IMF managing director Horst Köhler outlines his ambitions for the Fund as he leads it in the twenty-first century.
The world economy is in much better shape than it was two years ago.
It offers an opportunity to tackle some pressing questions about how the world economy can become not only more stable, but also better able to promote economic growth and prosperity worldwide.
Where is globalisation taking us? How far have we really come with the strengthening of the international financial system? And what can be done to keep the IMF true to its mandate and effective in a rapidly changing world economy?
It is this last question that has quite naturally been at the forefront of my thinking in my early days at the IMF. First, what is the present state of the world economy? The underlying conditions are still broadly quite favourable.
The Fund’s staff is maintaining its forecast that the growth of world output will increase from last year’s 3 per cent increase to more than 4 per cent this year, and will continue at about the same pace in 2001. These projections reflect buoyant activity in most advanced economies, which has underpinned the worldwide recovery from the financial crisis that began three years ago. The rebound of the emerging market economies has been particularly noteworthy.
Their commitment to structural reforms and sound financial policies has been the basis for this recovery – and the IMF has had a significant part. But there is no room for complacency. The current situation contains some risks, uncertainties and challenges, which call for vigilance and policy action. First, our current forecast for the world economy assumes that a rebalancing of global growth across the major advanced economies takes place in a gradual manner.
But a disorderly correction in US asset prices or any other development that leads to a hard landing of the US economy could have pronounced effects on world demand and the international financial markets. Second, external financing flows to emerging markets have shown large fluctuations in the past five years and are likely to remain volatile, particularly as they appear sensitive to interest rates in the industrial countries.
Since emerging markets are vulnerable to such volatility, it is essential that they maintain the momentum of structural reforms and also keep their macroeconomic fundamentals as strong as possible. Third, reform is not a one-way street; it is not only in the emerging market and developing countries that it is needed. A revolution in technology and communications is under way, but not all advanced economies are realising its full potential.
The advanced economies should accelerate their own efforts to remove the rigidities that impede the structural transformation taking place. A credible reform agenda for the mature economies, and in particular an accelerated opening of their markets, are indispensable for global growth, and will reassure markets that the correction under way in world equity markets need not become disorderly.
But there is an even broader, longer-term issue. Let me consider a general question, one that has come up not least during my recent visit to Latin America in talks with business people, trade unions, parliamentarians and civil society. Quite simply: where is globalisation taking us? Undeniably it has proven potential for promoting growth, investment flows, and technology transfers in an increasing number of countries. But we also have to be aware of the risks and costs of the process, and address them.
One reservation is held by a vocal constituency that questions whether the world economy and globally integrated financial markets can work in the interests of all. We have to acknowledge that there is a problem of global inequality and poverty. And, in the medium to long term, such inequity could easily become a source of political and social instability and, ultimately, of economic instability. Therefore, poverty reduction should be a vitally important issue for us all. The question then is how best to achieve it more rapidly.
It needs a comprehensive approach including, not least, education and training, good governance and a well-functioning social safety net. But key to the solution is strong and equitable economic growth, with the developing countries participating fully. We know, in this context, that global financial markets are a vital source of global growth and investment. But the experience of the past decade has shown that these markets are also prone to considerable volatility, thus making them a source of turbulence and crisis.
Therefore, it is right and important that the international community is now putting so much emphasis on the strengthening of the international financial architecture. The international community has undertaken numerous initiatives, many of which are already being implemented by the IMF. Much of the work is still experimental or in its pilot stages, but clear direction and tangible progress are evident in several key areas.
These include: l the promotion of transparency and accountability; l the development of internationally recognised standards and codes as a basis for the design of policies and institutions; l work to strengthen domestic financial systems and to assess financial sector stability in many countries; l strong efforts by the Bretton Woods institutions and others to assess external vulnerability; l the continuing debate over appropriate exchange rate regimes, which brings attention to bear on the paramount importance of supporting the choice in any country with appropriate macroeconomic policies.
This is “work in progress”, and the Fund has a strong commitment to carrying it forward through its surveillance and, where needed, through technical assistance. But I want to go a step further and find a credible answer to the question of where the IMF itself has to change. We have established a two-track work programme for the Fund in the coming months. One track responds to the guidance of the International Monetary and Financial Committee, which, at its meeting in mid-April in Washington, set us a very full programme.
The second track of our work programme in the Fund will seek to outline a vision for the future role of the IMF. We want the IMF to be as effective as possible in contributing to prosperity in all parts of the world, through the mandate that it has been given. The IMF has a long history of continuous reform and adaptation. And, clearly, it has not been standing still in the past few years after the emerging markets crisis.
I see no need to turn the Fund upside down or to devise some new grand design for it. But a crucial question for me is whether the IMF has yet sufficiently adapted itself to a world where financial markets have seen such phenomenal growth in size and sophistication. In this context, I believe the many recent reports on IMF reform are clearly helpful. The bulk of these reports recommend that the IMF should be more focused in its activities.
I share this view. The authority of the Fund derives strongly from its expertise. No institution can have expertise everywhere. The Fund’s concentration on macroeconomic stability should lead to a focus in its advice on monetary, fiscal and exchange rate policies and financial sector policies. The Fund should have a clear position about the key elements of a global growth strategy and this should be discussed and agreed with the other multilateral institutions. But, based on this and good co-operation among these institutions, there should also be a clear division of labour, not least between the World Bank and the IMF.
No-one can rule out that there will be more financial crises, although we cannot be sure where or when they will occur or how severe they will be. Clearly there is a need for an official international lending agency to be able to mount a credible response, and this is a responsibility of the Fund. The establishment in recent years of the Supplemental Reserve Facility – which provides large-scale short-term financing – and the Contingent Credit Lines – which enable countries to pre-qualify for financial assistance by adopting appropriate policies – are promising developments of the IMF’s lending facilities.
But we have to review the entire range of the Fund’s instruments to streamline and sharpen them. And here we must be realistic. We have to ask ourselves whether it is possible or even desirable that the IMF, as official lender, should try to match the extraordinary growth of private capital markets. It seems to me that we have to think about limits to the scale of crisis lending that the Fund can be expected to undertake.
It is imperative that the Fund, and the international community, pay the utmost attention to crisis prevention, especially through sound macroeconomic policy, the promotion of transparency and the implementation of practical standards and codes. And, if the Fund is effective in this task through its surveillance, then I see a good chance that there may not be a need for the ever–growing rescue packages that we saw during the 1990s. This brings me to the question of the involvement of the private sector.
My starting point for this discussion is the undeniable fact that it is the private capital markets that play the major role in promoting investment and growth around the world. It is particularly important that we do not jeopardise this role in the emerging market and developing countries. Therefore, how can the private sector be engaged to the mutual benefit of all, including through reduced market volatility? I see three broad considerations that should help us find answers to this question: l First, there should be no presumption about automatic “bailouts” either of countries or of lenders.
The primary responsibility, the first line of defence against crisis, is the sound policies implemented by countries and good risk appraisal by investors; l Second, the framework for the “involvement of the private sector” should shift towards “constructive engagement” – co-operation among the borrowing countries, private sector, and the official sector, especially during non-crisis times.
This means a focus on crisis prevention and a shift of emphasis away from the coercive or punitive approach that some market participants seem to perceive as the meaning of “private sector involvement”; l Third, in crises, solutions should not be seen as arbitrary. Although it may not be possible to devise a comprehensive set of rules guiding all such cases, there will need to be broad principles that can be applied to avoid the perception of uneven treatment of creditors and countries.
These considerations, especially the search for “constructive engagement”, make it essential that the Fund and the private sector engage in a dialogue that is well informed and wide ranging. This should become a permanent feature of the Fund’s work. We shall be establishing at the Fund a point of contact, the Capital Markets Consultative Group, to provide a forum for regular dialogue between market participants and the Fund’s management and staff. I am still in the early days of my post at the Fund.
But in this time I have been greatly impressed by the people of the Fund – its executive board, its staff and my management colleagues. And I trust in the tradition of consensus building among the membership of the Fund. This gives me confidence that our work programme for the months ahead will lead to an even more effective IMF, and a stronger international financial system.
This will be the greatest contribution we can make to promoting strong long-term growth, poverty reduction and global political stability.
Horst Köhler is managing director of the International Monetary Fund in Washington
This article is adapted from a speech delivered at the International Monetary Conference, Paris, on May 30, 2000.
