Rodrigo de Rato: The IMF in a changing world (keynote address)
Keynote address by Mr Rodrigo de Rato, Managing Director of the International Monetary Fund, at the
Joint IMF-Bundesbank Symposium "The IMF in a changing world", Frankfurt, 8 June 2005.
* * *
Thank you, Mr. Stark, for that opening and introduction. Good morning - It is a great pleasure to be
here today among this impressive gathering of experts from many countries. Let me first thank the
German authorities for graciously hosting this conference. Their organization of this event is much
appreciated.
As you know, the IMF was established about 60 years ago. The world economy has witnessed
dramatic changes since that time. For instance, our membership has grown four-fold, from around
40 to 184. The world's financial landscape has also been dramatically altered by the rise of private
international capital flows. Throughout the changes of the last six decades, the IMF has continually
evolved to meet the needs of its members and the international economic system. It is in that spirit of
evolution and renewal that we meet today to discuss issues related to the international monetary
system, financial stability and, more broadly, the IMF's role in the world economy.
My remarks this morning may be conveniently divided into three sections:
•
The origins of the IMF, addressing its purposes, objectives, and mandates.
•
Main changes to the IMF since its establishment, and the reasons for those changes.
• Some thoughts on the future role of the IMF in the international monetary system.
In going through these subjects, it is my hope that the developments and ideas in each section will
provide useful context for your panel discussions later today.
The IMF and its origins
We live today in a highly globalized and integrated world. However, some analysts may suggest that
the global economy was actually more integrated at the end of the 19th century than it is now. In the
first half of the 20th century, nationalism and protectionism disrupted this integration, setting off the
Great Depression and contributing to World War II. The IMF - and the World Bank, its sister institution
- were established to restore an open system of trade and finance, help countries rebuild from the war
and, in the process, hopefully build a new era of world peace and prosperity.
Against that background, a key part of the IMF's mandate today is the promotion and maintenance of
monetary and financial stability, both in individual countries and at the international level. Stability is
the foundation for sustained economic growth, and crisis prevention and resolution is an integral part
of our work. The IMF discharges this mandate in a variety of ways, including the following. First, it
provides the framework and mechanisms for international economic cooperation. With increasing
integration in the world economy, the importance of this aspect cannot be overstated. Second, it helps
countries design macroeconomic policies that achieve and maintain high levels of employment and
income. The promotion of open economies and trade is a key element of these policies. Third, the IMF
helps in the orderly correction of a country's balance of payments problems by providing temporary
financing.
The ways in which we carry out our operations are also unique in several respects. Broadly-speaking,
these may be divided into three categories of activities:
•
Surveillance - This involves the monitoring of economic and financial conditions, both at the
global level and in individual countries. For the IMF, surveillance is a central instrument for
maintaining monetary and financial stability. By obliging each IMF member to engage in a
regular consultation with us on its economic policies, the surveillance process also explicitly
recognizes the role that all countries play in maintaining global stability.
•
Lending - Our financing role is focused in assisting members with balance of payments
adjustments. Through the temporary provision of funds, IMF lending gives members
breathing room to implement policy measures to overcome underlying economic problems.
For the poorest countries, financing may be provided on concessional terms, and with longer
maturities. The availability of IMF funds to assist in economic adjustment gives confidence to
members and the international system as a whole, since it lowers the incentive for countries
to take adjustment measures which are damaging to the national and international
economies.
• Technical Assistance - Technical advice and assistance is provided to member countries
in areas of the IMF's expertise, primarily in macroeconomic and financial policymaking. By
helping to build institutional and human capacity for the making of sound economic policies,
IMF technical assistance contributes to the building of strong economies and stable growth.
The IMF's purposes, and its operational activities, were therefore designed with a key objective in
mind - that is, the fostering of healthy national economies, linked by finance and trade, as the
foundation for a robust global economic system. I think it correct to say that this vision for international
peace and stability has produced remarkable results, for the past fifty years have been a period of
growing economic prosperity and freedom. Global per capita income has more than tripled, and most
of the world has experienced major improvements in literacy and life expectancy. Among the biggest
gainers have been the developing nations, home to half of the world's population. Many of them have
been quick to take advantage of the opportunities afforded by the global economy, especially during
the last two decades. These countries - whose ranks include Brazil, Chile, China, India, Korea, and
Mexico - were able to double their share in world trade, raise per capita incomes, and lift millions out
of poverty. Their experience demonstrates that integration into the global economy can bring major
benefits.
The IMF's evolution
The world has witnessed many changes and developments - in technology, politics, culture, as well as
economics - over the years, and the IMF has adapted itself accordingly. At the time of IMF's
establishment, our economic policy advice focused mainly on helping members to shape sound
macroeconomic and financial policies, within the disciplines of the Bretton Woods system of fixed
exchange rates. The breakdown of that system in the early 1970s, and the resultant Second
Amendment of the IMF's Articles of Agreement, led to a re-orientation of the IMF's functions. In
particular, the revision of Article IV, and the introduction of the surveillance process, explicitly
recognized the close relationship between domestic economic policies and international stability. To
this day, this forms the basis for our systematic and comprehensive review of economic conditions and
policies in each member country.
Similarly, the wave of de-colonization that swept the world from the 1950s onwards placed new and
complex responsibilities on the Fund. The IMF quickly found that countries looked to it for advice and
assistance beyond the traditional macroeconomic areas of fiscal policy, monetary policy, and
exchange rate systems. In addition to these subjects, IMF advice and assistance were also sought on
establishing the institutions of monetary and fiscal policy, and on supply-side structural policies to help
promote sustained growth. In the last fifteen years, following the end of the Cold War, new challenges
were created in this regard by the transition of former centrally-planned economies to market-based
systems. Through our work in these areas, it also became increasingly clear that structural and
institutional issues were important for stability and growth in other member countries too, including the
major industrial economies.
The area of IMF financing has also seen great transformation. For example, although IMF lending
continues to be targeted at short-term balance of payments needs, our financing instruments have, for
nearly two decades, included concessional lending for low-income countries. In response to the rapid
development of international capital markets as a major source of financing for countries, special IMF
financing policies have also been put in place to assist countries facing capitalaccount driven crises.
Related to these capital market developments, the Fund also began to play an unanticipated role in
facilitating the resolution of sovereign debt problems. This function became critically important
following the emergence of the debt crisis in 1982, and it remains so today.
All of these changes - ranging from de-colonization and transition, to the rapid development of private
international capital flows and new instruments, to the emergence of capital-account driven crises -
posed new challenges for the IMF. In many cases, these developments touched upon issues which lay
at the frontiers of economic knowledge and research. Addressing them has led to a significant
transformation of the Fund, including a broadening of the skills mix of Fund staff, greater dialogue with
private financial sectors, and more involvement in institutional development in member countries. In
the process, the IMF has also become a more open and transparent institution.
Meeting the needs of the future
To continue to serve the interests of our member countries and the international community at large,
the IMF has to be in a position to deal with the influences that are expected to shape the global
economy in the coming years. We must not remain static, nor must we change only in a reactive
manner when forced to. For that reason, I have initiated an examination of the Fund's medium-term
strategic direction. We hope to use this opportunity to explore a variety of issues and their implications
for the work of the IMF. These include matters like global financial flows, regional integration, efforts to
reduce poverty, and questions concerning global governance, transparency, and accountability.
We are still in the early stages of the review, and there have been many preliminary ideas floated and
discussed. At this juncture, it is important for all of us to remain flexible and open-minded, particularly
to views and opinions from outside the IMF. However, there is a sense that the continuing evolution of
the Fund must remain grounded in the institution's key areas of responsibility, as specified in our
Articles of Agreement - that is, to facilitate international monetary cooperation, to foster a liberal
system of international trade and payments, and to promote macroeconomic and financial stability, as
a condition for sustained growth. As we ponder how best to meet the challenges of the future, there
appears a strong case that the IMF should remain anchored to its core macroeconomic and financial
areas of mandate and expertise.
The Fund's governing organs - including our Executive Board and the International Monetary and
Financial Committee (IMFC) - are already actively engaged in this review. They have had various
occasions to consider this matter, and I would like to use this opportunity to present some of the key
ideas that have emerged in discussion, in the following five areas: surveillance, financial sector and
capital markets work, Fund financing and lending, our assistance to low-income countries, and internal
management and governance.
First, on surveillance, both the IMF's Executive Board and the IMFC share my vision that a central
task of the Fund lies in a stronger and better-focused surveillance process. IMF surveillance provides
the foundation for cooperation among our members in the promotion of stability and growth in the
global economy. With increased trade and financial linkages among nations, and strong connections
between economic performance, poverty, and security issues, such cooperation to address shared
problems is now more important than ever. For instance, the IMF has repeatedly pointed to the need
to address current global imbalances, so as to reinforce the basis for more balanced and sustainable
global growth. The existing relatively benign global outlook provides an excellent window of
opportunity to do that, and the IMF serves as a ready vehicle through which to cooperate on the
necessary actions.
With respect to individual countries, we should continue working to strengthen the bilateral
surveillance process. While focused on the country at hand, it would be important that bilateral
surveillance be fully-informed by regional and global perspectives as well. Systemically important
countries will clearly continue to deserve special attention. Operationally, our respective country teams
will remain the focal points for our activities in individual members. At the same time, country teams
will continue to draw upon specialized expertise where necessary, from both inside and outside of the
Fund. To maintain overall coherence, it would be important for efforts to continue in the integration and
sharing of information among country teams and specialized experts.
Second, our work in financial sectors and capital markets. The IMF is the one international
organization capable of carrying out financial sector surveillance universally and comprehensively.
Further efforts will be needed to realize this potential, not least by deepening the IMF's role in
anticipating sources of instability in national and global financial markets, and in generating timely
action to address them. The IMF will continue to help countries strengthen their financial sectors,
including in following up on the findings of the Financial Sector Assessment Program (FSAP)
exercises. One important aspect of this will be to help members adapt their prudential and
administrative frameworks to benefit more from private capital flows.
As national financial sectors become increasingly integrated and interdependent, another top priority
for us must be to strengthen our understanding of the factors that drive global capital asset allocation,
and the reasons for capital flows across sectors and national borders. Early identification and
assessment of capital flows will help us evaluate vulnerabilities in a timely manner, as well as enhance
countries' ability to address them. The effectiveness of our bilateral and multilateral surveillance
activities will also be strengthened as a result. For members who wish to access international capital
markets and integrate their economies more fully into the global financial system, we can provide
advice on the appropriate sequencing of measures, such as how to strengthen their financial sectors
and reduce their vulnerability to shocks as preparatory steps.
Third, IMF financing and lending. The Fund's traditional role of providing financing to help smooth
the adjustment of temporary current-account imbalances remains vital for many countries. For others,
our main task is to help prevent, or mitigate, capital account crises and their cross-border contagion
effects. To succeed in these roles, the IMF must be able to exercise selectivity in supporting only
those adjustment programs that will put the relevant members firmly on the path to external viability.
The existence of robust domestic institutional frameworks, and strong national ownership of programs,
would be key. Building on these principles, we will continue working towards a clearer consensus on
the appropriate circumstances and scale for IMF lending, the possible need for additional financial
instruments, and the adequacy of the present framework for the orderly resolution of sovereign debt
problems.
Fourth, the Fund's role in low-income countries. Low-income countries present the international
community with some profound challenges. Over a billion people live on less than a dollar a day, and
hundreds of millions are affected by disease. Addressing the HIV/AIDS pandemic, in particular, will be
critical for growth and poverty reduction in many developing countries. Achieving durable economic
growth in these countries - which is essential for lasting poverty reduction and reaching the Millennium
Development Goals - will therefore require a strong social framework as well as sound economic
policies. On our part, the IMF can help countries put in place policies and systems to effectively
manage the increased and large inflows of aid that could be forthcoming in response to the HIV/AIDs
crisis.
Importantly, lasting poverty reduction can only be achieved with stable and sustained growth. The IMF,
with our mandate in promoting economic stability, can help countries to put in place strong
macroeconomic frameworks that will lead to economic expansion and debt sustainability. As in
everything else that we do, we must ensure that our assistance to low-income countries continues to
fit their particular needs and circumstances. Some issues which may warrant closer examination
include:
•
Ensuring that resources in the Poverty Reduction and Growth Facility - our main lending
instrument for developing countries - remain adequate to meet future demands;
• New ways to help low-income countries deal with economic shocks;
•
In the case of low-income countries which do not need or want IMF lending, how to enhance
the IMF's role in signaling to others the strength of these countries' policies;
•
The role of the Fund in supporting low-income countries' poverty reduction strategies; and
• Our relationship with donors and aid agencies.
As a partner of the 2002 Monterrey Consensus, the IMF is committed to supporting countries in their
efforts to reduce poverty and reach the Millennium Development Goals. Our unique position gives us
the potential to contribute to building both pillars of the Monterrey Consensus. On one side, we can
work with countries to design policies and build institutions that will help them grow out of poverty. On
the other, we can advocate for more and better international support, and help with its coordination.
Nevertheless, examining the issues highlighted earlier will help frame a better understanding of the
areas of low-income country work for which the IMF can take responsibility, and those that will fall to
other institutions and actors. It would be helpful to have greater definition in this area as we approach
the U.N. Millennium Summit in September.
To maintain the IMF's effectiveness, it is
Fifth, the IMF's internal governance and management.
essential for our membership to resolve the difficult issues that have been raised about our own
governance - notably, the voice and participation of emerging market economies and developing
countries in our institution. All members countries should have adequate voice and participation in the
IMF's decision-making, and the distribution of our quotas should reflect developments in the global
economy. In this connection, the ongoing 13th general review of IMF quotas provides an opportunity
to make progress on this front.
Further, given the demands placed on the IMF by its members, it is clear that the institution's
resources must be commensurate with the tasks it is asked to perform. This ongoing strategic review
will help us to identify needs, define priorities, and consider possibilities to redeploy resources from
lower-priority areas. Regardless of the outcome, IMF management, and our Executive Board, are
committed to making the most effective use of resources entrusted to them by our membership. Efforts
must therefore continue in the search for greater efficiency gains. One important aspect of this
concerns the cooperation and division of labor between the IMF, the World Bank, and other
international organizations. This is an issue which may bear revisiting, and I am very much looking
forward to working with President Wolfowitz, and to learning his views and vision for the Bank.
Conclusion
This conference's organizers have put together an excellent program that addresses many of the
points I have touched upon - from international financial stability, to capital market integration, to
financial crisis resolution, to IMF governance. In these and other areas, work is underway on a
medium-term strategy that will guide the IMF's priorities and decision-making over the next few years.
Your discussions will therefore provide valuable insights for that medium-term strategy, which we hope
to finalize by the time of the 2005 Annual Meetings in September. Subsequently, I anticipate that the
debate on longer-term issues, relating for instance to global governance and the future structure of the
international monetary system, will continue, both within and outside the Fund. I look forward to your
contributions to that debate as well.
Thank you once again for your presence and participation in this symposium. As we consider how the
IMF can best serve its membership and the world, it is indeed a great privilege to be able to tap into
your wealth of experience and knowledge on some of the issues that lie at the heart of our institution's
mandate.