Speech

98/16 Address by Michel Camdessus
Managing Director of the International Monetary Fund
at the High-Level Meeting of the UN Economic and Social Council
New York, July 6, 1998

Mr. Chairman, ladies and gentlemen. I am very pleased to participate in this year’s high-level meeting of ECOSOC. The events of recent months in Asia and elsewhere have brought home to us the perils as well as the promise of our increasingly globalized world. It is almost as if we face two doors, no matter which way we turn. Through one is the promise of a huge pool of resources for investment and growth, economic equity, and social advancement. But through the other is the threat of financial instability, crises, and the marginalization of countries that are unable to join this powerful current of world economic unification. Which door will we open? Will we get it right? Well, in fact, we have no choice. There is only one door! For along with the promise will come the perils.

This morning, I would like to share with you my thoughts on how the IMF is trying to create an enabling environment so that developing countries can enjoy better market access and better integrate into the global economy and the multilateral trading system. Or to put it another way: how the IMF can help countries open the door in such a way that they maximize the benefits of globalization and minimize the risks. I will touch on our efforts to liberalize economic and financial systems, strengthen sustainable development, and create a new architecture for the global economy. But first some thoughts on the realities and lessons of the Asian financial crisis.

The Asian crisis

For the past few decades, East Asia, without question, has showcased the benefits of globalization. Using a mix of saving, prudent fiscal policies, investment in physical and human capital, and—at least partially—the liberalization and opening up of economies, these countries managed to produce a "miracle" in terms of high growth and poverty reduction.

But there was another side to this miracle that we so admired. In a globalized economy, a few macroeconomic virtues are not enough. Constant vigilance by all countries must be maintained over all the socioeconomic parameters. The soundness of the bankingsystem, in particular, must be monitored at all times. The unsustainable accumulation of short-term financing must be avoided. And great care must be taken to ensure that governments conduct their affairs in an irreproachable and transparent manner and that all forms of corruption, favoritism, nepotism, and, if I may use the expression, "cronyism" are shunned.

But let us not single out the Asian countries alone. These missing elements exist to a degree everywhere. And these countries’ problems would not have reached such proportions if financial institutions operating in the international markets had not taken excessive risks.

What is the IMF doing to contain the crisis? As soon as it was called upon, the IMF moved quickly to help Thailand, then Indonesia, and then Korea formulate reform programs aimed at tackling the roots of their problems and restoring investor confidence. These programs—I would like to emphasize—go far beyond restoring the major fiscal, monetary, or external balances. Their aim is to strengthen financial systems, improve governance and transparency, restore economic competitiveness, and modernize the legal and regulatory environment. To provide the breathing space in which these efforts could go forward, we have marshaled an unprecedented volume of financial support. And in varied ways, we have helped countries around the world that were being threatened with contagion to strengthen their macroeconomic fundamentals and their economic structures. No wonder that, at the present time, 55 countries around the world are applying IMF programs and 28 more—for a total of 83 countries—are having more or less advanced negotiations with us: the effort at strengthening economic structures with IMF support is truly widespread in the world!

But in recent weeks, a new crisis—a crisis within the crisis—has emerged with the weakness of the yen. This new development reflects a serious lack of confidence, provoked in part by recessionary conditions in Japan, as well as the crisis facing its financial institutions. Clearly, the fall of the Japanese yen is not unrelated to the Asian crisis, but it could also seriously jeopardize the ongoing recovery of the economies that were hit first. And it adds to the market instability that is again affecting other countries within the region, as well as some countries, including Russia, outside it. Thus, Japan must now move aggressively and quickly to rehabilitate its banking sector, to adopt policies—including reforms that would provide significant tax relief—that ensure that fiscal stimulus is not withdrawn too quickly next year, and to open up and deregulate its economy.

What else needs to be done to dispel the crisis and restore broad-based growth?

First, the international community must pull together to support the adjustment programs of those countries most severely affected by the crisis. The multilateral institutions—the IMF, World Bank, Asian Development Bank—and a number of individual countries have taken on this task. But it is also vital that countries with balance of payments surpluses recycle these surpluses in the form of untied loans and humanitarian aid to countriesin the process of adjustment. As creditors—in the most difficult situations—they should stand ready to grant generous terms for the restructuring of their claims and, in general, support the recovery in Asia through new loans—and, above all, keep their markets open, a point I shall come back to shortly.

Second, we must strengthen policies to improve fiscal management, in order to put economies on a sounder footing. This message applies to all countries, including those now taking the historic step of adopting the euro. It applies in particular to the transition economies and certain emerging countries, particularly those in Latin America, which are more vulnerable than others. It applies most especially to Russia, which has also been severely shaken by the crisis and which knows that additional external assistance would provide only temporary relief unless accompanied by far-reaching financial adjustment measures that are long overdue.

Third, we must help preserve the stability of exchange rates in countries whose actions may be crucial to market stability, such as China and Hong Kong SAR, despite the short-term negative impact of the crisis on their exports and growth. In these countries, as in Singapore and Taiwan Province of China, there is a certain margin for fiscal stimulus, which should be used without delay if it becomes necessary. I would note here that Hong Kong SAR has recently announced a major package of measures to strengthen the economy.

Increased openness

Against the background of what has happened in Asia, what can developing countries do to position themselves to reap the benefits of globalization, while minimizing the risks? An important part of the answer lies in further liberalizing and opening up economies: liberalizing trade, liberalizing payments, and liberalizing capital controls—all in an orderly manner.

With the Uruguay Round behind us, thanks to the untiring, judicious, and successful efforts of the WTO under the leadership of Renato Ruggiero, the opportunities are greater than ever for developing countries to integrate into the global trading system. They must now create the macroeconomic and institutional framework—which includes trade liberalization—that would allow them to exploit export opportunities. This means going beyond the minimum requirements of the Uruguay Round, as the Fund and the WTO consistently counsel member countries. Indeed, the Fund and the WTO play complementary roles here: the Fund in pursuing the nondiscriminatory liberalization of applied trade barriers, whereas the WTO provides a forum for negotiating bound rates.

For it is the countries that pursue strong, progressive trade liberalization, in the context of general economic reforms and market-oriented policies, that come out ahead on growth and trade performance. And for some, regional integration initiatives may serve as a stepping stone for accessing the global trading system. But the risk of fragmenting the worldtrading system through propagation of a multiplicity of overlapping, conflicting, and contradictory regional trading arrangements must be avoided. This is why these initiatives must be preceded or accompanied by substantial nondiscriminatory trade liberalization.

But developing countries can only go so far, if they face restrictions in the markets where they have the greatest export potential. It is here that industrial countries could make a significant contribution—which would be a good investment in their own future—by liberalizing import restrictions on a bound and permanent basis. They should also resist the temptation to replace tariffs and nontariff barriers with administered protection measures, such as antidumping. An assurance of broad-based, nondiscriminatory access to individual country markets would be a shot in the arm for confidence in the developing countries and could play a key role in improving the climate for foreign direct investment in them.

Of course, trade liberalization goes hand-in-hand with payments liberalization, which historically has been a primary focus of the Fund. The agreement at Bretton Woods gave the IMF the mandate to help eliminate "foreign exchange restrictions that hamper the growth of world trade." It has taken more than 50 years, but we are well on our way to finishing the job: as of today, more than three quarters of our members (142) have eliminated restrictions on current transactions. We look forward to the remaining countries accepting this obligation at an early date.

Turning to capital account liberalization, as countries liberalize their current accounts, the trend toward capital account liberalization is irreversible. But are the customary arguments in favor of the freedom of capital movements still valid in light of the Asian crisis? I put this question to Korea’s President, Kim Dae-Jung. Do you know what he told me? He said, "Don’t let the crisis in Asia intimidate you!"

Indeed, the problem in Asia was not that countries—Korea, in particular—went too far or too quickly with opening their capital accounts. Rather, the problem stemmed from a poorly sequenced approach and a lack of prudential regulations and oversight. For this reason, the IMF does not support a mad rush to full capital account liberalization, regardless of the risks. What we do support is the liberalization of capital flows in a prudent and properly sequenced way that will maximize the benefits and minimize the risks.

Strengthening sustainable development

A particular issue of concern in this rapidly changing world economic environment is how the international community can help Africa and low-income countries in general avoid marginalization and accelerate high-quality growth. Let me just mention four things that the IMF is doing:

• First, we are taking steps to put the ESAF—our concessional lending window—on a self-sustained footing so that we can continue to support reform efforts in low-income countries over the long term. We are also exploring ways that the ESAF can serve the developing world better, drawing on findings of recent internal and external evaluations. Working closely with the World Bank, we shall be taking a fresh look at ways to accelerate public enterprise and financial sector reforms; improve the assessment of medium-term investment needs and capacity to absorb external financing; and identify potential adverse social consequences of reforms, to be in a position to coordinate with national authorities the appropriate, rapid, effective responses. And we shall certainly be looking at approaches that can help governments take ownership of programs, and truly call them their own.

For many years now, I have consistently advocated "high-quality growth." Indeed, the policy emphasis of Fund-supported programs includes protecting or increasing public outlays for health care, education, and other basic social services. In this connection, you might be interested to know that in our most recent study of 32 low-income countries implementing adjustment programs supported by the Fund during 1985-96, real per capita spending on health and education increased, on average, by 2.8 percent annually during the program periods. This is worth repeating: nearly 3 percent a year in real terms and per head. This increase helped underpin discernible improvements in key social indicators. Gross primary and secondary school enrollment increased, on average, by 1.7 percent and 1.1 percent a year, respectively; illiteracy rates declined by 2.4 percent a year; access to health care increased by 8.7 percent a year; infant mortality rates fell by 1.7 percent a year; access to safe water rose by 4.9 percent; and access to sanitation rose by 6.1 percent.

You might also be interested to know that the consensus of a recent conference we held in the Fund on economic policy and equity was that the best way to improve the long-run opportunities of the poor and the disadvantaged was by increasing their human capital and providing them with access to credit, justice, public services, and employment opportunities. And, importantly, that more equity need not hamper growth—rather the opposite, that more equity reinforces growth.

• Second, we have been moving swiftly to implement our joint HIPC Initiative with the World Bank for the heavily indebted poor countries. Just in the 18 months since its launching, commitments of about $6 billion have been made to six countries; and work with a number of other countries is in the pipeline. This Initiative may strike many as timid. It does have its limitations, for it calls for a very broad consensus on the part of creditor countries, which may not always share the same assessments or the same priorities. Nonetheless, the Initiative provides a major opportunity for debtor countries, and they must seize this opportunity to expeditiously reach a sustainable external debt position. So I call on all eligible countries to take the needed policy measures with all possible speed. The list of beneficiaries could be much longer, and we all hope to see this in another year or two.

But as you well know, debt is only one of the impediments to sustainable development. The countries that wish to solve this problem in the absence of an appropriate policy framework cannot hope to achieve much. That is precisely why we have stressed all along that debt relief under this Initiative be linked to programs that can act as a catalyst for high-quality growth and help position countries to tap international capital markets as soon as possible.

• Third, over the years, the IMF has provided assistance to countries that have experienced political turmoil, civil unrest, or international armed conflict—and since 1995, we have had a special policy to provide emergency post-conflict assistance. Bosnia-Herzegovina was the first country to benefit from this new policy in late 1995, and Rwanda, Albania, and Tajikistan have also received such assistance. The Republic of Congo may be next in line.

• Fourth, the IMF stands ready to continue to provide—and intensify—training and technical assistance for capacity building and institutional reform in Africa and low-income countries elsewhere. Perhaps one of the most encouraging signs is the recent Initiative of the African Governors of the Bank and the Fund to ensure that capacity building is henceforth an integral part of Africa’s development agenda. In this context, the IMF Institute has been expanding its training activities for African officials and supporting regional training and research institutions. It is our intention to extend the reach of our training by the establishment of an IMF regional institute in Africa, jointly with training partners in the region. The IMF is also actively participating in a joint initiative that we see as very promising —with UNCTAD, World Bank, ITC, WTO, and UNDP—aimed at enhancing the trade performance of the least developed countries.

A new architecture

So how can we make the world less prone to financial crises? What kind of new architecture of the global system could achieve this? Let me outline three challenges of reform on which the IMF has been asked to develop operational modalities and strategies.

First, we must continue our efforts to make Fund surveillance more effective and to enhance transparency in international finance. Indeed, transparency is the golden rule for a globalized economy. The IMF can play a central role in crisis prevention by encouraging members to strengthen their macroeconomic policies and financial sectors. The IMF must now step up its efforts on surveillance of the financial sector, capital flows, and the risks posed by a sudden reversal of capital flows. Work is also under way to develop a "tiered response," whereby countries that are believed to be seriously off course in their policies would be given increasingly strong warnings.

In order for our surveillance to be effective, however, data provision needs to be timely, accurate, and comprehensive. Thus, the IMF has decided to be more demanding about the coverage and quality of the data provided to us and communicated to the markets. As you are aware, the IMF has established data standards to guide members in releasing reliable data to the public. And recently, we adopted a code of good practices on fiscal transparency.

Second, financial and banking systems, as well as their supervision, must be strengthened. For some time now, the Fund has been working to help disseminate the set of "best practices" in the banking supervision area—as developed by the Basle Committee—so that standards and practices that have worked well in some countries can be adapted and applied in others. These efforts will now be stepped up.

Third, we need to establish more effective procedures to involve the private sector in preventing and resolving debt crises. Clearly, better ways must be found to involve private creditors at an early stage, in order to achieve equitable burden sharing vis-à-vis the official sector and to limit moral hazard.

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So this is our present agenda. An agenda that will require the creativity, and it goes without saying, the intense cooperation of the entire international community. I look forward to working with all of you as we open the door to better market access and better economic integration—doing so in a way that we keep the perils to a minimum while drawing out to the fullest the promises!