Presentation of the Forty-Ninth Annual Report by the Chairman of the Executive Board and Managing Director of the International Monetary Fund1, Michel Camdessus

International Monetary Fund. Secretary's Department
Published Date:
November 1994
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Your Majesties, Mr. President, Honorable Governors, Ladies and Gentlemen: On behalf of the IMF, Your Majesty, I would like to begin by stressing how much we appreciate the exceptionally cordial hospitality we have found in Madrid. And it is a very special honor for me to render homage to the formidable economic progress achieved by Spain during your reign, a progress that has gained vigor and meaning as democratic institutions have been established, maintained, and strengthened. We know how much all those in need here in Spain, and how much all those active in the unique world of Spanish art, owe to Her Majesty Queen Sofia. We all know how much Spanish democracy owes to its King. All of us here remember, among many other occasions, the long vigil of February 23,1981. Not only Spain, but also Europe and the world, owe a great debt to Your Majesty for that contribution to the history of our times.

Your Majesty, allow me now to continue in English, our working language, in accordance with the traditions and rules of the Fund.2

I would like to begin by extending an especially warm welcome to our new member Eritrea, a country that so fully deserves international cooperation and solidarity!

These Meetings have special significance because of our fiftieth anniversary. On this occasion three questions are inescapable:

  • are the purposes of the Fund still relevant to our times?

  • if they are, what do they suggest to our governments for today?

  • and what for the Fund and its future?

Let us take those three questions in turn.

* * *

First, are our purposes still relevant?

This question is of the essence. Our purposes were defined fifty years ago, when the Second World War had not yet ended, and when our founders had in their minds the experience of the 1920s and 1930s— an experience not to be repeated. Many of you know our purposes by heart. Are they still relevant today? Well, look at our world! The purposes are more valid than ever, and each time the world’s leaders gather to address any of the systemic challenges—

  • be it in Rio, to address environmental issues,

  • or in Cairo, to address the problems of population and development,

  • or in Copenhagen at next year’s Social Summit—each time, they recognize afresh that any viable solution to these diverse problems requires the steady pursuit of policies oriented toward what I call high-quality growth. By this I mean growth that is sustainable, growth that brings lasting high employment, growth that reduces poverty and distributional inequalities, that respects human freedom and national cultures, and that protects the environment. High-quality growth is an ambitious objective indeed, but we cannot go for anything less. And we know we can attain this objective only by complying with the purposes adopted fifty years ago:

    • international cooperation;

    • exchange stability;

    • elimination of restrictions;

    • and the Fund giving confidence to members.

* * *

What do these purposes imply for our national economic policies today, at the end of 1994?

This question could not be more timely. Our forecasts tell us that 1995 could see world growth above 3.5 percent for the first time in seven years. Yes, global prospects are distinctly better, but let us not forget that serious problems and policy failings remain:

  • high unemployment in most industrial countries, now peaking in much of Europe, I hate to say, at levels we have not seen since the 1930s;

  • the weakened saving performance of most industrial countries, related partly to the widening of fiscal deficits. This is a key reason for the high level of real long-term interest rates. And in some countries, the unsustainable build-up of public debt remains a threat to financial stability;

  • the unsatisfactory performance of many developing countries, with hundreds of millions in these countries still mired in extreme poverty;

  • then, of course, the huge task remaining to be accomplished for stability, reform, and growth in many of the countries in transition.

What do our purposes imply about how we should face such challenges? They tell us we should not miss the opportunity offered by this recovery to secure durable, more broadly based, higher-quality growth, and to raise living standards worldwide. To do so, we must act decisively on the many lessons we have learned in the past fifty years. This is what the Interim Committee intended last Sunday when it adopted its Declaration. I can, therefore, limit myself to proposing six rules for the wise use of this recovery.

First: Never relax in the fight against inflation! We have learned, at considerable cost, that inflation does not provide a lasting solution to any problem. The preemptive tightening of monetary conditions in recent months in a number of industrial countries where expansion is well established is a welcome sign that this responsibility is understood and accepted.

Second: Ensure strong domestic saving and fiscal discipline! Fiscal positions will now tend to improve in the industrial countries as activity picks up; but this should not be mistaken for the structural improvements that are required. A lot can still be done to cut unproductive spending everywhere, not least through cutting subsidies. Most industrial countries have adopted medium-term consolidation plans, but many need to do more to make decisive inroads into their structural deficits. The current expansion, and especially 1995, provides the opportunity for doing so.

Third: Fight unemployment! Of course, a strong recovery will perform part of the task. But expanding economic activity alone will not reduce unemployment to tolerable levels. This unemployment— especially in Europe—is largely structural in nature. More determined action is needed in the environment of this recovery to improve the flexibility of labor markets—including restructuring unemployment benefits, reducing nonwage labor costs, liberalizing employment and wage-setting practices, and improving training.

Fourth: Make full use of the engine of growth that trade provides! The first priority now, of course, is ratification of the Uruguay Round agreements. Further liberalization will be desirable within the framework of the World Trade Organization.

Fifth: Adjust and reform for sustainable growth! Structural adjustment is the strategy that has led to remarkable success stories in East Asia, Latin America, Central Europe, and some countries in Africa. It is the strategy that enabled a group of about forty developing countries to grow at such a pace in 1993 that the world was able to achieve growth of 2.3 percent even when Europe and Japan were in recession and the countries in transition suffered a decline in output of 9 percent. These countries have become an engine of growth in their own right! Is that not a formidable achievement? We are proud to have been associated with such successes through our policy advice, technical assistance, and financing. Such strategies and successes—based on strong fiscal and monetary discipline, structural reform, openness, social policies as an integral part of programs, and good governance—should inspire all countries that are still in the process of structural adjustment or that have not yet started along that path. We know it can be a painful and protracted process. But we also know there is no other way to achieve a sustained improvement in living standards. And when boldness in reform and perseverance are there, external support must be there also.

This brings me to rule six: four simple words—intensify cooperation and solidarity! And this in turn brings me to the Fund and its role for the future.

What of the role of the Fund and its future?

I am both impressed by, and grateful for, the abundance and quality of suggestions from so many quarters about how the Fund should move forward into its second half century. There are, of course, differences of view among the membership on a number of issues; but there is also much that is agreed, and much of it is fundamental. In a nutshell, the Fund continues above all to be entrusted with the same two basic tasks.

First, financial assistance. Over the past decades, the Fund has continually adapted its financial instruments to meet the changing needs of its membership. This adaptation continues. In fact, one of the most gratifying developments in my time at the Fund was the renewal earlier this year of ESAF, our most concessional window, with twenty-four developing countries participating as creditors and donors. What a fantastic turnaround in their international position, from being recipients of international support to becoming contributors to that window! And I am particularly pleased to mention, Mr. Chairman, that your country, Bangladesh, is among these.

Looking to further adaptation of our instruments, the Executive Board has in recent months been working to put together a “package” to help meet the sizeable financing needs of many developing countries and countries in transition. Consultations will have to continue on that, and I fervently hope that in the coming weeks the membership will be able to resolve the issues involved in a positive way. Today, I can welcome the Committee’s endorsement of the early adoption of a temporary increase in access limits. You can be certain that in implementing this we shall continue to ensure that our members, when they are in difficulty, adopt sound and credible programs. Sound conditionality is a responsibility we owe to our members in difficulty, not least to preserve our catalytic role. The Fund’s endorsement of policies is what other creditors and donors look for before providing their own support. The Fund’s seal of approval must maintain its credibility, and we shall ensure that it will.

But the Fund’s catalytic role relies on partnership. Our partnership with the World Bank over the past fifty years has been most effective; it will continue to be central for us. Together with the World Bank and the regional development banks, we need all potential bilateral creditors and donors to complement our increased contributions by providing adequate and timely financial assistance to the many developing countries and economies in transition cooperating with us. I would emphasize in particular the importance for low-income countries of a flexible and speedy implementation of the Trinidad terms of a stock of debt reduction of two-thirds, as well as of the continued availability of external assistance on concessional terms. We cannot be satisfied with official development aid (ODA) continuing to languish at a level that is only half the United Nations target of 0.7 percent of industrial countries’ GNP.

Our second major task is to strengthen the international monetary system by promoting more effectively the stability of the exchange rate system. This is called for even more now by the increasing integration of markets.

Our first fifty years have not been easy in this respect: moving from a dollar-dominated system to the floating regime, and then in the 1980s to our efforts to strengthen surveillance over economic policies and to promote closer cooperation among the key players. And now a new challenge is with us—the momentous process of globalization. Globalization has many aspects that carry important implications for the work of the Fund, including the increasing unification of financial markets, the integration into the global market economy of the countries in transition, the emergence of new economic powers, and the redistribution of economic responsibilities among countries. These are major changes indeed! Globalization will put an increasing premium on the integration of countries into the mainstream of international trade and financial flows, thus on the ability of all countries to remove obstacles to international transactions, and thus also on the soundness of all countries’ domestic economic policies. Conversely, countries maintaining inward-looking policies face a steeply increasing risk of being marginalized. Well, what does this suggest for the work of the Fund? Concentrating on approaches that have a reasonable prospect of being supported by a consensus, I would suggest seven courses of action:

  • First, strong surveillance at the center is of the essence. In a global market, the risk that the domestic policy mistakes of one country will spill over onto other countries is increased. This makes our task of surveillance even more important, to avoid negative spillovers and weak policies, which often lie at the root of exchange rate volatility and misalignment. I, therefore, greatly welcome the Interim Committee’s new call for the Executive Board to pursue its work in strengthening our surveillance, as the central element of the Fund’s contribution to better economic policies and more effective cooperation, and to deepen its work on capital markets. And through these efforts to sharpen our analysis and surveillance, we must try to provide the world with an even more reliable early-warning system of emerging economic risks.

  • Second, we must further intensify our efforts to promote global current account convertibility. In this context, I am pleased to note that sixteen additional countries have accepted the obligations under Article VIII since my appeal last year. This is far more than in any other year of the Fund’s history. But with eighty-three countries still to go, this progress must continue!

  • Third, the Fund will need to continue playing an active role in encouraging further trade liberalization, in close collaboration with the World Trade Organization.

  • Fourth, we must also intensify the encouragement we provide for the liberalization of capital account restrictions. The progress already made toward greater freedom of capital movements means we must consider more fully the best way of guiding the countries that are in the delicate transition to full liberalization. It also invites us to give early consideration to the appropriateness and modalities of the establishment of a fast-disbursing, very short-term financing mechanism, which would help cushion the reserves of countries experiencing short-term balance of payments pressures in spite of sound fundamentals and policies.

  • Fifth, as the international distribution of economic size changes, the Fund must ensure that all member countries “feel at home” in the Fund. For that they must be appropriately represented and share fairly in the Fund’s financial structure, financing, and responsibilities. This brings to the fore the following points whose importance has been emphasized by the Spanish Government:

  • that countries’ quotas must be a true reflection of their economic size;

  • that the costs of running the Fund must be distributed in a balanced manner among its members; and

  • that all members should have a stake in the SDR system.

In each of these areas, work is proceeding.

  • Sixth, the role of the SDR; even if its role is controversial today, the globalization of the world economy and financial system makes the question of a central reserve asset issued by an international monetary authority even more pressing. The question of the future of the SDR, in line with the Articles, calls for in-depth study. This work will, of course, require time, and it will have to take account of progress in Europe with the development of the European currency unit.

  • The seventh and last suggestion for action is strengthened cooperation and a stronger sense of solidarity in addressing at the global level macroeconomic and monetary issues of a global dimension. This means strengthened cooperation at the Fund! The Interim Committee’s continuing efforts to strengthen its contribution to the effective exercise of surveillance and policy coordination are directed toward meeting this need. I especially welcome the intention of the Committee to establish a methodology for reviewing progress in the implementation of the policies set out in its Declaration. The Committee is the only forum where economic policymakers representing the entire world—central bank governors and finance ministers—meet twice a year to reach understandings on policies and policy cooperation. A place where, whether we agree or not, we always seek to move forward. For those who want a locus for global and more effective economic policy cooperation, there is no need to look any further. Let us continue to concentrate on strengthening our cooperation, on ensuring that the Committee focuses on the global dimension of government policies, and on ensuring that the Committee makes its policy guidance concrete and decisive.

* * *

Cooperation and solidarity are the key words. During the last fifty years, what the Fund has been able to achieve—in moving the world toward current account convertibility, in handling the oil shocks and the debt crisis, and in helping developing countries and countries in transition in their journey toward high-quality growth—has depended upon the cooperation of its membership. We continue to need that cooperation now, to help deal with so many problems that still disfigure the global landscape. And we shall need your cooperation tomorrow as much as ever—cooperation for a world that has certainly advanced, a world that is more promising, but a world that also presents great risks. This world requires from us a renewed commitment to our purposes and, if we are to achieve these purposes, a renewed commitment to cooperation. Cooperation, but also solidarity. A few days ago, I read on the banners of the demonstrators here in Madrid, I quote, “Solidaridad es Ternura de los Pueblos.” Ternura de los Pueblos! Yes, ternura, or in English, perhaps, compassion—all that our hearts can add to the coldness of international relations. Solidarity is all of that, but also the last word of reason and wisdom.

October 4, 1994.

The first two paragraphs of the address were delivered in Spanish.

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