The IMF's Medium-Term Strategy: Meeting the Needs of Emerging Market MembersRemarks by Rodrigo de Rato
Managing Director of the International Monetary Fund
at the Banco de México
Mexico City, Mexico, March 23, 2006
As Prepared for Delivery
1. It is a pleasure to be here in Mexico City. I would like to thank the Banco de México for organizing this event.
2. Last September I published a report on the Fund's medium-term strategy. My premise in initiating the review was a simple one: 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.
3. I would like to talk today about a major theme of the review, which is the Fund's changing relationship with emerging market members. I want to share with you some ideas that could help the Fund engage fully the emerging markets as increasingly important members of the Fund. We have heard concerns expressed by emerging market members on issues of surveillance, instruments of financing, and members' voice in the Fund's decision-making process. The presentation will cover how we propose to address these concerns in several areas: surveillance, especially of financial and capital markets; the Fund's future role in financing emerging market economies; its role in the process of restructuring sovereign debt; and the issue of members' quotas and voice in the Fund.
4. I have come to Mexico to talk about the Fund's role in emerging markets because Mexico's relationship with the Fund has always been close. Also, Mexico has experienced both the benefits of globalization and the increased risks associated with it. On previous occasions the Fund has been able to help Mexico. So I turn to you for advice on what the Fund can do to help emerging markets in the future.
5. Globalization has profoundly influenced the Fund's work with emerging market countries. Emerging market economies have benefited from increased trade and investment flows, but they have also been exposed to volatility of capital flows. Access to plentiful capital has sometimes allowed countries to avoid the costs of deficiencies in economic management for a while, but it has also often magnified the effects of those deficiencies when a crises materializes. The Fund has responded to crises with unprecedented financial support, and mobilized further support from others. On many occasions, including in Mexico, this support, combined with a strong policy response, succeeded in resolving the crisis. But there have been cases where the Fund's conditionality has been seen as unnecessarily broad, and occasions when its support was not enough to prevent significant falls in output. Over the last few years countries that were burned by capital outflows and exchange rate crises have responded by strengthening their balance sheets and making their economies more flexible—including by allowing more flexibility in exchange rate policy—and by seeking to insure themselves against future crises. The insurance has taken the form of very large build-ups in reserves in many countries, and of attempts to develop regional risk-pooling mechanisms, such as the Chiang Mai Initiative in Asia.
6. Faced with these developments, the Fund and its members need to ask themselves some hard questions. What are the vulnerabilities in the system and in member countries that could lead to the crises of tomorrow, and what should the Fund be doing to address them? Is there still a role for Fund financing of emerging market countries? How can the Fund reassure emerging market members that its support will be available and tailored to their needs? And how can the Fund best support other initiatives, including regional initiatives, aimed at crisis prevention?
7. Looking first at potential vulnerabilities, it seems clear that developments in domestic and international financial and capital markets have the greatest potential to give emerging market countries unpleasant surprises. This underlines the need for a change in the Fund's culture to put financial and capital markets issues at the heart of its work. This is an issue that is important for all of the Fund's members, but it is particularly important for emerging market economies. The Fund has been steadily strengthening its financial sector work since the late 1990s. This year we will go further, merging 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. We have also established a taskforce to pioneer an analytical framework for covering financial sector issues in annual policy consultations. And I have directed that analysis of financial sector and balance sheet vulnerabilities should be integrated into staff reports, drawing out the implications for macroeconomic policy, capital controls and flows, and the scope for domestic and external spillovers.
8. Let me turn now to financing. 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.
9. But if the Fund is to continue to be relevant for tomorrow's as well as today's emerging market economies, we must be responsive to the needs and concerns of our members. Increasingly, our emerging market members are telling us that our existing instruments do not meet their needs, especially their needs for predictability and flexibility. We also need to consider whether our lending instruments are adequately adapted for crisis prevention as well as for crisis management.
10. To respond, I have proposed to the Fund's Executive Board that we develop a new type of arrangement that would offer high-access contingent financing. The instrument would be designed for members with strong macroeconomic polices, sustainable debt, transparent reporting, and a good track record, which nevertheless still face balance sheet weaknesses and vulnerabilities. Normal access would be high—perhaps 300 percent of quota—with the recognition that further financing could be provided based on need and the policy response if a crisis materialized. Conditionality would be focused on policies to maintain macroeconomic stability and reduce vulnerabilities. Many questions remain to be worked out, and here again I seek your guidance. For example, how can problems of abrupt expiry of access be avoided? How should we design conditionality to address underlying vulnerabilities and give assurance that policies will be adjusted appropriately in a crisis, without micromanaging member's policies? Most fundamentally, how do we make sure that the major emerging market economies would find such a facility useful enough to participate in it? What elements of the design would be most important for this?
11. I noted earlier that there were other initiatives geared toward crisis prevention. I believe that the Fund should be open to supporting regional and other arrangements for pooling reserves, at least by signaling sound policies. The collective foreign currency reserves of emerging market countries amount to one trillion dollars. Some groups, most notably in Asia under the Chiang Mai Initiative, have already set aside a part of these funds for contingent financing, and new regional or even interregional arrangements may emerge if potential members have confidence in each others' economic policies. The Fund can play a role here, based on regular and intensive surveillance. There may also be scope for links between such arrangements and the new contingent facility or the Fund's regular financial support. I would be interested in your views on these issues.
12. The Fund has long had an important role in the process of restructuring sovereign debt. But recent experiences lead me to believe that we should re-examine how the Fund interacts with creditors and debtors in this process, since our practices are largely based on the structured negotiating framework of the 1980's. I would certainly want to reaffirm the principle that the Fund's role should be centered on agreeing with the restructuring member on a fiscal and macroeconomic framework in cases where there are insufficient resources to pay creditors in full. But in other respects I would seek your guidance on what changes in our framework would be useful. You are well placed to give such guidance, as representatives of a country that has faced difficult issues in creditor/debtor relations, and has maintained good and constructive relations with its creditors throughout.
13. Turning now to the issue of voice and representation. 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. This is a crucial issue. The Fund's credibility depends on its perceived legitimacy as an international organization representative of its members, and our effectiveness suffers if countries of growing economic importance are not adequately represented. Compromises will also have to be found to give more voice to low-income countries whose share in the world economy has declined but for whom the role of the Fund is large. I hope that we can make significant progress on these issues by the next Annual Meetings in Singapore.
14. Finally, let me talk a little about the next steps in the review of the medium-term strategy. Much work has been done within the Fund over the last several months, and the report has also generated much debate and many interesting ideas outside the Fund. We are now moving from analysis to implementation. The Spring meeting of the IMFC next month will be another important point in the process. But the medium-term strategy will remain an iterative process: one certainty is that the world will change further, and the Fund will need to change with it. And now, I invite your comments and questions.
Thank you very much.