I welcome the decision to hold this meeting in Hong Kong, as a demonstration of its important role in regional and international financial markets. That is also the reason that the IMF decided to open an office here last October, with the help and encouragement of the Chinese and Hong Kong SAR authorities. This has strengthened our monitoring of regional and global financial markets at a time when careful attention to market developments is particularly needed.
Global and regional economic outlook
The current slowdown in world economic activity is testing the resilience of emerging market economies. Here in Asia, the past two years have brought a sharp recovery from the financial crises of 1997 and 1998. As a result of domestic policy reforms and strong export demand from the advanced economies, growth in Asia has resumed, fiscal and external positions have strengthened, and many countries have regained access to international capital markets. Now there are concerns that the weakening of exports and capital inflows may trigger a reversal of these gains. I believe that Asia will weather the storm. In most Asian countries, the risk of a new crisis has been greatly reduced through stronger macroeconomic fundamentals and the adoption of more flexible exchange rate policies. Unfortunately, the record is mixed when it comes to financial sector reform, improving governance, and strengthening the investment climate, and these remain sources of vulnerability in some cases. But it is clear that markets do differentiate, and countries that stay the course on these essential reforms should experience relatively good growth performance. And it goes without saying that political stability and respect for law and order are crucial for investment, growth, and job creation.
Asian countries have demonstrated that integration into the global trade and financial systems can bring opportunities for higher productivity, increased trade, stronger growth, and more jobs and higher incomes. But the pace of change constantly challenges the ability of societies and political structures to adapt. Support for integration into the global economy is undermined by the fact that too many people in the world have so far failed to share in the benefits. And some countries in Asia feel they have been left too exposed to volatility in international capital flows. Safeguarding stability and world prosperity obliges us to find better methods of international cooperation to address all of these concerns.
Crisis prevention and financial stability
In the wake of the Asian crisis, a broad work program was launched to strengthen the international financial architecture. I do think that these initiatives are making the international financial system more resilient. And while there can be no guarantees, this should give us greater confidence that the international financial system will withstand the current period of testing.
Despite all that has been accomplished, developments in international financial markets over the past few months underscore the importance of concentrating even more on crisis prevention. Last month’s meeting of the International Monetary and Financial Committee (IMFC) confirmed the IMF’s strategy and work program in this area.
Highest on our agenda for the coming months will be further work on early warning of potential crises. By this I do not mean that the IMF would intend to become a rating agency. What is crucial is that we sharpen our ability to identify emerging problems and bring about early and preemptive policy action in member countries. For this, we need to combine quantitative indicators of vulnerability with judgment from the field and from the markets. To ensure the maximum beneficial impact, it will be important for this work to move forward with the full participation of the IMF’s membership. In the process, we will need to take care that our warnings about potential crises do not become self-fulfilling prophecies.
The new International Capital Markets Department in the IMF will have to play a major role in this effort. It will serve as the IMF’s center of expertise, information, and analysis on capital market issues and as its primary point of contact with private and official institutions working in this area. By deepening our understanding and judgment about the operation of capital markets, this new department will strengthen the IMF’s capacities for crisis prevention and management and for safeguarding the stability of the international financial system. This department will also play a major role in the IMF’s efforts to address conceptual issues affecting global financial markets. For example, I would like to review—together with the private sector—the experiences with financial bubbles and volatility in international capital flows and, on this basis, to contribute to forward-looking financial markets policy. I also see an important role for the new department in helping members in their efforts to gain access to international capital markets.
A market economy requires debtors and private creditors to bear the consequences of their decisions.
New public-private partnership
International capital markets have been an engine of innovation and rapid economic growth in the postwar era, and they will take on an even more crucial role in the twenty-first century. There is obviously a need to adjust economic policy concepts to these developments. This change should include building a new partnership between the private financial sector and public institutions like the IMF.
A year ago, in outlining my initial thoughts on the future role of the IMF, I gave a commitment to work constructively with the private financial market participants. This approach is now reflected in a number of key elements of the IMF’s work program, including our informal but regular dialogue with senior representatives of private financial institutions, through the Capital Markets Consultative Group (CMCG). Our membership has welcomed this dialogue as an integral part of the task of safeguarding the stability of the international financial system. And indeed, I see the common ground for this in the fact that we all have a strong interest in limiting the risk of financial crises and thereby contributing to sustained growth and development in the world. Such enhanced interactions should not be seen as a way for selected creditors to gain a competitive advantage, but as a way to achieve that common interest.
Last year in Prague, the IMF’s membership took a major step forward with the agreement on a framework for private sector involvement in crisis prevention and resolution. Because prevention remains the first and best line of defense against crises, we are looking to private creditors to make better use of information on standards and codes, and to exploit the full potential of collective action clauses, contingent lines of credit, and procedures for a regular dialogue with borrowing country officials, as a complement to preventive actions by the IMF and its member countries. Notwithstanding these steps, the basic principle of the framework is that a market economy requires debtors and private creditors to bear the consequences of their decisions. This means they cannot expect to be “bailed out” by the official sector. I appreciate that the members of the IIF also recognize this principle. With this in mind, I do think it is right to work as much and as long as possible with market-oriented, voluntary solutions negotiated between debtors and creditors.
The Prague framework also made it clear that more concerted approaches to private sector involvement may be required in exceptional cases—including, as a last resort, the use of temporary payment standstills to provide breathing space for working out an orderly and cooperative solution. Obviously, any decision to move in this direction would need to be based on a careful weighing of the costs and benefits. We do not want to risk blocking the creativity of markets and harming emerging market economies. But we have also to recognize concerns about moral hazard. To provide a basis for sound judgment about the approach to take in concrete cases, we will need more adequate information and research—for instance, on the assessment of debt sustainability, prospects for regaining market access after a crisis, comparability of treatment among creditors, and the risks of contagion. The IMF will be engaged in a work program in these areas over the coming months, including outreach to private investors and creditors. I am confident that we will come to solutions that strike the right balance between a rules-based approach and judgment based on the situation in individual country cases. I recognize that the private sector is not one homogeneous entity, but consists of different institutions with different investor perspectives and interests. Therefore, it is all the more important to hear more concretely your views (possibly through the IIF) on the issues of rules and predictability, and how best to strengthen the role of the private sector in crisis resolution. I expect the CMCG will also play an important part in this process.
We know that “the business of business is business.” But business leaders also need to be aware of a wider responsibility. There is a growing critical discussion about globalization, and there is the potential for a political backlash against capital market liberalization and integration into the global economy. Therefore, it is important for the financial industry to demonstrate not only political sensitivity but also concrete capability for self-policing. I would encourage, for example, the private sector to work more ambitiously and systematically on voluntary codes of conduct to reduce the incentives for excessive risk-taking. Or, to put it differently, I encourage you to show leadership in promoting a culture of sustainable value creation. This is an objective for which it is well worth joining forces between the private and the public sector. The IMF looks forward to working with you.