The Role of the IMF in Safeguarding the Stability of the International Financial System, Address by IMF Managing Director Horst Köhler

June 21, 2002

The Role of the IMF in Safeguarding the Stability of the International Financial System
Address by Horst Köhler
Managing Director of the International Monetary Fund
on the Occasion of the 150th Anniversary Celebrations of Giesecke & Devrient
Munich, June 21, 2002

1. I am very pleased to be here with you today to celebrate the 150th anniversary of Giesecke & Devrient. The motto "Values in Changing Times" is very much to the point today. At the beginning of this 21st century, the world is caught up in a process of great change. If this process is to have a happy outcome, we need values and orientation. We must learn to cope with change and to shape it. Globalization and the consequent ever-increasing interdependence among nations and among economies require, now more than ever, that businesses be able to adapt and to innovate if they are to ensure their future. This safeguards incomes and jobs. It is part of the work of the IMF to contribute to creating predictable international conditions for firms such as G&D, in which entrepreneurial initiative can flourish.

2. As globalization today seems to inspire more debate and criticism than almost any other issue, people tend to forget that the world economy was perhaps just as strongly integrated toward the end of the 19th century as it is today. When G&D was founded in 1852, Europe was living through a period of profound political, economic and social change. From its beginnings in England, the industrial revolution had spread to include all of continental Europe. Pioneering inventions made industry and businesses independent of natural forces, they made mass production possible and allowed goods to be exchanged more efficiently through international trade. This first great wave of economic internationalization brought tremendous progress and higher living standards worldwide in its wake. Yet globalization was interrupted in the first half of the 20th century by the advance of aggressive nationalism and protectionism. The result was economic depression and world war.

3. Amid the rubble of the Second World War an act of global institution building without historic precedent proved that disasters and destruction can carry in them the seeds of change for the better. Spurred on by the traumatic experiences the world had just been through, the victorious powers gave the impetus for a new beginning in international cooperation through the establishment of the United Nations and the Bretton Woods institutions-the IMF and the World Bank. The specific tasks of the IMF include in particular:

    · To promote international monetary cooperation and exchange stability.

    · To facilitate the expansion and balanced growth of international trade.

    · To provide loans to its member countries to help them correct maladjustments in their balance of payments without resorting to measures that would be destructive of national or international prosperity.

4. The international economy has changed dramatically since 1944, when the Bretton Woods institutions were founded. Freedom, market economies and democracy have taken root around the world since the Second World War and have made possible an unprecedented rise in global prosperity. For example, in the last 50 years worldwide per capita income has more than tripled. It is primarily the industrialized countries that have benefited from economic integration. But there are also a number of developing countries that have seized the opportunity of market opening and integration into the world economy. Brazil, Chile, China, Korea and Mexico, for example, have managed over the last 10 or 20 years to double their share of world trade, and as a result their per capita income has been growing by some five percent annually.

5. And yet it is clear that there are also losers in globalization. Nearly 3 billion people today must live on less than two dollars a day. This persistent inequality and poverty in the world poses the greatest challenge to stability and peace in the 21st century.

6. A second great challenge is to design and establish a framework for international financial markets that will put the enormous potential of private investment capital to use while at the same time limiting the inherent risks. Today, private investment capital is indispensable, both in terms of volume and sophistication, for promoting development and growth and for creating jobs. Yet, in particular since the Asian crisis, we are also aware of the devastating impact that financial and currency crises can have on the economies of affected countries and on their people.

7. The 1998 Asian crisis has sparked broad debate over the need to reform and strengthen the international financial architecture. This debate has not yet been concluded, but has already led to some far-reaching reforms:

    · We have seen a near revolution in the transparency of economic and financial data among member countries of the IMF. The IMF itself now makes nearly all its country documents and policy papers publicly available.

    · We are working on a comprehensive concept to establish "rules of the game" for the global economy through universally accepted standards and codes, such as those for sound monetary and fiscal policy, the efficient supervision of financial sectors, and good corporate governance.

    · Together with the World Bank we are engaged in a systematic assessment of the banking and finance sectors, including supervisory systems and mechanisms for risk assessment and management.

    · We are also working on implementing a program for better surveillance of offshore banking centers, and for combating money laundering and the financing of terrorism, as a contribution to strengthening the integrity of the international financial system.

8. In fact, the international financial system has managed to absorb a sharp slowdown in the world economy in the past year without a major collapse. Certainly, the United States has played a major role in this through decisive interest rate cuts and tax reductions. It was also important to me that the membership of the IMF came together in November in Ottawa to define a collaborative approach to strengthen the global economy. Indeed, the recovery of the global economy is under way now. There are still uncertainties, in particular related to the strength and durability of the upswing in the United States, financial market volatility, and political tensions in the Middle East. On the whole, however, the IMF staff are confident that the recovery of the world economy will gain strength in the second half of this year. Financial markets have also been relatively successful at coping with the shock of the terrorist attacks of September 11. This demonstrates that the international reform initiatives are already beginning to bear fruit. The recent events in Argentina have shown clearly, however, that there is no room for complacency and that the IMF must strengthen its efforts to prevent crises.

9. The lessons of experience also suggest a larger dose of modesty and realism: a well functioning market economy, after all, derives its strength and its dynamism from competition, from the unending search for better results, better products, and higher productivity. We must accept that overshooting and correction will always be a part of this process if we want to preserve a system based on freedom, market economics, and self-responsibility. We must recognize that in an open and dynamic market economy there are limits to our ability to predict and prevent crises. The objective can only be fewer and less severe crises.

10. Previous crises have also taught us that markets need a sound legal and political framework and healthy institutions if their potential to promote sustained growth is to be realized. It is up to each country to ensure that such conditions exist at the national level. Self-responsibility must not be weakened at either the national or the international level. In the end, no external advice, however sound, and no amount of outside money can substitute for political will and determination in a society to help itself.

11. The focal point of the IMF's contribution to crisis prevention is its bilateral and multilateral surveillance mission, that is the regular examination and assessment of economic policies and performance at the national and international levels. As I see it, this involves two major goals:

    · First: the IMF must foster a greater awareness of how interdependent our individual economies are. This includes making it clear that financial crises can have their origin not only in emerging market economies but also by what happens in industrial countries. Money laundering and financial scandals, for example, nearly always involve the international financial centers.

    · Second: the IMF must do more to encourage countries to react promptly and take corrective economic measures before problems turn into crises. Countries should also pay much more attention to the availability of economic shock absorbers—in particular more flexible exchange rate regimes; budgets that leave some room for maneuver: and efficient and diversified financial sectors, as well as effective social security systems.

12. Individual responsibility is essential at times of crisis as well. And this means that the IMF is not a lender of last resort that has unlimited access to liquidity by printing its own money. Rather, I think it appropriate that we go back to viewing the limits to the IMF's financial contributions in their proper light. First and foremost, it is up to private creditors and debtor countries to assume the risks they take. Our work program is therefore targeted at ensuring greater clarity and predictability in this regard and at avoiding "moral hazard". To this end we are concentrating on:

    · A clearer definition of the conditions for and of the limits to access to IMF financing;

    · Improving our ability to assess whether debt is sustainable or not;

    · For the worst case, we are working on a new legal framework for restructuring sovereign debt more promptly and in a more orderly and less costly way—a kind of bankruptcy procedure for countries with unsustainable debt burdens.

13. I think it appropriate and important that the IMF is there not only for rich countries but also for poor countries. And this is not just because poor countries make up the majority of its membership. But in particular because the IMF must be an active part of the workforce for a better kind of globalization, in which risks and opportunities are better balanced and where all can benefit from the opportunities. With the outcome of the United Nations Conference on Financing for Development in Monterrey, we now have a remarkable degree of international consensus on the concept for fighting poverty. That concept rests on two pillars:

    · First: Greater efforts on the part of the poor countries themselves. It is up to them to ensure the rule of law, good governance, and a better investment climate. They must fight corruption.

    · Second: On that basis they can rightly expect swifter, more comprehensive, and more effective support from wealthy countries: above all, this means more opportunities for trade for developing countries, and more development aid and technical assistance.

This approach and the spirit of Monterrey is also reflected in the concept of a New Partnership for Africa's Development (NEPAD), which has been developed by a new generation of African leaders themselves.

14. The IMF and the World Bank are concentrating their efforts to support the poorest countries in poverty reduction strategies. This involves a systematic and long-term approach to strengthening the foundations for growth and development of poor countries. To this end we are defining priorities. These are: education and health; infrastructure and development of rural areas; fostering private entrepreneurial initiative and a good investment climate for domestic and foreign capital; and integration into the world economy through trade. It is also very important that the people themselves are involved in this process through a wide-ranging consultation process. The IMF's main contribution here is its expertise in the areas of macroeconomic policy and financial stability. We insist on stability not for its own sake but because inflation and disorderly public finances hurt the poorest people most, and because monetary stability is indispensable for sustainable growth.

15. I believe that a breakthrough in the worldwide struggle against poverty is both possible and realistic, if we pursue rigorously the comprehensive approach that I have outlined. Yet if this is to happen, industrial countries must recognize more clearly that structural change is not a one-way street and that they too must undertake structural adjustment and reform. Above all, this involves trade. Trade is the most important tool of help for self-help. This means that industrial countries must finally open their markets to the products of developing countries and phase out the billions of dollars that they provide in domestic subsidies. This concerns particularly agriculture and mining. If developing countries are to have greater opportunities, markets for manufactured goods in particular—for example, textiles but also chocolate—must also be opened to them.

I also believe it is important to fulfill the promise of 0.7 percent of GNP for official development assistance. This would be a concrete sign of solidarity that should find transparent expression in each year's budget. It is not only for moral reasons that we need such solidarity. Successful poverty reduction is the key to securing our common future in this one world of ours!

16. Ladies and gentlemen, security and stability are timeless values that are clearly in the national and the global public interest. But they will not simply fall into our laps—we must work toward them consciously, every day, at every level. The philosopher Karl Popper said: "All life is problem solving." The IMF is dedicated to this task at the global level.


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