Speech

99/6

ORIGINAL: SPANISH

Address of Michel Camdessus
Managing Director of the International Monetary Fund
at the 40th Annual Meeting of the Inter-American Development Bank

Paris, March 15, 1999

Mr. Chairman, Governors, ladies and gentlemen,

I would like first of all to thank Enrique Iglesias for the honor he has done me of inviting me to address this forum following his remarks this morning. Knowing him well, I wondered for a moment what reasons he might have had for inviting me. Did he want to put me to the test as one who seeks to be a prophet in his own country? . . . I think what he really wanted was to let you experience firsthand the closeness and warmth of the relations between our two institutions; although this is a constant, it is never more true than in difficult times such as these. But every honor has its obligations, and mine this morning is to use the working language of the IDB. I beg the French-speakers among you to forgive me, and also those of you who are Spanish-speaking, as my Spanish may grate on your ears.⁽¹⁾

It goes without saying that I concur wholeheartedly with the visionary and perspicacious analysis provided by President Iglesias. Allow me merely to add to his comments the experience of the IMF--an institution you have asked to take the lead in combating the crisis--and then, based on that experience, to try to respond in part to some of the questions that President Iglesias has so opportunely brought to your attention.

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It is true that these last few years have taught us much about the meaning of globalization and the opportunities and risks that it entails. Your countries' experience in this area points up three important aspects:

1. Your countries seized the opportunities that came their way, and, beginning in the early 1990s, attracted sizable capital flows that played a key role in the highly desirable acceleration of their growth;

2. Owing chiefly to their sustained efforts to overcome the debt crisis and to base their growth on macroeconomic stability, public deficit reduction, and structural reforms, your countries fortified themselves in such a way that they were able, collectively, to withstand the shocks delivered by the crisis and to do so in a most impressive manner--even though, of course, the effects of the crisis began to be felt in 1998 and will continue with greater severity in 1999. But I would like to highlight one aspect of their success in particular: the extraordinary resilience demonstrated by the region, which is due in large measure to the prompt, responsible reaction of policymakers in confronting the situation head-on, as well as their efforts, over the last ten years, to implement broad reforms that have provided the region with sound financial systems and a framework of more flexible policies. It is encouraging that investors now seem to be starting to discriminate more clearly among countries, based on their individual economic strengths and the consistent focus of their economic policy.

3. Third: The hardest-hit countries--Mexico in 1994-95 and now Brazil--have demonstrated their ability to respond with bold programs capable of attracting vital international support and to create new bases for stronger and more sustainable growth. This is what Mexico accomplished, and we all applauded its success, and this is what we now expect of Brazil, because we all know how strong the current program is, because we are all aware of the authorities' determination to implement the program resolutely and without delay, and because we are convinced that all its partners in the highly promising task of developing this great country--be they banks, private creditors, or friendly governments--will continue their support and will appreciate the special importance of bolstering Brazil's valiant efforts in these difficult times. Confident of the supplementary funds that will be forthcoming from all its partners, in addition to our own contribution of $18 billion, I have decided to submit the program for the approval of the Fund's Executive Board at the end of this month or in early April. The success of this program will be Brazil's, but it will also benefit Mercosur and its member countries.

What more, then, can your countries do now, when we know that 1999 will be extraordinarily difficult for all--when you are faced with repairing the damage of horrific natural disasters and adjusting to the slowing of world economic growth, falling export prices, exchange pressures, reduced external financing, and increasing interest rates and spreads? What can be done when, as a result of all this, the prospects for near-term growth have evaporated and a drop in per capita output is expected this year, with a consequent rise in poverty?

First, for individual countries, it is true that there is no quick fix and no substitute for the kind of prudent, consistent management that inspires market confidence. But what does such management consist of?

• The relentless defense of macroeconomic stability, with all its implications for fiscal policy, and a necessarily flexible approach to monetary policy.



• The deepening of structural reforms, as there is still considerable scope for pursuing privatization, increased flexibility in labor markets, and further advances in the area of banking legislation and supervision.



• And, lastly, pursuing the second generation reforms that your countries pioneered, with IDB and World Bank support, long before they became generalized in the international debate on the new financial architecture. It is now clear to everyone that investor confidence can be won only through good governance, transparency, and stronger market institutions.

But, as we all know, this globalized world of ours requires an additional dimension. At this point, I feel compelled to respond to President Iglesias's fourth question: "In these circumstances, do regional integration efforts have a future? My answer is categorical: yes, now more than ever. However, I am not going to discuss theory with you today. Instead, since we are the guests of one of the eleven countries currently in the process of creating a new currency, the Euro, which immediately established itself as the world's second reserve asset, with an impressive stabilizing and defensive effect on the economies adopting it, I would like to encourage you to take a few moments to think about this experience.

Above all, I want to stress that what we admire here today is not the result of an ingenious strategy to achieve monetary integration among economies with very similar characteristics. On the contrary, it is essentially the result of a persistent effort to achieve macroeconomic convergence, which, since the early 1980s, in a context of initially very different situations and perspectives, steadily created the conditions necessary for the adoption of a common currency. This economic integration effort is now culminating with the creation of the single currency. Of particular relevance, however, is the benefit that each of these economies has drawn, over this long interval, from these convergence efforts: that of being able to join forces to gradually root out problems created by inflationary imbalances and protectionist demands. This same route is open to all of your countries as well, to ensure the success of national efforts and reforms. Regardless of the final monetary option chosen, the convergence and regional integration of your economies is essential to the strengthening of your countries and their ability to adapt to the new international financial environment--regardless, I repeat, of the final monetary integration option chosen. The fruits of these convergence efforts--the difficulties of which I fully recognize--could be invaluable:

• They would provide further evidence of the region's determination to meet the challenges of a globalized economy and to continue managing their economies in a coherent and stable manner;



• Through an exchange of information and opinions, policymakers would be able to better assess the risks facing each country and formulate more appropriate policies;



• In addition to fostering the convergence of national policies, they would help governments consolidate domestic political support for their policies, warding off protectionist or backtracking tendencies;



• Lastly, they would offer a means of assessing the impact that policy changes in one country have on its neighbors, thus limiting the possibility of destabilizing unilateral decisions.

There are several ways of promoting such regionalism, and indeed many forums already exist. I would like to stress its importance in three areas: macroeconomic policies, finance, and trade.

I have already said enough about macroeconomics. I need only add that just as the International Monetary Fund makes itself available to the G-7 and other groups and regions, it is there to assist you in your efforts to facilitate a frank and open regional discussion of the economic policies being implemented. A convincing first step in this direction was taken last September when finance ministers and central bank governors from Latin American economies with regular access to financial markets met at Fund headquarters in Washington to discuss their situation and policy options in the aftermath of the Russian crisis. This experience could be expanded to periodic meetings, with broader representation and with countries possibly organized into subregions to ensure the active participation of all. Such meetings would provide fertile ground for the discussion of novel ideas and for gradual policy convergence.

Second, you may wish to consider a coordinated regional approach to financial supervision. If any lesson has emerged from the crises of the past few years, it is the necessity of decisively strengthening financial systems. The Basle Core Principles for Effective Banking Supervision represent an important step toward defining standards that are applicable throughout the world. I urge Latin America and the Caribbean to put these principles into practice as quickly as possible. But could you not go one step further? To give a strong boost to confidence in the region, why not consider complementary regulatory measures better attuned to the specific circumstances of the region? Let me give you one example: the Basle Core Principles recommend a minimum capital adequacy ratio, duly weighted for risk. But as the exposure of banks in the region may be greater than among more diversified international banks, a higher ratio may be needed, and indeed some countries have already come to that decision. Other regulatory issues such as accounting standards and portfolio valuation, or the proper criteria to assess banks' internal risk management policies, also could benefit from a regional definition based on international principles, adjusted to regional circumstances. All these aspects could in turn benefit from closer cooperation between national supervisors and renewed efforts on the part of the regional association of supervisors, with ongoing support from the IDB and the IMF.

The third area is trade. Evidence continues to mount of the close links between export performance, the degree of trade liberalization, and economic development. This is a lesson learned long ago in this region and most countries have remained firmly committed to open trade regimes. Indeed, progress has continued towards a further reduction in tariffs, including through the launching of the negotiations for the Free Trade Area of the Americas. However, in times of crisis, the risk of trade tensions increases. Trade policy can never be--nor should it be--used as a substitute for macroeconomic policy adjustment, and it is essential that we keep trade liberalization at the forefront of governments' agendas. I have no doubt that countries in the region will continue to eschew protectionism and will avail themselves of existing regional mechanisms, such as Mercosur, to preserve and accelerate the liberalization of their economies. Regional trade liberalization initiatives can offer important benefits, but we must avoid the disorderly proliferation of overlapping and sometimes conflicting regional trade arrangements. It is therefore essential that we promote dialogue and make certain that regional initiatives progress in a decisive and nondiscriminatory manner toward the liberalization of trade.

I feel certain that your responses to this very important question will be far more imaginative than my own. Allow me, however, to answer another question, which is surely on many people's minds: what does the IMF plan to do in these difficult times to help the IDB support its member countries? First, we will, of course, continue doing our utmost to fulfill our traditional role, and, in particular, to increase our support to the eleven countries which already have or which are negotiating programs with us, representing total commitments of as much as SDR 21 billion (US$28 billion). What this means now is bringing discussions to a successful conclusion, particularly those with Ecuador and Venezuela, and playing as active a role as possible in assisting the victims of Hurricane Mitch, to mention only a few programs. But beyond this, our mission is to contribute to the international community's efforts to find the most appropriate response to the poorest countries' severe debt problem and to create a new capability to enable us to grant contingent lines of credit to countries which, despite prudent macroeconomic management, are vulnerable to the volatility of financial flows. In this way, we hope to have a catalytic effect, facilitating the creation of the banking lines of defense that President Iglesias mentioned. Indeed, this new approach could be one of the first components of the new architecture of the international financial system, which the Interim Committee will discuss in Washington at the end of next month. The objective of this discussion should be to provide your countries with the stable, equitable framework necessary for sustainable, high-quality growth.

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This is a time of great challenges for Latin America and the Caribbean. But when I reflect on the courage of the people and governments of this great region--whether it is the efforts of the countries hit by financial turbulence to withstand contagion, the indomitable spirit of the people of Central America as they rebuild from the destruction of Hurricane Mitch, or the tenacity of the island nations of the Caribbean in the face of a difficult external situation--I am convinced that the region will progress to even greater heights and will be strengthened by this crisis. And rest assured that we at the IMF will do all we can, in close cooperation with the IDB, to make that come to pass.

1. The first paragraph of the address was delivered in French.