From the Crises of the 1990s to the New Millennium -- Remarks by Michel Camdessus

IMF News, November 27, 1999

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Published: November 27, 1999

Overview / Introduction

Context: delivered to the International Graduate School of Management (IESE), Palacio de Congresos, Madrid, Spain.
Time horizon framed: focuses on up to a decade rather than century-scale speculation.
Central aim: identify the crises behind the instability of the previous ten years and outline strategies to make the next ten years more stable and more prosperous.
Four major, intertwined factors explaining recent instability:
- a new breed of national economic crises;
- a crisis in the world financial system;
- poverty, as the ultimate systemic threat;
- a crisis in world governance.

I. The new breed of economic crises

Characterization:
- Crises now explode on open capital markets, arise from complex dysfunctions, are less exclusively macroeconomic, and rapidly assume systemic proportions requiring immediate massive financing.
- Three-dimensional problem illustrated by Thailand, Indonesia, and Korea:
- macroeconomic imbalances and massive outflows of short-term capital;
- acute crisis in the financial sector reflecting institutional and banking practice weaknesses;
- fundamental crisis in the economic management model (unhealthy relations among corporations, banks, and government; corruption, collusion, nepotism).
Notable trends increasing crisis complexity:
- The domestic private sector (banking and corporate) is typically a much more significant player now.
- The "foreign investment community" is far more diverse: direct investors, portfolio investors, banks, bondholders, and other creditors.
- Different investment types respond differently to crises: direct investment did not fall precipitously, while banks shifted from net inflows in 1996 to major net outflows by 1998.
- Nations can be both creditors and debtors; intraregional investment (e.g., Korea, Hong Kong, Thailand, Taiwan Province of China, Japan) remains important even amid crisis.
Lessons and required emphases for national policies (duty of universal responsibility):
- Any crisis, large or small country, can become systemic via contagion on globalized markets.
- Governments must pursue "excellence" or "absolute rectitude" in economic management.
- Four emphasis points in Fund dialogue with members:
- rigor and transparency in overall economic management;
- banking and financial sector soundness;
- reform of the institutions of the state (public sector efficiency, appropriate regulation, rule of law, independence of the judiciary, anticorruption measures, etc.);
- growth centered on human development.
Circular relation highlighted: integrity of monetary and financial management ↔ high-quality growth ↔ poverty reduction.

II. Identifying and correcting the weaknesses of the global financial system

Seven defects of the current architecture:

1. The inadequacy of financial information and failure to respect rules of transparency undermining policy credibility and IMF surveillance. 2. Weaknesses of financial and banking institutions and systems. 3. Poorly managed liberalization of capital markets facilitating unstable short-term capital flows while shackling direct investment. 4. Reluctance to define terms and conditions for private sector involvement in prevention and resolution. 5. Delay in establishing discipline on increasingly sophisticated international financial intermediation. 6. A global system that allows extreme poverty and growing inequality to persist. 7. A system that raises doubts about who is in the "driver's seat": the problem of global governance.

Five basic principles proposed for the financial foundations of a new structure:
- transparency;
- sound financial systems;
- private sector participation;
- the orderly liberalization of capital flows;
- modernization of international markets based on universally accepted standards with means to ensure respect.
Achievements and instruments:
- Consensus reached on transparency, financial sector stability, and standards and codes (accounting, auditing, securities markets, insurance, bankruptcy, corporate governance).
- IMF-developed standards/codes: data dissemination, transparency in fiscal policy, transparency in monetary and financial policies, and (jointly with the Basle Committee) banking supervision.
- New IMF lending window introduced: Contingent Credit Lines (CCL) to support countries otherwise sound but threatened by contagion.
Issues remaining on the agenda with direct Fund implications:
- Extent to which monitoring standards and codes enter day-to-day Fund surveillance and the Fund's role given its limited resources.
- Private sector involvement in prevention and resolution; consideration of a controversial mechanism to sanction a temporary stay of litigation by creditors via amendment or interpretation of the IMF's Articles (Article VIII (2b)).
- Role of the IMF in fostering sound, open, integrated capital markets and consideration of a gradual, country-specific approach to liberalization of capital movements; suspicion that liberalizing capital movements may not be completed by 2010.
Additional priorities:
- Energetic tackling of lack of transparency and control over hedge funds and transactions transiting off-shore centers to eliminate "black holes" in the financial system.

III. Poverty, the ultimate systemic threat

Poverty framed as the most serious crisis factor and a barrier to humanizing globalization.
Campaign to ensure promises are honored:
- Concern: major industrial countries reduced official development assistance, falling further short of the target of 0.7 percent of GDP set for the year 2000 (all except the United States).
- References to global pledges (Copenhagen Declaration and others) including targets to 2015 and 2005.
- Call for G7-G8 to review annual progress reports and reflect on remedial measures where delays exist.
- Appeal for universal mobilization of public opinion (example: Jubilee 2000).
Two initiatives highlighted to make progress:
- Vigorous implementation of debt reduction operations following the Cologne summit: agreement that debt relief operations should total some $60 billion over the years and result in additional expenditure on human development (education, health, rural infrastructure).
- Adoption of a new joint IMF–World Bank strategy to make poverty reduction the centerpiece in the 75 poorest countries.
Role of recipient countries and private sector:
- Recipient countries should lead reforms (public institutions and methods of government) to generate high-quality growth and human development.
- Rest of world should provide promised financing, open borders to goods from the poorest countries, and curtail the arms trade which provokes or supports wars that delay development.
- Private sector's contribution: invest guided by high-quality information and improved frameworks for risk assessment (transparency, standards, codes).
Key statistics cited:
- more than 1.3 billion individuals live on less than $1 a day;
- more than 1.4 billion do not have direct access to drinking water;
- 0.9 billion are illiterate;
- 0.8 billion suffer from hunger or malnutrition.

IV. The world governance crisis

Problem statement: globalization requires institutional conditions that enable collective protection against global risks and give a clearer view of collective destiny.
Observations:
- Bretton Woods institutions and bilateral/multilateral cooperation have contributed to avoiding a larger systemic crisis during the Asian crisis aftermath, but more can and must be done.
- International institutions are often perceived as irresponsible technocracies despite being assigned growing responsibilities.
Suggested reforms and proposals:
- French proposal: transform the Interim Committee of the IMF from an advisory committee into a decision-making committee for major strategic orientations of the world economy to place political responsibility where it lies.
- Jacques Delors proposal: replace the G7 Summit every two years with a meeting of the heads of state and government of the 24 countries represented on the Executive Boards of the IMF and the World Bank, with the heads of these organizations and the UN Secretary General, to strengthen links between institutions and legitimate world representatives.
Implementation challenges:
- Limited political momentum for these institutional reforms despite some sympathetic interest.
- Need for persistent effort; the task is to strengthen global institutions gradually while decentralizing and strengthening responsibilities at all echelons.
- World-level action must be subsidiary to effective national and regional action and accepted by public opinion.
Civic dimension: citizenship at all levels must be a key value of the 21st century.

Conclusion: values and outlook

Three guiding values identified: responsibility, solidarity, and a new kind of global citizenship.
Globalization presented as an opportunity to move toward a world economy more worthy of the human race if guided by these values and by strengthened institutions, transparency, and sustained commitments to poverty reduction and sound financial systems.

From the Crises of the 1990s to the New Millennium -- Remarks by Michel Camdessus, November 27, 1999.