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The IMF's Medium-Term Strategy: New Priorities, New Directions, Remarks by Rodrigo de Rato, Managing Director, International Monetary Fund, at the Aspen Institute
February 9, 2006
As Prepared for Delivery
1. Good morning. It is always a pleasure to be in Rome, and Rome is a fitting place to speak on evolution and change, construction and reconstruction. The city is a triumph of adaptation and harmonious placement of the new alongside the old. As I consider proposals for the future development of the Fund, I am conscious of being in a long line of architects, and I draw inspiration from the architecture of this city, built by many hands, and a testimony to human intelligence and imagination.
2. Last September I launched a review of the Fund's medium-term strategy. My motivation was simple: the world is changing and the IMF needs to change with it, as it has done throughout its 60-year history. Twenty-first century globalization, with massive movements of capital and abrupt shifts in comparative advantage, is presenting all countries and the global community with new challenges. The Fund must help our members meet these challenges, and it will need to adapt to do so. In my report, I highlighted several areas where changes are needed. Today I will talk mostly about two of them: the way the Fund conducts surveillance, and our relationships with emerging markets countries. I will also talk about the Fund's role in low-income countries; about how we help countries build institutional capacity, and about countries' voice and representation in the Fund.
3. I am very grateful to the Aspen Institute for hosting this round table. I think that this event is very much in the spirit of the Aspen Institute's mission of fostering enlightened leadership and open-minded dialogue. And it is with an open mind that I come to you today. I want to listen to you, and to get your insights on the issues I will talk about, and I will reflect on what you and others say as we develop the medium-term strategy further and move, in collaboration with our members, from ideas to implementation.
4. Let me begin with surveillance, the way in which the Fund monitors individual economies and the global economy. Surveillance is a central element of the Fund's work. It is the international community's chosen instrument to promote global financial and economic stability. In recent years we have strengthened our surveillance in many ways: notably through the initiation of in-depth reviews of members' financial sectors, the establishment and assessment of standards of codes, and increased transparency, including the widespread publication of IMF staff reports. The Fund is doing a good job, but I think we can do even better.
5. In particular, we need a sharper focus to our surveillance, especially of the larger, systemically important economies, to make it more useful and also more challenging to governments. On the other hand, there may be scope for some streamlining of Article IV consultations. In our global surveillance, I would like to see a sharper focus on the interaction between macroeconomic issues and financial sector developments and vulnerabilities. This will require more quantitative analysis and simulations.
6. We also need an enhanced focus on exchange rate issues. U.S. Treasury Undersecretary Adams made a number of very useful suggestions last week in a thoughtful speech on this issue. I am pleased that Mr. Adams and the U.S. Government more generally is eager to engage with the Fund on this issue, and I find that Mr. Adams' suggestions fit very well with ideas that we have been developing in the Fund as part of the medium-term strategy. I would be interested in your views on some of these ideas. For example, should the Fund expand its multilateral analysis of equilibrium exchange rates, which currently just covers industrial countries, to also cover emerging market countries? Such a globally consistent analysis could deepen the exchange rate discussion in Article IV consultation papers. Should we also prepare a separate report covering exchange rate developments across countries—which was one of Mr. Adams' proposals? Is there also a case for reviewing and updating the principles—formulated almost 30 years ago—that guide our surveillance over exchange rate policies? These have been reviewed regularly in the context of our biennial reviews of surveillance, but perhaps a more thorough review is now needed.
7. I also think that we need to give more prominence to issues of globalization. One way of doing this would be to include, in staff reports on countries where economic developments have significant regional or global impact, an assessment of international spillovers: that is, on the implications of a country's policies or vulnerabilities for its neighbors and the international community more generally. Meanwhile in our global surveillance we must pay particular attention to the effects of long-term trends in globalization on our members—for example the global effects of demographic changes, and at the implications of cross-border movements of people, capital and knowledge.
8. Understanding financial and capital markets is as fundamental to the Fund today as understanding fiscal and monetary economics, and we must make sure that its importance is systematically reflected in the work of the institution. To achieve this, last week I took a number of decisions to strengthen the IMF's work on financial markets. I have decided to merge the two departments that up to now have conducted this work with the aim of establishing a single center of excellence for all aspects of financial, capital market and monetary policy work in the Fund. The new department will be a one-stop shop to provide support to other economists in the Fund and to our members. I have also set up a task force to provide guidance on how to ensure that our country consultations give a central role to financial sector issues. And as we go forward, I will take steps to secure more effective integration of financial sector specialists into our country work, and to provide additional training in financial market issues for staff working on country teams.
9. The Fund's work with emerging market countries has been profoundly affected by globalization. Emerging-market economies have benefited from increased trade and investment flows, but they have also been exposed to volatility of capital flows, and in many cases to capital account crises. Over the last few years the markets have been calmer, and a number of emerging market countries, once bitten by capital outflows and exchange rate crises, have become twice shy, not only appropriately reforming their economic policies but also building up very large reserves. Some that in the recent past have borrowed from the Fund have recently repaid their loans, which will have implications for the Fund's income position. I am not too concerned by this: it demonstrates economic success on the part of the countries, and the Fund has in the past lived with low levels of outstanding loans. We can do so again, though we will need to examine some options for handling the Fund's income position in the future, as well as prioritizing our activities and continuing to control our expenditures. It is also important to recognize that although lending is an important part of what the Fund does, the Fund's core business is surveillance of national economies and the global economy. We give a great deal of technical assistance and support to members—something I will discuss below—and the bulk of our policy advice is provided outside the framework of lending.
10. This said, I doubt that the Fund's role in providing financial support for emerging market economies is over. Global financial conditions are unusually benign at the moment, and it would be unrealistic to think they will remain so favorable indefinitely, especially as monetary policies around the world are becoming less expansionary. Many emerging markets remain vulnerable, and not all have built up a cushion of reserves. And, over time, more countries will enter a phase of development when access to market financing becomes widely available, but subject to sudden withdrawal.
11. But if the Fund is to continue to be relevant for tomorrow's as well as today's emerging market economies it must adapt. Specifically, I would like to see a renewed emphasis on crisis prevention. Some will point out that this is a road we have been down before, with Contingent Credit Lines—the CCL. I am very well aware of that, and I think it's important to learn from that experience. But our emerging market members have repeatedly expressed their desire for an instrument that would provide contingent financing for crisis prevention, with substantial access and assurances that the money will be available to members when they need it. I will be looking to the Executive Board and to others for advice on how to meet this demand. One possibility would be for an instrument carrying relatively high access, available in a single purchase if a capital account crisis occurred, subject to a Fund-supported program being in place and on track. Under such a program, conditionality could be focused on policies that are critical to reducing vulnerabilities and ensuring that the macroeconomic stance does not deteriorate.
12. This is a topic on which there are many views, and I want to encourage rather than limit debate at this point: indeed, I would like to hear your views on the issue. But I think we owe it to our emerging market members to address this issue. If and when they need our help, we must be ready.
13. The international community's work on low-income countries is now at a critical point. Much progress has been made in addressing the debt issue, including through the Multilateral Debt Relief Initiative that the Fund's Executive Board completed for 19 countries at the end of last year. And there is a renewed commitment by donors to increase aid significantly to help low-income countries achieve the Millennium Development Goals. But for many countries, achievement of the MDGs remains a long way off. The Fund can play an important role in helping countries meet these goals, but to play that role effectively, we must focus on our core competencies, which are the areas where our advice can be most useful.
14. I think that it would be useful to have a more systematic division of responsibilities among the international financial institutions and donors in helping low-income countries. Too often policy advice is uncoordinated and the Fund is by default pulled into policy areas that are important but are not really within our area of expertise. Moreover, this detracts from work on areas where the Fund should be taking the lead. The international community is already making impressive efforts to enhance the coordination of assistance to low-income countries. Together we could build on this work, in close consultation with the country authorities, by identifying in each low-income country the critical issues that need to be resolved to allow strong, sustainable growth. The Fund and other relevant international financial institutions and donors could then identify areas in which the authorities need assistance, and make explicit commitments on which growth-critical areas they are prepared to take the lead on.
15. I expect the Fund to take responsibility for areas that are critical to growth and that that fall within its macroeconomic and financial expertise. These include fiscal, monetary and exchange rate policies, other reform measures and institutions relevant to macroeconomic and financial stability, and advice on how to adapt macroeconomic policy to handle the anticipated higher aid flows. Other institutions and donors could take responsibility for areas in which the Fund does not have the necessary expertise. We are already talking with our colleagues at the World Bank about the division of responsibility between the two institutions. I look forward to discussing this approach further with the rest of the international community.
16. The Fund supports its membership not only through surveillance and lending, but also through the development and assessment of countries' standards and codes in core macroeconomic areas; through technical assistance; and through training of country officials. These three activities share the common objectives of assisting Fund members in developing sound policies and strengthening their core macroeconomic institutions, as well as the quality of their economic data. Thus, they complement and support the other core Fund activities. As we review these three activities we need to keep in mind the objectives of strengthening their alignment and synergies with surveillance and lending; improving their effectiveness through close monitoring and evaluation; and enhancing country ownership of them, especially in view of their voluntary and, so far, free of charge nature. It also seems to me that we are entering an era in which capacity building is seen as increasingly important, and we need to make sure that we are able to support our members in this area. Thus, in view of the foreseeable pressures on Fund income, we are considering attempts to mobilize additional donor support for these activities and are also considering levying some charges for these services, consistent with countries' ability to pay for them. This would also encourage users to send clear signals about what services they want most, and subject Fund advice to a market test. In this area also, I would be interested in your views.
17. Turning finally to a key issue relating to governance of the Fund, I have spoken several times about the need for increases in voting power for some countries, including a number of emerging-market economies, to ensure that they have a role in the Fund's decision-making process that accords with their increased importance in the world economy. I should stress that this is not a regional issue: there are countries in every region that are underrepresented. The Fund's credibility depends on its perceived legitimacy as an international organization representative of its members, and our effectiveness suffers if we do not adequately represent countries of growing economic importance. The voting power of small, low-income countries has also been eroded over time due to decline in the relative importance of the "basic votes" to which each member is entitled. It seems that the most effective way to address these imbalances would be through a package approach, with a general quota increase based on a new quota formula, increases in the voting share of the most underrepresented countries, and an increase in basic votes. However, another possibility would be a more sequenced approach, perhaps beginning with ad hoc quota increases for the most underrepresented members. Again I would welcome your views. I would like to make some advances in this area soon: I think it is important to make a tangible advance on this issue by the time of the Annual Meetings in Singapore.
18. This is the first of what will be several opportunities for me to discuss the IMF's medium-term strategy. We are beginning the second stage of this work, moving from general ideas to specific proposals, and I have revealed some of my ideas on this today. I will be saying more on these issues in further round tables in Africa and in Mexico over the next couple of months. But I want to emphasize again that this will be an iterative process. I want to hear ideas from our members, including through the Executive Board, and from knowledgeable and interested people outside the Fund. I am pleased to see many such people in the audience. And I now invite your comments and questions.
19. Thank you very much.
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