The Role of the IMF: Past, Present, and Future -- Remarks by Michel Camdessus

IMF News, February 13, 1998

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The Role of the IMF: Past, Present, and Future -- Remarks by Michel Camdessus

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• Published: February 13, 1998

Origins and enduring mission

• IMF established to help restore economic stability and growth in the aftermath of global depression and world war.
• Founded on the principle that countries share basic economic goals, including high levels of employment and income, achievable through:
  • sound macroeconomic policies;
  • open economies to foreign trade; and
  • international cooperation to make the international monetary system function more smoothly.
• Emphasis unchanged: sound policies at the national level and effective monetary cooperation at the international level.
• Surveillance (annual consultations and in-depth staff analyses reviewed by the Executive Board) is described as the Fund's best instrument of crisis prevention.

Evolution of the IMF’s role and expanded policy scope

• Membership growth: expanded from some 40 countries in 1947 to 182 today.
• Global changes prompting IMF adaptation:
  • exponential growth in private capital flows and more agile private markets;
  • replacement of fixed exchange rates by a variety of exchange rate arrangements;
  • broader range of country problems and circumstances requiring IMF advice and temporary financing.
• Broadened scope beyond "sound money, stable exchange rates, and open markets" to include:
  • deregulation of domestic economies and a more level playing field for private sector activity;
  • stronger financial systems and development of effective regulation and supervision;
  • reductions in unproductive government spending, such as costly military build-ups;
  • increased spending on primary health and education, adequate social protection for the poor, the unemployed, and other vulnerable groups, and on key environmental problems;
  • greater transparency and accountability in government and corporate affairs;
  • a more effective dialogue on economic policy with labor and the rest of civil society.

IMF responses to past crises and regions

• Examples of IMF engagement:
  • mid-1970s energy crisis: mechanism for recycling surpluses of oil exporters and financing oil-related deficits of other countries;
  • 1980s Latin America: central role in overcoming the debt crisis;
  • post-1989: design and financing of efforts to help 26 transition countries of Eastern Europe and the former Soviet Union transition from central planning;
  • 1994-95: assistance to avert the financial collapse of Mexico;
  • continuing support for economic reform in Russia;
  • sub-Saharan Africa: reversal of deepening poverty, with growth now twice the rate it was at the beginning of the 1990s and rising per capita incomes.

The Asian crisis: objectives and distinguishing features of Fund-supported programs

• The centerpiece of programs for Korea, Indonesia, and Thailand:
  • forceful, far-reaching structural reforms to strengthen financial systems, increase transparency, open markets, and restore market confidence (not merely austerity measures).
• Key program elements:
  • closure of non-viable financial institutions;
  • requirement for restructuring plans and compliance with internationally accepted best practices, including Basle capital adequacy standards and internationally accepted accounting practices and disclosure rules;
  • institutional changes to strengthen financial sector regulation and supervision, increase transparency in corporate and government sectors, create a more level playing field for private sector activity, and increase competition.
• Acknowledgement that reforms require vast changes in domestic business practices, corporate culture, and government behavior and will take time.
• Judgment: Fund-supported programs in Asia responded to country needs (restoring confidence and correcting longer-term structural problems) and to international community interests in preventing crisis deepening and contagion.

Seven priority areas to strengthen the international financial architecture

• one: more effective surveillance over countries' economic policies, facilitated by fuller disclosure of all relevant economic and financial data; IMF has established data standards and is promoting fuller disclosure through programs and policy advice.
• two: regional surveillance to improve economic performance when neighboring countries coordinate and encourage sound policies; IMF assisting with initiatives in Asia and elsewhere.
• three: financial sector reform, including better prudential regulation and supervision; dissemination of "best practices" in banking developed with the World Bank and others.
• four: more effective structures for orderly debt workouts, including better national bankruptcy laws and international arrangements to associate the private sector with official efforts to resolve sovereign debt problems (as recommended by last year's G-10 study).
• five: orderly capital account liberalization—neither a return to outmoded capital controls nor an unsequenced rush to full liberalization, but prudent and properly sequenced liberalization.
• six: a worldwide effort to promote good governance and fight corruption; IMF engagement noted with Transparency International and the Financial Action Task Force.
• Additional point: reinforcing international financial institutions, including their financial resources, so the architecture is "more modern and more substantial."

IMF resources, liquidity concerns, and proposed increases

• Usable resources decline: "usable resources have declined rapidly by more than one third, or by almost $30 billion since 1996 to about $45 billion today."
• Implication: limited room for maneuver to protect liquid reserves or meet financing needs of 182 member countries and to respond to new crises.
• Proposed quota increase and expected yield:
  • proposed increase in IMF quotas amounting to approximately $88 billion;
  • U.S. share would be nearly $14.5 billion;
  • estimate that the new quotas would yield up to $58 billion of usable resources, "which should suffice for some years into the next century."
• New Arrangements to Borrow (NAB):
  • members have taken steps to increase special credit lines by $23 billion;
  • U.S. share in the increased credit lines is about $3.5 billion;
  • caveat: NAB is useful only if accompanied by the increase in quotas, since tapping the NAB without quota increases would immediately increase Fund liabilities and drive the IMF's liquidity ratio to an unacceptable level.

Framing IMF participation and final observations

• Participation in the IMF presented as an investment rather than a taxpayer expense:
  • narrow sense: member countries earn interest on IMF's use of their currencies;
  • broader sense: investment in the stability and prosperity of the world economy.
• Closing: reaffirmation of the need for adequate IMF resources and continued cooperation with the World Bank for future challenges.

Remarks at the Annual Meeting of the Bretton Woods Committee, Washington, D. C., February 13, 1998. 98/4 Remarks by Michel Camdessus, Managing Director of the International Monetary Fund.

References

• PRESS CENTER
• https://www.imf.org/en/home