Mr. Camdessus shares his views on a new financial architecture for a
Address by the Managing Director of the International Monetary Fund,
globalized world
Mr. M. Camdessus, at the Royal Institute for International Affairs in London on 8/5/98.
The G-7/G-8 Summit will be held in Birmingham next week. High on the Summit
agenda will be the issue of how to renovate the architecture of the international financial system
in the face of the tremendous changes under way in the global economy. The Asian crisis has
been so unexpected in many of its aspects, so broad, so cruel in its human consequences that
even before the crisis has run its full course - the leaders of the world want to embark on the
design of a new architecture. This is certainly the right thing to do, and the venue of this meeting
could hardly be more fitting. Like many other cities in advanced countries, Birmingham has
experienced the forces of change in the global economy first hand - from the loss of traditional
industries to the challenge of finding new employment opportunities. Moreover, two centuries
ago, this city was at the heart of the Industrial Revolution, an era that, like our own, was a time of
extremely rapid change. At that time, intellectuals of all schools of thought used to meet
frequently in Birmingham - every full moon, I understand - and bring their reflections to bear on
the challenges of their new world. This was the so-called Lunar Society, which included such
personalities as Matthew Boulton, James Watt, Erasmus Darwin (grandfather of Charles), and
William Small - a friend of Benjamin Franklin and Thomas Jefferson, all with wide-ranging
interests, all sharing a sense of optimism and responsibility for building a better world. Imagine
what a blessing it would be if the G-7/G-8 - our new Birmingham group - were to be inspired by
such an example when dealing with their pressing agenda!
As a modest preface to their work, I would like to share with you my personal
views on the need for change the Asian crisis reveals, the building blocks available for a new
architecture, and the work already under way at the IMF and, in the best traditions of Chatham
House, to fly a few kites and suggest some further steps for the longer term.
* * *
Change is needed
As in the days of the Industrial Revolution, we are now at a defining moment of
human history. The question before us is straightforward: how to utilize the full potential of
globalization to improve the living standards of all - particularly the poorest - while containing
the risks it entails, such as those we have seen materialize so brutally in Asia, and those at least
equally pernicious, even if less spectacular, of the continuous marginalization of the poorest
countries. What kind of new architecture of the global system could achieve this? The response
must be deduced from a proper analysis of the most recent crises.
Contrary to what we saw during the debt crisis of the 1980s, the problems in Asia
were not almost exclusively macroeconomic in nature; even if these countries suffered, all of
them, from some deficiencies in this respect, by and large they had long track records of
successful economic management. Rather, in a context dramatically changed by a major
realignment between the dollar and the yen, and important differences in short-term yields, three
other factors helped trigger the crisis:
• the weakness of their public and private banking and financial structures;
• an unsustainable accumulation of short-term financing - particularly of
interbank lending, which Alan Greenspan refers to as the Achilles' heel of the
international financial system - which made countries particularly vulnerable
to a sudden shift in market sentiment.
• and, last but not least, deep-seated problems of governance, corruption, and
what US commentators call "crony capitalism".
Together with the macroeconomic problems, these three major factors had to be
addressed for our response to the crisis to be pertinent. If you examine our programs with
Thailand, Korea, and Indonesia, you will see that we have tried to deal with these factors, and
they will have to be taken into consideration in the future in whatever efforts are undertaken to
avoid the recurrence of crises. But even that will not suffice. In view of the enormous human and
economic cost of the Asian crisis, no wonder we hear many radical suggestions as to how to
avoid such losses in the future. There are calls for us to do a better job of predicting and
preventing crises, addressing their social impact more effectively, stopping speculators and
properly regulating this "casino economy", seeing to it that investors bear the full costs of their
mistakes, stabilizing the international monetary system, providing for more political
accountability of our institution, etc., etc.
We cannot deny the basic justification of these - at times vociferous - calls for
change. No doubt there are at least some elements of validity in each of them. Taken together
they tell us that, at this stage, world public opinion expects its leaders to design and build a new,
common house with an audaciously modern architecture, and not limit themselves to some
plumbing and interior decorating of the old mansion.
But, as responsible architects, let us start by recognizing the building blocks at
hand. Indeed, they are substantial.
Seven building blocks
The first of these building blocks is the tremendous potential for growth and
prosperity globalization provides countries fully integrating into the global economy. Formidable
sources of dynamism are there, engendered by new information technologies and unifying
financial markets. The question, then, is how to discipline and channel these forces so that
growth will be sustainable and more broadly shared and the fundamental desire for greater equity
will be more fully satisfied.
The second building block is integration. By integrating themselves into the
mainstream of the globalizing world economy, the poorest countries will avail themselves of a
most powerful instrument of acceleration of development, while, if they preferred to do it alone,
they would expose themselves to the risks of marginalization, abandoning several generations to
economic stagnation and poverty.
The third building block is the universal consensus on the importance of an
increasingly open and liberal system of capital flows in order for globalization to deliver on its
promises.
The fourth building block is what we could call the "golden rule" of transparency,
now truly seen as the key for modern management, economic success, and rational behavior of
global markets.
The fifth is good governance, which is equally essential for strong economies and
properly functioning democracies. No doubt, competing for excellence in governance is the
modern face of statesmanlike responsibility.
The sixth building block could be a set of standards and codes of best practices;
this could require a few words of elaboration. More and more we observe an emerging
recognition that the global markets still suffer from the kind of anarchy that afflicted our
domestic financial markets here in Europe during the nineteenth and the beginning of the
twentieth centuries - that is, until various scandals and crises led to the creation of such
institutions and rules as securities and exchange commissions, banking supervision, accounting
standards, disclosure and prudential rules, and so forth. Our challenge today is to disseminate
these good practices in emerging markets and to establish similar checks and balances in global
markets. This could appear an impossible task, as many will pretend that the absence of rules or
regulations of any kind has been at the very origin of the developments of these markets. The
world community is now coming to a different view, and looks forward for the definition of
international standards and codes of good practices, which would be progressively disseminated
by the IMF through its surveillance, and could help limit the excesses of an international "casino
economy".
Last, but not least, the seventh building block is the option for the multilateral
approach to handle problems, which are now more and more global in nature. And the key
instruments of such an approach will have to be the Bretton Woods institutions themselves. Let
me be immodest for a moment. The experience they have accumulated, the quality of their staff,
their demonstrated ability to address new economic challenges promptly and efficiently make
them a major asset of the world community and a central pillar of a new architecture, provided
they continue adapting themselves, reforming themselves, to this new world. And suggestions for
self-reform are in abundant supply.
These seven building blocks have been neglected or unevenly utilized for too
long. Assembled in the right way, they could offer a rock-solid foundation for a new financial
system. Assembling them, nevertheless, will be hard work, each of them implying that vested
interests or perverse practices be challenged. Thus, notwithstanding our sense of urgency, we are
heading here for an evolutionary change: Athena in her helmet will not spring full-grown from
the head of Zeus! And, as with all transitions from one era to another, we can expect risks and
uncertainties to persist for some years to come. This makes it all the more urgent to get to work
on this new architecture right away.
Initial steps for a new architecture
In fact, a number of significant steps are already under way. At its April meeting,
our governing body, the Interim Committee (of Ministers and Central Bank Governors of IMF
member countries), set the broad agenda for the IMF's own work - and its work with others - for
the near future. Five areas have been given priority by member governments:
• The central role to be played by the IMF in crisis prevention through its
surveillance and its role in encouraging members to strengthen their
macroeconomic policies and financial sectors.1
The Interim Committee suggests that the Fund intensify its work in surveillance of
financial sector issues and capital flows, and focus on the risks posed by potentially abrupt
reversals of capital flows, especially those of a short-term nature. The Fund is also asked to
examine ways to strengthen the monitoring of capital flows, a major and difficult undertaking
indeed!
• Drawing on the lessons from the Asian crisis, and the frustration that
confidential warnings from the Fund were not always heeded, the Fund has
been asked to develop a "tiered response", whereby countries that are believed
to be seriously off course in their policies are given increasingly strong
warnings. Addressing an audience in this country, where football is a way of
life, or in my own country in advance of the World Cup, I do not need to
emphasize how important it is to know exactly when the referee has shown a
yellow card and how many yellow cards are permitted! We also have the red
card in our Articles of Agreement, but using this card could precipitate the
crisis we seek to avoid. So we prefer to use the yellow card.
• The Interim Committee also called upon the IMF to help members strengthen
their domestic financial systems by encouraging them to develop supervisory
and regulatory frameworks that are consistent with internationally accepted
best practices, as well as strengthened standards for bank and non-bank
institutions. Here you will recognize, of course, the "standards and good
practices" building block. Work in this area is already in progress in various
fora. A notable example is the Basle Committee's Core Principles for
strengthening banking regulation and supervision, which the IMF is now
helping to disseminate to member countries. We will now work with other
relevant institutions that could be responsible for developing similar standards
in areas such as accounting, auditing, disclosure, asset valuation, bankruptcy,
and corporate governance. We will also consider how to disseminate such
standards to member countries through our surveillance and encourage their
adoption. Working with so many institutions, public and private, in addition to
our 182 member countries, will be an ambitious undertaking, but we are
ready - and enthusiastic - to play our full part in this new chapter in
international cooperation.
In the meantime, the IMF has been applying this standards approach to one of its
traditional domains of expertise: fiscal policy. Last winter, following the suggestion of the
Chancellor of Exchequer, the IMF developed a code of good practices on fiscal transparency to
which members will be encouraged to adhere. Looking ahead, we plan to develop a similar code
with respect to financial and monetary policies in cooperation with the appropriate institutions.
• But despite these efforts at crisis prevention, crises may continue to arise from
time to time. In this regard, the Interim Committee also reaffirmed both the
central role of the Fund in crisis management and the need to develop more
effective procedures to involve the private sector in forestalling or resolving
financial crises.2
• Finally, as I have already alluded, the Committee reaffirmed its view that the
time has come to add a new chapter to the Bretton Woods Agreement by
making the liberalization of capital movements one of the purposes of the
Fund and extending, as needed, the Fund's jurisdiction for this purpose. It
requested the Executive Board to pursue its work on this issue with
determination, with the aim of submitting an appropriate amendment of our
Articles of Agreement as soon as possible.
Greater transparency and availability of economic information, adoption of
standards and dissemination of best practices, a continuous strengthening of IMF surveillance,
the orderly liberalization of capital movements, and better private sector involvement in crisis
prevention and resolution - taken together and utilized to their full potential - these first five
pillars could be a very significant contribution to a new financial architecture much more attune
to dramatically modernized and globalized markets. I have no doubt the G-7/G-8 leaders in
Birmingham will invite us to build on this basis. One can even imagine that they want to point
out some additional avenues, which, as we have been absorbed by more immediately pressing
aspects of our work - we have not, as yet, been able to explore sufficiently.
What next?
Trying to answer the question of "what next" is a risky endeavor. No doubt with
globalization unfolding its opportunities and risks, new priorities will promptly capture our
attention and overtake our pre-established agendas. But it is always better to try to anticipate
them, particularly when they reflect problems that should already have been addressed, be it:
2
As regards the latter, some follow-up actions are needed, including measures to discourage excessive
reliance on short-term financing and strengthen countries' capacity to withstand sudden shifts in market
sentiment. In addition, the Interim Committee has requested the Fund to consider other ways to strengthen
incentives for creditors to use available information to analyze risks appropriately and avoid excessive
risktaking. Possibilities include introducing provisions in bond contracts regarding bondholder representation
and voting in case of negotiations on bond restructuring; extending the Fund's policy of providing financing
to member countries in arrears to private creditors; encouraging strong bankruptcy systems for both
domestic and international capital markets; and advising member countries to exercise greater caution in
granting public guarantees. We also need to examine the possibility of closer contacts with creditors in
order to explain Fund arrangements and, if needed, catalyze private sector financing so as to achieve more
equitable burden sharing vis-à-vis the official sector and limit moral hazard.
Establishing closer contacts with private creditors, particularly at an early stage of a crisis, raises difficult
issues; thus, it is not surprising that the Interim Committee has not pronounced on this point. Among the
various options, I would suggest that consideration be given to asking the appropriate authorities in each
creditor country to arrange for the selection of a representative of its financial community, who could be
contacted in a crisis and who could provide a channel for communicating with a wide spectrum of financial
institutions.
• the integration of the poorest countries in the globalized economy. Asia should
not distract us from the pressing problems of the poorest economies;
• the stabilization of the international monetary system; or
• the issue of the democratic accountability of international financial
institutions, as far as the IMF is concerned.
The issue of the integration of the poorest countries is, of course, already on our
agenda. But, true, the attention of the world has been so focused on the Asian crisis and the need
to avoid its recurrence that the immense problem of development and alleviation of poverty,
particularly in Africa, seems to have been put temporarily on a back burner. This is no longer
acceptable.
In this context, I was particularly happy that, in drawing the lessons of an external
evaluation of ESAF, the Interim Committee encouraged us to "strengthen the ability of the Fund
to foster sustained growth and external viability in poor countries". There is more than
conventional rhetoric in these words. This mention, in a document essentially devoted to the
handling of financial crisis, surely testifies to the recognition by the world's financial leaders that
the success or failure of poor countries in finding their own way toward integration and
development in an interdependent world will have a major influence on what the twenty-first
century will be. This means that the solidity of our new architecture will crucially depend on the
way in which, for the poorest countries, monetary and financial strategies, on the one hand, and
poverty alleviation strategies, on the other hand, are made mutually reinforcing.
Poverty alleviation is chiefly, of course, the task of the World Bank, the regional
development banks and bilateral donors. Among the latter, it is quite encouraging, indeed, to see
the energy and enthusiasm with which the British Minister for Development - an MP from
Birmingham, as a matter of fact! - Ms. Clare Short, is promoting the DAC Target of reducing by
one half the proportion of the world's population living in extreme poverty by 2015.3 These
objectives are ambitious, but they remain realistic, provided industrial countries join forces in
stopping the present decline of development assistance and implement their agreed commitment
to support, as needed, countries that truly own their national strategies for sustainable
development. Among the latter, I would agree that particular priority be given to post - conflict
countries where we must join forces to give new chances to reconciliation, peace and
development. Obeying this same imperative of serving together peace and development, I would
also suggest that the G-7/G-8 warmly endorse Mr. Koffi Annan's recommendation to the African
governments to reduce purchases of arms and munitions to 11⁄2 percent of GDP and maintain zero
growth on defense budgets for the next decade. Industrial countries must play their full part in
these efforts, and, here, I must share with you my anxiety.
Today's silence on the crisis in official development assistance is profound and
distressing. It means that Africa, in particular, must rely chiefly for its economic progress on
humanitarian compassion or the benefits of trade. This cannot suffice if human development is to
be intensified and accelerated. Yet, at the present juncture, the macroeconomic and structural
successes of recent years, precisely in the context of IMF-World Bank supported programs, are
creating an opportunity that is too good to miss. Africa has found a way to advance from two
decades of negative per capita growth to positive growth in more than forty of its countries. In
many African countries, a new generation of leaders is seriously concerned about the need for
democratization, protection of human rights, promotion of "good governance", and human
development. Their efforts are in danger of falling short, however, because their domestic
savings rates are still too low to finance the volume of investments needed to boost their rate of
growth from approximately 5 percent to over 7 percent, which is not an unrealistic objective; it
could be attained and sustained for a long time if local savings were supplemented by an
appropriate mix of public and private foreign support and if a few key conditions were met,
notably:
• continued modernization of the framework for private investment; and
• improvement in public governance through the total commitment of new
governing teams.
Together with the World Bank and bilateral donors, we can make a difference. But
a strong political impulsion by the world's leaders and the example of their countries'
cooperation to development will be of the essence. May their communiqué demonstrate their
vision and leadership in this domain also.
The stability of the international monetary system has been on the agenda for more
than 20 years of annual summits. The Asian crisis has highlighted how disruptive developments
in exchange markets can help trigger a crisis. It is in this domain that efforts to strengthen
multilateral surveillance over the international monetary system could be particularly fruitful.
Moreover, the development of the euro into a key international currency could make a major
contribution to stability of the overall architecture, provided that close cooperation is established
among the monetary authorities of the tripolar system that might take shape. Even if it would be
premature at this stage to try to elaborate further on how to maximize the positive effects of this
major innovation, no doubt the new international monetary equilibrium will have to be kept
under review as a key element of the new architecture. From the outset, effective means of
coordination will have to be found to avoid excessive misalignments and disruptive corrections.
The world is fully justified in expecting a responsible leadership from these major currencies
blocs, which should be actively mindful of their global responsibility and resist the temptation of
"benign neglect". Each of them.
Lastly, at a time when de facto more and more responsibilities are being given to
the international financial institutions, and particularly to the IMF, the question of their political
accountability will probably be raised with increasing insistence. Indeed, this question already
arises from time to time, although not always with full awareness of the nature of our institutions
and of the powerful checks and balances already enshrined in their Articles of Agreement. In this
context, and as far as the IMF is concerned, is there anything that could be done to strengthen
what one might call the political accountability or legitimacy of our institutions? At this stage,
this would require at least a few organizational changes, which would make more explicit the tie
that binds us to the governments we depend on. The IMF could, for instance, encourage its
Governors, in general the Ministers of Finance, to become more actively involved in its work, in
terms of decision-making and not merely in a consultative capacity in the Interim Committee. A
similar question faces the G-7, which feels the need to embrace emerging market countries, but is
unclear about how to go about it, and finds it difficult to come up with acceptable ways of
choosing its partners. The design of a new architecture provides, perhaps, a good occasion to
address these long-avoided questions. Two avenues could be explored.
The first would be to "revitalize" the IMF Interim Committee. It could become an
essential structure, because no other can match the scope of its responsibility and the legitimacy
of its members, who are collectively responsible for key developments in the world economy. At
present, however, it is hampered by the ritualism of its meetings and an insufficient awareness of
its uniqueness and potential. This is why I think that the suggestion of the French Minister of
Finance, M. Strauss-Kahn, to consider its transformation into a "Council" with decision-making,
rather than merely consultative, powers, is particularly important. This is not a new idea. This
transformation, pursuant to Article XII, Section 1 of the Fund's Articles of Agreement, could
give it a new start. This approach was envisaged under the Jamaica accords, but deferred at the
time because of the experimental nature of the Interim Committee. But given the daunting
changes that have occurred recently in the world economy, and the fact that the IMF has achieved
truly universal status with the accession of the transition countries, perhaps the time has come to
consider it. Without greatly altering the operation of the institution and the pivotal role of its
Executive Board, such a transformation would give the IMF renewed and very valuable
legitimacy for the increasingly difficult tasks it is called upon to perform.4
The second avenue, in the same spirit, would consist of making provisions every
two years for the G-7/G-8 - on the occasion of their meetings - to join the heads of state and
government of the 16 countries holding seats on the IMF and World Bank Executive Boards to
discuss with them and with the heads of those two institutions and the WTO the major economic
and financial questions of the day. This new G-24 would have the significant merit of its basic
legitimacy, as it would strictly reflect the system of international representation established for
monetary and financial affairs in Bretton Woods. This would clearly represent a step forward not
only in terms of dispelling the current malaise, but also in terms of hastening the adoption of
integrated policy responses to the challenges of the globalized economy. The Secretary General
of the United Nations should also be invited to participate to take into account the work of the
entire family of UN agencies, which could become a fourth humanitarian and social pillar of the
world system.
Such ideas could, of course, be met with skepticism and run up against logistical
problems that may seem insurmountable. Nevertheless, they need to be discussed, as they could
provide a concrete way of recognizing that each medium-sized or developing country must have
a more equitable share of responsibility for the future of the world economy, a share that they
believe is unjustly denied them in the present institutional arrangements of the international
financial system.
* * *
Now, at the end of this analysis of a number of key issues confronting the world
economy, it is perhaps appropriate to come back for one minute to the central messages of our
eminent predecessors of the Lunar Society two hundred years ago. I am told that they included:
• the value of drawing lessons and inspiration from various disciplines and from
the experience in different countries;
• the need to establish and disseminate standards so quality would be upheld
and trade would flourish; and
• a deep concern for the social implications of economic change and a keen
desire to improve education;
• and, of course, a strong sense of purpose and confidence in the promises of
their new world.
No doubt these messages could strike a chord with many people today, including
why not? - the stellar group that will assemble in Birmingham. May they share these approaches
and concerns. Their confidence in the lasting benefits of globalization will be fully justified as a
new world, born from the opening of economies, the unification of markets, and the universal
availability of information and knowledge, has an immense potential for high-quality growth.
May they also validate their own message of confidence by a clear demonstration of their sense
of universal responsibility and solidarity.