The Challenges of Globalization and the Role of the IMF, Address by IMF Managing Director Horst Köhler

IMF News, May 15, 2003

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Bibliographic details

• Published: May 15, 2003

Definition and nature of globalization

• Globalization defined as a process of increasing international division of labor and integration of national economies through trade in goods and services, cross-border corporate investments, and financial flows.
• Integration is boosted by technological progress in transport and communications and includes the free exchange of thoughts and ideas and greater mobility of people.
• Not imposed but driven by human forces: the drive for freedom, a better life, new discoveries, and broader horizons.
• Evidence of broad interest: a Google search under the keyword "globalization" yields more than 1.6 million hits.

Historical context

• Globalization is not recent; examples cited include the 11th century Venetian Republic and the age of Portuguese, Spanish, and Dutch voyages of discovery.
• Mid-19th century to 1914: discovery of electricity, expansion of railways, and the gold standard led to enormous increases in trade and financial integration.
• First half of the 20th century: aggressive nationalism, protectionism, the Great Depression, and world war interrupted integration.

Opportunities and empirical outcomes

• Over the last 50 years industrialized countries: real per capita income more than tripled in the second half of the 20th century.
• South Korea: per capita income increased more than tenfold (measured in today's prices).
• Life expectancy: rose by over a decade in industrialized countries and by over 20 years on average in developing countries.
• Structural changes in developing-country exports: China, India, Malaysia, Brazil, Mexico, South Korea, and Thailand now export finished products and services.
• India: IT exports alone account for nearly 40 percent of export earnings.
• Scale of global exclusion: over 3 billion inhabitants in recent decades joined globalization gains, while a similar number live on less than $2 a day.

Major economic risks of globalization (three highlighted challenges)

• Unequal distribution of benefits: primarily to industrialized countries and a group of developing countries; persistent extreme poverty threatens stability and peace.
• Financial crises: globalization of financial markets accompanied by devastating crises in emerging market economies; common features include over-indebtedness and massive reversals in capital flows causing severe recessions and sharp rises in unemployment.
• Environmental pressure: domestic environmental policies alone insufficient; environment as a global public good requiring active engagement.

Policy framework and five guide posts for a "better globalization"

• Call for political management of globalization; endorsement of critical debate.
• Five guide posts:
  • Greater priority for international interdependence in national policy agendas; need for closer international cooperation and institutions responsible for global problems.
  • International solidarity as both ethical duty and investment in stability and peace.
  • International cooperation should not replace national self-responsibility; emphasis on good governance, sound institutions, and rule of law.
  • Market economy affirmed as best mechanism for economic coordination, but supplemented by internationally recognized ground rules for participation in globalization.
  • Respect for diversity; strengthening international financial architecture should not impose a uniform economic or cultural model.

International financial architecture and IMF priorities

• Crisis prevention central to IMF mandate; bilateral and multilateral surveillance are principal tools.
• IMF focus sharpened on sources of crisis vulnerability and strengthening crisis resilience.
• Policy recommendations for members include:
  • Fiscal policy that leaves room for maneuver in difficult times.
  • Efficient and diversified financial sectors.
  • More effective social safety nets.
  • Flexible exchange rates as buffers for adaptation.
• Financial Sector Assessment Program (with World Bank): over 50 country analyses completed; Germany's analysis under way.
• Private capital flows now dominate public flows in volume and variety; IMF established a special department for international capital markets and maintains a regular private sector dialogue.
• Global Financial Stability Report produced semi-annually; identified weaknesses in corporate balance sheets and early counseling for greater transparency in financial derivatives.

Capital liberalization stance

• Free movement of capital provides access to technology, investment, and financial expertise; promoting further liberalization remains appropriate and important.
• Caution: capital account liberalization must be carefully sequenced with sound institutions and domestic regulatory and supervisory capabilities established.

Transparency, standards, and surveillance

• Transparency imperative for crisis prevention; substantial progress since late 1990s crises.
• Special Data Dissemination Standard (SDDS): 53 member countries have joined, including major emerging markets such as Brazil, India, and Mexico.
• SDDS provides consistent standards for publication of important economic data; used in country risk evaluation (e.g., foreign exchange reserves).
• IMF transparency: nearly all country and policy documents publicly available unless consent withheld or market-sensitive; semi-annual work program published; Independent Evaluation Office established and has issued reports on IMF role in late-1990s crises.
• IMF promotes acceptance and observance of standards and codes across economic statistics, fiscal and monetary transparency, bank capital requirements, supervisory standards for investment and insurance industries, and anti–money laundering methodologies.

Crisis management, moral hazard, and debt restructuring

• IMF is not an unlimited lender of last resort; clarified conditions and limits of access to IMF resources.
• Proposal for bankruptcy-like mechanism for sovereign insolvency did not achieve required voting support; consensus exists on proceeding with Collective Action Clauses (CAC) in government bonds.
• Recent inclusion of CACs by Mexico, Brazil, and South Africa noted.
• IMF supports a voluntary code of conduct for debtor–creditor debt rescheduling procedures and continues work on issues like aggregation of debt claims across different bonds.

Poverty alleviation, development strategies, and IMF role in low-income countries

• IMF is a global institution with 184 member countries; focus must include poor countries where poverty remains the greatest challenge.
• Monterrey consensus (UN Conference on Financing for Development, March 2002) endorses two-pillar approach:
  • Greater efforts by poor countries: rule of law, good governance, fight against corruption, better investment climate.
  • Swifter, more comprehensive, and effective support from advanced economies; aid as partnership.
• NEPAD highlighted as embodiment of Monterrey spirit in Africa.
• Poverty Reduction Strategy Papers (PRSPs): World Bank leads with IMF support; emphasize country-owned long-term development strategies and broad consultation with civil society.
• PRSP uptake: twenty-eight developing countries have prepared full PRSPs and twenty-one others are coordinating with interim PRSPs.
• Early success examples: Mozambique, Tanzania, and Uganda—stable growth through recent global shocks and structural increases in education and health expenditures.
• IMF strengthened Africa engagement, including establishment of two regional technical assistance centers in Tanzania and Mali.

Debt relief outcomes and caveats

• Enhanced HIPC initiative: reduced external debt of 20 countries by $40 billion, a reduction by two thirds in net present value terms.
• In these countries, social expenditures are on average three times higher than their debt service.
• Debt relief is not a panacea; building and maintaining credit culture is essential for access to private finance and international financial stability.

Trade liberalization and agricultural policy recommendations

• Industrial countries urged to open markets and dismantle market-distorting subsidies; trade is described as the best form of help to self-help.
• Quantified estimates and examples:
  • Abolishing all trade barriers in goods markets would lead, according to best estimates and before taking into account productivity gains and improved investment prospects, to an annual increase in global income of $250 billion to $620 billion — of which one third to one half would benefit developing countries.
  • Total financial support to the agricultural sectors in the OECD reached over $300 billion in 2001 — six times overseas development assistance from these countries.
  • The average European cow receives a daily subsidy of $2.50 — statistically, that is more than almost 3 billion people in developing countries have to live on per day.
  • Example of tariff escalation: EU zero tariff on cocoa beans, but 9.6 percent duty on cocoa paste and processed chocolate tariffs that can add up to as high as 25 percent.
• Doha WTO negotiations: 2001 agreement to make the new multilateral trade liberalization initiative a "Development Round"; concern that optimism may be waning after missing the March deadline for modalities for agricultural talks.
• Three fourths of the world's poor live in rural areas and depend on agriculture; agricultural reform is central to a true "Development Round."
• Successful conclusion of the Doha Round by the agreed deadline in 2005 deemed vital to strengthen confidence in global cooperation.

Aid commitments and moral assessment

• Industrial countries urged to meet the 0.7 percent GNP aid target.
• Germany cited: development aid at 0.26 percent of GNP.

Ethical and governance considerations

• Optimism that better globalization is possible with right policies, including elimination of glaring poverty.
• Corporate governance and ethics called for beyond quarterly profits; need for corporate code of ethics that fosters sustainable value creation respecting shareholders, workers, and the environment.
• Endorsement of a "global ethic" that respects human rights and emphasizes duties as well as rights; cultural and religious commonality seen as a basis for optimism and peace-building.

Source: The Challenges of Globalization and the Role of the IMF, Address by IMF Managing Director Horst Köhler, Berlin, May 15, 2003.

References

• Brazil and the IMF
• Germany and the IMF
• India and the IMF
• Republic of Korea and the IMF
• Mexico and the IMF
• United Republic of Tanzania and the IMF
• Special Data Dissemination Standard
• The IMF and Good Governance -- A Factsheet
• Poverty Reduction Strategy Papers -- A Factsheet
• Standards and Codes
• Speeches
• Horst Köhler
• PRESS CENTER
• German
• https://www.imf.org/en/home