Evolution not Revolution: The Changing Role of the IMF in the Global Economy, by Anne O. Krueger, First Deputy Managing Director, IMF

IMF News, February 23, 2006

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Evolution not Revolution: The Changing Role of the IMF in the Global Economy, by Anne O. Krueger, First Deputy Managing Director, IMF

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Bibliographic details

• Published: February 23, 2006

Historical foundation and postwar context

• IMF origins: Bretton Woods conference, July 1945; representatives of 45 countries.
• Intended objectives:
  • Establish a well-functioning and stable international financial system based on multilateralism and rules.
  • Replace competitive devaluations and discriminatory exchange controls with a rules-based system to promote trade and payments cooperation.
• Pre-Bretton Woods historical data:
  • Between 1929 and 1932 the world price index, measured in gold values, fell by 47.5 percent.
  • In the same period, the gold value of world trade fell by 63 percent.
• Institutional complements:
  • International Bank for Reconstruction and Development (World Bank) to channel investment.
  • General Agreement on Tariffs and Trade signed in 1947; succeeded by the World Trade Organization in 1995.
• Early implementation facts:
  • First meeting of the IMF's Board of Governors: March 1946, Savannah, Georgia; 38 countries had joined or joined during the meeting.

The Fund’s role, instruments, and evolution

• Core mandate: maintenance of international financial stability through a combination of obligations and benefits for members.
• Membership and governance:
  • Members buy shares according to a quota system and undertake to abide by Fund rules (e.g., Article VIII obligations).
  • Access to Fund financial resources for temporary balance of payments problems.
• Surveillance:
  • Article IV consultations began in 1952; evolved from exchange-rate focus to broad macroeconomic policy discussions.
  • Multilateral surveillance expanded: modest precursor to the World Economic Outlook in 1969; first WEO published in 1980.
• Technical assistance:
  • Now accounts for about a third of the Fund's activities.
  • Early provision began in the late 1940s.
• Financial support:
  • Designed to give member countries breathing space to make policy adjustments (including fiscal rebalancing and exchange rate adjustments where needed).
  • Facilities expanded for low-income members, including the recently approved Exogenous Shocks Facility.

Membership growth and empirical outcomes

• Membership expansion:
  • 38 members in 1946; 68 in 1960; 184 members at the time of the speech.
• Postwar economic outcomes:
  • Rapid growth among major industrial countries between late 1940s and early 1970s:
  • United States: average annual growth in real GDP per capita of 2.4 percent between 1950 and 1973.
  • Germany: 5 percent (same period).
  • Japan: more than 8 percent.
  • Korea: per capita income increased roughly twelve fold between 1960 and 2005.
• Noted vulnerabilities: protectionism, fiscal deficits, weak macro policies in various regions constrained growth (examples cited: Latin America, some oil-exporting countries, parts of Africa).

Lessons from crises and policy implications

• Nature of 1990s crises:
  • Shift to large private international capital flows created capital account crises (Mexico 1994; Asia 1997-98; Russia 1998).
  • Asian crisis net flow data:
  • Net inflows to the Asian crisis countries were over 6 percent of their GDP in 1995.
  • Just under 6 percent in 1996.
  • In 1997, net outflows were 2 percent of GDP.
  • Net outflows rose above 5 percent in 1998.
• Identified causes and amplifiers:
  • Rapid, indiscriminate credit expansion → rise in non-performing loans.
  • Fixed exchange rate regimes and currency mismatches magnified the impact of reversals.
  • Weaknesses in domestic banking systems and poor credit assessment.
• Key policy lessons:
  • Sound macroeconomic frameworks: low or falling inflation, budgetary prudence, sustainable public debt.
  • Importance of flexible exchange rate regimes to allow adjustment to shocks.
  • Central role of a strong, transparent financial sector and effective regulation.
  • Transparency and good governance as enduring policy priorities.

Applied lessons: country case studies

• Brazil:
  • Crisis in early 1999; program supported by the Fund during the 2002 pre-election period committed new government to maintaining fiscal, monetary and exchange rate frameworks.
  • Outcomes:
  • External financing needs fell sharply; debt position strengthened.
  • In 2004 there were about four and a half million fewer Brazilians living on less than a dollar a day than there had been only three years earlier.
  • Brazilian government repaid all its outstanding debt to the Fund, well ahead of schedule (as of end of last year referenced in speech).
• Turkey:
  • Longstanding inflation problems; inflation had been above 60 percent a year from the late 1980s.
  • Crisis starting in 1999 and banking crisis in 2000-1 led to wholesale reforms supported by a Fund program.
  • Inflation dynamics:
  • Inflation fell from more than 70 percent just three years ago to below 8 percent in 2005.
  • It is expected to fall further, to 5 percent, this year.
  • Fund financing: a new $10 billion standby arrangement agreed last year in support of the program.

Financial sector work and standards

• Financial Sector Assessment Program (FSAP):
  • Introduced in 1999; conducted jointly with the World Bank for developing countries.
  • Well over 100 members have had, or requested, an FSAP.
  • Countries cited as beneficiaries include Britain, Iceland, Russia and Nigeria.
• Standards and Codes / ROSCs:
  • Joint work with the World Bank to encourage transparency across twelve areas including banking supervision, securities regulation and insurance supervision.
• Emphasis: surveillance of financial sector vulnerabilities and promotion of international best practice in regulation and transparency.

Technical assistance, surveillance, and programmatic priorities

• Technical assistance areas include:
  • Customs procedures, tax administration, public expenditure management, foreign exchange market development, monetary policy management, pension reforms.
• Surveillance tiers:
  • Global (WEO), regional, and national (Article IV consultations).
  • Regional surveillance highlighted for closely integrated areas (example: Euro area).
• Objectives across instruments:
  • Ensure policies that deliver macroeconomic and financial stability.
  • Lay foundations for sustained growth and poverty reduction.
  • Support institutional reforms (property rights, contract enforcement) to make macro frameworks sustainable and to attract investment.

Conclusion: adaptation, continuity, and priorities

• Central assertions:
  • IMF mandate remains relevant; maintenance of international financial stability is more important in a rapidly integrating global economy.
  • No single revolution anticipated: change is continuous and evolutionary for both national governments and the Fund.
• Enduring policy emphases identified since the 1990s:
  • Sound fiscal policies and sustainable debt levels.
  • Central role of a sound financial sector for growth.
  • Preference for flexible exchange rate regimes to adjust to shocks.
  • Structural reforms and institutional frameworks that respect property rights and contract enforcement to encourage enterprise.
• Overarching goal:
  • By fostering growth within a stable international economic environment, the IMF continues to play a central role in enabling accelerated growth, rising living standards, and poverty reduction.

Remarks by Anne O. Krueger, First Deputy Managing Director, IMF; Address to International Development Club, Graduate School of Business, Stanford University; February 23, 2006.

References

• PRESS CENTER
• https://www.imf.org/en/home