Svein Gjedrem: Multilateral approaches to global challenges
Speech by Mr Svein Gjedrem, Governor of Norges Bank (Central Bank of Norway), at the
Peterson Institute for International Economics, Washington DC, 25 February 2010.
* * *
Ladies and gentlemen,
I am honored to be a guest speaker today at the Peterson Institute.
The international order and Norway
The financial problems that originated in the US banking system spread quickly around the
world. A severe international financial crisis followed, leading to a deep economic downturn
and dramatic dislocations in global trade. Authorities worldwide have implemented
unprecedented policy responses.
When the crisis unfolded, the G201 and the International Monetary Fund (IMF)2 rose to the
task. Nevertheless, I believe that the role of non-statutory bodies and the statutory
institutions must be reconsidered to promote the necessary multilateral approach to global
governance. This will be the theme of my talk today.
Norway is a small, open, advanced and essentially commodity-based economy. Norges
Bank is an independent central bank with an inflation targeting framework. It also manages
the Norwegian Pension Fund Global, the world's second largest sovereign wealth fund. The
country is a founding member of NATO, but not a member of the European Union. However,
based on the European Economic Area Agreement (EEA), Norway participates in the Single
Market of the European Union. The country has been an active participant in multilateral
cooperation and institutions. It is an original member of the IMF and the World Bank, and is
represented on the Executive Boards of both institutions together with seven other countries
in the Nordic-Baltic Constituency.
In line with its long-held policy of supporting multilateral institutions, Norway entered into a
bilateral loan agreement with the IMF in the first half of 2009, when the IMF urgently needed
to strengthen its lending capacity. Later in 2009, Norway agreed to raise its commitment
under the New Arrangements to Borrow (NAB) and expanded its voluntary transactions in
SDRs following the large allocations. It also committed to support IMF lending facilities for
low-income countries. Thus, Norway has actively backed the multilateral responses to the
global crisis, in large part stemming from decisions of the G20 at the London Summit in April
2009.
Norway has a strong external and fiscal position based on large petroleum revenues. The
lion's share of the revenues is invested abroad through our sovereign wealth fund.
The accumulation of capital in the Fund reflects the depletion of a non-renewable resource.
The assets of the Fund now amount to some USD 450 billion, the equivalent of 115% of
Norway's GDP in 2009, or around USD 100 000 per capita.
About 40% of the Fund's investments are in fixed income instruments and 60% in listed
stocks. The Fund invests globally according to market value weights. It roughly holds 1% of
all listed equities. This would not be possible without open and accessible international
capital markets. Norway has a strong and vested interest in the well-being of global financial
markets. Norway participated actively in the formulation of the Generally Accepted Principles
and Practices
for Sovereign Wealth Funds, the "Santiago Principles", a process coordinated
by the IMF. Our sovereign wealth fund respects these principles.
Norway has weathered the crisis better than most countries. We believe a strong fiscal
position and well-anchored inflation expectations have contributed to our relative success. In
addition, investment activity in the petroleum sector held up well, our exposure to the hardest
hit sectors in the global downturn was fairly limited, and our banks are small and relatively
solid. Norway is recovering sooner than most countries, and Norges Bank was among the
first central banks to raise its key policy rate. It did so twice in late 2009, up to 1.75%.
As a global investor and an open market economy, my country shares the interests of most
market participants, large and small. We have a common interest in a market-based
international order, supporting a level playing field and sound economic governance. Like
many other countries, we have benefitted greatly from economic and financial globalisation.
It has delivered prosperity and growth without precedent. In the midst of the crisis, these
gains must not be forgotten.
The multilateralism of Bretton Woods
At the end of the Second World War, 45 countries agreed to establish a new international
financial and economic order with the Bretton Woods Institutions, the IMF and the World
Bank, at its center. In his inaugural speech to the Bretton Woods Conference in 1944, US
Treasury Secretary Henry Morgenthau noted the following:
"We know that economic conflict must develop when nations endeavor separately
to deal with economic ills which are international in scope. To deal with the
problems of international exchange and of international investment is beyond the
capacity of any one country, or of any two or three countries. These are
multilateral problems, to be solved only by multilateral cooperation. They are
fixed and permanent problems, not merely transitional considerations of the
postwar reconstruction. They are problems not limited in importance to foreign
exchange traders and bankers but are vital factors in the flow of raw materials
and finished goods, in the maintenance of high levels of production and
consumption, in the establishment of a satisfactory standard of living for all the
people of all the countries on this earth."3
These wisely spoken words are as relevant today as in 1944. When the IMF and the World
Bank were established, it marked the beginning of a period of international economic and
financial cooperation which over time embraced virtually all the countries of the world.
The Bretton Woods Institutions have served their membership well. When needed, their
policies have adapted promptly and timely to changes in the world economy and the global
financial system. The IMF, with its crucial competence, has been a key forum for policy
collaboration. Its surveillance and lending activities are unique. I strongly believe that global
governance is best served by a statutory-based international economic order, with effective
and legitimate multilateral institutions where all countries are represented.
In the recent decade, the rapid expansion of many large emerging economies has greatly
altered the global economic landscape. Most dramatic is the re-entry of China as a major
economic power. At the same time, the growing imbalances in the world economy became
and continue to be a source of instability, in addition to spurring protectionist tendencies. It is
perhaps time to honor some fundamental principles, such as the one noted in an IMF
Pamphlet from 1992: "The philosophy of the Articles of Agreement is based on the
superiority of free trade as the organizing principle of international economic interaction."4
Lessons from the crisis
The joint, massive, and unprecedented policy responses that were put in place as the crisis
unfolded surely deserve due credit. As Mr. Subramanian here at the Peterson Institute noted
in the Financial Times in late December 2009:5
"What is striking about the influence of economics is that similar policy responses
in the fiscal and monetary areas, and non-responses in relation to competitive
devaluations and protectionism, were crafted across the globe. They were
evident in emerging-market economies and developing countries as much as in
the industrial world; in red-blooded capitalist countries as well as in communist
China and still-dirigiste India. If ever there was a Great Consensus, this was it."
A key lesson from the crisis is the need for multilateral cooperation and collective action. It
relates to the framework for polices on prevention, resolution, reform and implementation. It
also relates to the institutional set-up. The international community turns to the IMF in times
of crisis, in part because it is an effective institution that performs the vital functions that are
called for, but also for the very simple reason that the world has no one else to turn to. The
IMF has played a pivotal role in presenting the initial lessons from the crisis, in providing
finance to countries with temporary balance of payments needs, and in preparing the overall
framework for the international policy response. When the good times return, we must avoid
memory failure and remember these facts of life.
The financial crisis has left a legacy. Large public and private debt, high unemployment and
wide global imbalances continue to challenge the global framework for economic policy.
Shaping the global governance structure
In recent years, increasingly
assertive non-statutory bodies have emerged in the area of
international economic and financial collaboration, most notably the G20. The global crisis
pushed the G20 into closer cooperation and at new levels. As an effective and powerful
group, the G20 featured prominently in the broad international efforts to stabilise the global
economy in late 2008 and early 2009. Without its prompt and comprehensive action, the
consequences of the crisis would have been much worse. It is in the interest of all that the
large and systemically important countries discuss issues of common interest. Their
successful collaboration benefits not only themselves, but also the rest of the world.
Among the G20 measures of 2009 were the efforts to strengthen confidence in international
financial institutions, the IMF in particular, to permit it to play an effective role in tackling the
crisis. Indeed, the G20 increasingly uses the IMF as an instrument of its policy
implementation.
The governance structures of the IMF have received considerable attention, as they are not
deemed to adequately reflect recent important changes in the global economy. Misgivings
about the legitimacy of these structures have played a role in prompting the G20 member
"...designate[d] the G20 to be the premier forum for our international economic
countries to
cooperation" as agreed by the G20 leaders at their summit in Pittsburgh last September.
With his presence at the World Economic Forum meeting in Davos last month, the Chair of
"drum up support for the idea of making the summit [in Korea later this
the G20 aimed to
year] a "premier forum" where all major discussions on worldwide economic cooperation will
take place".6
Therefore, the current ambition of the G20 may not only be driven by the global crisis. It may
also reflect the frustration of some key countries with what they see as a slow evolution of
the decision-making bodies of the IMF in response to changes in the composition of the
world economy and the rise of new economic powers.
International policy cooperation has thus moved out of statutory bodies and into groups of a
select few, bypassing established channels and fora. Other countries do not participate,
directly or indirectly, but are called upon to contribute to efforts that others have agreed. The
G20 discusses and aims to agree on changes in IMF governance. The vast majority of the
membership of the IMF has no voice or representation in these discussions, including all
lowincome countries and most emerging economies.
If they are not addressed effectively, the large and growing global imbalances that
contributed to the current crisis are likely to widen anew. This would again put at risk the
stability of the global economy. Linked to these prospects are the continued rigidity of
important exchange rates and excessive reserve accumulation leading to the build-up of
unsustainable debt. I agree with those who have said that in recent years, the international
monetary system failed to promote timely and orderly economic adjustment.7 Global capital
markets failed to channel surplus savings in emerging market economies into profitable
longterm investment in wealthier countries. It would seem that we still risk repeating recent
failures.
Let me also mention another concern. Mercantilist attitudes may also gain ground in surplus
countries. Investment behavior in these countries may be motivated by broader strategic
considerations, which may prompt retaliatory measures and result in restrictions on
crossborder capital flows.
Global and prompt policy action is warranted yet again. To this end, the G20 has embarked
upon an unprecedented exercise in policy collaboration with the adoption of the Framework
for Strong, Sustainable and Balanced Growth. IMF surveillance will acquire a new dimension
by assisting G20 Finance Ministers and Central Bank Governors in the process of mutual
assessment of their economic and financial policies. It is crucial that the G20 framework lives
up to expectations. The decisions and policies adopted by its members will affect the
environment for the formulation of economic policies in all countries, large and small, rich
and poor. The Governor of the Bank of England, Mervyn King, remarked last month that
"...so far the only specific agreement [among the G20] is to talk to each other. Concrete
steps to reduce the scale of global imbalances have, to date, been notable by their absence."
And I agree that the G20 has laid its reputation on the line. It will be damaged if the
framework comes to nought.8
And yet, the G20 lacks the legitimacy that historically has been associated with a truly
multilateral framework. Its ambitious economic cooperation should be anchored in a
multilateral institution. The IMF is the logical choice.
The G20 includes only the countries that established it. Membership seems to have been
somewhat arbitrarily determined and not solely on the basis of relative size or importance in
the global economy. The G20 formally founded the Financial Stability Board (FSB)9 and sets
its agenda. Membership is at the discretion of the G20. The G20 agrees on the activities of
and changes in the IMF and more or less dictates decisions to the rest of the membership.
The FSB agrees on standards for financial sector activity, which the rest of the world is
expected to adopt, without having been consulted or given the opportunity to voice an
opinion in the preparatory phase.
A strong institution like the IMF must be at the center of multilateral economic and financial
cooperation. Virtually all the countries of the world participate and are represented in the
IMF. To be able to continue to play an effective role, the IMF needs to enjoy confidence and
trust, and to be seen as having a legitimate structure of governance. Last but not least, the
IMF needs to be financially strong, to have at its disposal financial resources commensurate
with its tasks, including the ability to provide prompt and significant financial support when
needed.
The Bretton Woods Institutions are adapting to new world economic conditions, including
greater relative weight of some emerging market economies. The members of the IMF aim to
agree on changes in the governance of the Fund by January next year as confirmed in the
latest IMFC10 Communiqué. A review of quotas is central to these deliberations. Quotas
determine the voting weight of individual member countries in the institution. Some expect
the review to lead to changes in the Executive Board of the IMF. Its current size ensures
broad and fair representation of the member countries and avoids an undesirable
concentration of power.
An important part of the governance reforms should be to enhance the role and status of the
IMFC. The composition of the IMFC ensures fair representation of the membership through
the constituency structure. Although without formal decision-making powers, it has political
policy
power and stature which it can bring to bear. A reinvigorated IMFC requires a firm
commitment from the membership that strategic discussions for the institution and global
economic cooperation take place in the IMFC. Adequately dedicated and effectively
managed, it can provide strategic leadership and guidance to the Executive Board.
The G20 has assumed a dominant role in matters of international economics and finance.
Success in their ambitious tasks can only be welcomed by the rest of us. However, it is a
weakness that the members of the G20 represent only themselves. Virtually entire groups of
countries and regions are left out. They have no voice and no representation in the work of
the G20 or in the institutions which it chooses to set up to further its agenda. This is at
variance with the principles of multilateralism and international cooperation that have
prevailed since the end of the Second World War. Over time, this could easily weaken not
only the G20 process, but also the IMF as it will be perceived as increasingly guided and
controlled by the G20.
I referred earlier to a recent speech by the Governor of the Bank of England and I wish to do
so again where he states: "Looking further ahead, the legitimacy and leadership of the G20
would be enhanced if it were seen as representing views of other countries too. That could
be achieved if the G20 were to metamorphose into a Governing Council for the IMF, and at
the same time acquire a procedure for voting on decisions." Needless to say, I agree with
him, as did the Managing Director of the IMF in a recent interview.11 In an article in the
Financial Times late last year, Anders Åslund, a Senior Fellow at your Institute, argued in a
refreshingly blunt manner for a change in the G20.12
The ongoing efforts to change global governance should not be limited to the IMF alone. In
saying this, I repeat that I fully recognise the important role played by the G20 in the time of
crisis. However, while the G20 continues to exist and even expands into policy areas as
varied as food security, energy and climate change, its legitimacy and democratic
foundations must be reinforced. This can be achieved by, for example, representation and
participation on a rotating basis. Everyone does not have to be present all the time. The
constituency model of the IMF and the World Bank could be adopted, providing for the
participation of other countries, even if only indirectly. In that vein, the G20 might be
expanded by, say, four members in conjunction with the adoption of a structure which
embraces the rest of the world.
On the matters of economics and finance, I view the G20 as a complement, not an
alternative, to the IMF. An appropriate solution would be the recognition of the IMF and the
IMFC as the statutory-based principal forum. G20 collaboration on these matters would be
recast in the IMFC or in an enhanced version in the Council if the membership decides to
activate the provisions on its establishment. The IMFC is an institution of the IMF and thus
has a statutory basis. It engages the membership of the IMF directly and indirectly. It would
lend legitimacy and integrity to the process of international economic and financial
cooperation. The Articles of Agreement of the IMF confer upon it to "oversee the international
monetary system in order to ensure its effective operation."13
During the crisis, the IMF
proved its ability to respond promptly and effectively to very challenging developments.
I therefore submit that a statutory-based and representative global order should be one of the
main objectives of the discussions on changes in the international financial architecture.
Conclusion
To conclude, I have presented my view on the prevailing international economic order which
I find deficient in important respects. The G20 played a vital role in the response to the global
crisis and the rest of the world depends on its successful cooperation. With the world
recovering from crisis, the G20 should merge its activities with those of the IMF. That will
give them both wider acceptance and legitimacy.
At the outset, I described some characteristics of Norway and emphasised our history of
active support of multilateral institutions and collaboration. Currently, we do not participate
where decisive discussions take place on international economic and financial issues and
cooperation, including changes in the governance of the IMF. Yet we are called upon to
make relatively large contributions to efforts agreed by a non-statutory body.
I would emphasize certain key principles:

First, systemically important countries need to collaborate effectively on
Their success is vital not only for their own good,
consistent economic policies.
but also for that of others, including small open economies.

Second, this collaboration should be anchored in a multilateral and
statutorybased system of representation, for example through constituencies, where
smaller countries would participate, even if indirectly.

Third, the constituencies should have rotating representation, where small
countries, at least periodically, could participate directly.
Without such a global order, the interest in contributing to international efforts is certain to
diminish. There can be no taxation without representation.
Thank you.