[stop-imf] Kohler: Investing in Better Globalization

[Robert Weissman]

http://www.imf.org/external/np/speeches/2002/091902.htm

Investing in Better Globalization Remarks 
by Horst Köhler 
Managing Director of the International Monetary Fund 
at the Council on Foreign Relations 
Washington, D.C., September 19, 2002

1. Ambassador Fisher, ladies and gentlemen, it is a pleasure to meet
today with the Council on Foreign Relations. I appreciate the
contributions that the Council has made over the years, to the
development of US foreign policy and to the broad debate on
international economic and financial issues.

2. The Annual Meetings of the IMF and World Bank, which take place in
less than two weeks, have been shortened as a result of legitimate
security concerns of our hosts, the District of Columbia and the US
government. I hope that Ministers and Governors from our 184 member
countries will nevertheless take advantage of the restricted
opportunities for personal encounters, discussion, and dialogue. This is
essential for building trust and finding true common ground in
responding to the challenges facing the global economy. In my remarks
today, I would like to outline what I think the international community
in general, and the IMF in particular, should do to address those challenges.

The Global Economic and Financial Outlook

3. The global economy has shown remarkable resilience in the face of
multiple shocks over the past two years. Nevertheless, we need to be
concerned about the strength and durability of the ongoing economic
recovery, and the stability of the international financial system. Risks
to the global economic outlook today are clearly tilted more to the
downside than they were a few months ago. These include continuing
fallout from the collapse of the equity price bubble and corporate
scandals, difficulties in some emerging market economies, regional
political tensions, and volatility in world oil prices. But on balance,
we do still expect that the recovery will continue. The major industrial
countries have on the whole reacted responsibly to the global slowdown,
the effects of earlier relaxation of monetary policy are still in the
pipeline, and improved technology holds the potential for new products,
new services, and greater productivity. Moreover, I do have some trust
in the forward-looking, optimistic way of life exemplified by the
American people. Crucial at this moment for safeguarding and reinforcing
global growth are continued vigilance, and action to build confidence:

  Confidence that each country is acting to put its own house in order,
by tackling the underlying problems and strengthening growth
fundamentals, Confidence in the institutional framework for market
economies, including accounting and corporate governance, And confidence
that nations remain committed to effective international cooperation and
are prepared to take concrete actions to strengthen it.

4. A process of confidence-building requires, in particular, strong
leadership from the advanced economies. This means that the United
States should beware of falling back into chronic public sector
deficits. It means that Europe and Japan have to be more serious about
accelerating structural reforms, to unlock self-sustained growth. It
means that Japan should act decisively to bring an end to deflation. And
I also think that the advanced economies have a particular
responsibility to work for a successful conclusion of the Doha Round.

The Critical Debate on Globalization

5. The world needs sustained and environmentally-sustainable growth. And
globalization is a crucial engine of growth, through the spread of
knowledge, better division of labor, increased productivity, and access
to foreign direct investment. Indeed, over the past 50 years, the
process of globalization has been the source of unprecedented gains in
human welfare. But it has also brought risks and challenges, such as
disruptive volatility in international capital flows and the depletion
of natural resources. 

6. I welcome the ongoing, critical debate about globalization, as an
opportunity to clarify its costs and benefits, and as an antidote to
complacency. Let us not confuse ourselves—the people of the world need
more globalization, not less. But it is also clear that we need to work
harder to make globalization more inclusive, and seek a better balancing
of the risks and benefits. This means that integration into the global
economy must be accompanied by investments in making integration pay off
for the people of the world, and especially for the poor—investments in
better policies and regulatory frameworks at the national level, to
safely take advantage of the opportunities of the global marketplace;
and investments in more effective international cooperation, to guide
and shape the process of globalization.

The IMF in a Process of Change 

7. I am strongly convinced that the IMF must play an active role in the
search for a better globalization. There is clearly a need for an
institution that—based on cooperation and mutual trust —encourages sound
macroeconomic policies in its member countries and looks after the
stability of the international financial system. We have a
responsibility to speak out when countries live too long beyond their
means, not least because the poor suffer most from disorderly
adjustment, high inflation, and volatility. And we have a responsibility
to help them restore the conditions for sustainable growth. While the
IMF is far from perfect, we do try to learn from experience, and to
adapt to the needs of a changing global economy. Since the Asian crisis,
in particular, the IMF has been in a process of reform.

  There has been a near-revolution in transparency at the IMF, and
steady improvement in the release of economic information by our member
countries. This approach has strengthened accountability and given
markets better tools for assessing risk. To promote financial stability
and growth, the IMF and World Bank are helping member countries to build
sound financial sectors, and developing "rules of the game" for the
global economy, through our work on standards and codes. We are working
to safeguard the integrity of the international financial system,
through our assessments of offshore financial centers and our assistance
in the effort to combat money laundering and the financing of terrorism.
We have created an International Capital Markets Department and Capital
Markets Consultative Group, to enhance the IMF's capacity for monitoring
and analyzing developments in international financial markets. We are
taking steps to streamline IMF conditionality, in order to improve its
effectiveness and make room for true national ownership of reform
programs. And as part of a culture of greater openness, we have stepped
up our cooperation with other international organizations and our
outreach to civil society.

8. I believe it is also essential for the IMF, as a universal
institution, to be actively engaged in meeting the special needs of our
poorest member countries. And I am encouraged that a remarkable degree
of agreement that has emerged on a "two-pillar" approach for overcoming
world poverty. It means that the sense of self-responsibility and
determination in low-income countries to pursue sound policies and good
governance must be matched by stronger and more comprehensive support
from the international community. This approach was the guiding
principle for the Monterrey Consensus, which was reaffirmed at the
Johannesburg Summit on Sustainable Development. The IMF is committed to
act decisively in its own areas of competence, to complement the World
Bank's lead role in poverty reduction. And I also think it is right for
us to speak out on behalf of the poor—for stronger growth in the world,
for better market access and a phasing-out of trade-distorting
subsidies, for more aid, and for doing more to build local capacities.

Latin America

9. The reforms introduced since the Asian crisis have made a difference
for growth and stability in the global economy, at a particularly
difficult time. But they have not prevented the emergence of new strains
in a number of Latin American countries. Access to international
financing has been closed for all but the most creditworthy borrowers in
the region, and some have also faced capital flight and problems in
rolling over domestic liabilities. To an extent this reflects a
generalized increase in risk aversion around the world. Rising public
debt burdens, institutional weaknesses, and extreme inequalities in
income distribution have also raised doubts in some cases about the
political sustainability of reforms. But these current difficulties
should not obscure the progress in promoting democracy and economic
stability over the past decade. And we should never forget that each
country has its own unique situation, strengths, and weaknesses.

10. As the former President of Mexico, Ernesto Zedillo, recently wrote
in Forbes magazine, the main problem in Latin America has not been too
much reform, but too little. We have seen in Argentina that it is
dangerous to stop halfway. It is clearer than ever that strong
institutions and good governance are indispensable for sustained growth
and financial stability. Reducing glaring inequalities in income should
also be an essential part of any economic reform strategy. The IMF is
strongly engaged with our members in Latin America. Our strategy is to
tailor our advice and financial support to the particular circumstances
of each country. And our mandate obliges the IMF to take reasonable
risks. Where there are governments that are living up to their own
responsibilities and committed to working with the international
community, our members can count on the Fund's assistance in restoring
the conditions for sustainable growth.

The Agenda for Further Reform

11. The latest experience in Latin America should also make us more
humble about our own performance. The IMF, too, has a lot of unfinished
business. We clearly need to implement forcefully the initiatives that
are already underway. And I am absolutely convinced that, over time,
these will pay off in greater financial stability and stronger global
growth. In addition, however, I believe that further reform is required
in four crucial areas.

12. First, we must do more to improve the IMF's capacities for crisis
prevention. Here we must combine ambition to prevent crises with a
recognition that some degree of overshooting and correction—and thus
some risk of crises—is inevitable in a market economy, as part of the
competitive search for better results, better products, and higher
productivity. Strengthening our continuous policy dialogue with member
countries, or IMF surveillance, is key for crisis prevention. We must
help member countries put in place "shock absorbers" to cope with
risks-including better debt and reserve management; more flexible
exchange rate regimes; sound budgets that leave some room to maneuver in
difficult times; efficient and diversified financial systems; and more
effective social safety nets. Beyond improving the quality and coverage
of our advice, we should also become more effective in convincing member
countries to take early, preemptive action. In addition, where a country
has established a good track record, the IMF should have the capacity
for a rapid and flexible response, to help sustain a sound policy
framework against turbulence in the global economy. While the IMF's
Contingent Credit Lines have not so far been utilized, I still believe
that the underlying concept of using IMF financing to reward good
policies and help countries to stay the course is right.

13. Recent developments have made it clearer than ever that efforts at
crisis prevention must pay as much attention to risks and
vulnerabilities arising in the advanced economies, as they do to
problems in emerging markets and developing countries. We need to think
creatively about ways to deal with excessive volatility in international
capital flows, including ways to strengthen self-correcting forces in
markets and the role of regulation. And in the context of the Enron
collapse and WorldCom scandal, the broad discussion and legislative
response in the areas of accounting and corporate governance now
underway in the United States is welcome. But I also think that the
international community as a whole—especially standard-setting bodies
and the Financial Stability Forum, with the cooperation of the IMF and
World Bank—should take up these issues, as a natural extension of our
work on financial stability and internationally-recognized standards and
codes. Thus, for instance, I would suggest that the responsible
institutions concentrate on refining and harmonizing accounting
standards; enhancing corporate disclosure; and ways to align management
incentives better with shareholder objectives, to reduce the potential
for conflicts of interest.

14. As a second major element in our reform agenda, the IMF must
continue working to strengthen the framework for crisis resolution. We
are working toward an integrated approach, combining access policy,
systematic debt sustainability analysis, greater selectivity in IMF
lending, and better debt restructuring mechanisms. As a natural
counterpart to an emphasis on self-responsibility, and to improve the
pricing of risk and minimize moral hazard, we intend to make our policy
on access to the IMF's resources clearer and more predictable. While
there may still be cases in which exceptionally large financial support
is warranted, we need to ensure that exceptional access is truly
exceptional. In parallel, we are working to improve the basis for
inherently difficult judgments about debt sustainability. My strong
advice to our members is that they work as much as possible, and as long
as possible, with voluntary, market-oriented solutions. And I would
expect that private creditors in turn will act responsibly, in
recognition of their own interest in stability and growth in the global
economy. On the basis of these principles, there is also broad agreement
within the public and private sectors that, as a truly last resort, we
need better ways to deal with cases in which sovereign debt burdens have
become unsustainable—to restructure debt more promptly and in a more
orderly manner, while protecting asset values and creditors' rights. 

15. The IMFC has asked the Fund to pursue two tracks, to improve the
tools for dealing with the most difficult cases of unsustainable
sovereign debt and, in particular, to help coordinate action among
diffuse and diverse groups of creditors. We are seeking to promote the
use of collective action clauses in debt contracts. And we are also
working on some for of statutory Sovereign Debt Restructuring Mechanism,
which would enable a sovereign debtor and a super-majority of its
creditors to reach agreements binding on all affected creditors. We
understand these approaches as being complementary. I expect, based on
the progress already made, that the Annual Meetings will give further
impetus to our efforts to resolve these issues by the time of the IMFC
meeting next spring.

16. A clearer, more predictable role for the IMF in the resolution of
crises will strengthen incentives for proper risk management by
borrowers and lenders. And I am confident that improvements in IMF
surveillance will also help to make crises less frequent and less
severe. At the same time, however, the case of Brazil demonstrates that
the international community must have the firepower to provide
wholehearted support for good performers. Brazil has invested in
globalization by working to establish a strong track record of monetary,
fiscal, and exchange rate management. Recently Brazil has faced renewed
pressures, due to the deterioration in global economic conditions and
concerns that the upcoming Presidential elections might lead to a change
of course in economic policy. In my opinion, the electoral debate is
part of a healthy long-term process in Brazil. The authorities have
demonstrated continued responsibility and maturity through a credible
reinforcement of their policy framework. And the Fund has shown its
readiness to work with any government committed to sound economic
policies, while avoiding outside interference in the democratic process.
On the basis of Brazil's strong track record and policy program, our
exceptionally large financial support for Brazil was justified. And I am
confident that Brazil will stay the course of sound policies in the
period ahead, regain the full confidence of international financial
markets, and resume a strong growth path.

17. The broader lesson is that, in an integrated global economy with
large and volatile capital flows, both self-responsibility and
international cooperation take on added significance. Countries seeking
access to international capital markets thus need to bend over backwards
to follow sound policies and address actual or potential sources of
vulnerability. If a country is not committed to working with the
international community, we must be prepared to say "no" to its request
for financial support. But where a country has been doing all it
reasonably can to cope with a risky global environment, the
international community should have the capacity to provide effective
support. Failure to have any kind of "safety net" could undermine trust
among nations and confidence in the global system, which would have
implications going well beyond the economic sphere.

18. The IMF is not a lender of last resort, because it does not—and
should not—have access to unlimited liquidity. But the international
community looks to the IMF for crisis management, and our ability to
protect good performers from circumstances beyond their control is a
confidence-building anchor for the international financial system. This
does not mean that the Fund should seek to match the scale of private
financial flows. Indeed, the Fund has adequate liquidity for the
immediate future. But markets and political processes are
forward-looking, and it would not be prudent to allow the size of the
Fund to shrink in relation to the size of the global economy. Thus, a
crucial third element in our reform agenda should be openness to an
increase in IMF quota resources at the appropriate time, as an
investment in better globalization.

19. A final area for further reform is our work to enhance governance
and accountability in the IMF. This should include consideration of a
more open and transparent process for selecting the IMF's Managing
Director, continuous review of the role and procedures of our Executive
Board, and revisiting quota shares. I share the view that the current
distribution of quotas in the IMF needs to be reconsidered—especially to
correct the under-representation of a number of emerging market
countries. We should also consider ways to strengthen the voice of
African countries in the Fund. Addressing these issues would clearly
serve the interests of developing countries. But it would also benefit
the entire membership, by reinforcing the cooperative nature and
perceived legitimacy of the IMF, which are crucial counterparts to the
insistence of the international community on the Fund's central role in
crisis prevention and management. 

20. I hope we can count on the Council on Foreign Relations to help
generate constructive discussion of these and other ideas for reform in
the period ahead. And now I would welcome your questions.