The IMF's Agenda for a New Year

A Commentary
By Horst Köhler
Managing Director
International Monetary Fund

Financial Times
January 8, 2001

Much of the world began the year 2000 with its fingers crossed—hoping that our transportation, communications, and electric power systems would not be disrupted by the "Y2K bug." Now, at the beginning of another new year, much of the world is again preoccupied with near-term threats to political and economic stability—including unresolved conflicts in Africa, Asia and the Middle East, and slowing economic activity and falling stock prices in the United States and other advanced industrial countries.

A natural human tendency, in the face of such personal insecurity, is to become self-absorbed. And yet it is clear that during the past year, people the world over have instead turned outward. There is an increased consciousness of the need for global solidarity and cooperative action. As part of this, international institutions created to serve the global common good are called upon to be more effective and proactive.

I want to assure our member governments and the broader public: the IMF is aware of the many challenges we face, and intends to do its part in meeting them.

The most immediate challenge is to safeguard strong and sustained world economic growth. In the United States there is room to maneuver for both monetary and fiscal policy, to ensure that the current weakening of economic activity is transformed into a soft landing, rather than a recession. The recent reduction in key US interest rates was thus a timely and appropriate way to strengthen US and global growth prospects. The IMF has advised Europe and Japan to make further progress in growth-oriented structural reform—and even to accelerate this process. And it is encouraging both borrowers and lenders in international capital markets to take measures to enhance their resilience at a time of economic uncertainty. With action along these lines, there is no reason to be pessimistic about the global economy.

During my first year at the IMF, I engaged in discussions with our member governments and with supporters and critics from outside the organization, as well as an internal review, to define the future role of this institution. The vision which emerged from this process was overwhelmingly endorsed by the IMF's governing bodies at its Annual Meeting in Prague, and we are now working every day to put it into practice. It is a vision in which the IMF:

• strives to promote sustained non-inflationary economic growth that benefits all people of the world;
  
• is the center of competence for the stability of the international financial system;
  
• focuses on its core macroeconomic and financial areas of responsibility, working in a complementary fashion with other institutions established to safeguard global public goods; and
  
• is an open institution, learning from experience and dialogue, and adapting continuously to changing circumstances.

In these ways, we see an IMF which is actively engaged in helping to make globalization work for the benefit of all humankind.

A sampling of the activities of the IMF's Executive Board during the last two weeks of December give some idea of the complex and broadly-based effort that is underway.

• During those two weeks, the Executive Board took the final decisions necessary to begin providing debt relief to 22 heavily-indebted poor countries, in support of their efforts to promote sustained growth and reduce poverty.
  
• It welcomed the Federal Republic of Yugoslavia back into the IMF, under new democratic leadership, and provided it with emergency financial assistance.
  
• It debated further steps to improve the IMF's capacities for crisis prevention and management, through surveillance over financial sectors in member countries and a streamlining of the IMF's policy conditionality. This ongoing effort builds on the lessons learned, not least, from the crises in Asia and Russia.
  
• We also supported Argentina and Turkey in their efforts to overcome difficult financial situations. The continued success of those efforts will now depend crucially on the implementation of the well-defined adjustment. Determined policy action will also be the best confidence-building signal these countries can provide to capital markets, which have demonstrated the willingness to remain constructively engaged.

In all of these areas, the IMF is working to support far-reaching internal reforms. In the process we are taking risks. But I would argue strongly that it is a part of the mandate of the IMF to take risks. The IMF was created as a permanent mechanism for cooperation among its worldwide membership, to ensure the effective operation of the international monetary system and promote sustained growth in our member countries. To fulfill those responsibilities, the IMF must be proactive and it must adapt to changing circumstances.

The most important area for further adaptation and internal reform of the IMF is in our work on international capital markets. We must develop a deeper understanding of the functioning of these markets and greater financial sector expertise, and we must incorporate this understanding into the IMF's surveillance, technical assistance, and lending activities. The IMF should have the capacity for clear advice on the proper sequencing of domestic financial market development and liberalization, while also seeking constructive ways to reduce the volatility of international capital markets. On this basis, the IMF will be better able to help member countries to take advantage of the opportunities of international capital markets while minimizing the associated risks. We are proceeding as rapidly as possible down this path, through our research agenda, internal organization and recruitment, intensified outreach and constructive engagement with private institutions, and cooperation with other international organizations and fora.

In a increasingly interdependent world, prosperity will not be sustainable unless it is broadly shared. Thus, it is both a moral imperative and a matter of vital self-interest, for all members of the international community to join in decisive action to eliminate world poverty. Jim Wolfensohn and I have recently reported on the progress last year by the IMF and World Bank in delivering debt relief to our poorest member countries. We are determined to carry this process forward for as many eligible countries as possible.

But while helpful for many countries, debt relief is only one part of the equation. More and more, developing countries recognize the critical importance of their concerted efforts to help themselves—including through improved governance, conflict resolution, human capital, and the creation of a vibrant private sector. The most important thing that the international community can do to support these self-help efforts is to provide enhanced opportunities for international trade and investment. That is why the IMF strongly supports calls for a new round of multilateral trade negotiations, as well as steps to provide poor countries with access to markets in the advanced industrial economies. In addition, the IMF will continue to call upon the wealthy countries to meet their long-standing promises to increase aid to developing countries to 0.7 percent of GNP, about three times the current level.