"Asia and the IMF"

September 19, 1997

Seminar Schedule

The Changing Emphasis of the Fund
Implications for Stabilization and Growth Policies

Jack Boorman

Let me start by suggesting that we flip the topic of this session around from "The changing emphasis of the Fund and its implications for stabilization and growth policies" to "How the requirements of stabilization and growth are changing the emphasis of the Fund." I would put it this way because it’s the changing world and the changing environment in which countries are framing their macroeconomic and financial policies that’s driving the adaptation of Fund policies and the focus of our work. The Fund’s relations with the countries in Asia have, in important ways, been affected by this change in focus!

Reading of press reports on the Fund, however, may suggest a bewildering range of activities that might seem to some to stretch well beyond the Fund’s traditional focus on fostering macroeconomic stability and providing balance of payments assistance. Let me give just a few examples by quoting press headlines of the last few months:

Many of the recent policy prescriptions coming from the Fund--reflected in these news stories on issues ranging from land reforms in Russia, to military spending, to debt relief mechanisms, could hardly have been envisaged by the founders at Bretton Woods and the moves by the Fund in these directions have surprised some and been questioned by others, including in this region. Nevertheless, I would argue that not only are these moves consistent with our traditional roles, but that they represent an appropriate--indeed necessary--response to a changing and diverse world if the Fund is to fulfill the tasks given to it under its Articles. Change and adaptation have been constants in the history of the Fund.

The IMF began with some 40 countries as a partnership to promote international monetary cooperation to help restore economic stability and growth in the aftermath of World War II and to help prevent a slide back into the counter-productive "beggar thy neighbor" policies that had so much to do with the length and severity of the depression of the 1930s.

The motivating factors behind the formation of such a partnership and the consultative format adopted for that partnership were nicely stated in a commentary from the U.S. Treasury in June 1944--in preparation for the discussions at Bretton Woods:

"International monetary problems cannot be solved by occasional cooperation improvised among a few great countries to meet a threatened disaster. Such monetary difficulties can be met only by continuous cooperation, to prevent them, if possible, to remedy them when necessary. It is for this reason that the International Monetary Fund is proposed as a permanent institution for international monetary cooperation."

Initially, the operations of this partnership aimed primarily at helping countries establish and maintain currency convertibility for current account transactions at fixed exchange rate parities. But its role evolved, adjusting to the changing international economic environment and to the needs of a diverse and growing—now almost universal—membership of 181 countries. Some of the most important and defining changes came in the wake of the enormous pressures put on the system in the late 1960s and early 1970s.

I expect most of you know this history well and Mr. Tanzi touched on this, so there is no need for me to repeat it here! First, the collapse of the Bretton Woods par value regime and the growing economic imbalances of the period prompted a redefinition of the Fund’s surveillance functions embodied in the Second Amendment. These and other events also led to a substantial expansion of the Fund’s financing role, both through increased lending under its regular facilities, but also with the creation of facilities directed at the specific problems of the membership of that time—the extended Fund facility, the oil facilities, the trust fund, and the supplementary financing facility. Again in the 1980s, events fostered further adaptation. The Fund responded first to the debt crisis— further enlarging its lending capacity through rapid quota increases and developing new mechanisms under its financing arrangements with members to prevent a withdrawal of the commercial banks from the financing of country programs. It also responded to the growing needs of its poorer members--many that had come into the Fund in the post-colonial wave of the 1960s and 1970s--through the creation of its concessional facilities--the SAF and ESAF; and, finally, in 1989, with the breakup of the Soviet Union and a new surge in membership, the Fund responded with the Systemic Transformation Facility, and was led in its technical assistance into new areas of institution–building.

But the world continues to change, and many of the policy changes reflected in the press clippings I cited at the beginning reflect the Fund’s further adaptation to these changes. The Fund prides itself on its mostly apolitical, technical orientation. At the same time, the Fund serves the real world and is affected in numerous ways by the changing geopolitical realities. Two recent changes, in particular, have influenced the focus of the Fund’s work--the first is collapse of socialism and the second is globalization, both of which have profoundly affected the countries of Asia.

The collapse of socialism, or central planning, and the reduced ideological tensions resulting therefrom are reflected in an increasingly wide acceptance of the market paradigm—and a primary reliance on the private sector—as the basic principle around which to organize economies. This has been manifested not only in Eastern Europe and the states of the FSU, but also in a growing number of developing countries that have turned their backs on interventionist, protectionist, and inward-looking development strategies.

These changes have among other things, prompted a rethinking of the role of government in the context of more market-oriented and more open economies. We have been reminded that markets do not operate in a vacuum and need a supporting institutional framework. Governments need actively to promote well-functioning markets. Although there are differences in view about the extent and form it should take, broad agreement exists on some very basic propositions on the role of government. These include the provision of a stable legal, regulatory, and supervisory framework and essential infrastructure. There is also general agreement that, along with growing democratization, transparency and accountability in government operations are important for a well–functioning market economy.

But the role of the government goes beyond this. There is growing recognition that in fostering growth, governments must be concerned with more than simply the expansion of GNP. The composition of growth, the distribution of the gains from growth, and the sharing of some of the inevitable costs of growth—on the environment, and in terms of dislocation of individuals--are all matters of concern to government. These are factors that ultimately influence the sustainability of growth. Governments have the responsibility of encouraging and facilitating greater investment in human capital—an important source of high growth, as demonstrated so convincingly by the experience of a number of countries in Asia; of reducing unproductive expenditure in favor of investment in health, education, and basic infrastructure, and of improving social policies that provide for a more equitable sharing of the benefits of growth and strengthen the consensus for growth-oriented reforms (as was discussed by Mr. Tanzi).

The near worldwide acceptance of the market paradigm is coincident with and, indeed, fostered by the tremendous forces being unleashed by globalization. This environment is creating new needs and challenges for domestic policymakers and for the Fund. Globalization holds great promise: its potential benefits are well understood; it expands the range of investment opportunities; it offers higher returns on savings; it promotes a more efficient allocation of resources worldwide and, thus, higher world growth. Globalization also brings with it the disciplinary effect of financial market pressures; it also forces the private sector to be more responsive to competitive forces. Greater global competition will also expose structural weaknesses that hold back countries’ efforts to achieve faster growth and create more jobs, and hence encourage their removal.

However, as recent events in Asia have once again vividly illustrated, globalization holds some risks: countries are more vulnerable to shifts in market sentiments about their economic situation or policies; changing perceptions can trigger massive shifts of capital that can precipitate financial crises and have serious spillover effects on other countries. Moreover, not all countries are well-equipped to make the most of these opportunities, and, for them, there is the risk of marginalization. They risk being left behind in the expansion of world trade and being unable to attract significant amounts of private investment.

But, how has all of this influenced the Fund’s work? The fundamental task of the Fund to promote stability, the balanced expansion of trade, and growth remains unchanged, even in this fast-changing international economic environment. But the Fund’s activities are being deepened in at least four directions in light of these developments. These four areas involve: (i) strengthening Fund surveillance over member countries’ policies (ii) helping to strengthen the operation of financial markets; (iii) providing policy advice and financial assistance quickly when crises emerge; and (iv) helping to ensure that no member country is marginalized.

Let me elaborate briefly on what is involved for the Fund in each of these four areas

First, the Fund’s surveillance activities, particularly the annual policy consultations with all our members and the semiannual WEO exercise, lie at the heart of the Fund’s efforts to maintain an orderly international monetary system. Adaptation of the Fund’s surveillance activities reflects the principle contained in my earlier quote of 1944 from the U.S. Treasury. Close and continuous cooperation is necessary to avert crises to the extent possible and to respond to them when they do occur. It is in the collective interest of the Fund membership that the Fund and its members maintain a close and sustained policy dialogue on the basis of regular and comprehensive provision of information. The interaction between domestic and international economic policies has taken on even greater importance in the more fluid and integrated global markets of today. Countries’ fortunes are simply more closely interconnected then ever before! To meet this challenge, Fund surveillance has been strengthened on several fronts. One, in order to detect financial tensions early, the Fund has sought to make surveillance a continuous activity. More emphasis is being given by members to the regular provision of data and new internal procedures have been introduced to ensure that important developments in any country are quickly brought to the attention of the Executive Board. For example, the overheating of the high growth economies of South East Asia has been the subject of several exercises in the Fund over the past 1 years. Two, in response to the growing number of regional economic policy fora and institutions, the Fund has been expanding its surveillance to cover policies decided at the regional level and to assess national policies and economic situations in a regional context—often by participating with the policymakers who meet in those regional fora. The opening of the Fund office in Tokyo, for example, reflects the Fund’s desire to enhance its dialogue and contribution to regional developments in Asia, as does the Fund’s participation in the current APEC meetings. Three, in response to growing concerns about the soundness of banking systems around the world, the Fund, as part of a wider international effort, is giving increased attention to the banking and financial sector in its surveillance--as well as in its technical assistance--focusing on identifying vulnerabilities in the institutional and policy frameworks needed for sound financial systems.

The second area in which the Fund has intensified its activities aims at strengthening the operation of markets. A good deal of progress has already been made in liberalizing current account transactions, and now, with the globalization of financial markets, our emphasis is turning to fostering an orderly move by member countries to an open and liberal system of capital movements. There is broad agreement among members that the Fund’s Articles should be amended to make the liberalization of capital movements one of the purposes of the Fund, and to extend Fund jurisdiction to capital movements. In discussions in the Executive Board, consideration has been given to providing safeguards with regard to members’ obligations under an amendment, in the form of transitional arrangements aimed at ensuring that liberalization is neither premature nor unduly delayed. This would involve flexible approval policies of existing restrictions and, as appropriate, financial assistance to support their removal. This initiative will be an important element of the Interim Committee’s agenda when it meets on Sunday.

To strengthen market discipline, and avoid delayed or incorrect information that can lead to market surprises and potentially disruptive overreaction, the IMF is actively encouraging all countries to improve the dissemination of economic and financial data. A set of standards has been developed for its members regarding the quality, coverage, frequency, and timeliness of data made available to the public and has established on the Internet the Dissemination Standards Bulletin Board (DSBB) Thus far, 10 Asian countries have subscribed to these standards. Also, since April, it has become possible to move directly from the DSBB to several national Internet sites to access key economic and financial data. This is possible for 3 of these 10 Asian countries. Decisions have also been taken to permit member countries to make public the Fund’s assessment of their policies in the Article IV surveillance process. The Executive Board has agreed to the voluntary issuance of so-called "Press Information Notices" following the conclusion of regular Article IV consultations, giving member countries the opportunity to convey to markets, and the public more generally, the Fund’s views on their economic situation and policies.

Recognition of the importance for growth of creating an environment that encourages private sector activity has also led the Fund into structural areas that we have called "second generation reforms." These reforms cover those elements of the institutional framework that provide legal protections, that help limit arbitrary and corrupt government practices, and that set clear regulatory and supervisory standards for markets, including financial markets. They also include policies to assure sufficient budgetary allocations for education and health to help individuals prepare themselves to participate effectively in a market economy, and the provision of social protection to individuals caught in the changes of a dynamic economy.

These latter are particularly complex and controversial areas. We are working hard to increase our collaboration with other agencies and institutions that have expertise in these areas, but we are also acting directly on issues that fall within the Fund’s mandate. These include technical assistance in the financial sector and in fiscal policy areas. But they also include raising matters of governance when they have a significant impact on the performance of the economy. This latter issue will be addressed by the Development Committee at its meeting on Monday and is sure to become a more active area of Fund involvement in the furture.

The third area in which policy has been adapted has been to put the Fund in a better position to provide its members adequate and timely financial assistance to support ambitious reform programs and to assist at times of financial crises. To assure the Fund’s ability to provide resources when needed, work is underway on the Eleventh General Review of Quotas, to increase the IMF’s main source of adjustment lending. In addition, the Fund has taken steps to augment its financial resources through the agreement recently reached on the socalled New Arrangements to Borrow (NAB), under which 25 countries would be prepared to lend amounts totaling up to SDR $35 billion when supplementary resources are needed. We are also working to ensure that the Fund’s concessional window for supporting the reform efforts of its poorest members, the Enhanced Structural Adjustment Facility (ESAF), has sufficient resources to continue operating until it becomes self–sustaining early in the next century. In terms of procedures for delivering financial assistance, following the Mexico peso crisis an emergency financing mechanism was put in place to facilitate rapid approval of Fund support when countries facing external crises are willing to take strong corrective actions. The first two countries to have benefited from this policy have been the Philippines and Thailand. In Thailand, in particular, the Fund responded to the request of the Thai authorities for assistance under a stand-by arrangement in three weeks and this in a package which included truly exceptional access to the Fund’s own resources in the concept of the total financing package of over $17 billion!

Fourth, and finally, as part of our efforts to mitigate the risk of marginalization of our poorest members, or those that are emerging from a domestic or international conflict, we have adapted the Fund’s facilities to their particular needs. The ESAF, our concessional window, is also the vehicle by which the Fund will contribute to the joint IMF/World Bank initiative to relieve the debt burdens of heavily indebted poor countries. In addition, to assist countries emerging from conflict to reestablish macroeconomic stability, the IMF has expanded the coverage of its emergency assistance to include post-conflict situations. Such assistance has already been provided in the cases of Cambodia in Asia [in 1993], and also to El Salvador [in 1990], Georgia [in 1994], and Haiti [in 1995], and most recently in Bosnia and Rwanda.

There is a Chinese proverb--or perhaps it is a curse--that says "May you live in interesting times." Well, we are living in fascinating times. But also, more complex and, in many ways, more risky times. The changes underway hold great promise for the world economy. But they will not be realized without strong mechanisms of coordination and cooperation. The adaptations you see going on in the Fund reflect our response to those changes. Our effort is to see that, in the areas under the Fund’s mandate, we do all we can to assist members to exploit the opportunities the new world economy offers. At the same time, we are building mechanisms to contain the risks inherent in the system and to deal with the problems that emerge when those risks are not contained!

All of these changes have touched the Asian countries quite directly!