The IMF in a Changing World -- Remarks by Horst Köhler
IMF News, August 7, 2000
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- Published: August 7, 2000
Global economic outlook
- The IMF staff expects the global economy this year as a whole to grow by about 4 3/4 percent.
- The U.S. economy is described as an "unprecedented non-inflationary" engine of growth, with evidence it may be slowing to a more sustainable pace and a hoped-for soft landing.
- Europe: reforms and growth have picked up; advice to Europeans to be "even more ambitious with reforms" to reach a medium-term growth path "well above 3 percent."
- Most emerging market countries hit by financial crises two to three years earlier are now experiencing strong growth again.
- Risk noted: good global conditions could weaken momentum for continued reform and structural change.
Why the IMF must change — diagnosis and lessons
- Two principal reasons the Fund must change:
- The operating environment has changed dramatically: international financial markets have grown in volume and sophistication; private capital flows are now a major source for promoting growth and productivity but also a source of abrupt volatility and crisis.
- Lessons from experience: the Fund made mistakes, including insufficient attention to changes in global financial markets and their repercussions on exchange rate systems and domestic financial sectors; underestimated the importance of institution building and ownership by societies affected.
- Key observations from visits to 15 developing and emerging market countries in Latin America, Asia, and Africa:
- Market economy and democracy are advancing worldwide; the IMF has contributed to this trend.
- Broad recognition of serious homegrown problems: disregard for the rule of law, corruption, and armed conflicts; main responsibility for tackling these lies with the countries themselves.
- Despite criticism, emerging market and developing countries value IMF advice and support and wish to continue using it.
- Developing countries want the Fund to focus on traditional functions: promote macroeconomic stability and growth; endorse cooperation and division of labor with the World Bank taking the lead in direct poverty reduction.
IMF mandate, focus, and core purpose
- The IMF’s mandate includes promoting "the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members," and fostering international financial stability.
- Nearly universal membership: 182 member countries.
- The Fund has been overstretched and needs to refocus on promoting macroeconomic stability and growth by fostering sound monetary, fiscal, and exchange rate policies.
- The IMF is obliged to "oversee the international monetary system in order to ensure its effective operation," obliging attention on financial markets, domestic and international.
Roles: crisis prevention and crisis management
- Two major roles to implement the focused mandate:
- Crisis prevention through surveillance and advice.
- Crisis management including catalytic lending.
- Emphasis on crisis prevention: identify problems early through better data transparency and promotion of internationally agreed standards and codes for sound monetary and fiscal policy.
- Surveillance must pay much closer attention to financial sectors in member countries to identify vulnerabilities and advise on soundness.
- The IMF should have a coordinating role among various fora and agencies (central banks, Financial Stability Forum, supervisory authorities), not as a regulatory superpower.
- Private sector engagement:
- Regular direct exchange of information and dialogue with the private financial sector is an important element of crisis prevention.
- Decision to establish a Capital Markets Consultative Group in the IMF; first meeting planned in September before the Annual Meetings in Prague.
- The Fund’s resources should remain limited; private sector involvement in orderly and timely crisis resolution is necessary so creditors and borrowers assume responsibility for risks.
Conditionality, ownership, and technical assistance
- Efficiency depends on the principle that Fund resources are temporary and granted on the basis that borrowers undertake necessary and timely adjustments; conditionality is indispensable for IMF lending.
- Fund facilities should discourage countries from becoming dependent on IMF loans; a review of conditionality is underway in the IMF Board.
- Ownership: adjustment and reform programs are more likely to succeed when countries identify themselves with the programs.
- Recommendation: limit structural conditionality to priorities in content and timing; concentrate on working with authorities and civil society on implementation.
- Technical assistance should be prioritized; "less can be more" if it helps break ground for sustained adjustment and reform.
- Respect for national sovereignty in defining adjustment and reform paths, while candidly advising on costs of alternatives.
Transparency, accountability, and public engagement
- The Fund has become more open: letters of intent routinely published; many countries publish Article IV reports; website traffic of several million visitors a month.
- Need to balance openness with members’ desire for candid and confidential advice.
- The Fund must explain itself better in program countries; effectiveness is greatest when there is broader understanding and support for its work.
- Recommendation: expand dialogue with the public and reach out to regional and local levels, including parliaments and civil society.
Role in poor countries, PRGF, and debt relief
- Conclusion: the Fund should stay engaged in poor countries; disengagement would deepen global divisions and undermine ambitions in poor countries.
- Main justification for continued engagement: the Poverty Reduction and Growth Facility (PRGF) to help build fundamentals for growth and access to international investment capital.
- The PRGF takes a new approach toward focused poverty reduction, help for self-help, and ownership; visits to Africa indicate the approach is working and having an impact.
- The Fund should concentrate on core competencies and rely on the World Bank for promoting structural changes; simplify and de-bureaucratize requirements for setting up poverty reduction strategies.
- PRGF is an important vehicle to help make the initiative for enhanced debt relief for the poorest countries (HIPC) successful:
- Objective to bring half of the 41 eligible countries to the decision point by the end of this year.
- Debt relief is important but must be combined with better policies and better governance.
- Differentiate between countries that lack capacity to repay and those that could repay with better policies.
- Preserve an ethic of credit: trust ("credere") is indispensable in creditor/debtor relations.
Trade, aid, and global partnership
- Preference for trade over aid: estimates of potential welfare gains for developing countries from a 50 percent worldwide reduction in barriers to trade generally fall in the range of US$110 to 140 billion per year.
- If developing countries’ willingness to help themselves is combined with bold debt relief and industrial countries opening markets, the UN objective to halve the number of people in poverty by 2015 "could become reality."
- Vision to be shared at the Annual Meetings in Prague, with hopes for a message about a new culture of global partnership and cooperation.
Source: The IMF in a Changing World — Remarks by Horst Köhler, August 7, 2000.