Eva Srejber: Globalisation and the IMF
Speech by Ms Eva Srejber, Second Deputy Governor of the Sveriges Riksbank, at
The Social-Domocratic Student Club, Stockholm, on 19 September 2000.
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Thank you for the opportunity of coming here to Stockholm University and meeting you from the
different social-democratic student clubs in Stockholm and others among you who have seen posters
here at the University.
In a week's time, the International Monetary Fund, IMF, will have its annual meetings with the World
Bank in Prague. We will probably see demonstrations at these meetings - in the same way as we saw
at the World Trade Organisation's meeting last winter and at the IMF and World Bank meetings in
Washington in April. In a short time, the IMF has increasingly become the subject of debate, not least
since it is closely associated with the controversial and often hard-to-interpret economic trend called
"globalisation".
The Riksbank has a reason for taking part in this debate. Most of you will be aware that one of our
tasks is to maintain stable prices. The other main task of the Riksbank is to promote financial stability
and an efficient payment system and to issue banknotes and coins. As part of this task, we participate
in various international organisations which work for financial stability, among other things we are the
contact authority for the IMF in Sweden. This means that we, together with the Ministry of Finance in
the Government Offices, coordinate and conduct Swedish policy in this forum.
This evening, I am intending to talk about globalisation - as an opportunity and a challenge. I am
going to discuss what the International Monetary Fund is and the role that it has in an increasingly
globalised world. To conclude, I will take up Sweden's participation in the IMF, and what we can
expect from the meetings in Prague next week.
Globalisation and its benefits
Before commenting on critical remarks often presented on globalisation, let me first begin by noting
that prosperity in the world has improved dramatically during the past decades. Never before in history
has the situation of so many people improved so much so quickly. Since the beginning of the 1980s,
purchasing power per capita in the world has more than doubled. In the poor developing countries, this
has meant that purchasing power correlated GDP per capita has increased by almost 350%. In the rich
industrialised countries, the corresponding growth was 220%. In certain cases, developments have
been particularly spectacular, not least in Asia. In 1975, six out of ten Asians lived in absolute poverty
- under a dollar a day. Today, the figure is two out of ten. In China alone, the number of poor has
fallen from 60 to just under 30% in less than twenty years.
There are many factors that explain this development. Major technical advances have taken place
enabling manufacturing and other production to be made more efficient. However, a crucial factor has
been the increased opportunities for contact between people in different parts of the world, and
increased opportunities for making use of each other's abilities. All prosperity is based on people
producing goods and engaging in trade to obtain other goods from those who are comparatively better
at producing them. This was the case when the Vikings exchanged fur and amber for salt and it still
applies today when banks sell foreign exchange derivatives and equity. These greater opportunities for
exchange are the foundations of globalisation. It materialises in increased trade, increased capital
investment, increased travelling and increased flows of information.
The greater opportunities are often related to political decisions on deregulation and opening of
borders. Since 1950, the quantity of tariffs and other trade barriers has drastically reduced. This has
meant that the total trade in goods and services in the world is now sixteen times larger than then. The
market for consumers and producers has thus become many times larger than before. This has meant
that workers and companies in different parts of the world have been able to concentrate on producing
what they are relatively best at. Specialisation and increased competition have pushed down prices.
The housekeeping money lasts longer. Moreover, we can buy far more types of goods. It was not so
long ago that oranges were a luxury. If you go into a food shop today, you will find Swedish blood
pudding as well as Italian salami, Chinese noodles, American peanut butter and coffee from Brazil.
The same applies to most other types of goods.
Increased trade also benefits the developing countries, which has been shown in various studies.
Jeffrey Sachs and Andrew Warner at Harvard University have found that welfare in developing
countries with an open trade policy has increased by 4.7% per year between 1970 and 1990, compared
with 0.7% per year for those with closed borders. This means that a country can create more than six
times as much welfare each year, just by deregulating its trade. No development assistance project in
the world comes anywhere near such figures. The price for shutting oneself off from world trade is
very high.
Another important trend in recent years has been the deregulation of the international capital markets
and the new information technology enabling savings capital to move in a second between different
parts of the world, at almost zero cost. Capital is not really different from any other type of good.
Some people need capital, and are willing to pay to borrow it. Others have savings and can sell the
opportunity to use these for a period of time. Deregulation has meant that savings can to an increasing
extent be channelled to where they will be most useful. The medium income countries today finance
their growing industries and their infrastructure with the aid of the savings capital from us in the rich
part of the world. At the same time, those who save money - not least all those saving for pensions
can benefit from the growth potential that exists outside of their own country's borders. Free capital
movements have also made it possible to diversify savings capital and thus reduce risks. This gives
greater financial security both among those who invest and those who use borrowed capital.
Globalisation brings many benefits that are not only economic. Contacts with the surrounding world
have increased and developments in IT make it increasingly difficult to isolate a country. Openness is
increasing in all areas, facilitating the exchange of knowledge and information and receives further
nourishment from growing economic prosperity. In addition, since it has become less costly to travel
and easier to undergo education in other countries, more and more people have had personal
experience of everyday life in other countries.
Criticism of globalisation
Nevertheless - despite the very positive development in many respects - there are many that regard
globalisation as a threat rather than an opportunity. There are a lot of organisations with many
different views in this area. However, they seem to share some of the concerns about trends in the
world economy. This may concern the following:
• Trade and new technology increase competition and the requirement to change. The changeover to
new types of production makes demands for great, and often swift, adaptation. Some companies
become unprofitable and employees both in industrialised countries and developing countries are
forced to leave their jobs and look for new.
• Although the situation of more and more people is improving, the gap between the poor and the
rich is increasing. Countries, which due to deficient infrastructure and incapable political
leadership, etc. are not equipped to take advantage of the benefits of globalisation, risk falling
further and further behind.
• The global environmental problems are aggravated.
Free capital movements make countries more vulnerable if they carry out less credible policies. As
•
quickly as investments flow in when economic prospects are good, they flow out just as quickly
when financiers suspect that growing problems threaten the savings they have the task of
managing.
These are some of the problems that we cannot ignore. They are among the great challenges for world
politics today, and I understand those who feel concern. Many of these issues require coordination
between countries, and it is therefore an ambitious agenda that we have to tackle energetically. A lot of
work is already in progress, nationally and in various multilateral organisations.
However, despite these issues being important, the conclusion is not that we should endeavour to
reduce trade or have fewer contacts between countries. A number of the problems I mentioned are
rather related to growth and economic development in general entailing change. All societies, whether
open or closed, must find ways of ensuring that people are not excluded when technological progress
makes old industries unprofitable. All societies also have a responsibility for production and
consumption not having too great an impact on the environment since the welfare and health of future
generations will otherwise be imperilled.
We must be clear that development and collaboration are good. Almost everyone, including many of
the poor in the world, has experienced great improvements in the past decades. In many respects, it is
exactly the increased contacts and trade between countries that has contributed to it being possible to
solve the problems that I have just mentioned. Growth in the industrialised countries has led to us
being able to afford to conserve our environment, which most poor countries cannot afford to do. To
reverse the trend - to attempt to isolate countries from one another - is not the way forward.
Globalisation makes new demands
I will now make some remarks on challanges specifically related to globalisation. Like all other
development, globalisation is not without problems. These were clearly expressed in the severe
economic crises that we have seen in recent years - in Mexico in 1994-95, in South-East Asia in
1997-98, in Russia in 1998 and in Brazil in 1999. These crises illustrate that increased trade and
financial flows makes new demands public policy.
Firstly, requirements increase on the national institutional settings - on laws, authorities and practices.
These systems must be solid enough to cope with increased flows of trade and capital. Some countries
are not sufficiently well prepared to handle the new conditions of the world economy. Sometimes,
countries have deregulated their economies too quickly or in the wrong way. Industrialised countries
have deficiencies too.
Secondly, requirements increase on coordination of policy among countries. The countries of the
world are increasingly dependent on one another. A financial crisis in South-East Asia has effects in
Sweden as well. For this reason, we also benefit from other countries on the other side of the world
acquiring better systems for, for instance, bank supervision and bankruptcies. This means that we have
greater reason to become involved in global issues. We also have reasons to show lenience on issues
that are important for Sweden sometimes, in order to create common rules of play and agreements that
will benefit everyone. The old slogan "international solidarity" is national self-interest in a very
concrete way.
International collaboration is thus of great value. Therefore, we have reason to take a great interest in
the multilateral organisations for collaboration that exists. The "Bretton Woods institutions" - the IMF,
the World Bank and WTO/GATT - were established fifty years ago during a period when the countries
in the world economy drew the lesson that the trade wars of the 1930s, payment obstacles and
competitive devaluations contributed to unemployment, lower prosperity and war. Among other
things, it is the collaboration in these organisations that opened the road for the economic development
we are seeing today. It is also in the first place within these organisations that the countries of the
world discuss how the gains from globalisation shall benefit everyone.
The World Bank is a development organisation, whose main purpose is to reduce poverty in the world.
Every year, the World Bank lends the equivalent of roughly 200 billion Swedish crowns (25 billion
US dollars), to finance several thusand projects in water sanitation, combating AIDS, vaccination, etc.
The World Trade Organisation, WTO, that has replaced GATT, is working to remove tariffs, import
quotas and other trade barriers. The increased world trade that I recently mentioned is largely a
product of the work that has taken place in this forum.
The organisation and purpose of the IMF
The IMF can be characterised as a financial "club". It is an association of countries that share their
experiences and help one another during crises, among other ways by lending one another money from
a common fund. Influence in this club - in the form of voting rights on the IMF board - is quota-based
and reflects among other things the amount of capital the member countries have provided. The
background to this is that the creditors in the IMF wish to have a reasonable control of how their
money is used. Not least to be able to justify this to taxpayers in their home countries. Voting power in
the IMF is a balance of creditors' interests, borrowers' needs and that all members should be able to
exercise influence.
Membership of the IMF is open for all countries that meet certain criteria. Today, 182 countries are
members, which means that very few countries do not take part in the IMF. This broad membership is
one of the organisation's strengths. The IMF's head office is in Washington DC in the USA. Around
3,000 people work there. The major part are economists specialising in macroeconomics and
international finance. The IMF board which decides on the day-to-day policy in the organisation is
also located in Washington DC. The board meets at least three times per week. It has 24 seats, where
all countries are represented, most of them in geographical groupings.
The IMF's purpose is to work for financial stability. In simple terms, this means ensuring that the
various macroeconomic variables in a country - the exchange rate, inflation, the budget deficit, for
instance - are dealt with in such a way that the economy can run smoothly and efficiently. A stable
economy allows people to think in a long-term way when they invest and consume. Without stability,
it is not possible to create sustainable growth. In Sweden, we have recent experiences of the opposite.
The financial crisis here at the beginning of the 1990s increased unemployment and reduced
production at the same time as government finances were dramatically weakened and Sweden entered
the deepest recession since the 1930s. Bear in mind then that Sweden is an industrialised country.
Many of the member states of the IMF are poor and have even in calm periods unemployment of
around 30%, a very strained government budget and limited opportunities to obtain foreign finance.
Financial stability is even more important in these countries.
Activities to prevent crises
A large part of the IMF's activity centres around preventing crises arising. Globalisation has meant
that this work has become increasingly important. Few people want to trade with a country that is
insecure, and even fewer to lend money there. Since the flow of information is increasing and capital
can swiftly be moved between countries, economic crises can arise more quickly in the event of
indications of problems in a country. They can also become deeper and spread to regions farther away
than previously. The value of a stable, long-term economic policy has therefore been reinforced.
Briefly, the IMF's preventive work involves spreading knowledge, giving advice and creating norms.
Spreading knowledge means that the IMF continually monitors trends in the world economy, conducts
research and spreads knowledge to national governments and the general public. Knowledge about
where the economic risks are has a stabilising effect on markets and also allows countries to tackle
their problems. The IMF continuously surveys economic trends in each member country and also
gives regular advice on economic policy on issues concerning, for instance, exchange rates, inflation
and the financial market. Most countries receive a visit from the IMF every year. In Sweden this
usually takes place in the early summer and the delegation stays for a week and visits during this
period the Riksbank, the Ministry of Finance, Finansinspektionen [the Swedish financial supervisory
authority], the social partners and other central economic participants to obtain a picture of the
economic state of the country. This leads to a report that is discussed in the IMF board.
In some cases, the IMF has a very practical involvement in countries. Many central banks in
developing countries have been established with the assistance of the IMF. An example that is close to
hand is the establishment of a central bank in Kosovo. The same applies to introductions of new
currencies, or the introduction of new exchange rate regimes. The IMF also trains officials from
national central banks and ministries of finance as part of the work of spreading knowledge.
An increasingly important part of its activity concerns creating common rules of play within different
areas that affect financial stability. Many of these are in the form of general minimum standards and
recommendations, for instance, in bank supervision, financial statistics, transparency and foreign
exchange reserve management. By encouraging countries to meet these, countries reinforce their
institutional framework, at the same time as increased standardisation makes it easier for everyone to
be cognisant of systems in different countries. Not least, this assists investors to make risk
assessments.
Fund lending
The areas of activity that I have just mentioned involve in the first place the long-term prevention of
crises and the promotion of trade and growth. They account for the major part of the IMF's work.
However, the IMF also has the role of fire brigade in the international financial system. Roughly,
financial problems occur in four or five countries each year. This often includes difficulties for these
countries to handle their foreign payments - their foreign exchange reserve runs low since imports are
greater than exports, and there is insufficient foreign capital inflow to bridge the gap. In such a
situation, the country can apply to the IMF for a loan. A team of economists is then quickly put
together and sent to the country to assess how severe the crisis is and what has to be done to regain
control over the situation. Together with the country's government, the IMF staff rapidly creates an
economic reform programme that runs over a couple of years. The purpose of this programme is to
establish confidence in the country's economy and in this way turn the outflow of capital to an inflow,
so that the country can regain balance in its payments. During the period that the country is
undergoing the programme, it can also borrow limited amounts from the IMF to assist in covering
parts of its deficit.
The IMF's lending is thus relatively short-term. It is often sufficient with loans with a three to five
year term to restore balance in the foreign payments. In the case of developing countries, however, it
has increasingly been seen that short-term instability often depends on deep-seated structural
problems. Examples of this type of problem are inability to collect taxes, inefficient bankruptcy
legislation, widespread corruption and weaknesses in the banking sector. These types of issues are in
the borderland between the mandate of the IMF and the World Bank and the two organisations
collaborate in initiatives in this area. Among other things, the IMF and the World Bank have certain
types of loans which, in combination with economic reform programmes, are focused on building
long-term, strong structures in poor countries.
Another type of structural problem is the unsustainable foreign debts burden that some of the most
poor developing countries have to contend with. For a couple of years, the IMF and the World Bank
have been working together in debt relief projects for these countries. In practice, this implies writing
off parts of the debts. The debt relief goes hand-in-hand with economic reforms in the countries, aimed
at decreasing poverty. In the longer term it is only through a responsible economic policy, focused on
growth, stability and sound government finances, that these countries can avoid debts building up
again. An important part of the IMF's work with debt management in the poor countries is therefore to
strive for the resources that are released in the country are invested long-term and in a way that
benefits all the population.
Research shows that IMF lending and programs are successful. In the years a program is implemented,
and the countries save to finance their deficits, growth is normally decreased a bit. After a few years,
the countries can however reap the fruits of a more stable economy, in terms of lower inflation and
higher growth. Successful programs also have a positive effect on social policy in the countries.
Expenditure on education and healthcare in the poorest program countires increased by four per cent
per capita between 1985 and 1998, and these areas now account for a larger share of the government
budgets. Countries with IMF programs have seen more children in schools, increased literacy and
access to clean water, and lower child mortality.
Swedish participation in the IMF
Sweden is one of the creditor countries in the IMF. In the board we share a seat together with the
seven other Nordic and Baltic countries. As well as other country groups, we have an office in
Washington with representatives who work full time on pursuing our interests on the board. I worked
at this office myself for over four years as Nordic-Baltic representative in the board. Our board
representatives receive guidance from their home countries on important issues and statements in the
board are coordinated among our countries in advance. In Sweden, the Riksbank has the main
responsibility for contacts with Washington, but all issues are coordinated with the Government
Offices where the Ministry of Finance is our contact. In certain cases, there is also consultation with
the Ministry for Foreign Affairs.
The Nordic and Baltic countries are small on the board - our combined voting power is just over 3.5%
of that of the IMF as a whole. Our opportunities to pursue policies on the board are in having sensible
points of view on the proposals that are on the agenda and, together with other countries, trying to
influence proposals so that they move in the direction we want them to. To some extent, we have an
advantage in appearing independent on the board, since we represent neither the most influential
creditors within G7 nor the large group of debtor countries. This means that our statements sometimes
have more weight than our voting powers indicate.
Let me give three examples of issues where our countries have been actively involved in the IMF. The
first concerns the transparency of the IMF. In Sweden, we are accustomed to authorities publishing
their decisions and their way of dealing with items. Many international organisations on the other hand
operate behind closed doors. However, the IMF has become considerably more open in recent years,
and today material on almost all activities is available, not least on the IMF's website (www.imf.org).
A second example is the issue of capital account liberalisation. Besides working for opening up the
capital account in many countries, we strive for the long-term goal of giving the IMF a clearer
mandate to regulate issues relating to the international capital market. A third issue where we have
been active is developing a body of rules for how private creditors are to contribute to the financing of
countries' finance requirements in crisis situations.
The increased attention in the media about the IMF and the World Bank has arisen during a period
when the functioning of these organisations and their mandate have been discussed intensively
internally as well. The growth of private capital markets has resulted in many countries no longer
requiring financing from the IMF. At the same time, the need to build institutions, regulation and
coordination is increasing, not least in the financial sphere. Some radical groups have argued that the
IMF should be abolished, or considerably reduced in size. Others believe that the organisation should
take on more responsibilities, such as within areas concerning the labour market, the environment and
money laundering. Sweden is among those who believe that the IMF can only be an efficient
organisation if its mandate is kept relatively narrow. The IMF shall work with financial stability, and
in particular macroeconomic issues. Within this area, the IMF has its main competence and can
contribute most. At the same time, the world has changed a lot since the IMF was set up at Bretton
Woods in the forties, and it is natural for the organisation to expand its involvement in financial issues
and, in particular, with respect to how private flows of capital are to operate within a good regulatory
framework.
The annual meetings in Prague
The coming annual meetings in Prague are to some extent a continuation of this discussion. In Prague,
the ministers of finance and governors of central banks from the member countries will meet to
discuss the IMF's future agenda and share views on the work that has been done since the meetings in
Washington in the spring. Most of the issues that I have mentioned will be taken up at these meetings.
They will discuss trends in the world economy and future risks and opportunities. They will discuss
the increased role of private flows of capital and how they affect the IMF's provision of advice and
loans. They will also discuss how the IMF can obtain a more constructive collaboration with private
financiers. The experiences of standards within different areas will be analysed as well as the poorest
countries' debt situation, and not least how the debt relief is to be financed.
The IMF has accordingly a key role in what we somewhat carelessly call globalisation. I hope that the
trend towards increasing economic and cultural openness will continue. People continually seek new
opportunities to trade and communicate with one another, and find new ways to benefit from one
another's knowledge and possibilities. It is fundamentally a very positive development which gives
poor and rich people enormous opportunities for greater wealth and reduced suffering. In order to
make use of this potential, intensive international collaboration is required, and energetic national
efforts. Sweden and all other countries must adapt their national systems so that they can cope with the
increased contacts with the outside world and so that other countries can benefit from increased
contacts with us.
Issues of financial stability and macroeconomics are intimately related to this. The IMF therefore has
an increasingly important function to fill. Economic developments, not least in the financial sphere,
take place quickly, however. In order to be able to make an active contribution, the IMF and other
financial organisations must continually be reformed and keep in step with this development. The
meetings in Prague are a part of this reform process.