of the International Monetary Fund
at Transparency International (France)

Paris, France, January 21, 1998

Ladies and gentlemen. I am very pleased to participate in this forum, not only because of the importance of transparency and good governance, but also because it gives me the opportunity to express my admiration for the work that Transparency International is doing around the world. By helping to enhance public sector accountability and transparency and developing greater public awareness about the need for and requirements of good governance, your organization is performing a vital service to individual countries and the global economy. So I was very pleased in looking at my schedule following the most recent series of negotiations in Asia to find an opening--all too small, but large enough--for me to come to pay tribute to the work that you do. On the advice of my friend and former colleague at the Ministry of Finance, Mr. Dommel, I will do so by describing the IMF's activities in this field and recounting, without embellishment, our experience in Asia.

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The IMF's role in governance issues has been evolving over the years, and good governance has taken on increasing importance in our traditional mandate of promoting economic stability and what I call high-quality growth. It is not only the IMF, but also its member countries that have awakened to this concern, although with varying degrees of enthusiasm. Indeed, as recently as a few years ago, there was little support among our members for the IMF, or for any other international financial institution, to become more actively involved in governance issues. Some of our shareholders feared that in taking on such issues the institutions would become politicized and lose their effectiveness--don't we have enough to do in our missions to preserve monetary and exchange stability? Others attached higher priority to other issues. In short, there was no shortage of excuses for keeping us at arm's length. Today, however, not only have governance issues moved to the forefront of discussion, but in many cases government reform has moved to the top of the policy agenda. What has changed?

One important change has been in the perception of what constitutes sound economic policy. As more and more evidence has come to light about the adverse consequences of governance problems on economic performance--among them, losses in government revenue, lower quality public investment and public services, reduced private investment, and the loss of public confidence in government--a broader consensus has emerged on the central importance of transparency and good governance in achieving economic success.

Numerous studies have shown that where governance is poor, domestic investment and growth suffer.1 Moreover, in a world in which private capital has become more mobile, there is mounting evidence that corruption undermines the confidence of the most serious investors and adversely affects private capital inflows--this is the case in all too many countries in Africa. Even Asia is no exception; we have seen there that governance problems can also undermine the ability of countries to channel private capital inflows into productive, long-term investment. Moreover, the Asian crisis has demonstrated in a very dramatic way how the lack of transparency about underlying economic and financial conditions can feed market uncertainty and trigger large capital outflows that can, in turn, threaten macroeconomic stability. Conversely, progress toward greater transparency can radically alter the very terms of the public debate.

Other factors also come into play. With government budgets under pressure in virtually every country in the world, bilateral aid donors have become more conscious of the need to direct their resources to countries that they believe will use those resources most productively and in which such use can be monitored. The IMF itself has a responsibility to its members to ensure that the resources they provide to the Fund are put to good use.

For all of these reasons, our member countries have come to recognize the vital importance of good governance, and, at our Annual Meetings in September 1996, a Declaration on Partnership for Sustainable Growth was adopted, though, paradoxically, despite its fundamental importance it appears to have gone unnoticed. It reflects a now universal consensus on these issues, and states that "promoting good governance in all its aspects, including ensuring the rule of law, improving the efficiency and accountability of the public sector, and tackling corruption" is an essential element of an environment in which countries can achieve lasting prosperity. It may seem like a catch-all, but its words give legitimacy to our efforts in this area and to the "second generation of reform" that we are now trying to promote. Subsequently, the IMF's Executive Board met a number of times to develop guidance for our staff in dealing with governance issues. The result was a set of guidelines that have been in effect since last July.2 They confirm and strengthen the approach that the Fund has been taking for some time, and also stress the importance of addressing governance issues evenhandedly in all member countries and, of course, the need to work together on these issues with other multilateral institutions, especially the World Bank, since we are jointly confronted with these problems.

So how does the IMF go about promoting good governance? Not by systematically seeking out all cases of corruption in the world, but by helping members improve the management of their public resources and establish a stable and transparent regulatory environment for private sector activity, a sine qua non for economic efficiency and the eradication of corruption.

Broadly speaking, our approach is to maximize the transparency of government financial operations and create systems that minimize the scope for making decisions on an ad hoc basis and for giving preferential treatment to individuals and organizations. For example, we are helping members simplify their tax systems and business legislation and strengthen tax and customs administration by eliminating special exemptions that apply to a privileged few; this is the best means of ensuring that adequate revenues are received to finance essential public services and that such services are accessible to the general population. Likewise, we are working with countries to strengthen and increase the transparency of budgetary procedures to ensure that government revenues are fully accounted for and used as agreed in the budget. We are also seeking to improve the quality of government expenditure by reducing outlays for unproductive purposes, such as costly military buildups and large projects that benefit influential groups while stroking the egos of the high and mighty. The savings will make room for spending on primary health care, basic education, vocational training, and essential infrastructure.

At the same time, the IMF seeks to promote more effective and accountable economic and financial institutions. To this end we are working to improve the quality of financial sector regulation and supervision and enhance the transparency of financial sector operations. Similarly, we are encouraging countries to improve the quality of the data they provide to the public about domestic economic and financial policies and performance. We cannot overemphasize the importance of high-quality statistical data; such data are an influential factor in improving economy policy and an essential aid to potential investors in evaluating countries' economic policies and performance. They allow the markets to become more informed and selective, and constitute a first-class protection for countries with good policies, which will be less vulnerable to the often capricious fluctuations and herd behavior on the financial markets. Certainly, these examples will not come as any surprise to you. In fact, you have probably noticed the similarity between the measures that the IMF is advocating and the areas of reform that the Transparency International Source Book has identified as useful elements of an overall anti-corruption strategy.

Corruption. What specifically are we doing to combat corruption? Our institution has a macroeconomic mission, and our mandate is restricted to those specific instances of corruption that may have a significant--some would say demonstrable--macroeconomic impact. We do not hesitate to bring such cases to the attention of the authorities. The macroeconomic nature of corruption may be identified by the large amounts involved or the fear that specific cases of corruption are symptomatic of a wider governance problem. Examples might include tax and customs fraud with the involvement of senior public officials, the misuse of official foreign exchange reserves, and abuses of power by bank supervisors or failure on their part to take action. This has led us in some cases to delay or suspend our support until the member in question has taken appropriate corrective action, such as presenting external audit reports, canceling illegal contracts, and removing or even taking legal action against key officials found to be at the center of fraudulent practices.

Need I add that, in our view, good governance is essential for countries at all stages of development--from the poorest countries that are still in the process of building up domestic institutions and undertaking the basic reforms needed to accelerate economic growth to the advanced countries, both as regards their own internal governance and their dealings with developing countries? In this connection, I welcome the commitment of OECD countries to criminalize the bribery of foreign officials and put an end to the tax deductibility of these so-called fees, which are really nothing more than bribes. But let me move from the theoretical to the factual and focus briefly on an experience that is still very much on my mind: the current problems in Asia. I am especially eager to tackle this subject as it is the first time in the history of the IMF that we are applying, on a very large scale I might add, the new mandate that we have been given in this field.

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In recent months, the world has been shocked to see how quickly countries renowned for outstanding economic performance have been engulfed in crisis. Although the causes of the crisis are varied and complex, many of the problems that lie at the heart of Asia's difficulties are bound up with poor governance. In Korea, for example, opacity had become systemic, as in the case of the chaebols, which are to be completely overhauled under the negotiated program. In addition, relationships among governments, corporations, and financial institutions were so close--I have even gone so far as to say incestuous--that in the long run they could only result in unclear accountability and disastrous investment and lending decisions, ultimately undermining banking sector health and impeding competition. Finally, the lack of transparency about government, corporate and financial sector operations concealed the extent of Korea's problems, so much so that corrective action came too late and ultimately could not prevent the collapse of market confidence, with the IMF finally being authorized to intervene just days before potential bankruptcy.

The situations in Thailand and Indonesia have forced us to deal with similar problems, although to a lesser or different degree. Our programs in these three countries have been designed to go to the heart of these problems. In each case, the centerpiece of the program is a thorough restructuring of the financial sector. The goal is to ensure that owners and managers are genuinely more accountable for the prudent operation of their banks, that loans are made on the basis of objective commercial criteria, and that banks return to their essential role of mobilizing domestic savings and promoting sound investment. We must make sure that insolvent institutions are closed down, and that their owners and managers share in the losses. We are also calling for institutions that are simply illiquid to come up with restructuring plans that bring them into compliance, within a relatively short time and in full transparency, with internationally accepted accounting practices and disclosure rules, and with the Basle capital adequacy standards. Also required are institutional changes to strengthen financial sector regulation and supervision.

The programs are no less ambitious as regards the corporate sector. They include measures to improve the transparency of corporate balance sheets through independent external audits, disclosure and publication of consolidated statements for business conglomerates so that markets can monitor corporate performance. At the same time, the programs seek to create a more level playing field for private sector activity by dismantling monopolies, eliminating government-directed lending, increasing the transparency of foreign trade procedures, and revising government procurement and contracting regulations. Bankruptcy laws are to be allowed to work without government interference. Meanwhile, the opening of domestic markets to foreign participants should help stimulate domestic competition and encourage domestic firms to adjust. The media have discussed the scope and coverage of the Indonesian program at length, so I won't go into further detail about the arm-wrestling we had to do with the directors of monopolies and cartels of all kinds.

Just as corporations and financial institutions must become more open and transparent, so too must their governments. All three programs call for governments to improve the publication of key economic data and bring off-budget activities into the budget so as to provide a clearer picture of the financial position of the wider public sector and improve its governance. The programs are far-reaching; the Indonesian Fund for Reforestation is just one example.

Yes, the programs are far-reaching and confirm the basic intuition of your organization: that anyone who takes the need for transparency seriously will profoundly change the course of events. If you permit me to paraphrase the words of the Duc de Liancourt, Master of the Robes to Louis XVI, on July 14, 1789, I would say: "It's not progress, Sire, it's a revolution!" Such reforms will require a vast change in domestic business practices, corporate culture, and government behavior. Obviously, this will be a long-term process--a process in which the IMF, the World Bank, and others can assist, but one whose success depends on the efforts of the countries themselves. However, the positive effects are already being felt: witness the attitude of the Korean unions. They were convinced to give up the idea of a general strike in return for a tripartite dialogue with the government and employers regarding the accounts of the chaebols, which are finally more transparent and more widely disseminated. I think we will have turned the corner in the current crisis when markets become fully aware of these changes. In any event, it is heartening to see the determination with which President-elect Kim Dae-Jung appears set to address these issues in Korea. I hope other country authorities will follow his example.

"Revolution!" It is probably too strong a word. History will judge, but for the IMF, which for fifty years confined itself essentially, in accordance with its mandate and not without some success, to helping its member countries accept essential monetary and macroeconomic discipline, these are entirely new frontiers, both vast and promising, as they are for the World Bank and the other major international organizations. However, we must guard against leaving this work to the international organizations, which risks setting them up as the scapegoat for all the world's ills if progress should come too slowly. Like all revolutions, this one will be successful only with the unrelenting and ultimately irresistible pressure of civil society. Spearheading this effort, Transparency International has already contributed to bringing about change. The IMF is proud to work alongside Transparency International in this vitally important effort: on it depend good governance in service of society and the opportunity for a new form of citizenship.

1See, for example, Mauro, Paulo, Why Worry About Corruption? Economic Issue No. 6, (Washington: International Monetary Fund) February 1997.
2Good Governance The IMF's Role (Washington: International Monetary Fund) August 1997.


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