Stanley Fischer -- Farewell to the IMF Executive Board

August 30, 2001

Stanley Fischer
First Deputy Managing Director, International Monetary Fund
August 30, 2001

Mr. Chairman: I would like, first, to thank you for your kind words - and to thank you even more for the cooperation and friendship we have developed over the past year and a half. And to thank you too for the wonderful farewell dinner last night. That was a never-to-be-forgotten experience, and I cannot tell you how much I appreciated that evening and all you did to make it such a pleasure.

I would like also to thank the eight Executive Directors who spoke on behalf of the Board today. As you could see, your speeches touched me deeply. Besides being excessively kind, you brought back many wonderful memories, and reminded me of why working with the Board has been such a privilege. Thanks to the eight of you, and to your sixteen fellow Executive Directors, and to your many predecessors, for your friendship, and for the constructive way in which we have been able to work together over the past seven years.

This is obviously an emotional occasion for me, my final meeting with the Board as First Deputy Managing Director of this great institution, which I have come to respect and even to love. I intend to limit my remarks to "a few" key topics - which I can tell the newcomers in the Board is an absolutely reliable signal that the speaker is about to launch into a lengthy speech. Or, to use the Secretary's method of counting, I may be about to address "some", or is it "many", topics - in any case it is nine - three sub-topics each under three main headings: changes; unchanged virtues; and challenges.

I. Changes

Throughout its history, the Fund has been quick to adapt to changes in the economic and financial environment in which it operates. Our critics call this "mission creep"; we should recognize it as flexibility, for we cannot hope to achieve the enduring objectives laid down by our founders in the Articles of Agreement - promoting good economic performance, helping our members in times of difficulty, and providing a forum for international cooperation - if we fail to move with the times.

I will talk about three sets of changes:

    · First, in transparency;

    · Second, in our work with our poorest member countries.

    · And third, in our work with the transition economies;

On transparency: The main argument made for transparency a few years ago was that it helps make markets more efficient. That it does, despite the difficulties skeptical markets frequently create for member countries and for us. But transparency has many other benefits. It improves policy, because policymakers operating in the light of day cannot do some of the things they can do in the dark of secrecy. It improves the quality of the Fund's work, for we are bound to be even more careful to get it right when we are subject to scrutiny - and here the IEO will also make an important difference.

But transparency does even more than that, in two regards. First, it promotes interactions with the outside world, for as we put information out, we also interact with the outside, listen to what outsiders are telling us, and take information in. This happens in a variety of ways: the posting of papers for comment on the web; the important initiative of the MD in setting up the CMCG; and the MD's tendency - which is wholly healthy - in reaching out informally to talk to those on the outside. Of course we have to be careful in all these interactions not to betray the trust of our members by revealing privileged information, or by giving anyone favored access to this institution - and that is an important challenge for the ICM.

Second, transparency strengthens the potential effectiveness of our surveillance over non-borrowing countries. In that regard, consider the U.S. The U.S. government used to ignore the Article IV, and of course hardly anyone outside official circles got to see it. The Article IV report for the United States for 2001 is certainly not being ignored: it has already been the subject of several op-ed columns and many news reports. And all the attention it is getting ensures the next Article-IV consultation with the U.S. will be treated more seriously by the United States authorities than in the past. Of course there is also a risk - namely that our surveillance fails to establish a track record. But that means we have to continue to strive to get the best people here, and to meet the most exacting standards in what we do - which we have been trying to do all along, and in which we are more likely to succeed if our work attracts attention in the leading industrialized countries.

Looking back, I regard the transparency revolution as one of the two most important changes of the last seven years. Who would have predicted seven years ago that the vast majority of our members would now be publishing their Article IV conclusions and staff reports, and that most borrowers would be releasing their Letters of Intent? And who would have predicted that many of our member countries would sign up to international standards for data dissemination, financial sector soundness, or monetary and fiscal transparency, and submit themselves to external assessments in ROSCs and FSAPs? This is not simply a bureaucratic change; it is a culture change. It has some costs - but it is overwhelmingly a positive development.

On our work with our poorest member countries, and the PRGF: Before I even knew I was coming to the Fund, I wrote an article about the Fund (and the Bank) at fifty. In it I criticized the Fund's rhetoric about poverty, and came close to suggesting that the Fund should be getting out of the poverty business. It is, by the way, what almost every academic says. In many ways, this is a debate about the role of the Fund in Africa, but it is not only about Africa.

But putting the debate in terms of whether we should be involved in the poverty business is a mistake, as my adviser Ratna Sahay pointed out to me just a few days ago. The issue is not whether the Fund should take an interest in poverty, but whether it should continue working, and working better, with its poorest member countries.

The answer to that is yes: as a universal institution, we have to stay involved with all our members. And if we are, and are to lend to them, then we had better do so on terms they can afford, hence the need for concessional funding.

Let me make a few more points about poverty:

    · I am concerned that we are overpromising on PRSPs. The process of using the PRSP as the vehicle for designing and describing a country's poverty reduction strategy is an improvement, but there is much more to development than improving process. I fear that the risks are high that many countries will underperform relative to the goals set out in PRSPs, and the aid process and the IFIs will pay a price - a price that will ultimately be paid by our poorest member countries.

    · In addition to the question of whether we should be involved in the macroeconomics of our poorest member countries, there is the question of whether we should take a direct interest in poverty. I believe the answer is yes. Why? Because policies will not be sustainable in poor countries, or anywhere else, if they are not equitable. Nor will the countries that provide the bulk of the financing for the IMF support policies that are perceived as anti-poor in the countries where they are implemented. One could also argue for involvement on the grounds that it is the moral thing to do, but people seem to be more comfortable with arguments grounded in realpolitik than in morality.

    · But of course, we need the right division of labor with the World Bank and the regional development banks. We need to work on and take account of the impact of what we do on poverty, but most of the directed anti-poverty structural elements in programs should be undertaken with the assistance of the Bank and the regional development banks.

    · I would like to mention one very important development of the last few years, which has occurred almost without public notice, but that is very important. Up to a few years ago, there was almost never an occasion on which bread prices, or fuel prices, were raised by the 50 or 60 or 80 percent that may be necessary when countries have failed to adjust prices for too long, without setting off a riot. Naturally these riots would be blamed on the IMF. Well, such riots are not necessary. You can compensate people beforehand, and you can inform the public of what is being done, why, and how they are being compensated. And as a result, we have been able to help quite a few countries, for example Ecuador, make necessary price changes without creating what used to be called "IMF riots". There are no doubt other areas of program design where we can help countries do better, by paying careful attention to offsetting the social costs of economically necessary measures.

On the transition economies: When I joined the Fund, three things I had long thought would never change seemed to be changing: apartheid in South Africa; the absence of Israeli-Palestinian peace; and the Soviet bloc. Relative to my expectations at the time, the greatest disappointment is what is happening now in the Israeli-Palestinian peace process - though I still believe that process will resume at some point. The most positive surprise is how well, despite the many challenges and risks, the South African economy is being run.

Relative to the speed of convergence that was expected at the time, the outcome in the transition economies is not as good as hoped for, but there are major achievements:

    · The leading East European economies, Hungary and Poland in particular, and also the Czech Republic have done well, and are beyond the point of being called transition economies. But there have also been disappointments, particularly for me, Romania, on which we have spent much time, but so far with relatively little success. However, the Fund's role in Bulgaria has been very successful.

    · The Baltics are another success story.

    · On Russia, we should not exaggerate our role, for Russia is too big and the forces at work there too powerful for us to have been the decisive influence. As I have discovered by reading the writings in English of Gaidar and others, they believe that the Russians made the key decisions about economic policy in Russia. But it is true that we pushed in the right direction, and that the direction in which we pushed is now the accepted way in Russia.

    · There are economic improvements too in Ukraine, but the politics there seem to be extremely complicated.

    · Major problems are emerging in some of the poorest countries in the CIS, which the Board has been discussing recently.

On the whole we acquitted ourselves well: the approach we pushed is the right one economically, even if the politics is much more difficult than we had anticipated in some of the CIS countries. As we think about the experience of the former Soviet Union, we should think also of the many threats that did not eventuate. We were told there would be starvation in Russia in 1991 and 1992. There wasn't. We were told there would be wars all over the former Soviet Union. There weren't. We were all scared in the early days about a return to communism. That didn't happen. Democracy was preserved in Russia. And as we contemplate the great events in which we played a part, we should remember that every time there was a risk of going the non-democratic way, Boris Yeltsin chose democracy. There was a giant figure, with giant flaws, but great achievements.

All this was done without much money. The aid efforts that were promised never really materialized. The IFIs lent large, but not massive amounts. Bilateral aid from Germany was substantial, but there was not a whole lot more.

Our role was important, especially in standing for the policies we always stand for, and in institution-building. We can regard what has been achieved with some satisfaction - and we should record our thanks to the teams in the European II and European I departments who worked so hard and so devotedly with these countries over the past decade.

II. Unchanged Virtues

First, the Fund remains true to its goals. It is sometimes said that the Fund was established to manage the fixed exchange rate regime set up at Bretton Woods. But the purposes of the Fund, set out in 1944 in Article I of the Articles of Agreement, make it clear that the Fund has a far broader role than the management of a particular exchange rate system.

The Managing Director in his speech referred to the little plastic-coated page I carry in my pocket that has Article I inscribed on it. I got that idea from Michel Camdessus, and like him, I refer to it frequently. Mike Mussa used to say that Article IV, which among other things prescribes that countries direct their policies to "fostering orderly economic growth with reasonable price stability" deserves equal billing with Article I. So perhaps we need a two-sided page.

In joining the IMF, countries sign up to a set of principles regarding the operation of the international economic system that are in their mutual interest. We work on the international framework, and we promote good policies in member countries: sound money, prudent fiscal policy, strong financial systems, and open markets foremost among them. Our Articles of Agreement in essence confer legitimacy on the pursuit of those principles by the Fund and its members. And experience over the past fifty-five years - but going back much earlier than that - shows that these policies work.

The policies we promote are essentially what is known as the Washington consensus, something to which I subscribe. But like the word "globalization", the term "Washington consensus" has become a slogan, a litmus test, rather than an object of serious study. It is not worth arguing very much about those two words, but it is worth arguing for the policies that we promote - sound money, prudent fiscal policy, strong financial sectors, and open markets.

The second unchanged, but ever-changing, virtue is you, the Board. The Fund derives much of its authority and legitimacy from the fact that it is a near-universal institution. With the demise of colonialism and communism, the Fund's membership has risen from 29 at the outset to 183 today. The fact that 183 countries can be effectively represented around this table is a tribute to the way this organization works. Its success is due both to weighted voting and the constituency system, which allows 24 Executive Directors to represent all 183 members.

We have in recent months heard many farewell speeches in the Board, several of which tried to pin down why the Board is such a successful institution. A very large element is the absence of the Part I, Part II distinction made in the World Bank between creditors and potential borrowers. The Board works because all members, large and small, rich and poor, have a chance to make their voices heard. I believe it is critical to the success of the Board that surveillance applies to every country, and that every country has the opportunity to comment on what is happening in other member countries. Whenever I hear some industrialized countries say they don't need surveillance because after all they're managing very nicely, thank you, I think that would be a huge mistake. It is important that the countries affected by the economic policies of the industrialized countries have an opportunity to comment on those policies - and that opportunity is available several times a year in the Board.

The international community depends on you, the Board. In this room, week in, week out, you make difficult and important decisions, quickly and usually by consensus, which are then accepted outside as the settled will of the international community. It is a heavy responsibility and you do a remarkable job.

Your job is made no easier by the demands of twin loyalties: to your national authorities and to the institution. Of course, some of you have more awkward authorities than others - and some of you have several awkward authorities at once. But it is a testament to all of you, and to your predecessors, that you have managed to serve two masters and yet retain the collegial spirit that makes the board run so amiably and effectively.

In doing so, you also perform the valuable function of keeping staff and management up to scratch. We rely on you. In bringing proposals to you, I have always been conscious over the last seven years that we have a tough audience to please. And believe me, that helps a lot in negotiations - the statement "The Board could not accept that" is a much better way of explaining why a proposal cannot be accepted than the alternative "You can't mean that seriously".

The tradition - and it is only a tradition - of working by consensus is also critical. I don't know how it began. But the mutual forbearance that is implied by not generally throwing your weight around, but trying to reach an accommodation, is one of the true sources of the success of this organization. And at this time when, unfortunately, there is so much turnover among you, I hope that all the new Board members will follow that tradition.

Let me also say something about voice and vote. The quality of representation in the Board really matters. I don't want to be invidious by singling out particular chairs, but I could mention the Dean and Associate Dean of the Board. It is probably no accident that their influence in the Board is enhanced by the length and depth of their experience. I do not want to say that the size of a country's quota doesn't matter. But the quality of the representation matters more. That can be seen also in the cases of the two African chairs. So, those of you who have any influence on who your successors will be, please do your best to find worthy successors.

A few days ago Mr. Wijnholds noted, not approvingly, that I had written an article before coming to the Fund in which I referred to Executive Directors as middle-level bureaucrats. I did also say that some of them were on their way to greater glory. In any case, if I were rewriting that article now, I would have to change more than my comments on the Board, whose role is easy to underestimate from outside.

Finally, a word on politics, the Board, and the IMF. No statement has been more often quoted in farewell speeches than that of Keynes at the 1946 Savannah conference. He asked what gifts the fairies would bring to celebrate the christening of the Bretton Woods twins. And at the end he offered a warning:

"I hope that Mr. Kelchner has not made any mistake, and that there is no malicious fairy, no Carabosse, whom he has overlooked and forgotten to bring to the party. For if so the curses which that bad fairy will pronounce will, I feel sure, run as follows: `You two brats shall grow up politicians; your every thought and act shall have an arriere-pensee; everything you determine shall not be for its own sake or on its own merits but because of something else.'"

Keynes said many wise things, but in this case he was wrong. There is inevitably a political element in deciding on loans. Trying to help a member with balance of payments problems restore stability and rekindle growth in an often tumultuous political environment is a much more complex task than its purely technical aspects. Deciding what conditions we attach to a loan is not simply a matter of determining what is necessary. It is also a question of deciding what is achievable.

That requires political as well as economic judgments. All our work should be based on the best possible technical analysis. But political judgments are necessary; not only on what is sustainable, but also on whether the international community should support a particular program. You, the Board, are the locus for those decisions. That, I think, is why treasuries and not central banks are the dominant force in the Board. I dislike it when the political decisions dominate, as they did for instance a few years ago in the case of Croatia. But the notion that the decision on whether to assist Russia was purely a technical one is simply not credible; nor could we have decided whether to make loans to Indonesia during the past few years without some political judgment.

We need political backing for what we do, and you, the Board, are the locus for that backing. The only difficulty with that is that sometimes your authorities say one thing in the Board and another in public. They should not do that, and the Managing Director has rightly made it clear that he wants member countries to stand up and defend in public what they urge and support in the Board.

The third unchanged virtue is the staff. Even before I came to the Fund, Michel Camdessus, the most loyal of men, especially to those who were loyal to the Fund, sang the praises of the staff. I cannot speak too highly of the virtues of the staff: their loyalty, their talent, and their capacity for hard work. Even in the most hectic days of the financial crises, they kept their cool and did a heroic job for our members. And there have been occasions, too many of them, where staff members have put themselves in physical danger to do their jobs.

I know that many members of staff feel disappointed - and sometimes upset - that their work prompts such hostility from parts of the academic and NGO community. One would wish it were otherwise, but given the central role of the Fund, such criticisms should be expected. Nonetheless, I understand the staff's frustration - in particular when their motives are questioned, when they are accused of callousness or indifference to the plight of the poor. We in this room know that this is not the case, and that the vast majority of our staff joined the Fund because they want to make the world a better place - and that indeed they are helping to do so.

But while we, the management, have the luxury of being able to fight back when we are unfairly criticized, most members of the staff cannot. They just have to take it. And that makes it all the more important that we, the management, the Board, and your authorities, should return their loyalty and defend the staff on such occasions.

On this issue, I often remember the farewell words to the Board of my colleague, former Deputy Managing Director, P.R. Narvekar, who said: "Take care of the staff, and they will take care of you".

III. The Challenges

The first challenge we face now is to help reduce the volatility of international capital flows. We generally encourage countries to rely on the international capital markets. Yet the international capital markets seem to work imperfectly, and seem subject to excessive volatility. For instance, we are all very hard on Argentina now. Where do Argentina's present woes come from? From too easy market access in the late 1990s - at a time when the staff was warning against Argentina's fiscal excesses, and were told to relax, because the markets disagreed with them. The staff was right, though it does not help much now to know that.

We need to make the markets work better. We need to do everything we can to prevent crises - and that effort accounts for a very large part of our work agenda, a part that is, I believe, quite successful. We also need to do everything we can to minimize the costs of crises. That includes the work on private sector involvement, PSI, which has been a disappointment so far.

Many feel that it would be useful to have a default, to remind the markets of the real risks in member countries. Defaults will happen. But as Mike Mussa said in his farewell speech a few weeks ago, we need to go the extra mile - but not the extra two miles - with countries, when they are willing to do what it takes to avoid default. We should not be seen as being on the side of those who want to break contracts, except in extremis.

Although it is sometimes forgotten, we have had a major default in the emerging markets recently, in Russia. I believe it was correct not to increase lending to Russia in August 1998 - that would have been to go the extra two miles. But we should not understate the costs of the Russian default, to Russia and the system. That default had major impacts all over the emerging markets, and even for a while in the United States capital markets. The present difficulties in Argentina can plausibly be traced in part to the Russian default, via the Brazilian devaluation.

The Russian default was not a small event. Maybe the implications of any future default will be smaller. Who knows? But we cannot take the risks of such an event lightly. We should not be making decisions about individual countries in order to make examples. We are dealing with the well-being of real people, and our principles need to be applied with an understanding of the potential political consequences.

One lesson is that we need to continue working on PSI. As part of that work, we need to develop a better framework to enable countries to reschedule debts. Such reschedulings or restructurings should not be costless, but the penalties should not be as severe as they are now.

Another lesson is that debt criteria taken from Maastricht and the advanced industrial economies are not appropriate for emerging market countries. Countries that are vulnerable because they operate in the emerging markets need to make themselves less vulnerable by having smaller debts.

A third lesson is that we need to ask ourselves whether the present quotas, derived from current account needs, are still the best yardstick for determining a country's access to Fund resources in the case of capital account crises. Formally speaking we have already made the decision - which is no, and that is reflected in the structure of the Supplemental Reserve Facility (SRF). But clearly several Board members are very unhappy with that result.

In this regard, let me say something about the Fund as lender of last resort. I gave a paper on this topic early in 1999. It seemed to irritate Board members, and since I did not think the FDMD should be in a controversy with the Board, I stopped referring to the international lender of last resort. I do though refer to the Fund's roles as crisis lender and crisis manager, which was my definition of what the lender of last resort does. But let me note for the record that I believe that paper was right, and that if we were to revisit that discussion, I would conclude "And yet, it moves".

Exchange rate systems also fit under the heading of reducing the volatility of international capital flows. We have made a great deal of progress in our understanding of the key role of flexible exchange rates for countries with open capital account. But as some recent Board discussions in individual cases have revealed, our exchange rate advice may still not be fully acceptable to some member countries and some Board members. Pursuing those questions must be a high priority for the Research Dept. Similarly, I feel we do not yet have sufficiently good advice to offer countries about the mechanics of running a flexible rate regime - and this is another area on which we need to make progress.

The second challenge is that of combining conditionality and ownership. Here I shall be brief, because the approach set out by the Managing Director represents major progress. There are likely to be some difficulties in the area of governance, but we are certainly on the right track overall in this area.

The third challenge is to deal with the backlash against globalization. We need to take this very seriously. And the only way to take it seriously is to move away from pointless arguments, based mainly on emotion, about whether to be for or against globalization. We need to ask what are the policies that will promote equitable growth, what problems may arise in the process, and how to deal with them. And we need to recognize that this is a debate that is taking place in the media, and get on with developing simple, appealing arguments, that will succeed in the court of public opinion. The MD knows that well, and has set up a work process to that end.

The disruptions that have already been put in place to the Annual Meetings are an unfortunate development. We have to keep resisting such changes, trying to do our work, trying not to be distracted from what really matters, but engaging in the debate and trying to move public opinion.

IV. Conclusions

Last night, I looked back at some of the highlights of the last seven years. Inevitably that focused on the drama, on the big events. But we do so much more than crisis management. One of the things I am happiest about in looking back is the long list of countries that we have helped with little fanfare: including Jordan, Bosnia, Colombia, Uganda, Tanzania, Bulgaria, the Baltics, Jamaica, and more. And some countries we have helped by being tough, for instance Kenya, and for a while, Indonesia. The day-to-day work of the staff really matters - on programs, on surveillance, and in technical assistance. Somehow we need to get that story out.

More personally, Rhoda and I have made unforgettable friendships during our time at the Fund. I hope and expect to continue to see you and our other friends frequently, and that the friendships we have made here will persist, whatever our next port of call. I tried last night to thank many of you for those friendships. Still, let me thank again all those of you who spoke today, and the many ED's past and present, with whom it has been such a pleasure to interact. This Board is really a pleasure to work with. When I try to count the number of times we have laughed together against the very few occasions on which I can remember harsh words, the ratio is overwhelmingly in favor of our having had fun together.

We leave the best for last. It is claimed that I work hard. Well, I do, but not as hard as many people think - those 4 a.m. emails are not usually sent from Washington, but rather from Europe, which means they were sent in mid-morning. But I am not the hardest worker in our office. That is Keila Moses, who is here when I arrive, and here when I leave, who knows every memo that was ever written and where to find it, who worries about the details on every trip, who has the Davos crowd totally under control, and whose loyalty has been beyond imagination. Keila, thank you - without you it couldn't have been done. And to Ernie Parham, whose quiet efficiency and good humor are an essential part of this office, thank you for everything you have done. And to David Naismith, thank you for your incredible good cheer, and your excellent driving - and yes, Colin Montgomerie's time will yet come. I am grateful also to others in OMD, including Elfriede Archer and Djenane Elie-Goodall, and all the others.

I will mention other members of staff at the staff farewell on September 13. But I would like here to thank a succession of superb advisers who have worked with me, each one working in a slightly different way, each one making a huge difference: Mohamed El-Erian, David Burton, the late Owen Evans, Dan Citrin, and Ratna Sahay. Thank you each and every one of you. It has been an absolute pleasure to work with you, as well as with Robert Chote, who unfortunately couldn't be here today - it has actually been fun.

Let me conclude on a serious note. Most ED's, when they leave, say something very positive about having lived in the United States. Some of them are so positive that they don't go home. Well, I would like to say the same. I am an immigrant to this country, but within about five minutes of arriving, Rhoda and I felt completely at home here. As the MD said last night, we have become Americans, Americans by choice, and we believe deeply in the freedom, the opportunities, and the openness that this society represents. As immigrants, we probably feel that more deeply than those who grew up in this country, and do not know what conditions are like in some other countries. So let me too conclude by thanking the United States authorities for their support and friendship during the last seven years.

Thank you all - this has been an incredible experience, a pleasure, and a unique privilege.


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