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The IMF—Feeding the rat|
By Diwa C. Guinigundo1
Alternate Executive Director
International Monetary Fund
February 28, 2002
There is good news from Washington: the International Monetary Fund, after more than half a century since its establishment at Bretton Woods, is now going the way of mortal men in search of relevance. In the last seven years, coinciding with the tenure of Stanley Fischer as first deputy managing director, a series of events has driven and at the same time been influenced by the creeping changes at the Fund.
The Last Seven Years
First, the Tequila crisis of 1994–1995 crystallized the Fund's philosophy that a country in need could be helped on a large scale and in the quickest way, something in which the Fund was not exactly raised. Second, almost inevitably, Argentina was threatened by contagion and again, against the grain of history, the Fund endorsed the big facility with Argentina even as it relaxed bank liquidity requirements. The Asian crisis of 1997 was third; the Fund learned the hard way in Indonesia, Korea and Thailand. The other economies of Malaysia, Hong Kong, the Philippines and Singapore provided additional intellectual challenges on the design of monetary and fiscal policies, the exchange rate and capital mobility or even the exigencies of capital control.
Russia also joined the list of countries that contributed to the Fund's crucible in 1998. Here, there was a quick succession of debt default, installation of a Fund program, collapse of the adjustment process, and more Fund support to ensure macroeconomic stabilization and structural reforms. The next three years saw the addition of Turkey, Brazil and Argentina—yes, again—where the issue of moral hazard has become established within the board and out of it. Fund critics charged that in lending into arrears and providing countries the go-signal to suspend debt payments, the Fund could be building up the incentives for more defaults, more bailouts and more moral hazards.
Parenthetically, it should be mentioned that as early as the second quarter of 1996, following the Mexican crisis, it was the finance ministers and central bankers of the G-10 nations who decided to urge the Fund "to do more of what it had done occasionally in the past: lend to countries in arrears on old loans from both commercial banks and official creditors...it gave its stamp of approval to nations suspending debt payments in `exceptional cases' and on a `temporary' basis."
The Heart of the Events
One would have guessed that at the heart of these events and the challenges they posed to the Fund is the idea that globalization and all that it stands for should be revisited. That the world is increasingly becoming truly more global and prone to crisis is getting more and more economists to go back to the drawing board.
For the Fund whose membership includes almost every country in the world—183 nations in all—this required a refocusing of its activities on promoting international financial stability as a public good. Crisis prevention and management was made absolutely necessary because of the economic and social costs of the crisis as well as the public attention they elicit. And without doubt, the challenge is daunting because each of the successive crises after Mexico was more difficult than the previous one on account of the increasing speed and extent of capital flow reversals and the contagion that they trigger.
Looking at some of the staff reports, the discussions in the Executive Board and policy statements during the last seven years will indicate that the Fund has walked the extra mile of considering virtually all the important angles of the financial crisis. The emerging conclusions are not actually surprising. Not all crises are equal. Both macro and micro institutional factors are involved in the financial crisis. There are links between moral hazard and overinvestment. Cronyism and politics could not be ruled out from the list of factors that led to the crisis. Panic was more than exuberant in the run-up to the crisis. Premature financial sector liberalization also underpins those economies in crisis. Indeed, crises reflect deeper characteristics of the financial sector which make it susceptible to such events.
But as Fischer loved to emphasize, the Fund has been quick to adapt to changes in the economic and financial environment in which it operates. The last seven years did not actually invalidate the objectives of this Bretton Woods institution to promote good economic performance, help the member countries in difficult times and provide a forum for international dialogue and cooperation. Rather, the last seven years were a period in a biblical sense to prepare for any lean years ahead, not that the last seven years were easy in themselves.
The Fund: In Search of Relevance
The Fund at last is feeding the rat: leaving the comfort of established ways of doing things in search of greater relevance. This is good for the international financial community and the peoples involved. What are the changes being established at the Fund?
First, the Fund is going back to the fundamentals. Management has decided to concentrate on the Fund's core areas of expertise: macroeconomic policies such as exchange rate, monetary and fiscal policies as well as financial sector and capital market issues. Under the heading of reforming the international financial architecture, the Fund has attempted to strengthen its most important function of surveillance of national economic developments and policies as well as international capital markets; promote transparency and compliance with international best practices or standards and codes of good economic conduct; update its treasury of lending facilities and develop a framework for involving the private sector in resolving financial crisis.
Briefly, more effective surveillance could help prevent or minimize the impact of a crisis. Greater transparency and higher standards will help markets work more efficiently. New and more innovative lending facilities are indispensable if the Fund is to match the new demands on its resources and thus were born the Supplementary Reserve Facility (1997) and the enhanced Contingent Credit Lines (2000). More work has to be done of course in the areas of financial crisis resolution and addressing anti-money laundering issues.
Second, the Fund is also revisiting the conditions it attaches to its assistance to member countries. In the last seven years, the list of conditionalities has exploded due to at least two factors. One, the Fund has put more emphasis on growth as an explicit policy objective while upholding the urgency of stabilization. Two, the Fund has realized that growth and stabilization were possible only with far-ranging structural reforms. Today, these conditionalities are being streamlined and refocused with the important proviso that only those that pass macro relevancy would be included.
Moreover, to aim for more appropriate conditionalities is to enhance the ownership of the adjustment program and improve governance, until today the Achilles' heel of important policy implementation. As the new Managing Director puts it, while conditionalities serve to protect the Fund's lending and ensure the needed adjustment processes, conditionalities should by no means be so restrictive and extensive that the national authorities would already refuse to own the program and therefore, the chance of its success will likely be very low. More technical assistance has been deployed to the member countries for capacity building and, in the process, ensure more effective implementation of the program.
Third, the Fund is now strengthening its work on global capital markets. Surveillance has been firmed up by making the detailed analysis of the financial markets an integral part. The Fund has started to publish the International Capital Markets Report and a quarterly report on the risks and opportunities facing emerging economies in tapping the international capital markets. Internally, the Fund circulates a daily global markets monitor coming from the new International Capital Markets Department, covering the equities markets, currencies, interest rates and bond yields and spreads. The new department is expected to help the Fund deepen its understanding of capital markets, address systemic problems and opportunities, and help member countries gain better access to international capital markets.
Is the world convinced of these important changes producing some positive results for the world economy and the people at large?
If the APEC and similar international and regional groupings of heads of states and finance ministers and central bank governors were any reliable indicator, there is a high degree of confidence on these changes which are likely to produce positive results. In the APEC leaders meeting in Shanghai last October, the Fund's contribution to strengthen the international financial architecture was recognized. External vulnerability was assessed with focus on readily usable reserves adequacy in the terms used by the Fund. It was also acknowledged that promoting policy transparency and enhancing crisis prevention could be achieved by the work on international standards and codes. The Fund philosophy and strategy on financial sector surveillance, assessment of offshore financial centers, anti-money laundering, capital account liberalization, crisis resolution and conditionality were pervasive.
If there is any basis for being positive with the Fund approach, it must have been the initial results of having some of these changes producing better capacity for countries to manage the crisis. The armor comes in the form of stronger banking system, appropriate macroeconomic policies, comprehensive structural reforms and much more.
Thus, it is important for the world to look at globalization—with its benefits and risks—like the gift of fire of old. Fire is important in all facets of our lives including our need for light, power and heat. Yet fire is not without risks to life and property. What is important is to be able to master it and harness it to serve human needs. Globalization and the world's vulnerability to periodic crises should pose a challenge to put together an infrastructure for managing those risks so we could maximize the benefits of globalization and minimize its risks. One does not fly a jumbo jet into a tall building because he realized it could be risky. Even rats do not rage into the night without putting up a fight.
1Guinigundo is alternate Executive Director for Australia, Kiribati, Korea, Marshall Islands, Federated States of Micronesia, Mongolia, New Zealand, Palau, Papua New Guinea, Philippines, Samoa, Seychelles, Solomon Islands, and Vanuatu. Formerly Director for research of the Bangko Sentral ng Pilipinas. He contributed this article to the Bangko Sentral Review: A publication of the Central Bank of the Philippines (January 2002, Volume IV, Number 1). It was reprinted in Manila Standard of February 28, 2002.
IMF EXTERNAL RELATIONS DEPARTMENT