Speech

Remarks by IMF Managing Director Horst Köhler
Meeting with Members of the Deutsche Bundestag
Berlin, April 2, 2001

Deutsch

1. The world economy is currently undergoing a critical period of adjustment. The engine of global economic growth over the past ten years—the U.S. economy—is sputtering, and no relief is forthcoming from economic developments in other regions of the world. On the contrary, in Asia and in Europe growth is also slowing. It would, nevertheless, be wrong, in my opinion, to lapse into gloominess. Some slowdown in the U.S. economy was necessary, not least in order to correct exaggerations in the financial markets. Moreover, in many countries, key economic fundamentals are stronger today than they were a few years ago. Inflation is not a pressing issue at the moment, government budgets are comparatively solid, and the international monetary system is in a better position to respond to pressures thanks to the predominance of flexible exchange rate regimes. Above all, however, there is sufficient room for maneuver for economic policy to counteract the dangers of a deeper recession. On that basis the IMF is forecasting global economic growth of above 3 percent for this year (after 4.8 percent in 2000), which is roughly in line with the average growth rate over the past two decades.

2. Achieving a growth rate above 3 percent in 2001 will, however, require skillful policy management. By aggressively lowering interest rates, the U.S. Federal Reserve has appropriately demonstrated its determination to act, and it has further room for maneuver if necessary. The tax cut discussed in the United States will also ultimately strengthen consumer and investor confidence. And while Japan has returned to a zero interest rate policy, more resolute efforts at restructuring the corporate and banking sectors have still to be made. The tax reforms in Europe have proved appropriate and timely. However, I would not be happy if the Europeans were to content themselves merely with achieving a faster growth rate than the United States for the first time in many years. The IMF staff is likely to revise its growth forecast for Europe down to 2.5 percent for 2001 after 3.3 percent in 2000. Given this outlook, an interest rate cut by the European Central Bank would certainly help the European economy. However, more ambitious reform efforts are at least as important as lower rates. Human capital and the technological know how are clearly available to raise the path of potential growth from about 2½ percent today to well over 3 percent—an increase that would significantly lower unemployment, strengthen the euro, and help strengthen the global economy.

3. It is the task of international economic policy to tap the opportunities of globalization, while limiting its risks. The opportunities it affords are higher productivity, increased trade, stronger growth dynamics, and more jobs and higher incomes. In my view, globalization also offers a chance to attain a new awareness of the interdependence of developments all over the world. The risks lie in overstretching the ability of societies and political structures to adapt, and in financial crises caused as a consequence of excessive volatility in capital flows. The central problem is, however, the fact that too many people have so far had no share of the gains in the prosperity that was brought about by globalization. The successful fight against poverty is, in my view, the key to peace in the 21st century.

4. At the Annual Meetings of the IMF in Prague last year, I gained the overwhelming support of the IMF's 183 member countries for the Fund to play an active part in the international effort to make globalization work for the benefit of all. In my opinion, the Fund can fulfill that role best by refocusing its mandate and by being ready to learn and by accepting new challenges. Given the structural changes in the world economy, the IMF must focus on promoting international financial stability as a global public good. This means that the Fund must concentrate its efforts on macroeconomic stability, on fiscal and monetary policy, and capital markets issues.

5. The main lesson from the financial crises of the past is that crisis prevention must be at the heart of the Fund's mandate. Much has already been accomplished in this field in recent years. The IMF's bilateral and multilateral surveillance functions are the main vehicle to pursue this objective through the regular review and assessment of economic trends and policies at the national and international level. It is encouraging that most IMF member countries show a genuine interest in an open and frank surveillance discussion in the Executive Board of the IMF. I regard that as a clear indication that there is a broader base for the acceptance of globalization than sometimes portrayed in the media. It is my goal to use the Fund's surveillance discussions as a means to highlight the interdependence between member countries. Part of this is the recognition that financial crises are not only triggered in emerging markets but also in the global financial centers of industrial countries. Likewise, money laundering activities almost always involve the world's major financial centers.

6. The IMF and other institutions have done much in the past two or three years to increase the transparency of economic and financial data. Economic agents today enjoy much broader access to information for decision-making. While increased transparency does not, as such, prevent wrong decisions, it makes the repetition of a crisis like it unfolded in Korea in late 1997 fairly unlikely. An important area in which much remains to be improved, in my opinion, is the early detection of vulnerabilities and signs of potential crises, and the development of practical economic policy approaches to counter those developments.

7.Transparency can also rightly be demanded of the IMF itself, and the institution aims to live up to this standard. Currently, almost all country- and policy-related Board papers are published, unless a member country expressly opposes publication or a paper contains market-sensitive data. Recently, we published a paper on the IMF's website that reviewed Fund conditionality and have invited comments on it. In addition, during the course of this year, an independent Evaluation Office will begin assessing the work of the IMF. It will evaluate Fund policy and operations without any interference from management or staff. I expect this to enhance the effectiveness and credibility of the Fund's work.

8. Another important vehicle to enhance crisis prevention is the IMF's work on the elaboration and dissemination of standards and codes for sound economic and financial policies and corporate governance. Much has been achieved already in this regard. We must continue to work patiently but persistently to convince developing and emerging market countries not to interpret these standards primarily as a "dictate" by the industrialized countries but rather to see them as useful guide posts in their own efforts to strengthen institutions and gain greater access to international investment capital.

9.We recently witnessed in Turkey how a public dispute between leading politicians can unleash a financial crisis. I do not accept that in globalization capital markets have taken the place of politics. But politicians must nevertheless recognize that, in open economies, political stability is a key factor for investor confidence. In the case of Turkey, the restructuring of the banking sector, especially the state-owned banks, lies at the core of resolving the current financial crisis. In retrospect, I wish that Turkey had participated in the pilot Financial Sector Assessment Program (FSAP) that the IMF and World Bank jointly developed after the Asian crisis. The FSAP gathers and analyzes detailed information on the strengths and weaknesses of the financial systems in member countries. So far, FSAP assessments have been conducted in 24 countries, and the Executive Boards of the IMF and the World Bank have already taken the decision to extend the program in 2001 to cover 30 more. This is a very ambitious target, which incidentally places considerable demands on the resources of both institutions. However, I consider this program an important means to strengthen the stability of the international financial system by reinforcing its foundations. In that context, special priority must be attached to the assessment of financial sectors of countries with systemic importance for the stability of the international financial system.

10. In particular, the development of capital markets has dramatically altered the global economy over the past 20 years. In both volume and sophistication, private capital flows have by far overtaken official flows. Progress toward prosperity for all will only be possible with a policy of constructively working with—rather than against—the private sector. Both economic theory and policy application are clearly lagging behind developments in financial markets. This is also an area where the IMF itself needs to catch up. I have made a start on this with two decisions. First, we are systematically building up expertise on capital market issues by establishing an International Capital Markets Department in the IMF. Second, we are developing a channel for informal but regular dialogue with high-level representatives of private financial institutions. This dialogue is aimed in particular at engaging the private sector more closely and from the outset in crisis prevention. I also believe that such systematic dialogue can help build a financial culture which is oriented towards sustainable value creation, and helps mobilize forces within the private sector that countervail "irrational exuberance" (Alan Greenspan). In the end, it is however also necessary for the IMF to be in a position to make well founded judgments regarding the appropriate regulation of international capital markets. The further liberalization of capital flows remains an important goal. However, progress in this regard, has to draw on the experience gained in the past. That means, in my view, that capital account liberalization must be carefully sequenced, in terms of timing and degree, with the development of a sound financial sector, including of adequate regulatory and monitoring frameworks.

11. The Asian crisis was a combination of over-investment, and banking and currency crises. Research by the IMF indicates that no single type of exchange rate regime is appropriate for all countries in all circumstances. It is quite striking, however, that financial crises have invariably been linked, directly or indirectly, with fixed exchange rates. Fixed exchange rate regimes, in combination with insufficiently regulated and supervised banking systems, allow the buildup of speculative bubbles. That is why the IMF regards a flexible exchange rate regime as a better and safer option, particularly for emerging market countries. Such a regime can function as a safety valve in the event of economic policy slippages. A currency board, if accompanied by disciplined economic policies, may be an option in certain circumstances—above all to break the back of stubbornly high inflation. I also believe that the European experience with economic and monetary integration may hold lessons for other regions of the world on how economic and monetary stability can be secured. In any event, exchange rate regime and exchange rate policy issues must be at the core of the IMF's advisory expertise.

12. However much effort goes into crisis prevention, crises cannot be completely ruled out in an open and dynamic global economy. The IMF therefore needs to be and remain an efficient "firefighter". This presupposes the availability of sufficient financial resources and adequate instruments for their use. However, it is also true that the IMF is not, and should not be, in a position to match the volumes of private capital markets. Debtors and private creditors must always be aware that the IMF's financial assistance is not there to relieve them of their responsibility for the risks they take. The IMF is not an international lender of last resort, in the sense of providing unlimited liquidity. Such a notion would undoubtedly exacerbate the moral hazard problem. In order to limit moral hazard in the current system and to bring about equitable burden-sharing, we must engage the private sector in crisis resolution efforts. Substantial progress has been made in this area in the past few months. However, the discussion is far from concluded. In addition to the steps already outlined, the IMF amended its lending facilities in 2000, in order to discourage the extended use of Fund credit, and to be in a position to respond adequately to a sudden loss of market confidence and to contagion effects. (SRF, CCL)

13. Another important reform effort at the IMF concerns the conditionality attached to Fund lending. Conditionality remains essential to protect the Fund's resources and to promote the needed adjustment processes. However, in the past, conditionality sometimes became too extensive and, in some structural areas, ventured into areas outside the expertise of the Fund. I consider it very important that countries reaching an agreement with the Fund "own" the reforms themselves. In this context, less can be more if it strengthens country ownership and contributes to a sustained implementation of needed reforms. In my experience, it is often not a lack of political will that hinders reform, but rather the lack of know-how. Therefore we must pay even more attention in future to providing efficient technical assistance and to building efficient administrative structures in the developing countries.

14. Globalization requires a policy concept for one world. In my talks in developing countries, not least in Africa, I was told quite clearly—and not just by government representatives—that the IMF's involvement is welcome and that its advice and expertise are sought after, naturally along with its concessional loans under the Poverty Reduction and Growth Facility (PRGF). The demand by some that the IMF should withdraw from poor countries has not been thought through. Such a move would further a division of the world, whereas global partnership and cooperation is what is urgently needed. Those to whom I spoke in Africa confirmed in particular that the new concept of the World Bank and IMF cooperating to support comprehensive poverty reduction strategies developed by the countries themselves is beginning to bear fruit.

There is increasing awareness that success in poverty reduction must rest on two pillars: First, resolute efforts by the countries themselves to address the home-grown causes of poverty. This involves above all good governance, respect for the rule of law, an end to armed conflicts, and the fight against corruption. The second pillar consists of more decisive, faster, and more comprehensive support from the international community.

15. Debt relief clearly must form part of a comprehensive concept for poverty reduction. The IMF and the World Bank brought 22 countries to the Decision Point under the Enhanced HIPC Initiative by the end last year—an enormous effort on the part of all involved. As a result, the total external debt of those countries will be reduced to one-third. I also welcome the decisions by a number of G7 countries to forgive 100 percent of bilateral claims in the context of the HIPC Initiative. However, debt relief should not be viewed as a panacea. Credit is and remains an indispensable element for economic development. Credit must, however, be based on the confidence that contracts will be respected. Promotion of such a credit culture is not only essential for development but also for the stability of the international financial system as a whole.

16.The true test of the credibility of industrial countries' efforts to combat poverty lies, in my view, in their willingness to open their markets to poor countries' exports and to deliver on their promises of official development assistance. The governments and parliaments in industrial countries have more than a moral obligation here. They must, at last, allow developing countries free access to their markets. It is political and economic madness for OECD countries to spend US$360 billion a year on agricultural subsidies, while poverty rages in developing countries, especially in the rural and farming regions. It is also overdue for industrial countries to honor their commitment to provide 0.7 percent of GNP for official development assistance. Germany's development aid is equivalent to about 0.26 percent of GNP, and thus roughly in line with the average of ODA from all OECD members. I hope that the discussion about globalization in the German Bundestag will lead to concrete results under their own responsibility in this area—for instance by legislation that makes the achievement of a level of ODA of 0.7 percent of GDP within 10 years legally binding.