Klaus Liebscher: Global development and stability - the challenge for
international institutions
Speech by Dr Klaus Liebscher, Governor of the Austrian National Bank, at the Sozial- und
Wirtschaftswissenschaftliche Fakultät der Universität Innsbruck (CSI), Innsbruck, 21 November 2003.
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Ladies and Gentlemen:
The organizers of today's conference have presented me with a formidable challenge. The topic I am
to cover is vast, and it is a challenge to delineate the essentials without neglecting the overall picture.
As the Governor for the International Monetary Fund (IMF) for the Republic of Austria, let me focus my
deliberations on the role especially the IMF plays in fostering global development and stability. This
does not imply that other organizations or agencies are less relevant or minor. However, the IMF is
tasked with providing the global public good of a stable international financial and monetary system,
without which nation states around the world would not enjoy economic growth and rising standards of
living.
The main challenge international institutions face today is how to provide the best framework for the
governance of globalization such that this process becomes a win-win situation, in which all
economies ultimately benefit through productivity and growth effects. This means that a level playing
field should govern the international division of labor and the integration of national economies via
trade in goods and services to minimize unfair cross-border competition. This also means that there
have to be rules which regulate corporate and foreign direct investment as well as financial flows. In
the political arena, the United Nations (UN) attempts to deliver global public goods, while the World
Bank, the World Trade Organization, the International Labour Organisation, the Bank for International
Settlements and the International Monetary Fund are charged with delivering these goods in the
economic arena.
I believe that the market is the best coordinating mechanism between free agents. However, there is
also no doubt that market forces alone are not sufficient. That is why we need an international
regulatory framework for the global community, with recognized and clear rules and with effective
institutions. This framework also has to ensure that global public goods such as international financial
and monetary stability, a clean environment and free trade are defined and provided, even if this
requires nation states to give up part of their sovereignty.
I do not want to imply that international institutions must endeavor to impose a global harmonization of
economic and social models. The market economy has many different facets and competition is
healthy for the world economy. International institutions help preserve such social and cultural
differences by making all countries stakeholders in the global polity. The 1930s have shown that
without multilateral cooperation, the lack of national self-responsibility and of international cooperation
can have dramatic and devastating effects.
Ladies and Gentlemen:
A recent World Bank1 study gives clear evidence that opening markets and integrating them into the
world economy has contributed to enormous economic progress for many developing countries over
the past 20 years. Countries such as Brazil, China, India or Mexico have doubled their ratio of trade to
income. Many of these countries have moved up the value chain from mere raw material exports to
intermediate and even to finished products and services. The average annual per capita economic
growth has increased from 1% in the 1960s to 5% in the 1990s. Real per capita income in China has
increased more than fivefold since 1978. Hence on average, the global income distribution has
improved rather than deteriorated.2 Life expectancy, too, has improved: for example in China, it has
increased by nearly 30 years.3 Hovever, some countries, especially countries in Africa which have not
been integrated into the global economy and have not been exposed to globalization, have been left
behind.
Dramatic and distressing poverty is still widespread. And I believe that one of the major challenges the
international community as well as international institutions face is the eradication of poverty.
According to a World Bank classification, nearly 1.2 billion people continue to live in absolute poverty,
with incomes of less than USD 1 a day. In many countries, durable economic and social progress
remains elusive. In most of these countries, trade has decreased and on average, economic growth
has not kept pace with population growth. The situation in Africa is particularly dramatic because it is
aggravated by the AIDS pandemic. The fight against global poverty is therefore the greatest challenge
for stability and security in the 21st century.
In its fight against poverty the international community is following a strategy based on three
interrelated elements:
First, the UN has set a specific objective with the Millennium Development Goals (MDGs) which have
identified eight key areas, including for example the halving of absolute poverty or the reduction of
child mortality by two thirds by 2015.
Second, the International Conference on Financing for Development held in Monterrey, Mexico in
2002 called for a partnership for development. Industrialized countries offered more comprehensive
support while developing countries agreed to greater efforts with respect to good governance and
ensuring a better investment climate.
Third, the World Bank and the IMF have formulated the HIPC (Highly Indebted Poor Countries) and
PRSP (Poverty Reduction and Strategy Papers) processes as operational vehicles to achieve the
MDGs. Both initiatives are encouraging developing countries to develop their own long-term poverty
reduction plans in the form of Poverty Reduction Strategy Papers.
Experience4 over the past decades has shown that especially IMF programs are more successful if
these programs are owned by the government and if the support is based on a broad consultation
process including government and civil society, who set the priorities for development.
Almost simultaneously with the genesis of the enhanced HIPC, a further basic change in the Fund's
approach to low-income countries occurred. A review of the Enhanced Structural Adjustment Facility,
ESAF, led the Fund to substantially reframe its role in the low-income countries by launching the
PRSP and PRGF (Poverty Reduction and Growth Facility) approaches, making poverty reduction,
growth, and a participatory process that enhances ownership the key objectives and modalities for
program supported by the Fund's concessional lending. While the PRGF relates strictly to the Fund's
role, the HIPC and the PRSP are initiatives that guide all cooperation with developing countries, not
only that of the Fund, but also that of the World Bank and increasingly the entire community of donors.
The Fund's role in the developing countries is increasingly becoming an essential and integral part of
the efforts of the whole international community to advance development. The HIPC and PRSP are
clear examples of such integration and of the coordination of development efforts. They are also novel,
given that heavily indebted poor countries must design poverty-reducing strategies in collaboration
with their parliaments, subnational entities, business and trade union organizations, and civil
organizations representing the poorest members of society.
I also think that much more progress is needed in coordinating multilateral and bilateral support more
closely with the poverty reduction strategies and in reducing the administrative burden linked to aid.
Better governance in the poorest countries, and the pursuit of best practices by donor countries under
the guidance of the OECD's Development Aid Committee (DAC) could help to reduce these
administrative burdens.
Finally, patience and perseverance are needed. Effective poverty reduction requires that the recipient
countries receive consistent support from donor countries, international financial institutions (IFIs), and
UN organizations to help them pursue the right policies unswervingly for very long periods.
I believe that if we follow through with the elements I have outlined, developing countries stand a
reasonable chance to eradicate poverty. Therefore, I do not think it is productive to constantly start
new initiatives to fight poverty, which I also judge to be a sign that the involved parties are not willing to
live up to their responsibilities.
Poverty will only be eradicated by economic growth, which also depends on integrating in particular
African countries into the world economy and offering them fair and equitable access to markets in
developed countries. Trade is one of the best forms of self-help. Therefore, it was very disappointing
that the multilateral trade talks in Cancún failed a few weeks ago. However, at the Annual Meetings of
the IMF and the World Bank in Dubai, there was a general consensus that the parties have to return to
the negotiation table as soon as possible.
Ladies and Gentlemen:
Next to the fight against poverty, I perceive the strengthening of the international financial architecture
as a major challenge.
Since the Asian crisis, the international financial system has undergone significant reform. An
important outcome of these reforms has been the relative resilience of international financial markets
to a series of shocks over the past three years: Owing to the decisive intervention and cooperation of
the Federal Reserve System and the Eurosystem, September 11 did not produce a major financial
crisis, the synchronised economic slowdown of major industrial countries has not led to any major
stress in the financial system, and the financial meltdown in Argentina did not entail any significant
contagion except on Uruguay, which proves that financial market agents may be pricing risk better and
have become more discriminating without falling into irrational herding behavior.
I see that particular progress has been made on three fronts:
First, the international dialogue has been broadened and has been made more inclusive. The
committees of the BIS as well as the creation of the G-20 have enabled emerging market countries
(EMCs) as well as developing countries to get involved in the discussion on how to strengthen the
international financial system.
Second, the establishment of the Financial Stability Forum in 1999, which brings together high-ranking
G-7 officials and market participants, has been an important step to identify gaps and weaknesses in
the international financial system.
Third, the IMF with its near universal membership is devoting an increasing amount of resources on
crisis prevention. The main element that the IMF has at its disposal is bilateral and multilateral
surveillance work, with which it regularly examines the economic developments and policies at the
national and international level.
Ladies and Gentlemen:
One can also identify a shift in the crisis prevention strategy the IMF employs. Indeed, mistakes were
made in assessing vulnerabilities up to the Asian crises. But now the IMF is concentrating on
identifying vulnerabilities such as excessive sovereign debt or balance sheet mismatches. Also, its
stance on capital account liberalization has changed. Now the IMF advocates that member countries
should first have the institutional capacity and a relatively strong financial sector with a good
supervision before taking this major step of liberalization. IMF members are advised to move to flexible
exchange rates as a shock absorber as well as to implement fiscal policies that permit cyclical
behavior in the case of a crisis. One important initiative is the Financial Sector Assessment Programs
(FSAP) which are conducted together with the World Bank. An FSAP draws up profiles of the
strengths and weaknesses of a financial sector of a country. This initiative is not only geared towards
EMCs or developing countries, but also towards industrial countries. Austria, for example, is currently
conducting an FSAP.
Another key area is economic and financial standards and codes, which are formulated in
collaboration with public and private sector institutions. The aim of such standards is to promote
meaningful comparable statistics, transparency rules for fiscal and monetary policies and supervisory
standards for the banking, securities and insurance sectors. The idea behind this is to facilitate the
integration of countries into the global economy.
Will all of these initiatives prevent financial crises from occurring? Overshooting and correction will
always be part of financial markets. This means that in an open and dynamic market economy there
are limits to our capacity to anticipate and prevent crises. With skillful and prudent economic, monetary
and financial policies, however, crises should be rarer and less severe.
An important initiative which the IMF started to discuss in 2001 proposed the establishment of an
international bankruptcy procedure for unsustainable sovereign debt. However, the time may not have
been right yet to establish such a comprehensive framework for the restructuring of sovereign debt.
Nevertheless, public and academic awareness has been raised; the debate has helped prompt many
EMCs to introduce Collective Action Clauses (CACs) in their sovereign bond contracts, as the EU,
Canada and Switzerland have. Also, this awareness has induced the Paris Club to change its debt
restructuring procedures for insolvent countries. Nevertheless, I am still firmly convinced that we need
an international treaty which would facilitate the orderly resolution of sovereign debt crises.
Ladies and Gentlemen:
I have the impression that very often, the strong track record the IMF as well as the World Bank have
established in transition countries is overlooked. At the beginning of the 1990s, all of those countries,
apart from Slovenia, had some form of IMF involvement via a fully fledged IMF program or technical
assistance. The IMF together with the World Bank and the country authorities concerned have worked
hard to stabilize the economies of those countries, devise economic policies and build up modern
institutions. The Bretton Woods Institutions have thus successfully contributed to transforming these
economies into today's very successful market economies. We have also contributed to this effort by
setting up the Joint Vienna Institute together with the IMF, which has trained many officials from these
countries.
Their successful work in that area has also helped pave the way for the inclusion of many of these
countries into the European Union, while for other transition economies the EU represents an anchor
of stability. The Bretton Woods Institutions supported by the EU will help them to successfully
graduate from the status of transition economies to that of modern market economies.
Ladies and Gentlemen:
With my remarks, I have only been able to scratch the surface of the problems involved. At the
moment, I see a certain tendency in some parts of the world to turn back the hands of time. I believe
that instead, we must look ahead and work to find global solutions to global problems, solutions that
are both practical and that garner sufficient support. While they are not without flaws, international
institutions contribute to making the global economy more stable and to promoting economic growth.