Reflections on the IMF and the International Monetary System — Address by Michel Camdessus (March 12, 1998)
IMF News, March 12, 1998
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- Published: March 12, 1998
Historical role and evolution of the IMF
- Founded just after World War II to avoid policy mistakes that contributed to the Great Depression and war; promoted policies conducive to economic growth and financial stability, open trade, and mutual support in adjustment.
- Membership growth: from 40 countries in 1947 to 182 today.
- Key past roles highlighted:
- 1970s: helped oil exporters recycle surpluses and financed oil-related deficits.
- 1980s: helped Latin America overcome its debt crisis.
- 1989–early 1990s: assisted transition countries of eastern Europe and the former Soviet Union.
- Late 1994–early 1995: helped Mexico avert financial collapse (noted as the United States’ third largest export market).
- Ongoing: active in Russia (promoting market reform), Africa (reversing two decades of decline), and Asia (containing the current financial crisis).
IMF policy advice and expanded scope
- Core advice: sound economic policies that promote growth through low inflation, sound money, prudent fiscal policies, and a sustainable current account position.
- Broadened advice to include:
- the creation of a more level playing field for the private sector, by dismantling monopolies and setting up simpler, more transparent regulatory systems;
- stronger banking systems that protect the savings of small depositors and channel savings not just to a favored few, but to those who will use it productively;
- reductions in unproductive government spending, such as costly military build-ups and prestige projects;
- higher spending on primary health care and education; adequate social protection for the poor, the unemployed, and other vulnerable groups; and environmental protection;
- greater transparency and accountability in government and corporate affairs; and
- a more effective dialogue with labor and the rest of civil society.
Questions raised by the Asian crisis — four core issues
- First question: Are we giving the right advice in Asia?
- Acknowledges economic activity is slowing mainly because of the sudden reversal of capital inflows.
- Argues IMF-supported programs, international support, and confidence-building effects prevent even more acute suffering (more bankruptcies, larger layoffs, deeper currency depreciations).
- Emphasis of programs: strengthening financial systems, improving governance systems, increasing transparency, opening markets, and restoring market confidence.
- Reports “very encouraging signs” that reforms in Korea and Thailand are taking hold.
- Second question: Are we creating a moral hazard for borrowers and investors?
- On borrowers: rejects the claim that countries would deliberately pursue reckless policies expecting IMF bailouts because the pain would be too great.
- On investors: programs are “hardly bailouts”; many private investors are taking heavy losses.
- Foreign equity investors have lost “nearly three quarters of the value of their equity holdings in some markets.”
- Many firms and financial institutions will go bankrupt; lenders will not be repaid.
- Fourth quarter earnings reports indicate the Asian crisis has been very costly for U.S. and other foreign commercial banks.
- Notes some short-term private creditors are being at least partly protected; stresses need to find better ways of including the private sector in sovereign debt resolution.
- Case of Korea: “short-term creditors are being bailed in at longer maturities and below comparable market rates.”
- Third question: Is the IMF using taxpayer’s money to bail out Asian economies?
- IMF described as not a charitable institution or aid agency; operates “something like a credit union, or a revolving fund.”
- Members subscribe resources (quotas); countries can draw a multiple of their quota to finance balance of payments deficits.
- Borrowing countries take steps to restore ability to repay the Fund.
- U.S. fiscal impact: quoting Treasury Secretary Robert Rubin, since the start of the IMF, America’s participation "has not cost the taxpayer one dime."
- Over the last 15 years, the United States has enjoyed a small financial gain, “averaging somewhat less than $100 million annually—if exchange rate changes as well as interest costs and receipts are taken into account.”
- Distribution of IMF capital: U.S. resources constitute only “18 percent of the IMF’s capital base; the rest of the world provides the other 82 percent.”
- Benefits to the United States: improved economic performance in other countries creates growing markets for U.S. exports, new U.S. jobs, better U.S. investment opportunities, and contributions to world peace and security.
- Fourth question: Is the IMF too secretive?
- Notes increased transparency efforts: posting a wealth of data and information on the Fund’s website; data standards and a bulletin board so the public can track countries’ data practices.
- Raises caution about public warnings: warns that IMF predictions might be wrong and that warnings could provoke crises; prefers market-driven conclusions.
- Maintains that member governments have full access to Fund opinions and operations through their Executive Board representatives.
Looking ahead — prevention, reforms, and resource needs
- Key preventive measures and institutional reforms:
- Improve quality and quantity of information available to the IMF and the public, specifically on:
- structure of countries’ external debt,
- reserve levels,
- corporate sector leverage,
- level of nonperforming loans.
- Strengthen domestic financial systems via improved domestic regulation and supervision and increased financial sector transparency.
- IMF has helped develop a set of "best practices" in the banking area and is disseminating them through policy dialogue.
- Encourage prudent and properly sequenced liberalization of capital flows as countries open to foreign capital.
- Work is under way on an amendment to the IMF’s charter to make the liberalization of capital movements one of the purposes of the Fund and extend its jurisdiction to capital movements.
- Continue pursuit of good governance and intensify the fight against corruption.
- IMF encourages transparency of government operations and is prepared to interrupt Fund-supported programs on grounds of corruption; has already done so in a number of cases.
- Find better ways to involve the private sector in official efforts to resolve debt crises and avoid moral hazard, perhaps through orderly mechanisms for settling and restructuring debts.
- Enhance effectiveness of multilateral institutions, including ensuring they have sufficient resources to do their jobs.
- IMF resource concerns and appeals to members (Congress context)
- Warns that IMF usable resources have dropped to a level that leaves “little room for maneuver”—to protect members’ liquid reserves in the Fund, to meet normal but sometimes very large financing needs, or to respond to a new crisis.
- Notes Congressional consideration of whether to approve:
- the U.S. share of the quota increase proposed by the international community, and
- the U.S. share of the enlarged special credit lines—the so-called New Arrangements to Borrow, or NAB.
- Argues NAB would be of little use if the quota increase is not in place.
- Frames participation in the IMF as an investment rather than an expense:
- Investment in the narrow sense: member countries earn interest on the IMF’s use of their currencies.
- Investment in the broader sense: stability and prosperity of the world economy.
Italic: Reflections on the IMF and the International Monetary System — Address by Michel Camdessus, March 12, 1998