Speech

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Remarks by Michel Camdessus
Managing Director of the International Monetary Fund
At the Council on Foreign Relations
New York, February 1, 2000

Thank you, Mr. Chairman, Ladies and Gentlemen. During my 13 years at the IMF, I have been privileged to meet with the Council on Foreign Relations on four previous occasions. On each of these encounters I have been impressed by your openness and by the attention that you have paid to the IMF. Your forbearance toward me personally makes me feel that I received much more than I gave. Today I come to thank you for all this, for your understanding, your encouragement, the public support that many of you individually have given us, and the intellectual contribution that you have generated, prominent among which has been the recent report of your Independent Task Force.¹ So I feel it appropriate, with an audience that always encourages candor and openness, to share with you a few thoughts on the role of the IMF at the start of a new century.

Let me immediately state that the hallmarks I have most admired in the IMF are its universality and its adaptability. It is a perennially "self-reforming" institution, very mindful of its obligation to its entire membership. Consider what this has meant over recent years when the world was facing three major challenges: the gathering pace--and expanding opportunities and risks--of globalization; the transition from plan to market in many countries; and the realization that we were lagging far behind in responding to the plight of the world's poorest people and poorest countries. Looking to the future, we can anticipate a continuation and deepening of the trends toward integration of markets and of massive global private capital flows, but also the presence of tough challenges: old ones--like poverty--and new ones, such as the aging of populations in many countries, and the potential for a surge in extremism and violence if we are not able to reverse the trend toward greater inequalities between the poorest and affluent countries. To play its appropriate role, in such a context, what kind of a Fund do we need?

Let us start by considering the IMF that exists today. I see five well demonstrated strengths that the Fund offers its membership:

• One, universality and the responsibility it bears to interact cooperatively with each of its members on their economic policies;

• Two, a clearly defined, tried-and-tested mandate as set out in its original purposes, which continue to ring remarkably true today;

• Three, its flexibility, its capacity to adapt rapidly its activities to the new demands of a continually evolving global economy;

• Four, the fact that it was conceived as "the machinery," as it is put in the Articles, for promoting multilateral cooperation in addressing international economic issues;

• And finally, a staff well-known for its professionalism and its unique experience in performing its tasks of surveillance, technical assistance, and crisis management.

How can these strengths be most effectively deployed and developed in the midst of today's rapid innovation in a world where we must always be prepared for the unexpected? Well, to put it in a sentence: by striving to be responsible to each member whatever their size or condition; and simultaneously, and by keeping a global perspective, discharging the Fund's responsibility with respect to the whole international monetary and financial system.

These are the two domains on which our reform effort must be focussed.

* * * * *

I.  Responding to the needs of each of our members

Yes, all countries must always be able to rely on the Fund to be helpful in pursuing their objectives of stability and high-quality growth and so contributing--I quote the Articles of Agreement--"to the promotion and maintenance of high levels of employment and real income...."

All this points to an active and wide-ranging agenda. Let me concentrate on three areas of work with countries where our activities are changing: economic management in normal times (the other name of crisis prevention), the specific problems of the poorest and most heavily indebted, and crisis management.

First, in the aftermath of the Asian crisis much emphasis has been placed on crisis prevention--rightly so. Yet I find that emphasis too limiting. The world needs an institution, of course, to help in crisis prevention! But this is the very minimum: we are in a unique position to help each country to generate higher and higher quality growth for itself and in so doing to help generate high, better-balanced growth for the entire world. We cannot aim for anything less! We must place the emphasis on the ultimate objectives of national policymakers: stability and high-quality growth through sound policy. The Fund's proper role in normal times is analysis and policy dialogue--surveillance--for all its members, from the United States to the smallest Pacific island nations. The primary focus, of course, will be on the core areas of the Fund's mandate--macroeconomic policy and management. But we have learned that effective, credible policy implementation hinges on the broader issues of sound institutions, transparency, and good governance with all this implies for financial soundness, structural reform, the implementation of standards, and social and labor policies. This is why our surveillance is rapidly changing:

• emphasizing more strongly the international implications of domestic economic policy;

• developing its regional dimensions;

• integrating within surveillance technical assessments of vulnerabilities and risks in the financial sectors; and

• disseminating internationally recognized standards and codes. ²

Second, we must try to draw the logical conclusions from the recognition that, the plight of the poorest countries--and the poorest people within them--is the "ultimate systemic threat." ³ Despite all the efforts of the past 50 years, including a new emphasis on structural adjustment programs during the 1980s, the gains have been too slow, per capita income in many of the poorest countries has declined, debt has increased, and poverty remains widespread. For these reasons, the international community has recently decided to launch a renewed effort simultaneously to address poverty and the debt overhang. We have put in place the revised HIPC initiative, which will provide large-scale debt relief to countries whose pro-growth policies include an explicit and targeted anti-poverty strategy, reached by a process involving widespread participation of civil society. The new approach is based on the closest possible collaboration between the IMF and the World Bank, with the World Bank taking the lead in lending for anti-poverty purposes.

As part of its contribution to the global anti-poverty effort, the IMF has replaced its concessional facility, the ESAF, with the better focussed Poverty Reduction and Growth Facility (PRGF). Why should the IMF be involved in this new approach? Because now, at last, there is a widespread conviction that there is a mutually reinforcing relationship between macroeconomic stability and structural reform on one hand, and growth and the reduction of poverty and inequality on the other. Stability and strong institutions are clearly essential for growth, and hence for poverty alleviation. But the converse is also true: popular support for stabilization and reform will not be there unless the whole population, including the poorest, is able to participate in the benefits of a comprehensive set of policies which also aims to unlock all its productive potential, prioritize human development spending, and provide sufficient safety nets for the most vulnerable.

However, articulating poverty reduction as an explicit objective of our programs does not mean that the IMF will be heading off in a major new direction in its operational focus. Rather, we will have to rely on our partners in the World Bank and the regional development banks to undertake the lending operations that will support the direct anti-poverty policies included in the economic programs we support. For the Fund, the objective is to ensure that poverty reduction is an integral and explicit objective when designing policies, and to verify that the machinery and support are available to pursue these policies.

Third, crisis management: this is the IMF's most publicized work, it must of course continue to be essential. But, to respond adequately to the range of country circumstances, the Fund needs a variety of approaches.

• At one end of the spectrum, we find the headline-grabbing situations where domestic crises have systemic implications in countries suddenly hit by urgent large-scale liquidity crises. The Fund is better equipped to extend such support. At its disposal it now has the Supplemental Reserve Facility (SRF), designed to respond rapidly to major crises, and the Contingent Credit Lines (CCL), aimed at averting the effects of contagion on countries that are otherwise implementing sound policies.

• At the other end of the spectrum, we find a substantial number of the poorest countries, facing the deep-seated crisis of declining incomes and poverty. These cases will need policy advice, technical cooperation and extensive financial support (albeit small in global terms), typically over a period of years rather than months or weeks.

• Between these two extremes, are the many countries, each relatively small in global terms, that will continue to demand the Fund's attention and support. Ineligible for concessional support, not yet able to attract sizable private capital flows, and yet at times faced with the challenges of deep structural reform, some of these countries will continue to need recourse to official sources of support from time to time. These countries should have the assurance of drawing, when necessary, on the IMF's existing facilities--ranging from the classic 12-month stand-by arrangement to the well-established 3-year extended arrangement. It goes almost without saying that we keep these facilities under frequent review adapting them as needed. It is with them that the IMF reveals its nature as a kind of world "credit union": as D. Rockefeller put it so well in a recent article ⁴. Contributing in ordinary times to the financing of the cooperative institution at market rates, countries are entitled to benefit from its contribution in times of adversity provided they undertake the needed reforms.

II.  Responding to the systemic needs of a globalized world

Let me now turn to the global dimension of the Fund's responsibilities. This brings us to the reform of the global financial architecture, to the question of how the Fund might be even better equipped to respond to a major global meltdown, and finally to the broader question of the operation and governance of the international monetary and financial system.

A year ago, in virtually every international conference the central theme was reform of the international financial architecture. A great deal has been achieved in the past year in advancing transparency--that golden rule--together with financial sector stability, and internationally recognized standards. Now we are in the midst of the long process of implementation and it is vital that the world maintains its enthusiasm for change even when we are no longer in the midst of emergency.

But there are also three important areas where the debate is still open.

First, given the rapidly growing role of private capital flows, and the long-term potential for further expansion, a key issue is the role of the private sector in financial markets. Unfortunately, the debate on "involving the private sector," has developed into a highly technical discussion that too often has focussed on the role of the private sector in situations of crisis. Important though that is, we must keep sight of the broader principles involved: promoting open capital markets in which foreign and domestic private investors are able to compete in an environment marked by stability and transparent relationships between public and private partners. This is clearly not a goal that will be achieved overnight: volatility in private sector flows is likely to persist in crises, and the Fund may well have to step in from time to time.

Therefore, it seems particularly productive to place the emphasis on how to expand the opportunities for and contribution of the private sector, on promoting investors' ability to undertake adequate risk assessment and generally on ensuring that the IMF is well adapted to interacting with the private sector. Developing a stable private sector presence is, to my mind, the most productive way to prevent crises and to keep the Fund to its intended role in the international economy. This doesn't mean that I am ready to accept as satisfactory the present regime of our intervention in times of crisis. Far from it. I urge the membership to consider more actively our role in times of crisis, including those extreme situations in which, even after good faith efforts, default cannot be avoided. In this situation, I continue to hold the view, that the international community needs the right to impose a temporary stay on legal action by creditors while the debt is resolved. One option is to agree on amending or interpreting the Fund's Articles to enable it to perform this role.

Creating optimal conditions for the private sector leads logically to the second issue, a key contribution to creating the condition for a constructive role for the private sector. It is the question of promoting the liberalization of capital movements. The founders of the Bretton Woods Institutions were motivated by their clear perception that free trade was the key to unlocking the world's economic potential. How amply their foresight has been rewarded in the past 50 years! Capital liberalization is the analogous issue of today. Few would now dispute the potential benefits that can flow from liberal capital movements supported by the appropriate economic policies, institutions, and financial sector stability. However, the wide variety of country situations means that each country needs to prepare its own path to liberalization, under carefully tailored conditions. Work is under way in the Fund on proposals that would allow countries to identify the steps that individually they need to take, and to define their own timetable. Here also the reform efforts should be intensified. ⁵

Third, the debate on exchange regimes still has a long way to run. Certainly some preference is emerging for exchange regimes at one end or the other of the spectrum--firm pegs or currency boards at one extreme and free floats at the other. In practice, today's regimes are not so sharply polarized and a mixture of regimes will no doubt be with us for some time. In the long run, I would suggest that we are gradually evolving toward a world of fewer currencies. However, the outstanding example of the birth of the euro, the culmination of a long journey toward regional monetary union, suggests that this is a process that is likely to be measured in decades rather than months or years. But in the final analysis, the success of any exchange regime is the reflection of the success of domestic economic policy. A chain is only as strong as its weakest link, and any exchange regime is only as strong as the weakest element of domestic policy.

* * * * *

These then are a few of the issues currently on the agenda in the search for a more stable global economy. But let us imagine a hypothetical situation in which a meltdown worse than we observed in 1997 and 1998 were to occur. Would the world be in a position to respond? And what would the role of the IMF be? ⁶

This raises the question of a need for an international lender of last resort, and whether the IMF can fulfil that role. Using Walter Bagehot's classic criteria, a domestic lender of last resort, in the event of a national systemic crisis, would provide the system with unlimited amounts of liquidity, unconditionally, at penalty interest rates, to borrowers who have good collateral. Of course there are not convincing reasons to try to establish a simplistic parallel between the national and international levels. Nonetheless, the IMF is the closest that the international financial system has to a lender of last resort. It is a function that we have been performing, and adapting, for over 50 years, and it wouldn't hurt to recognize it, to confirm the Fund in this role and to invite it to continue to offer the international community this vital guarantee with enough of a judgmental basis to avoid any risk of moral hazard.

Our newest lending mechanism, the CCL, a major departure from traditional IMF lending in several important respects, is an experimental new step in that direction, still to be put to its first real test. In some ways, it loosely approximates three of Bagehot's four criteria: lending at above-normal interest rates to countries that have otherwise sound policies, and with appropriate but limited conditionality given that countries would prequalify for the use of resources. But there is clearly a limit to the fourth criterion. In the crises of 1997-98, when several systemically important countries simultaneously needed large support, the resources of the IMF were stretched to the limit. In a more widespread conflagration, a truly systemic crisis, what would happen? The IMF's resources, substantial though they are, could be completely inadequate. This is not a plea for a massive increase in the IMF's resources, which I do not believe to be necessary or desirable.⁷

Instead there is a role for being able to create additional liquidity on a temporary basis. How? I don't see any better way than by making an innovative use of the SDR, the IMF's reserve currency. It is not unreasonable to expect that in a grave crisis the leading countries would collaborate to inject a proper amount of international liquidity through a very simple mechanism which could decisively underpin confidence in the international system. To this end, the IMF might be authorized to inject international liquidity--and to withdraw it when the need had passed--in a manner analogous to that of a national central bank, through the creation and selective allocation of SDRs. The international community has been cautious in authorizing use of the SDR in the quarter-century of its existence, in part because of concerns about its inflationary potential, but the experience of the past two years reinforces the case for considering the tremendous potential that this instrument could have for the stability of the global economy. It would be sufficient to decide to put in place a contingency system of allocation, to be activated only in the event of a systemic credit crunch. It would be understood that in such cases all countries would receive allocations, but that countries not significantly affected by the crisis, would put their allocation at the disposal of an administrative account in the Fund to be lent conditionally to countries facing a severe liquidity squeeze.

Finally let me turn to the perennial question of the international monetary system and of the governance of the IMF, as part of the governance of the entire international economy. I am sorry that circumstances have been such that, except for the remarkable start of the euro, no significant progress has taken place during the last 20 years in these fields. Of course, I was happy to contribute to, and placed great hope in, the attempts in the Plaza and Louvre accords to contribute to greater stability of the International Monetary System. History will tell us why these attempts were only a flash in the pan, even if the G-7, through the careful phrasing of its communiqués has since then tried to avoid excessive volatility in the markets. But this remains a suboptimal solution. I hope that as soon as the euro has acquired the full standing and prerogatives of a major reserve currency, effective cooperation will be established among major players to provide the world with the instruments of monetary stabilization it needs, on the basis of strengthened cooperation to harmonize macroeconomic policies.

Increasingly, during this period, the issue of stability of the international monetary and financial system has been viewed in the context of the broader issue of world economic governance. This is not a reference to some kind of world economic government, but instead to the more limited ambition of finding a global response to inescapable global problems. The task is monumental. Ours is the first generation in history to find itself in the position of being called upon to influence global affairs, not from a position of military conquest or imperial power, but through voluntary international cooperation. The challenge is to find mechanisms for managing the international economy that do not compromise the sovereignty of national governments, that help the smooth and effective working of markets that increase opportunities for the poorest, that ensure international financial stability but that, also, offer solutions to problems which now transcend the boundaries of the nation state. A tall order indeed! As time is too short for me to elaborate, I would like to mention just two problems: first, coherence in international economic decision-making, and second, political responsibility.

The problem created by a lack of coherence in decision-making at the world level is exemplified by the failure, in Seattle, to launch the 2000 round of trade negotiations. If not corrected promptly such a situation could lead to major setbacks. Consider the incoherence between, on one hand, the bold decision by governments--in the framework of the Bretton Woods institutions--to reduce by about one-half the debt of 35 or 40 heavily indebted poor countries; and, on the other hand, the failure of those same governments--in the framework of WTO--to promptly eliminate trade barriers to the export of these countries. Such a failure would make a mockery of a decision on debt that is, otherwise, of historic dimensions.

Equally urgent--with little progress so far--is the issue of the "political responsibility" of international institutions. Too often they are portrayed as unaccountable technocracies. The truth is that the IMF is responsible and accountable to its member governments, and that all decisions have to be approved by the Executive Board of 24 members, representing 182 countries. Every single loan--including of course the controversial loans in Asia and to Russia--has had the support of our membership, that is to say, of our member governments.

No, the problem is not that we are not accountable, but that we are not seen to be accountable, and that some member governments from time to time find it convenient not to express their public support for actions they have supported in the Executive Board. Part of the problem is that member governments have until recently been reluctant to publish their agreements with the Fund, and our Article IV reports on their economies, heightening the perception that we are not accountable. As you know, I have strongly supported much greater transparency for the Fund, and I am extremely happy as I leave the institution to see how much more open we have become. Greater openness will help ensure our legitimacy as well as our effectiveness in improving the quality of policy debate and democratic participation in member countries, and at the same time it will help the international capital markets become more efficient.

But it is also important to ensure that the IMF is seen far more visibly to have the legitimate political support of our shareholders. One reform that I have recently supported would respond to this problem. It would entail transforming the IMF's advisory ministerial committee--until recently called the Interim Committee, renamed in September 1999 the International Monetary and Financial Committee--into a decision-making council for the major strategic orientations of the world economy. Far from leading to an undue politicization of the IMF, this would simply in the eyes of the public, place responsibility squarely where it already rests. This would help. But governments remain to be convinced.

Another suggestion, along the lines of an Economic Security Council, would consist of replacing the G7 Summit every two years by a meeting of the heads of state and government of the countries--approximately 30 at any one time--who have Executive Directors on the Boards of either the IMF or the World Bank. This would provide--particularly after the present review of our quotas is completed--a fair and legitimate representation of the entire membership of 182 countries. As it would be attended by the heads of the two organizations, the Secretary General of the United Nations, as well as the heads of the ILO and WTO, it would offer a way of establishing a clear and strong link between these institutions and a representative grouping of world leaders with the greatest possible legitimacy. Here again, apart from some sympathetic murmurs of interest, I do not see distinct signs of movement, but this could be a useful item together with several other suggestions for discussions in forthcoming G-7/G-8 summits.

* * * * *

Summing it all up Mr. Chairman,

• Boldly adapting IMF surveillance, particularly of the financial sector;

• Actively using instruments for debt and poverty reduction squarely to address poverty as the "ultimate systemic threat";

• Modernizing its facilities to better serve its entire membership when acute balance of payments crisis occur;

• Completing our work on the architecture, and, particularly allowing the Fund to facilitate a stay in the most severe debt crises and to avoid disorderly outcomes;

• Adopting the needed changes in our articles of Agreement to facilitate our work in promoting full freedom of capital movements;

• Designing, for contingency use, an appropriate instrument for the use of the SDR in the event of a global liquidity crunch;

• Engaging in the study of how to maintain the stability of the international monetary system, once the euro reaches its full potential as a major world reserve currency;

• Adopting the needed institutional changes to promote better exercise and perception of the political accountability of the IMF;

• Ensuring permanently that each country feels properly associated to the decision making process; and

• Conceiving and experimenting with the structures of coordination to ensure the proper coherence of decision making at world level.

These ten items for reform must, in my judgement, be part of any reform agenda of the IMF and indeed our ongoing experience already suggests several others. As you have seen these are not particularly radical, yet they are still proceeding at a very uneven pace: a few already under experimentation, several others being heatedly debated, while others are still regarded as rather far-fetched or somewhat futuristic. May the world leaders who once again expressed recently in Tokyo their interest in reforming the IMF and the other international financial institutions, may all our 182 members, remember that the period of calm we have bought for the world at a high price may be only too short-lived, and so must also be a period of intense work toward reform and strengthening of our institutions. And may all of them recognize that, in a world of accelerating history, the future is already with us, calling for a high sense of responsibility, for bold action, and for more intense cooperation.

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¹Safeguarding Prosperity in a Global Financial System: The Future International Financial Architecture, Report of an Independent Task Force sponsored by the Council on Foreign Relations, published by the Institute for International Economics, New York, 1999.
²In collaboration with relevant national authorities and the World Bank, the Fund staff has now completed two rounds of experimental reports on the observance of standards and codes. Also the Fund and the World Bank have worked to coordinate support for strengthening financial systems, and to bring vulnerability assessments more centrally into the Fund's surveillance process, using various instruments, including the joint Bank-Fund Financial Sector Assessment Program.
³To quote Minister Gurria of Mexico.
⁴David Rockefeller: "Why we need the IMF," the Wall Street Journal, May 1, 1998.
⁵The Fund has been considering proposals for a two-phased approach to liberalizing capital flows. The first phase envisages that countries would formally declare the liberalization--subject to transitional arrangements--of payments associated with capital movements that are already authorized by a country's existing laws. In the second phase, which would operate on a purely voluntary basis , countries would identify capital transactions that could be liberalized according to their own timetable.
⁶This is not a purely theoretical case. I can say today that we were very close to it in October 1998. Had it not been for the positive reaction of the markets to the significant move by the US Federal Reserve Board and other monetary authorities, the reinforcement of IMF resources, and the launching of the successful program with Brazil, almost certainly, we would have been confronted with a major credit crunch.
⁷ If quotas were today the same size relative to global trade as they were in 1945, the resources of the Fund would be roughly 15 times their present size. And we should remember that capital flows have grown far more rapidly than trade.