Stanley Fischer: Recent developments in the Israeli economy; future
paths of the IMF and the World Bank
Speech by Professor Stanley Fischer, Governor of the Bank of Israel, at the IMF-World Bank
annual meetings, Washington DC, 22 October 2007.
* * *
Mr. Chairman, distinguished Governors, Mr. Rodrigo de Rato, Managing Director of the
International Monetary Fund, Mr. Robert Zoellick, President of the World Bank Group,
delegation members, colleagues and former colleagues, ladies and gentleman:
These meetings take place not only at a challenging time in the international economy, but
also at a time of unexpected changes in the leadership of both the Bank and the Fund. I will
use this opportunity to discuss the futures of each of these two great institutions. But let me
start with recent developments in the Israeli economy.
1. The Israeli economy
The Israeli economy has been growing at an average annual rate of more than 5 percent,
since 2004. In 2007, inflation is expected to be within the target range of 1-3 percent per
year. The budget should end the year close to balance. The balance of payments is in a
surplus of between 4 and 5 percent of GDP, and foreign direct and financial investments
continue to flow into the economy. Controls on capital flows have been removed
progressively over the last fifteen years, and the capital account is essentially totally
liberalized. The exchange rate floats freely and the Bank of Israel has not intervened in the
foreign exchange markets since 1997.
Fiscal discipline has reduced the share of government spending in GDP from 52 percent in
2003 to 44 percent this year. Fiscal discipline, together with privatizations and sustained
growth, has reduced the debt to GDP ratio from more than 100 percent in 2003 to a level
expected to be about 82 percent at the end of this year - a level that is still too high but that
is expected to continue to decline. Growth has reduced the unemployment rate, from more
than 11 percent in 2003 to about 7.5 percent at present. This has been accompanied by an
increase in the participation rate, which is very low in Israel. The poverty rate - a relative
measure in Israel - is beginning to decline but more needs to be done to improve the
standard of living of the poorest members of the population.
The impressive achievements of the Israeli economy are due in part to the global boom, but
also to improved economic policies based on the understanding that the only way to
sustainable growth, particularly for a small economy, is to pursue market-based policies and
to embrace the possibilities that globalization offers. At present we are working on a new and
modern central bank law that will clearly define the independence of the Bank of Israel, while
increasing its accountability and transparency.
The problems of our economy can be solved only with continuing growth and policy
discipline, mutually reinforcing elements of success. They are also more likely to be solved in
an environment in which the prospects for peace with our neighbors continue to improve.
2. The Fund
As Managing Director de Rato steps down, we thank him for his many contributions that will
bear fruit in the coming years, including the Strategic Review of last year, the work
summarized in this year's Policy Agenda Report, and the ongoing work on representation
and voice. This agenda defines the major challenges that face incoming Managing Director
Dominique Strauss-Kahn.
A great deal has been written about the problems confronting the Fund as it reassesses its
role in the rapidly changing global economy of the twenty first century. The problems are
there, but we need to remind ourselves that they are the problems of success, not failure. As
many here can testify, it was exciting to be here when the Fund was at the center of the
global financial storm of the 1990s and early in this century. It may be less interesting, but it
is certainly more impressive to be present in an era of unprecedented global growth - growth
based on the Fund's approach of integration into the global economy - as the increasing
economic weight of developing countries, especially of China and India, transforms both
economic and political relations among nations.
What will be the role of the Fund in the future? Article I (i) of the Articles of Agreement, states
as the first purpose of the Fund, "To promote international monetary cooperation through a
permanent institution which provides the machinery for consultation and collaboration on
international monetary problems". This is the essential role of the Fund. Even if on some
fardistant day, financial crises become only a historical memory, this function will remain central
to the Fund, for there is no other organization with the legitimacy of the Fund, with its global
membership, with both finance ministries and central banks involved, that can fulfill that role.
No less important, time and again the superb staff of this institution has risen to the challenge
of implementing the wishes of its member countries.
That is to say: the Fund's fundamental strength is that it is the central global financial
institution for consultation on international monetary (and financial and economic) problems,
with the capacity to implement the conclusions of those consultations among its member
countries.
Second, firm surveillance over the global economy and over its member countries is vital to
the Fund's role. The new Decision on Bilateral Surveillance adopted in June this year
emphasizes surveillance over policies - particularly exchange rate policies - that influence
the stability of a country's external accounts, and the need to deepen further the integration
of financial sector issues in surveillance. In the words of the Managing Director's policy
agenda report for this meeting, surveillance needs to "characterized by greater clarity,
candor, evenhandedness, and accountability"
with the concept of external stability serving as
an organizing principle. The emphasis on candor and evenhandedness is particularly to be
welcomed: surveillance will not be successful in influencing a country's policies if it is not
seen to be applied candidly and equally to all countries, large and small, rich and poor.
In addition, surveillance needs to be timely. Surveillance matters not only because it helps
member governments improve their policies, but no less because it informs a wider public.
Therefore publication should be speeded up. In the age of emails and the internet, there is
no good reason why Article IV reports should not appear within a month of the conclusion of
the staff's visit to the country. It is also desirable that the Fund increase its use of interim
reports, as has been done in the publication of quarterly WEO forecasts.
Third, the Fund needs to maintain its financial capacity to help members deal with financial
crises. A decade ago we may have thought that financial crises among the industrialized
countries were a thing of the past. After the events of this summer, we can no longer think
that. We should all be grateful that improvements in economic management and the
strengthening of financial systems in emerging market and developing countries have kept
this crisis away from them. But we cannot rule out the possibility that the Fund will once
again have to lend to member countries facing the threat of serious economic instability, as a
result either of their own actions or of contagion. The owners of the Fund need to ensure that
it be in a position to help when needed.
Fourth: if the Fund is to retain its legitimacy, it needs to reform its governance to give the
rising nations a greater share. The problem with percentage shares is that they have to add
up to 100. This means that if the emerging and developing nations are to have a larger role,
the industrialized nations have to have a lesser role in determining its decisions. It is that
simple. It is also clear that the governance/quota problem will not be solved without resolving
difficult issues about the representation of Europe in the Fund.
For lack of time, I pass over quickly two other issues: the income of the Fund, and the Fund's
role in poorer member countries. As emphasized in a recent paper by Jack Boorman, the
Fund's income needs to be fitted to its role, and not vice versa. With regard to poorer
member countries, the Fund, in close collaboration with the World Bank, needs to continue to
be involved in working with them. After all, its claim to legitimacy depends on its being and
being seen as a global institution. In this regard, it will probably be necessary to increase the
basic vote by more than agreed upon at least year's Singapore meeting.
There is much to be done, and we wish incoming Managing Director Strauss-Kahn every
success as he takes over leadership of the Fund.
3. The Bank
President Zoellick has set out his vision for the Bank in his October 10 speech at the National
Press Club and his October 21 Note to the Development Committee. The vision is
appropriately ambitious. It deserves the strong support of the membership.
The overall vision is to contribute to an inclusive and sustainable globalization - to overcome
poverty, enhance growth with care for the environment, and create individual opportunity and
hope. To do that, the President sets out six key strategic themes:
• Overcoming poverty and spurring sustained growth in the poorest countries,
especially in Africa;
•
Helping rebuild post-conflict and failing states;
•
Producing an appropriate business model to help middle income countries meet their
development goals;
•
Fostering regional and global public goods;
•
Promoting development and economic opportunities in the Arab world;
•
Developing the role of the Bank as "the knowledge bank", a brains trust of applied
experience.
As they should, these themes clearly reflect the needs and wishes of a wide range of the
developing and emerging market member countries of the Bank. The goals implied by the
themes will not be achieved easily. Indeed it is fashionable to emphasize the failures of
development over the past fifty years, the many countries where per capita income has
declined, the persistence of poverty and of hunger. It is right to emphasize the problems that
remain to be solved. But we should also from time to time recognize that this has been a
remarkably successful decade for the developing countries, that many African countries are
now growing at rapid rates, and that in Asia, nearly 40 percent of the world's population is
seeing sustained growth at unprecedented rates. In the process, the world is being
transformed.
We wish President Zoellick every success in achieving the goals he has set out for the World
Bank - goals that as they are attained will help bring the fruits of economic development to
people and to nations who do not yet share in the historic global transformation now under
way.
Thank you, Mr. Chairman.