Transcript of a Briefing by Horst Köhler, Managing Director of the International Monetary Fund at the Council of Foreign Relations, Washington, D.C.

IMF News, September 19, 2002

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Published: September 19, 2002

Overview

Event: Briefing by IMF Managing Director Horst Köhler at the Council on Foreign Relations, Washington, D.C.
Date: September 19, 2002
Theme: "Investing In Better Globalization"
Moderator: Richard Fisher, Managing Partner, Kissinger McLarty Associates
Context: Remarks and audience Q&A touching on IMF strategy, conditionality, transparency, social safety nets, capital account policy, country cases, and institutional roles.

IMF role in a changing global environment

Key observations:
- Bretton Woods institutions remain important "formidable piers in a turbulent sea."
- The IMF prepares for its 57th Annual Meeting to address international solvency procedures and financial stability.
- Global environment described as turbulent with many long-standing assumptions altered.
Manager’s stance:
- IMF "has a lot to learn" (cited from Horst Köhler’s article in the Financial Times, September 11).
- The IMF should provide rules, regulation, and guidance to markets, not merely rely on market outcomes.

Social safety nets and fiscal discipline

Main points:
- Social safety nets should be established early—before crises occur.
- In crises, tough choices are unavoidable; objective is to restore sustained growth which eases financing of social safety nets.
- Policy: do not cut well-established social safety nets; they should be the last resort when regaining fiscal solidity.
Practical implications:
- Argentina example: lack of prior consistent social safety-net building made fiscal adjustment appear as cutting social protection.
- Early and consistent reforms are emphasized.

Capital account openness and sequencing

Assessment:
- The rapid opening of capital accounts in parts of Asia contributed to the Asian financial crisis when domestic financial infrastructure was weak.
- Lesson: do not rush capital account liberalization; use a sequenced approach tied to domestic regulatory, supervisory, and local capital market development.
Policy implication:
- Build local financial markets and strengthen domestic financial institutions before full capital account convertibility.

Transparency and disclosure

Observations:
- IMF increasing transparency; progress is work in progress.
- Two driving forces for transparency:
- Market demand for reliable, transparent data.
- Domestic political demand (parliaments, publics) for openness.
Tensions and balances:
- Need to balance disclosure of market-sensitive information against potential damage to countries’ reputations and market stability.
- Preference for voluntary approaches to advance transparency (example: China joined the IMF's Special Data Dissemination System).

IMF relationship with industrial countries

Leverage and influence:
- IMF has more leverage when members seek its financial support; less leverage over industrial countries that do not need IMF borrowing.
Role emphasized:
- Create awareness of inter-connectiveness of policy issues (financial markets, environment, migration).
- Engage in dialogue with major shareholders on fiscal deficits, current account deficits, and structural reforms (examples mentioned: U.S., Europe, Japan).
- Persuasion and cooperation rather than coercion are the practical approach.

Financial inclusion, technical assistance, and investor engagement

Initiatives:
- Poverty Reduction Strategy Paper/Process: IMF focuses on macroeconomic stability while the World Bank leads institution building.
- Private Investor Advisory Councils initiated by Köhler and set up in Tanzania and Ghana to connect business leaders with high officials about investment climate.
- Regional Technical Assistance Centers established in IMF core expertise areas to address capacity constraints in administrations.
Rationale:
- Access to private capital markets is essential; official development aid alone is insufficient.

Conditionality, sequencing, and program design

Critiques acknowledged:
- IMF labeled by some as "SAD" (Secretive, Arrogant, and Dominant).
- Conditionality has at times been too ambitious or poorly sequenced.
Reforms in approach:
- Reduce and better tailor conditionality to areas where IMF has expertise.
- Sequence structural reform demands to align with countries’ political processes and implementation capacity.
- Where conditionality is indispensable, maintain clarity on implementation requirements.

Governance, political dimensions, and institutional capacity

Framing:
- Many development challenges (governance, civil society, transparency, poverty) are as much political as economic.
IMF capacity:
- IMF focuses on macroeconomic, financial-sector, exchange rate, and monetary-policy expertise.
- Institutional collaboration is necessary: IMF to coordinate with World Bank and United Nations on complementary roles.
African perspective:
- Recognition of African-led agenda NEPAD (New Economic Partnership for Africa's Development).
- Emphasis on self-responsibility (good governance, rule of law, conflict resolution, anti-corruption) as preconditions for external support.

Country examples and outcomes

Turkey:
- IMF highly exposed but Turkey has implemented an ambitious reform program: fiscal consolidation, banking-sector cleanup, decoupling politics from economics.
- Results noted: inflation falling more than expected under the program, exchange rate stability, lower interest rates, growth recovering.
- Upcoming parliamentary elections expected in November will clarify political support for continued reforms.
Africa successes:
- Countries cited with progress: Tanzania, Mozambique, Uganda, Cameroon, Benin, Ghana.
- Success linked to IMF engagement on poverty reduction strategies combined with domestic commitment to governance and reform.

Reflections on leadership and institutional role

Horst Köhler’s view:
- IMF Managing Director role is "the most fascinating" among prior public jobs; requires comprehensive, "eyes-open" attitude under intense public scrutiny.
- Acknowledgement of pressure: "six billion people, so you have 5.99 billion people who know everything better."
Closing assessment:
- The IMF should focus on areas of core competence, promote sequencing and ownership of reforms, support transparency, and collaborate with other institutions to make globalization benefit the poor.

Transcript of a Briefing by Horst Köhler, Managing Director of the International Monetary Fund at the Council of Foreign Relations, Washington, D.C., September 19, 2002.