The last decade of the twentieth century has seen a remarkable step forward in the evolution of financial intermediation. Investment and saving habits are changing worldwide—as we can see from proliferating securities markets, diverse financial instruments, and large flows of foreign direct and portfolio investment. These have been—and have all the potential to be much more—essential instruments of this explosion of international transactions of the last 15 years—a major component of globalization with all its opportunities and risks. During the last two years, we had a vivid illustration of these risks and of the virulence of the crisis, which is the other side of the glittering promise of globalization. The worst of this crisis being over, and being a member of the team of firefighters who had to contain and extinguish it, and at the same time being active in the workshop where the new architecture of the international monetary and financial system is being designed, I believe that I can perform no better service than to bring you up to date with the work governments and financial institutions are undertaking to adapt this system to the globalized world of the twenty-first century.
New economic and financial system
As the world emerges from a period of intense turbulence, what kind of economic and financial system can we expect to develop?
The emerging markets crisis revealed deficiencies in the international financial system both on the debtor side—in the national policies and institutions—and on the creditor side—notably in the capacity of investors to undertake adequate risk assessment and of supervisory authorities to monitor properly their activities. The cost of it was high: the most severe worldwide crisis of the last 50 years. Was that a reason to abandon globalization with all its promise for a more prosperous world, in favor of the old models of protectionism and state intervention? There was, on the contrary, a very broad consensus for embarking on a major and immediate cooperative effort simultaneously to contain the crisis—a task now well advanced—and to reform the “architecture” of the system. This had to entail a profound change in what has been the relationship among governments, banks, and enterprises in promoting economic development during the last 30 or 40 years. The emerging consensus reaffirms a world economy based on free market mechanisms—on open trade and capital movements—buttressed by sound national financial systems and by good public and corporate governance. This would be a system that fosters the private sector—both domestic and foreign on a truly equal footing—as the primary source of investment and growth. It would require establishing an arm’s-length relationship between governments and markets, neither too close nor too distant. It is a partnership that demands good governance, transparency and disclosure of information, and a respect for standards and codes of good practice that are consistent across countries.
Investors should be able to assess risks realistically and operate within a clearly defined, but not oppressive, framework of laws and regulations. And a consistently stable macroeconomic framework will be a sine qua non of national and global stability. It would also be a world that benefits from the existence of international institutions with well-defined, but constantly evolving, mandates that promote the smooth functioning of markets and economies and, as far as the IMF is concerned, could strengthen and, if needed, broaden further its surveillance to better promote the stability of the global system.
There is a strong consensus for making transparency the “golden rule” of the new international financial system. A lack of transparency has been found at the origin of each recurring crisis in the emerging markets, and it has been a pernicious feature of the “crony capitalism” that has plagued most of the crisis countries and many more besides. Markets cannot work efficiently, and they will remain vulnerable to instability in the absence of adequate, reliable, and timely information from all quarters. Here, IOSCO has been in the forefront, not only developing principles for the securities markets but also working together with other agencies, for instance the International Accounting Standards Committee, to develop proper accounting and disclosure rules. It may seem like a tall order to change the culture and attitudes of many decades, but, in fact, considerable progress is being achieved in defining new standards and establishing new practices.
A consensus is clearly crystallizing on the need to establish at the international level the discipline that has progressively come to prevail in domestic markets. In the international markets, we are already living in the twenty-first century but with an absence of universally accepted rules and standards reminiscent of the domestic environment that prevailed at the end of the nineteenth century in the industrial countries. No wonder that a number of countries have hesitated to expose themselves to such a risky environment.
Consequently, tremendous effort is under way to establish standards and codes of good practice at the international level that build on and offer the potential to globalize the standards that exist within the most advanced nations. New standards are being defined and existing ones refined. The IMF has been formulating standards or codes of good practice for governments in its core domain of responsibilities, which are already well advanced or being implemented. Many agencies have been working to develop standards in their areas of expertise: accounting, auditing, corporate governance, payment and settlement systems, insurance, and bankruptcy. IOSCO was among the first agencies to make a concerted response to the crisis, rapidly bringing to completion in Nairobi last September a set of Objectives and Principles of Securities Regulation that provide a pragmatic launching pad for national regulators to establish codes tailored to their own countries. What is more, the objectives on which those principles are based—protecting investors; ensuring that markets are fair, efficient, and transparent; and reducing systemic risk—can serve as a guide for all of us working on standards and codes of good practice.
In the critical area of financial sector strengthening, the IMF and the World Bank are cooperating closely to help promote stronger financial systems, based on the internationally accepted Basle Core Principles. But there is scope for even deeper international cooperation, and the Financial Stability Forum that has just been established to encourage dialogue among the many relevant national and international agencies will make an invaluable contribution.
What are the implications for the IMF? Our activities are being affected in some quite profound ways. At one level, we have been asked to take the initiative to define standards in three areas:
• The IMF began to formulate standards for data dissemination shortly after the onset of the Mexican crisis. These are now fully operational, and the more demanding Special Data Dissemination Standard (SDDS) has now been adopted by about one-fourth of the membership, with the large majority of those countries participating in capital markets.
• In April 1998, the Interim Committee adopted the Code of Good Practices on Fiscal Transparency. Since then, we have made this code operational through the preparation of an implementation manual and development of a questionnaire that a number of countries are now using to assess the transparency of their fiscal systems.
• The IMF—working together with the Bank for International Settlements, a representative group of central banks, the World Bank, and the Organization for Economic Cooperation and Development, among others—has prepared a draft code of good practices on transparency in monetary and financial policies. The unusually broad participatory approach used in this case will continue through consultations with the public and other agencies, with a view to finalizing this code before our Annual Meetings in September.
Looking to the future, new priorities are emerging for the IMF. With many agencies now preparing or updating their standards, principles, and codes of good practice, attention is shifting to the challenge of implementation. There are no special difficulties within the domain traditionally covered by IMF surveillance, but the question arises beyond that, since many agencies do not have the capacity to conduct the country-by-country consultations that will be necessary. Although the IMF does not yet have the expertise to assist in implementing many of the new standards, it is in a unique position to contribute to their dissemination and, with the help of the standard-setting institutions, to contribute to their implementation. The IMF’s mandate enables it to have regular contacts with all member countries for policy discussions. This has led to a number of calls for the IMF to use its surveillance to play a significant role in encouraging the implementation and monitoring of observance.
The precise mechanics of this have yet to be worked out, but it will clearly build on the experience that we will gain in implementing the standards that are the direct responsibility of the IMF (data dissemination and transparency in fiscal, monetary, and financial policies). It will also build upon the collaborative approach with the World Bank under the Financial Sector Assessment Program that we have recently formalized. Another proposal is that countries should prepare transparency reports. In a first experiment, three countries—Argentina, Australia, and the United Kingdom—have volunteered transparency reports. We will continue to work with our members on this most promising avenue.
A further reason for the IMF to become involved in encouraging and assessing the implementation of standards arises from the important adaptation in our functions that follows from the newly established Contingency Credit Lines (CCL). One of the criteria for access to the CCL is the country’s “progress in adhering to relevant internationally accepted standards,” and clearly judgment calls will have to be made by the IMF.
In executing these new tasks, the IMF will have to enhance and supplement its in-house expertise by relying heavily on the skills, resources, and advice of the many agencies engaged in defining standards. But, even more, we would look to the standard-setting agencies to play an active role in developing methodologies for assessing observance of their standards. We shall have to develop with IOSCO and organizations like it a high degree of collaboration. As we proceed, the most pressing needs will be for technical assistance in countries adopting new standards, and the human resource constraint may well be the largest challenge we face. An uncommon degree of cooperation among the many international bodies and national agencies is now essential to meet this challenge.