Toward a Better Globalization, Horst Köhler, Managing Director of the IMF, Inaugural Lecture on the Occasion of the Honorary Professorship Award at the Eberhard Karls University in Tübingen

IMF News, October 16, 2003

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Toward a Better Globalization, Horst Köhler, Managing Director of the IMF, Inaugural Lecture on the Occasion of the Honorary Professorship Award at the Eberhard Karls University in Tübingen

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Bibliographic details

• Authors: Horst Köhler Managing Director
• Published: October 16, 2003

A practical definition of globalization

• Searching in Google under the key word "globalization" yields more than 5 million hits.
• For most economists globalization primarily means:
  • increasing international division of labor;
  • integration of national economies through trade in goods and services, cross-border corporate investments and financial flows;
  • boosted by technological progress in transport and communications.
• Globalization is characterized as an ideal "win-win proposition" but also entails:
  • rising cross-border competition requiring constant change and adjustment;
  • non-economic dimensions: environmental problems, contagious diseases, organized crime;
  • cultural and political risks exemplified by Samuel Huntington's "Clash of Civilizations" question.

A brief history

• Waves of globalization:
  • 11th century: Venetian trade prosperity.
  • 16th century: Portuguese, Spanish, Dutch voyages of discovery.
  • Second half of the 19th century: electricity, steam engine, railways, gold standard — first comprehensive boost.
  • Interruption: protectionism, aggressive nationalism, Great Depression of the 1930s and World War II.
  • Post-World War II: second wave with UN, IMF, World Bank — industrialized countries' real per capita income more than tripled in the second half of the 20th century; in Germany it increased even fivefold.
  • Recent ("third wave"): last 20 years — many developing countries doubled their ratio of trade to income; exports shifted from raw materials to finished products and services.
• Selected statistics from recent decades:
  • In India, IT exports today account for nearly 40 percent of export earnings.
  • "New globalizers" have a combined population of more than 3 billion people.
  • These countries increased their annual per capita economic growth: from 1 percent in the 1960s to 3 percent in the 1970s and 5 percent in the 1990s.
  • In China, real per capita income has increased more than fivefold since 1978 and the number of people living in absolute poverty has fallen by 200 million.
  • Life expectancy increases (1950 to 1999): industrialized countries about 10 years; developing countries nearly 20 years; India and China nearly 30 years.

The risks of globalization

• Persistent poverty:
  • World Bank classification: nearly 1.2 billion people — one fifth of mankind — live in absolute poverty with incomes less than $1 a day.
  • In 1999 the World Bank estimate: 1.169 billion people living in absolute poverty (not undisputed).
• Uneven benefits: many countries where trade decreased in the last 20 years and economic growth did not keep pace with population growth.
• Regional crisis drivers:
  • Africa’s situation aggravated by the AIDS pandemic.
  • Financial crises in the 1990s (Latin America, Asia, Russia) with devastating economic and social consequences.
• Financial globalization complexity:
  • Private capital flows to emerging markets overtook public flows in volume and variety over the last two decades.
  • Questions about crisis vulnerability related to financing type (direct investment, portfolio investment, bank loans), maturity structure, currency pegs.
  • Uncertainty about causes/implications of financial bubbles and the role of deregulation initiated in the 1980s.

Globalization requires political management — six guideposts

• Overarching principle: globalization is neither inherently good nor bad; it must be "shaped politically."
• Six guideposts:

1. Global domestic policy:

• Each country must consider consequences of its actions on others;
• Multilateral cooperation required to resolve issues like the U.S. current account deficit and corresponding surpluses in Asia and Europe.

2. Multilateral solutions and national self-responsibility:

• United States: return to a balanced fiscal position in the medium term;
• Europe and Japan: sustained growth requires vigorous structural reforms;
• Developing countries: good governance, rule of law, and fight against corruption are essential.

3. International regulatory framework:

• Market forces insufficient alone; need recognized rules and effective institutions;
• Framework to provide global public goods: international financial stability, a clean environment, free trade;
• Institutions cited: UN, World Bank, WTO, ILO, IMF;
• Support for a clearly defined international competition policy (proposal referenced from Mario Monti).

4. Social dimension:

• Social equity is crucial for political stability and investment climate;
• Consideration of John Rawls's "Difference Principle" in international development policy.

5. Respect for diversity:

• Globalization should not impose harmonization of economic and social models;
• IMF provided technical assistance for development of different forms of Islamic banking in Iran, Malaysia, Pakistan, Sudan.

6. Global ethic:

• Endorsement of Hans Küng's call for a basic consensus concerning binding values and absolute standards;
• Ethical principles and sustainable value creation compatible with profitability and competitiveness.

The fight against poverty — IMF role and international consensus

• Conceptual approach with three key elements:

1. Specific objective: Millennium Development Goals (MDGs) — include halving absolute poverty and reducing child mortality by two thirds by the year 2015. 2. Partnership for development: Monterrey Consensus (2002) — poor countries' efforts matched by comprehensive support from industrialized countries. 3. Concrete implementation plan: Poverty Reduction Strategy Papers — country-owned, broad-based consultation, priorities such as education, health, rural development, investment climate, fighting AIDS.

• African focus:
  • NEPAD reflects this concept; sets goal of achieving sustained growth of at least 7 percent per year in Africa (described as ambitious but doable).
  • Integration into international trade is essential; trade called "the best form of self-help."
• Trade and aid imbalances:
  • Over $300 billion annually spent to support agricultural sectors in industrialized countries versus barely $50 billion in overseas development assistance.
  • Industrialized countries committed to spend 0.7 percent of GNP on development assistance; Germany's ratio of official development assistance to GNP is 0.26 percent.
• Additional financial support and debt relief needed; preference for grants rather than loans.

Strengthening the international financial system — progress since the Asian crisis

• Three areas of progress:

1. Broadened and more inclusive international dialogue:

• Developing and emerging market countries increasingly involved (BIS committees, G-20).
• Evian G-8 summit expanded participation to leaders from a wide array of emerging market and developing countries.

2. Establishment of the Financial Stability Forum (1999):

• Mandate: identify gaps and weaknesses in the international financial system.
• Example concerns: unclear ultimate risk-bearers for derivatives and hedge funds and supervision responsibilities.

3. IMF focus on crisis prevention:

• Bilateral and multilateral surveillance: semiannual World Economic Outlook (WEO) and Global Financial Stability Report (GFSR).
• Research finding: clear positive correlation between sound institutions and economic growth; relevance of "Ordnungspolitik" (institutional and regulatory framework).
• Shift in IMF advice toward identifying vulnerabilities (excessive sovereign debt, balance sheet mismatches); recommend careful sequencing of capital account liberalization and stronger shock absorbers (flexible exchange rates, fiscal space, diversified financial sectors, social safety nets).
• Financial Sector Assessment Program (with the World Bank): completed more than 50 country analyses; extended to off-shore financial centers.
• Development and promotion of standards and codes: comparable statistics, transparency rules for fiscal and monetary policies, supervisory standards for banking/securities/insurance.
• Collaboration with FATF on methodology to counter money laundering and financing of terrorism.
• Greater transparency: nearly all country and policy documents now published.

• Limits and realism:
  • Acknowledge limits to anticipating/preventing crises in open market economies; objective is fewer and less severe crises.
  • Emphasis on self-responsibility to minimize moral hazard; IMF cannot be a lender of last resort with limitless liquidity.
  • IMF proposal for an international insolvency procedure for sovereign debt failed to secure required support to amend Articles of Agreement; nevertheless progress achieved via Collective Action Clauses (CAC) in sovereign bonds.

The IMF as a learning institution

• IMF must remain open to change and learning; recent reforms introduced recognizing necessary policy changes.
• Independent Evaluation Office (established two years earlier) expected to play a vital role.
• Quotation guiding attitude: Karl Popper (1991) — focus on "What should we do to make the world a little better?"
• Vision: IMF contribution toward a better globalization; encouragement for students to engage with global economic issues.

Speech by Horst Köhler, Managing Director of the International Monetary Fund, Tübingen, October 16, 2003.

References

• Brazil and the IMF
• People's Republic of China and the IMF
• Germany and the IMF
• India and the IMF
• Mexico and the IMF
• Malaysia and the IMF
• United States and the IMF
• The IMF and Good Governance -- A Factsheet
• Speeches
• Horst Köhler
• PRESS CENTER
• https://www.imf.org/en/home