Linah K Mohohlo: The challenges faced by developing countries in the current
global environment, and how the IMF could be reformed to meet these
countries' needs
Speech by Ms Linah K Mohohlo, Governor of the Bank of Botswana, at the 2007 Executive
Directors' Retreat, International Monetary Fund, Washington DC, 20 June 2007.
* * *
Managing Director, Mr de Rato
Deputy Managing Directors, Mr Kato & Mr Portugal
Distinguished Executive Directors, ladies and gentlemen,
It is an honour and privilege that I am in your company this evening. Equally important, I am
most grateful that I have the opportunity to share some thoughts with you on the challenges
faced by developing countries in the current global environment, and on how the
International Monetary Fund could be reformed to meet these countries' needs. These
subject matters are the core dimensions of your Retreat discussions and there should be
consensus building emerging at the end of the Retreat.
Since these are broad topics, I can only briefly highlight a few points in view of the time
constraint. I should also admit that although the topics have a global perspective, it is
inevitable for me to draw on my African and Botswana's experience, where I continue to
serve in a number of capacities. In sharing my views with you on these matters, I can assure
you that none of my remarks are intended to be provocative. However, I am convinced that it
is in the best interest of your deliberations that I express my perspective on the issues as
candidly as possible.
Global economic trends
I consider the hallmark of my remarks to be opportune for several reasons. This is a time of
almost unprecedented increase in global prosperity. World economic growth is not only rapid
(estimated at 5.4 percent in 2006); it is also broad-based. In Sub-Saharan Africa, economic
growth in 2006 was 5.5 percent, a trend which is forecast to continue through 2007 and
2008, and has, accordingly, given rise to optimism which borders on euphoria.
In fact, some commentators (non-economists presumably) have gone as far as to describe
the current situation as a "perfect calm". While this expression or description may be more
poetic than accurate, it, nevertheless, helps to draw attention to an important point, and that
is, if "perfect calm" is a correct analogy for "anti-storm", then the favourable current
conditions should be regarded as exceptional, which means that they will not continue
indefinitely. For this reason, the International Monetary Fund and other concerned parties
cannot afford to be complacent, for to do so is to ask for trouble. To paraphrase a recent
a lack of fear cause for concern.1
piece by Larry Summers, this is a time when would be
This is not the time, therefore, to argue that the international financial institutions have
become obsolete. On the contrary; given what are commonly referred to as "global
imbalances", global monetary stability has become even more uncertain, a situation which
calls for the Fund to safeguard global stability now and into the future.
Moreover, the seemingly increased prosperity of many developing countries, although
typically from very low levels, may tempt the advanced economies to drag their feet in
implementing important previously promised initiatives, including the increase in aid to Africa
by the G8 and pushing for a successful conclusion to the Doha Round of trade negotiations.
Failure to fulfil these commitments energetically, and now, risks missing the opportunity
afforded by the current favourable global economic conditions to sustain global prosperity.
Worse still, it would undermine the very dynamic that underpins the current rapid pace of
economic growth. In fact, a well known economist, Joseph Stiglitz, may have exaggerated
close
the current global economic situation, when he described it as being to having
conditions where all countries, including the poorest, can benefit. It is my belief, however,
that we are still far from achieving that desirable goal, despite the undeniable rapid speed of
globalisation.
Globalisation and world trade
Speaking of globalisation, we are aware that, for the most part, it is driven by technological
advances that have made diverse means of transport and communication increasingly
cheaper. As a national of a developing country, I firmly believe that we should seek to take
advantage of the many opportunities offered by globalisation rather than seek to avoid the
accompanying challenges. I am convinced that the challenge is to improve levels of
productivity as the key to rising living standards; this is a fundamental truth which I never tire
to raise.
But how can we maintain this positive approach when so many larger and more developed
economies are so wary of some of the effects of globalisation? The scope for avoiding the
challenges of globalisation is almost non existent. Even bilateral and regional trade
agreements may not be favourable to small developing countries such as Botswana with a
population of only 1.8 million, given the world trading system that is increasingly becoming
complex and competitive.
Globalisation also affects international financial markets, where the amounts traded are
becoming larger and more diverse. You will recall that the Managing Director, Mr de Rato,
underscored the point when he characterised these developments in his recent speech to the
Bretton Woods Committee, as a "torrent of change"2. Faced with this torrent of change, the
alternatives are either swimming or sinking, as drifting is not an option.
Changing balance of economic power
Related to the globalization process is the fact that, in recent times, the world has witnessed
a change in the balance of economic power. Observers suggest that 50 years ago, 60
percent of global GDP had come from within the original G7 countries and the balance from
the rest of the world; but now the situation has reversed. There is no doubt that this change
is a challenge to the Bretton Woods institutions. For instance, it so happens that no
advanced industrialised country has borrowed from the Fund for more than 20 years, and yet
these countries tend to dominate decision-making. On the other hand, other members of the
Fund expect the institution to deliver on its mandate fairly and equally to all the 185
members. It is in this context that there remains the legitimate expectation that, in time, there
will be a reform of the voting system so that developing countries, a large number of which
are in Africa, can be in a position to influence policy in a meaningful manner, both in the
Fund and World Bank.
Indeed the role of China and other countries in its league, as major economic players in the
world, has made it imperative and urgent to change the quota system. Hence the decision of
the Fund's Board of Governors to increase the voting power of China, Korea, Mexico and
Turkey. While this is a laudable decision, a lot more needs to be done on the Fund's quota
system and, therefore, voting power, so that it can be reflective of the member countries'
economic weight, while ensuring that the voice of low income countries can have a
meaningful impact in decision-making.
Quota reform
While the Fund's Medium Term Strategy has several complementary elements, the centre
piece is still the issue of quota and voice reform. It was heartening to see that some progress
is being made as reported in the communiqué of the International Monetary and Financial
Committee (IMFC) following the 2007 Spring meetings. Nevertheless, we have only heard
fine statements of principle, and hardly any reports on concrete agreements. For instance,
the quota and voice reform brief on the IMF website, currently states that "Following the
endorsement received in Singapore last September, IMF staff and the IMF Executive Board
have looked at several of the key issues, many of which are complex and require careful
deliberation and broad consultation". This may be true, but it is hardly informative.
Of course, it is true that collective action requires consensus building and a "give and take"
approach in order to make progress. But for quota reform, two salient points stand out. First,
a situation where we rely on the current voting system to produce reform of itself in a manner
that would be acceptable to all members, inevitably requires more giving than taking by those
wielding more voting power due to their economic weight.
Second, the basic issues of quota reform, and the basis of their resolution, appear very
straightforward to many of us. Continued delay can only risk a wider malaise. If I may quote
again, a recent IMF working paper entitled "Rethinking The Governance of the International
Monetary Fund" submitted that: "a major revision of the quota formulas is long overdue, and
leaving this unaddressed raises serious questions regarding the IMF's governance which
could develop into a core mission risk and jeopardize the relevance of the institution"3. For
this reason, observers have called for meaningful progress such that the quota review can be
completed in time for the 2007 Annual Meetings4. It is encouraging that the Fund's Managing
Director has recently indicated that the Executive Board is earnestly working towards
accelerating the quota review timetable. In this endeavour, it is legitimate to expect that the
views of a diverse spectrum of interested parties will continue to be canvassed in order that
an amicable consensus can be reached.
Role of the international financial institutions
I thought I should also comment on the role of the international financial institutions.
Admittedly, there have been benefits derived from these institutions since the end of the
Second World War. In particular, the contributions of the Fund, World Bank, World Trade
Organisation and the OECD have been remarkable. It was inevitable that, over time, the
Fund would change in many ways from its original role of policing a fixed exchange rate
system among the major economies. In this regard, only a few weeks ago, the Independent
Evaluation Office reported on Exchange Rate Surveillance for the period 1999-2005 and
IMF was simply not as effective as it needs to be in both
concluded, among others, that "the
its analysis and advice, and its dialogue with member countries"5. This shows that, in this
case, there is unanimity that there is need for change.
On a related matter, the Policy Support Instrument (PSI), which was introduced in October
2005, was in recognition of the fact that fewer countries need to borrow from the Fund. While
it is acknowledged that one contributing factor to the reduced need for Fund lending is the
extent of success of IMF programme implementation in the past, this reduced recourse to
Fund resources should not lead to member countries ignoring the Fund's reform
programmes and policy advice, because doing so would be counter-productive. I hasten to
add that, although not a borrower of Fund resources for programme assistance, Botswana
values her long-term partnership with the Fund. There is absolutely no doubt that Fund
advice has largely been beneficial; so too has technical assistance.
However, in the advent of the PSI, we should ask whether it has moved far enough from the
Poverty Reduction and Growth Facility (PRGF). Is there still too much prescription and not
enough discussion? Is the Fund's endorsement of policies still so important for member
countries, given the increased opportunities for funding provided by financial globalisation?
And what are members to do when the assessments by the Fund and World Bank differ
radically? It will be interesting to see the number of countries, if any, that have so far taken
advantage of the programme, now that the PSI Fact Sheet is published on the IMF website.
Furthermore, the Fund needs to change its approach to surveillance and, accordingly, some
important structures of the Fund, such as the IMFC, have suggested that surveillance needs
to become more advisory than prescriptive. It is felt that such an approach would encourage
country ownership of decisions resulting from IMF advice, and facilitate more timely
publication of surveillance Reports, instead of the current protracted exchanges, in some
cases, on the findings of Fund surveillance missions. This is not to suggest that there should
be no scope for a more constructive dialogue, especially in areas where the difference
between fact and perception is negligible. As it should be, the Managing Director espouses
the view that the Fund must be trusted to give even-handed advice and fair representation to
all its members. I need not emphasise that the role of the Executive Board is to ensure that
this trust is earned and then maintained.
Governance
As I come to the end of my remarks, I would like to devote a few minutes to the related and
equally important topical issue of governance, which is one of the principal themes of your
Retreat.
You may be interested to note that, earlier this year, the Bank of Botswana hosted a two-day
workshop for SADC Central Banks on Trends in Central Bank Governance, with technical
input and assistance from the Central Bank of Sweden, Bank for International Settlements
and the Fund. Unsurprisingly, it was found that there is diversity in the internal governance
structures and procedures required to ensure good governance of an autonomous central
bank, and it was further noted that consensus is yet to emerge regarding best practice in the
conduct of a central bank in its relations with various stakeholders. Diversity was due to
several factors, among which are historical and socio-political characteristics of a country.
Nevertheless, there were common pillars that are a basis of good governance, namely,
accountability, transparency and avoidance of conflict of interests by Boards and
management.
Evidently, governance issues in the Fund are similar and equally challenging. It follows,
therefore, that despite the diversity of the 185 member countries, the governance of the Fund
must, of necessity, be based on these principles. You will agree that unless the Fund is seen
to be managed according to the highest standards of good governance, which enshrine
widely accepted notions of fairness and accountability in its operations and decision-making,
including in staff appointments, then its relevance and objectivity will continue to be
questioned.
The Executive Directors themselves do, of course, strive to be above reproach on this
matter, and it is important to stress that, from the member countries' point of view, the buck
of accountability stops with you, as you are effectively the guardians of this institution.
Unfortunately, recent events at the World Bank are not encouraging. While almost every
independent commentator saw an excellent opportunity to reform the outdated system of
choosing the leadership of the two Bretton Woods institutions, it was disheartening to note
that the need for the reform of this practice was apparently not even on the agenda of those
entrusted with such responsibility. This suggests that the United States of America has little
inclination, if at all, of giving up its "traditional right" of appointing the President of the World
Bank. Similarly, Europe appears disinclined to change with respect to its historical
"entitlement" to appointing its national to the leadership of the Fund. Needless to add, such
"traditions" or "rights" have no place in the governance of modern institutions. The selection
process must, of necessity, be based on merit, certainly not on the current primary criterion
of nationality. Even the British seem to have seen the light on this important matter with
respect to appointments to the House of Lords, which used to be based more on heredity.
It is my sincere hope, therefore, that as you continue your deliberations tomorrow, this
Retreat will explore new and innovative ways for the Board to effect appropriate changes to
its governance practices, in the interest of all stakeholders. One of those changes, as many
member countries have submitted, should be the policy or practice of selecting and
appointing the leadership of both the World Bank and the Fund. In addition, there is
implementation of the main elements of the Medium Term Strategy, with emphasis on quota
and voice as well as surveillance reform.
We all look forward to reaching the goal of an increasingly assertive International Monetary
Fund based on its relevance. Such relevance to developing and developed countries alike
must be earned through good governance in all its manifestations.
Distinguished members of the high echelons of the Fund, with these words, it only remains
for me to wish you success in your collective endeavours to advance the course of this great
institution. I wish you fruitful deliberations in your Retreat.
Thank you for your attention.