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The IMF in Asia and the World Economy, Speech by Rodrigo de Rato, Managing Director of the International Monetary Fund
May 24, 2006
1. Thank you Mr. Khor for that very kind introduction, and thank you also to the Economic Society of Singapore for inviting me to be with you tonight. It is a pleasure to be here on this great occasion. I would like to talk to you about the changing role of the IMF in Asia and in the world economy. But I'd like to begin with a few words on change and continuity. These thoughts are suggested by the two events that we have just witnessed: the conferring of the honorary fellowship on Senior Minister Goh Chok Tong, and the award of prizes to these extraordinary students for the essay competition.
2. Last year, Minister Mentor Lee Kuan Yew gave an interview in which he stressed the need to have a continuous renewal of talent in Singapore's leadership. He said:
"We need to find a niche for ourselves, little corners where in spite of our small size we can perform a role which will be useful to the world. To do that you will need people at the top, decision makers who have got foresight, good minds, who are open to ideas... So there must be this continuous renewal of talented, dedicated, honest, able people who will do things not for themselves but for their people and their country."
These words resonate with me tonight. Singapore has for many years exemplified the virtues of continuity and renewal. I am very pleased that I could be with you as Goh Chok Tong, who has contributed so much to modern Singapore, is honored. And the students who prepared these wonderful essays represent the hope of Singapore, the continuous renewal that countries and institutions need to thrive in a changing world.
3. It is important that Asia, like Singapore, renew itself continuously and rise to meet new challenges. Asia has thrived on close engagement with the world economy, and has been one of the great beneficiaries of globalization, with its wide-ranging impact on trade patterns, production processes and employment opportunities. But Asia has also experienced the risks and costs of financial globalization, and now faces new challenges stemming from the accelerating pace of globalization. Let me talk about some of these, and some ideas that we in the IMF have that could be useful to our Asian members.
4. Taking the challenges first:
The integration of capital markets has helped to allocate savings and investment more efficiently, but it has also increased the risks from volatile capital flows and financial contagion. How can Asian countries reduce domestic vulnerabilities, avoid future crises, and make itself resilient against large and volatile capital flows?
The globalization of production creates tremendous opportunities but also potentially serious challenges for Asian countries. What can countries do to meet these challenges?
Around the world, populations are aging, and this is also true of some Asian countries. How should governments adjust their budget policies to adapt to this reality?
5. Now let me suggest some answers to these questions.
The first line of defense against crises must be a sound macroeconomic framework, including appropriate monetary and fiscal policies. Asian countries have made great progress on this, especially in making policy frameworks more flexible, but more could be done. For example, I see a need in some countries to make fuller use of flexible exchange rate arrangements to enhance their capacity to absorb external shocks. There is also a need in some cases to further strengthen financial sector supervision to safeguard against systemic risk and to improve risk management skills. Enhancing corporate governance and improving the efficiency of bankruptcy systems would also make economies more resilient.
To meet the challenge of global competition in production, I would commend to you policies to promote the development of capital markets and improve labor market flexibility. Measures to improve the business environment, which would encourage new investment and innovation, would also help. And—of course—education, including skills upgrading to prepare children and adults for a changing world, remains crucial.
For those countries with aging populations, I would recommend preparing budgets that reduce public debt levels. The current period of strong growth provides a golden opportunity to further strengthen fiscal positions, and prepare for the fiscal costs of aging populations, as well as to reduce vulnerabilities.
6. As Asia grapples with these problems, I hope that the International Monetary Fund will be a helpful partner. One exciting process that is going on in Asia is regional integration, encompassing trade agreements, regional economic cooperation, and financial integration. The last is an important initiative, and one that the Fund supports. Tomorrow I will be attending a high-level seminar on Asian financial integration organized, for the second time, by the Fund and the Monetary Authority of Singapore, and I look forward to continuing what has been a fruitful dialogue on this subject.
7. Let me now talk about the changing role of the International Monetary Fund in the global economy. The Fund, like Singapore, has survived by combining continuity—preserving a core of knowledge, experience, and integrity—with constant adaptation. For sixty years, the Fund has risen to meet the challenges that have confronted the global economy. But our members continue to face new challenges, and, like Singapore, we must continually adapt to help our members meet them.
8. Last month, I reported to the International Monetary and Financial Committee on my plans to implement the Fund's Medium-Term Strategy. The IMFC welcomed the proposals, and gave me specific mandates to carry some of them forward in the period through the IMF's Annual Meetings, which will be held in September here in Singapore. The Medium-Term Strategy is motivated by the conviction that the Fund needs to change and renew itself to help its members take the opportunities and meet the challenges posed by 21st century globalization. It covers all aspects of the Fund's work, but I would like to talk to you tonight about three initiatives, which I think are particularly important for Asian countries, and on which I hope to make progress during the coming months. The three initiatives are in the areas of multilateral surveillance, financing for emerging market countries, and IMF governance.
9. One of the Fund's most critical jobs is its surveillance of the global economy and of individual countries' economies. This surveillance has served our members well over the years, and will continue. But I believe it needs to be supplemented by multilateral consultations, in which particular issues of global or regional significance will be taken up comprehensively and collectively with systemically important members and, where relevant, with entities formed by groups of members. These multilateral consultations will be something new for the IMF and for our members, and they will be an important vehicle for analysis and consensus-building. They will enable the Fund and its members to address vulnerabilities that affect individual countries and the global financial system within a framework that helps overcome some of the hurdles to individual action by emphasizing the benefits of joint action for all.
10. Over the coming year, I see a particular need for multilateral consultations to deal with the growing global economic imbalances which threaten the world's prosperity. The most obvious manifestations of these imbalances are a large deficit in the current account of the balance of payments of the United States—almost 6½ percent of GDP in 2005, and expected to be as high again this year—and large surpluses in the external accounts of other countries, including oil exporters such as Saudi Arabia, Japan and some of the emerging market countries of Asia, especially China.
11. Global imbalances must eventually unwind. The risk is that they will be unwound in an abrupt and disorderly way. For example, there could be an abrupt fall in the rate of consumption growth in the United States, perhaps triggered by a slowing housing market. Or a disorderly adjustment might be triggered by developments in financial markets. Trends in exchange rates in recent months are in the right direction to help aid the adjustment process and, so far, have been orderly. But if investors become suddenly unwilling to hold U.S. financial assets at prevailing exchange rates and interest rates, this could lead to an abrupt depreciation of the U.S. dollar and increases in U.S. interest rates. This could cause global financial market disruptions as well as a downturn, and both could affect the open, trading economies of Asia seriously.
12. There is a broad consensus among policy makers on the measures that are needed to reduce global imbalances. Most policy makers around the world agree that what is needed is fiscal adjustment and measures to stimulate private saving in the United States, further exchange rate appreciation and measures to stimulate domestic demand in some countries in emerging Asia, and structural reforms to stimulate demand and improve productivity in the non-tradeables sector in Europe and Japan. But this consensus has so far been translated into only limited action.
13. I think that the IMF can help. The time is now ripe for a coordinated approach to the problem, as policy makers around the world are increasingly recognizing its seriousness. There is also, I believe, growing recognition that coordinated action would produce better results than unilateral action, and would be better understood by national public opinion. I also believe that the Fund's role as a trusted independent source of analysis and advice will help the major players move more quickly beyond diagnosis of the problems to prescriptions for how to fix them.
14. Of course, the process must be consensual: it is only going to work if all of those involved want to participate and are convinced that the actions they jointly agree to take are in their own best interests. It will also take time. Global imbalances are a complex problem, many years in the making, and the point of this exercise is not to come up with a quick adjustment—an abrupt adjustment of global imbalances is just what we want to avoid. Rather we want to begin a benign sequence of events that will allow global imbalances to unwind in an orderly and gradual way. We need to start working together, but I do not expect a single dramatic meeting here in September or anywhere else any time soon. The necessary condition for success is voluntary, multilateral action over time.
15. Let me move on now to another area where I see the need for a renewal of the IMF's role—its role in preventing and responding to financial crises. At the moment, the risk of a new financial crisis may still be small. Global growth is high, and financial markets are managing the latest movements well. Many emerging market countries, especially here in Asia, have also accumulated very large precautionary reserves. But benign financial market conditions will not last forever, and reserves come at a high financial and opportunity cost. And in a world where financial markets are becoming more aware of the risks of inflation and global imbalances, continued strong and resilient macroeconomic policies in emerging markets are even more important. There is also the risk that high and volatile oil prices will begin to adversely affect global growth and inflation, as well as the risk of an avian flu pandemic, for which many countries still need to strengthen their business continuity plans. At this point let me say that the world will miss the leadership of Dr. Lee Jong Wook, Director of the World Health Organization, who died on Monday. Dr. Lee was a tireless advocate for public health, especially the health of the poor, and he worked hard to increase awareness of the risks of avian flu.
16. What do we need to prevent and respond to financial crises? Our emerging market members tell us that they would like an instrument that meets their needs for predictability and flexibility. To respond, I have proposed to the Fund's Executive Board that we develop a new instrument to provide high-access financing to emerging market countries that have strong fundamentals but remain vulnerable to shocks. The instrument would be a kind of liquidity cushion for our members, designed to help them avoid crises and to respond to crises if they do occur. To be more attractive to emerging market countries than previous approaches, such an instrument must provide for more automatic drawings for programs that are on track, and provide more finance up front. Conditionality under it would need to be narrowly focused on policies to maintain macroeconomic stability and reduce vulnerabilities. In addition, and complementing this proposal, we will also explore the scope for more interaction between the Fund and reserve pooling or regional financing arrangements, such as the Chiang Mai Initiative.
17. Introducing a new high access financing arrangement would have advantages for emerging market economies, including those in Asia. Emerging markets that use such arrangements would benefit from an added level of protection against crises, and would need less in the way of precautionary holdings of reserves. Last month, the IMFC supported further examination of this proposal. I intend to initiate discussions on it in our Executive Board over the next month or so, and I hope that we can make some progress on this proposal before we come back to Singapore in September.
18. Let me now turn to IMF governance, beginning with IMF quotas. In a number of countries, Fund quotas have got increasingly out of line with economic weight. Take the situation of Asia. Asia's share of world GDP was about 22 percent in 2003. This is about one third higher than its share in Fund quotas. In other respects too, Asia has become more important in the world economy. Its share of world exports is over 27 percent. And Asia continues to grow rapidly: last year, economic growth in Asia was about 7 percent; we expect the same again this year.
19. I am also concerned that the voting power of small, low-income countries has been eroded over time. This gives rise to concerns about the adequacy of voice and representation for a number of relatively small, poor countries that continue to borrow from the Fund but that have only a limited share in Fund voting. One way in which these concerns could be addressed is if there is an increase in the number of "basic votes," which are the minimum and equal number of votes, unrelated to quota size, to which each member is entitled.
20. I should emphasize that these are difficult issues, on which reaching agreement will not be easy. But I do think that action in this area is vital for the effectiveness of the institution, including on some of the multilateral issues I mentioned earlier.
21. I am pleased to say that my views on the importance of this issue are shared by the IMFC. At our Spring Meetings last month, the IMFC gave me a mandate to make concrete proposals to address these issues by the time of the Annual Meetings. I am now in the process of working with the membership to develop these proposals. At this stage, I envisage that we tackle the issue in a two-stage process. This would involve agreement among our members in Singapore in September on ad hoc quota increases for countries whose quotas are most clearly out of line with their weight in the global economy. I would also like to see at that time an agreement that we should move in a second stage on more fundamental changes, which would tackle the issue of basic votes, of the quota formulas that could help guide subsequent quota changes, and perhaps of broader governance issues, such as the way Management is selected.
22. All of the issues that I have talked about today—multilateral consultations, a new financing instrument for emerging markets, and Fund governance—are important for the future of the Fund and for our members. I hope that we will be able to make progress on them by the time we return to Singapore in September. Reform and renewal take time and effort, as you well know, but they are essential both for countries and for institutions.
23. In concluding, I would like to thank the Economic Society of Singapore for being our hosts tonight. I would like to thank the Monetary Authority of Singapore, who will be hosting the seminar with the IMF tomorrow, and I would like to thank the Government of Singapore for accepting the IMF and the World Bank as your guests later this year.
Thank you very much.
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