New Priorities for an Era of Globalisation, A Commentary by Rodrigo de Rato, Managing Director, IMF

January 2, 2006

By Rodrigo de Rato, Managing Director
International Monetary Fund
The Banker
January 2, 2006

With demographic change and globalisation presenting fresh challenges, Rodrigo de Rato explains how the 60-year-old International Monetary Fund is adapting itself to new paradigms.

The IMF recently marked its 60th anniversary. Created toward the end of the Second World War to establish a multilateral framework for trade and finance that would avoid the failings of the inter-war period, the organisation has seen, and adapted to, huge changes in its 60-year history.

Economic and financial globalisation has progressed throughout this period as markets in goods, services and capital have become increasingly integrated. In such a world, macroeconomic and financial stability is a vitally important public good. Our main focus in the next few years will be on helping countries maximise the benefits, and minimise the costs and risks, of globalisation.

From just 40 countries at the start, the IMF's membership is now nearly global, as first developing countries and then the countries of the former Soviet Union joined. The new countries have faced problems very different from the original members. This has led the IMF to adapt its role in many respects, while remaining true to its original mandate.

In low-income countries, especially in Africa, the fight against poverty has required a focus on helping these countries achieve stronger, sustainable economic growth by helping them build basic economic institutions and conduct economic policy better. In the transition economies, reform of the basic structure of the economy was the pre-occupation for many years, and still is in some countries.

Financial globalisation has transformed the IMF's relations with emerging markets. This began in the 1980s debt crisis, when much of the Fund's work was dominated by helping countries, especially in Latin America, overcome the consequences of reckless borrowing - and, with hindsight, unwise lending. In the 1990s, turbulence in international capital markets hit Mexico, the major Asian economies, Russia, Turkey, Brazil and Argentina. And again the IMF helped, first in conjunction with others, more recently mostly alone.

The IMF's relationship with advanced economies has changed too. In a world where private finance is readily available to advanced economies, their need for financial support from the Fund in times of crisis has virtually disappeared.

Current imbalances

Globalisation offers important opportunities, but it also presents risks that affect all countries. It has contributed to the size of today's world current account imbalances, and the associated risk of disorderly adjustment. The global savings pool made possible by financial integration has allowed some countries - most notably the US - to run up very large current account deficits, as countries with surpluses build up reserves to insure themselves against crises.

Just as global imbalances and the way they are corrected can affect the welfare of all, so can developments in trade in goods and services. The experience of the last 60 years, shows that lowering trade barriers and eliminating trade-distorting subsidies facilitate trade, enhance growth and reduce poverty.

Resisting protectionism

The protectionist pressures that have evolved in some quarters must be resisted. The ongoing Doha Round of trade negotiations offers an opportunity to take decisive steps toward further liberalisation, and to extending the benefits of globalisation to hundreds of millions of people in the poorest countries.

Globalisation poses other specific challenges for macroeconomic and financial sector policies in advanced economies. These challenges are too little recognised and too often misjudged by decision-makers, who may also not recognise that globalisation can also offer a solution.

Consider current demographic trends. Ageing populations will put pressures on government budgets by increasing pension and health expenditures on the one hand, and reducing tax revenues on the other. And many countries need to adjust their budgets to deal with this, particularly given the current under-funding of pensions in many countries.

But globalisation can help smooth the difficult adjustment needed in individual economies. Countries at the demographic stage where the working share of the population is higher, and whose saving is therefore higher, can lend to the rest of the world, while others with older populations can draw down their investments abroad. International labour mobility can also help individual countries deal with the impact of ageing.

There is still much we do not know about how such transitions will play out. For example, changes in savings, investment and growth trends are likely to produce large changes in current account balances and financial flows, suggesting that the global imbalances of 20 years' time will be very different from those of today. This is one reason why we need not only just solutions to today's problems, but also a structure to deal with the global imbalances and other economic problems of the future.

We have such a structure, and such an organisation. The IMF, as the institution of international monetary cooperation, has a global membership and established mechanisms for regular consultation and decision-making. But to perform its functions well, the IMF needs to enhance its own understanding of the issues, especially the benefits, imbalances and fragilities associated with cross-border flows of goods and services, capital and people. In this way it will be better able to give all of its members concrete advice on policies to address the consequences of increasing integration.

Emerging markets benefit greatly from globalisation, but are perhaps particularly vulnerable to the associated risks. They are in a phase of development where they need high investment. But these economies also often have fragile balance sheets and institutions that are mostly young and sometimes weak. These factors contribute to high demand for, and unstable supply of, market financing, and to periodic demands on the IMF for support.

China and India are two of the world's fastest growing economies. As they grow and become more integrated into global financial markets, they could become vulnerable to the kind of pressures that hit Mexico and Korea in the 1990s. This could put considerable demand on IMF resources.

This, however, is not an immediate problem, and both China and India have substantial reserves. Nonetheless, it does illustrate the fact that capital account crises in emerging markets have the potential for systemic instability and could lead to demands on the IMF.

It is important for the Fund to expand its coverage of globalisation in reports on the world economy, and the focus of its surveillance work on individual countries. What countries need most from the IMF is the benefit of its long experience in dealing not only with the particular country in question, but also with other economies.

There will continue to be a need for crisis prevention. The Fund has made significant improvements in its work in this area over the past few years, especially work on vulnerability assessments, and the development of the balance sheet approach to financial crises. But much still remains to be done, both on the underlying vulnerabilities in emerging market countries, and on the risks from disturbances originating in advanced country financial markets.

At the same time, we must also strive to resolve crises when they occur, for example by offering large contingent or precautionary credit lines to members with strong policies. The IMF actually developed an instrument for this a few years ago, the Contingent Credit Lines, but it was not used.

Attacking poverty

The IMF continues to refine and improve its advice and support for low-income countries, and has a great chance to make a difference in the lives of millions of people. It has developed a wide and flexible set of instruments to help low-income countries deal with problems such as exogenous shocks, and the temporary costs of trade liberalisation, as well as the longer-term challenges of poverty reduction.

The implementation of the Multilateral Debt Relief Initiative, based on the proposal made by the G8 in summer 2005, will bring a new round of debt relief to some of the poorest countries. The IMF is at a critical juncture in trying to help these countries achieve the Millennium Development Goals.

Finally, to bring the organisation more in line with present day realities, the IMF is reviewing the issue of country voting shares and representation. This means, in particular, a need for increases in voting power for some emerging-market economies, especially in Asia, and the need to ensure that members in Africa, where so many people are profoundly affected by the Fund's decisions, are adequately represented. The agenda for the IMF's medium-term strategy, which encompasses these areas and more, is a long one, and work is under way on specific proposals to implement the strategy.

One of the lessons of IMF history is that the organisation has survived by a process of adaptation to new demands and new challenges. The institution will continue to make itself ready for the challenges of the next five to 10 years, and must continually adapt to face the next 50.


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