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Reflections on the IMF and the International Monetary System Address by Michel Camdessus
March 12, 1998
Thank you, ladies and gentlemen. I am very pleased to join you here tonight—
especially at this important time when so many things are going on in the world that are relevant to the international financial system, not least the debate on IMF resources in the U.S. Congress. This debate, which only occurs every five or six years, is of immense importance for us. After all, there are not that many other countries in the world where such a wide-ranging discussion of the IMF takes place. And so in listening to, and trying to respond to, the questions raised here in this country, we have the distinct impression that we are answering questions that are on the minds of people on Main Street in a great number of countries around the world. Many of these questions have to do with our very identity, the purposes of the IMF, and the type of advice we give to our member countries. Let me try to answer these questions for you. Then I will turn to some questions raised by the Asian crisis and some thoughts on the future shape of the international financial system.
Let me begin with a little history. The IMF was founded just after World War II in the hopes of avoiding the kinds of destructive economic policies that had contributed to the Great Depression and the outbreak of war. The idea was that if countries adopted policies conducive to economic growth and financial stability, opened their economies to foreign trade, and supported one another when adjustments had to be made, all countries would be more prosperous. The world economy has had a number of ups and downs since then, but the validity of this approach has stood the test of time. Indeed, for those countries that have followed this approach, it has brought a half century of unparalleled prosperity.
Over the years, the IMF has grown from 40 countries in 1947 to 182 today. And during this time, we have stood by our members, helping them cope with problems that were not foreseen when the IMF was established. We were there in the 1970s, helping oil exporters recycle their surpluses and helping others finance their oil-related deficits. We were there in the 1980s, helping Latin America overcome its debt crisis. We were there in 1989 and the early 1990s, helping the transition countries of eastern Europe and the formerSoviet Union overcome the legacy of central planning. And we were there in late 1994 and early 1995, helping Mexico—the United States’ third largest export market—avert financial collapse. These days, we remain quite active in Russia, where we are promoting market reform; in Africa, where we are helping to reverse the effects of two decades of decline; and, of course, in Asia, where we are trying to contain the current financial crisis.
What kind of policy advice have we given? Throughout our history, we have urged countries to pursue sound economic policies—and by that I mean policies that promote growth through low inflation, sound money, prudent fiscal policies, and a sustainable current account position. Yet, as the economic landscape has changed and we have learned more about how economies work in a globalized world, we have broadened the scope of our advice to include other elements that are also vital for economic growth and financial stability. These include:
Questions from the Asian Crisis
The recent financial crisis in Asia has underscored the importance of many of these elements. But it has also generated a lot of debate about the IMF and its policies. Let me address four questions that have been at the heart of the discussion.
First question: Are we giving the right advice in Asia? Some people say that the IMF-supported programs in Thailand, Korea, and Indonesia are too tough. There is no question that economic activity in the affected countries is slowing down. But this is mainlythe result of the sudden reversal of capital inflows. Without these programs, the international support behind them, and their confidence-building effects, Asia’s suffering would be even more acute—with more bankruptcies, larger layoffs, and even deeper currency depreciations. The point of the IMF-supported programs is to address the problems that precipitated the crisis. Thus, their main emphasis is on strengthening financial systems, improving governance systems, increasing transparency, opening markets, and restoring market confidence. Needless to say, none of this will be easy, but already there are very encouraging signs that reforms in Korea and Thailand are taking hold.
Second question: Are we creating a moral hazard for borrowers and investors? As for borrowers, no country would deliberately pursue reckless policies because it thought the IMF would bail it out in the event of a crisis. The economic, financial, social, and political pain would simply be too great.
As for investors, these programs are hardly bailouts. Many private investors are taking heavy losses. With stock markets and exchange rates plunging, foreign equity investors have lost nearly three quarters of the value of their equity holdings in some markets. Many firms and financial institutions will go bankrupt, and their lenders will not be repaid. Moreover, fourth quarter earnings reports indicate that, overall, the Asian crisis has been very costly for U.S. and other foreign commercial banks.
That being said, it is true that some short-term private creditors are being at least partly protected. And looking ahead, the international community needs to find better ways of including the private sector in efforts to resolve sovereign debt problems. But please note that in the case of Korea, short-term creditors are being bailed in at longer maturities and below comparable market rates. In any case, surely the global interest—and the U.S. interest—lies in containing and overcoming this crisis as quickly as possible.
Third question: Is the IMF using taxpayer’s money to bail out Asian economies? The IMF is not a charitable institution. It is not an aid agency. And its operations are not carried out at taxpayer expense. Rather, it operates something like a credit union, or a revolving fund. A country subscribes resources to the Fund, and it can draw a multiple of this subscription—or quota—when the need arises to finance a balance of payments deficit. This arrangement enables the resources of members that are in strong balance of payments positions to be loaned temporarily to other member countries that need them. The borrowing countries, in turn, take steps to put their economies in order, thereby ensuring their ability to repay the Fund. All countries can benefit from this system. And, in fact, the list of beneficiaries in the 1960s and 1970s was quite prestigious, as it included both your country and mine.
What has this arrangement cost U.S. taxpayers? As Treasury Secretary Robert Rubin recently said, since the start of the IMF, America’s participation "has not cost the taxpayer one dime." In fact, over the last 15 years, the United States has enjoyed a small financial gain, averaging somewhat less than $100 million annually—if exchange rate changes as well as interest costs and receipts are taken into account.
What does the world, and the United States in particular, get for its money? First, if I may be just a little bit immodest, it gets the most effective vehicle yet created for improving economic performance in countries around the world. And this, in turn, makes for growing markets for U.S. exports, new U.S. jobs, better U.S. investment opportunities, and stronger U.S.—to say nothing of the contribution that stable, growing economies make to world peace and security.
Second, the IMF provides a highly effective mechanism for burden sharing. While U.S. participation is substantial, U.S. resources still constitute only 18 percent of the IMF’s capital base; the rest of the world provides the other 82 percent. Consider how much more costly it would have been for the United States to address any of the major international financial problems of the past few decades if it hadn’t been able to work through the IMF.
Fourth question: Is the IMF too secretive? Does it practice the transparency it preaches? Let me answer this by raising a few questions about the IMF that might be on your minds. What have Thailand, Korea, and Indonesia promised to do in their Letters of Intent to the IMF in return for financial support? What the does the IMF’s Executive Board think about the economic situation in the Czech Republic, Argentina, and Canada—all countries taken up by our Board in the past few weeks. And how have we revised our world economic outlook in light of the Asian crisis? You can find the answers to these and probably just about any other question you have on the Fund at our website on the Internet. There, we have posted a wealth of data and other information—part of our effort in recent years to reduce the mystery surrounding the IMF.
Should the Fund warn markets when it thinks a crisis is brewing? Should we become whistle-blowers? The danger is that our predictions, however well founded, may sometimes be wrong. Moreover, our warnings could provoke the very crises that we are trying to prevent. It is far better that the market come to its own conclusions. That is why we have set up data standards to guide members in releasing reliable data to the public, along with a bulletin board on the Internet so that the public can track the data practices of individual countries. That being said, member governments—including the United States—continue to have full access to information on Fund opinions and operations through their representatives on our Executive Board.
Looking Ahead
But now let’s look ahead. What could be done to prevent future crises?
But realistically, the international community cannot expect to avert every potential crisis. So what else can be done to ensure that future crises can be handled effectively?
Clearly, the IMF cannot continue to do its job—in Asia or elsewhere—unless it has adequate resources. I don’t want to sound alarmist, but there are major risks in the worldeconomy. Only a few months ago, many observers thought the Asian crisis might spill across the Pacific. In fact, it did not, but I cannot guarantee you that it won’t. Thus, it is a matter of some concern that the IMF’s usable resources have dropped to a level that leaves us little room for maneuver—either to protect the liquid reserves that members hold in the Fund or to meet the more normal, but at times very large, financing needs of our member countries—much less to respond to a new crisis.
So these are the issues that Congress will no doubt weigh as it considers whether to approve the U.S. share of the quota increase being proposed by the international community and the U.S. share of the enlarged special credit lines—the so-called New Arrangements to Borrow, or NAB. I put them in that order because the NAB would be of little use if the quota increase is not in place.
We must earn our members’ support by doing our job well and continuously reforming ourselves. But I hope it will be recognized that participation in the IMF is not fundamentally an expense to the taxpayer; rather, it is an investment. It is an investment in the narrow sense that member countries earn interest on the IMF’s use of their currencies. Far more important, it is also an investment in the broader sense—an investment in the stability and prosperity of the world economy.
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