## Toward a Better Globalization, Horst Köhler, Managing Director of the IMF, Inaugural Lecture on the Occasion of the Honorary Professorship Award at the Eberhard Karls University in Tübingen

_IMF News, October 16, 2003_

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## Bibliographic details
- Authors: Horst Köhler Managing Director
- Published: October 16, 2003

---

### A practical definition of globalization
- Searching in Google under the key word "globalization" yields more than 5 million hits.
- For most economists globalization primarily means:
  - increasing international division of labor;
  - integration of national economies through trade in goods and services, cross-border corporate investments and financial flows;
  - boosted by technological progress in transport and communications.
- Globalization is characterized as an ideal "win-win proposition" but also entails:
  - rising cross-border competition requiring constant change and adjustment;
  - non-economic dimensions: environmental problems, contagious diseases, organized crime;
  - cultural and political risks exemplified by Samuel Huntington's "Clash of Civilizations" question.

### A brief history
- Waves of globalization:
  - 11th century: Venetian trade prosperity.
  - 16th century: Portuguese, Spanish, Dutch voyages of discovery.
  - Second half of the 19th century: electricity, steam engine, railways, gold standard — first comprehensive boost.
  - Interruption: protectionism, aggressive nationalism, Great Depression of the 1930s and World War II.
  - Post-World War II: second wave with UN, IMF, World Bank — industrialized countries' real per capita income more than tripled in the second half of the 20th century; in Germany it increased even fivefold.
  - Recent ("third wave"): last 20 years — many developing countries doubled their ratio of trade to income; exports shifted from raw materials to finished products and services.
- Selected statistics from recent decades:
  - In India, IT exports today account for nearly 40 percent of export earnings.
  - "New globalizers" have a combined population of more than 3 billion people.
  - These countries increased their annual per capita economic growth: from 1 percent in the 1960s to 3 percent in the 1970s and 5 percent in the 1990s.
  - In China, real per capita income has increased more than fivefold since 1978 and the number of people living in absolute poverty has fallen by 200 million.
  - Life expectancy increases (1950 to 1999): industrialized countries about 10 years; developing countries nearly 20 years; India and China nearly 30 years.

### The risks of globalization
- Persistent poverty:
  - World Bank classification: nearly 1.2 billion people — one fifth of mankind — live in absolute poverty with incomes less than $1 a day.
  - In 1999 the World Bank estimate: 1.169 billion people living in absolute poverty (not undisputed).
- Uneven benefits: many countries where trade decreased in the last 20 years and economic growth did not keep pace with population growth.
- Regional crisis drivers:
  - Africa’s situation aggravated by the AIDS pandemic.
  - Financial crises in the 1990s (Latin America, Asia, Russia) with devastating economic and social consequences.
- Financial globalization complexity:
  - Private capital flows to emerging markets overtook public flows in volume and variety over the last two decades.
  - Questions about crisis vulnerability related to financing type (direct investment, portfolio investment, bank loans), maturity structure, currency pegs.
  - Uncertainty about causes/implications of financial bubbles and the role of deregulation initiated in the 1980s.

### Globalization requires political management — six guideposts
- Overarching principle: globalization is neither inherently good nor bad; it must be "shaped politically."
- Six guideposts:
  1. Global domestic policy:
     - Each country must consider consequences of its actions on others;
     - Multilateral cooperation required to resolve issues like the U.S. current account deficit and corresponding surpluses in Asia and Europe.
  2. Multilateral solutions and national self-responsibility:
     - United States: return to a balanced fiscal position in the medium term;
     - Europe and Japan: sustained growth requires vigorous structural reforms;
     - Developing countries: good governance, rule of law, and fight against corruption are essential.
  3. International regulatory framework:
     - Market forces insufficient alone; need recognized rules and effective institutions;
     - Framework to provide global public goods: international financial stability, a clean environment, free trade;
     - Institutions cited: UN, World Bank, WTO, ILO, IMF;
     - Support for a clearly defined international competition policy (proposal referenced from Mario Monti).
  4. Social dimension:
     - Social equity is crucial for political stability and investment climate;
     - Consideration of John Rawls's "Difference Principle" in international development policy.
  5. Respect for diversity:
     - Globalization should not impose harmonization of economic and social models;
     - IMF provided technical assistance for development of different forms of Islamic banking in Iran, Malaysia, Pakistan, Sudan.
  6. Global ethic:
     - Endorsement of Hans Küng's call for a basic consensus concerning binding values and absolute standards;
     - Ethical principles and sustainable value creation compatible with profitability and competitiveness.

### The fight against poverty — IMF role and international consensus
- Conceptual approach with three key elements:
  1. Specific objective: Millennium Development Goals (MDGs) — include halving absolute poverty and reducing child mortality by two thirds by the year 2015.
  2. Partnership for development: Monterrey Consensus (2002) — poor countries' efforts matched by comprehensive support from industrialized countries.
  3. Concrete implementation plan: Poverty Reduction Strategy Papers — country-owned, broad-based consultation, priorities such as education, health, rural development, investment climate, fighting AIDS.
- African focus:
  - NEPAD reflects this concept; sets goal of achieving sustained growth of at least 7 percent per year in Africa (described as ambitious but doable).
  - Integration into international trade is essential; trade called "the best form of self-help."
- Trade and aid imbalances:
  - Over $300 billion annually spent to support agricultural sectors in industrialized countries versus barely $50 billion in overseas development assistance.
  - Industrialized countries committed to spend 0.7 percent of GNP on development assistance; Germany's ratio of official development assistance to GNP is 0.26 percent.
- Additional financial support and debt relief needed; preference for grants rather than loans.

### Strengthening the international financial system — progress since the Asian crisis
- Three areas of progress:
  1. Broadened and more inclusive international dialogue:
     - Developing and emerging market countries increasingly involved (BIS committees, G-20).
     - Evian G-8 summit expanded participation to leaders from a wide array of emerging market and developing countries.
  2. Establishment of the Financial Stability Forum (1999):
     - Mandate: identify gaps and weaknesses in the international financial system.
     - Example concerns: unclear ultimate risk-bearers for derivatives and hedge funds and supervision responsibilities.
  3. IMF focus on crisis prevention:
     - Bilateral and multilateral surveillance: semiannual World Economic Outlook (WEO) and Global Financial Stability Report (GFSR).
     - Research finding: clear positive correlation between sound institutions and economic growth; relevance of "Ordnungspolitik" (institutional and regulatory framework).
     - Shift in IMF advice toward identifying vulnerabilities (excessive sovereign debt, balance sheet mismatches); recommend careful sequencing of capital account liberalization and stronger shock absorbers (flexible exchange rates, fiscal space, diversified financial sectors, social safety nets).
     - Financial Sector Assessment Program (with the World Bank): completed more than 50 country analyses; extended to off-shore financial centers.
     - Development and promotion of standards and codes: comparable statistics, transparency rules for fiscal and monetary policies, supervisory standards for banking/securities/insurance.
     - Collaboration with FATF on methodology to counter money laundering and financing of terrorism.
     - Greater transparency: nearly all country and policy documents now published.
- Limits and realism:
  - Acknowledge limits to anticipating/preventing crises in open market economies; objective is fewer and less severe crises.
  - Emphasis on self-responsibility to minimize moral hazard; IMF cannot be a lender of last resort with limitless liquidity.
  - IMF proposal for an international insolvency procedure for sovereign debt failed to secure required support to amend Articles of Agreement; nevertheless progress achieved via Collective Action Clauses (CAC) in sovereign bonds.

### The IMF as a learning institution
- IMF must remain open to change and learning; recent reforms introduced recognizing necessary policy changes.
- Independent Evaluation Office (established two years earlier) expected to play a vital role.
- Quotation guiding attitude: Karl Popper (1991) — focus on "What should we do to make the world a little better?"
- Vision: IMF contribution toward a better globalization; encouragement for students to engage with global economic issues.

*Speech by Horst Köhler, Managing Director of the International Monetary Fund, Tübingen, October 16, 2003.*

---


## References

- [Brazil and the IMF](http://www.imf.org/external/country/BRA/index.htm)
- [People's Republic of China and the IMF](http://www.imf.org/external/country/CHN/index.htm)
- [Germany and the IMF](http://www.imf.org/external/country/DEU/index.htm)
- [India and the IMF](http://www.imf.org/external/country/IND/index.htm)
- [Mexico and the IMF](http://www.imf.org/external/country/MEX/index.htm)
- [Malaysia and the IMF](http://www.imf.org/external/country/MYS/index.htm)
- [United States and the IMF](http://www.imf.org/external/country/USA/index.htm)
- [The IMF and Good Governance -- A Factsheet](https://www.imf.org/en/about/factsheets/sheets/2023/the-imf-and-good-governance)
- [Speeches](https://www.imf.org/en/news/searchnews)
- [Horst Köhler](https://www.imf.org/external/np/omd/bios/hk.htm)
- [PRESS CENTER](http://presscenter.imf.org/)
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