I see two major challenges to which the membership of the IMF must respond. First, international private capital flows have become a major source of growth, productivity, and job creation. But they can also be a source of volatility and crisis. The crises of 1997-98 have heightened the awareness that the stability of the international financial system is an important international public good. Second, 10 years after the end of the Cold War, there are more opportunities than ever to promote a better world. Ideological divides have faded, and new technologies and the expansion of the marketplace have opened new horizons for shared prosperity. But at the beginning of the new millennium, we are also aware of huge unsolved problems. The most pressing of these is poverty, which is becoming a major threat for political stability in the world.
The philosopher Karl Popper said, “All life is problem solving.” This is also my approach and how I see my role as Managing Director of the IMF. In my vision, the IMF should
• strive to promote sustained noninflationary economic growth that benefits all people of the world;
• be the center of competence for the stability of the international financial system;
• work in a complementary fashion with other institutions established to safeguard global public goods; and
• be an open institution, learning from experience and dialogue, and adapting continuously to changing circumstances.
In this vision, I see the IMF as an active part of the workforce to make globalization work for the benefit of all. This vision builds on an enhanced partnership with the World Bank, based on a clear sense of the complementarities of our two institutions.
Globalization and cooperation
If the IMF did not exist already, this would be the time to invent it. More than ever, globalization requires cooperation and institutions that organize this cooperation. Its 182 members make the IMF a truly global institution, and the cooperative nature of this institution is an invaluable asset. We should all seek to preserve and strengthen this asset, which requires trust in cooperation. That means trust that the interests of all members are taken into account and, equally, trust that each member lives up to its own responsibilities.
Members need to listen to each other, and the IMF should see itself as a partner to its members and as a provider of help for self-help. And it means that the IMF’s mandate is directed to promoting the international common good.
Economic growth is not everything, but without growth we get nowhere. Growth requires innovation, adaptation, and reform as permanent features of societies. To a remarkable extent—and notwithstanding severe strains and hardships—developing countries and transition economies have embraced this challenge. But this process is not a one-way street. Many industrial countries have not yet developed enough of a sense of urgency to deliver their part of structural change to make globalization work for all. This includes, crucially, that industrial countries recognize that it is both in their own interest and in the interest of the global economy to take a strong lead in opening their markets. It also includes the necessary awareness of the importance of balanced exchange rate relations between the major currencies. I welcome the action taken by the ECB [European Central Bank], together with other major central banks, to bring the euro better in line with the fundamentals of the European economy. This action also demonstrates the institutional maturity of the ECB.
If the willingness of the developing and emerging market countries to tackle energetically their homemade problems is combined with more determination in the industrial countries to reform and open their markets, we will create a win-win situation for all and thus make the United Nations’ objective of halving the share of people living in poverty by 2015 achievable.
Refocusing the IMF
The IMF’s focus must clearly be to promote macroeconomic stability as an essential condition for sustained growth. To pursue this objective, the IMF has to concentrate on fostering sound monetary, fiscal, and exchange rate policies, along with their institutional underpinnings and closely related structural reforms. And more important than ever in the modern economy is the IMF’s mandate to oversee the international monetary system and ensure its effective operation. This virtually obliges the IMF to give particular attention to systemic issues of financial markets, both domestic and international.
To fulfill this task effectively, the IMF must gain a better understanding and judgment of the dynamics of international capital markets and the operations of private financial intermediaries.
My ambition is not to have more and more lending programs but to place crisis prevention and, thus, surveillance at the center of the IMF’s activities. For this, we must develop a culture in the IMF where member countries are eager to seek the IMF’s advice early and voluntarily. In our bilateral surveillance, we need to place particular emphasis on identifying sources of external and financial sector vulnerability and on helping our member countries cope with volatility in international capital flows. The IMF should further develop its multilateral surveillance with a focus on the early identification of systemic issues and risks, particularly in global financial markets. We should also pay increased attention in our policy advice to issues of regional integration, including through regional surveillance. In its advice, the IMF should show respect for the cultural and historical traditions of its member countries and should not lecture. But, at the same time, it must be candid in conveying its professional analysis and judgment to member countries.
The International Monetary and Financial Committee has launched a wide range of measures to strengthen the global financial architecture, particularly through improved data transparency, standards and codes, vulnerability assessments, and the Financial Sector Assessment Program, a joint initiative of the IMF and the World Bank. Taking stock today, we can state that the international financial system is stronger now than before the outbreak of the Asian crisis. But we should beware of complacency. Financial sectors in many countries are not yet as robust as they need to be, and there is a risk that the high growth rates could weaken the momentum of reform. All members have to ask themselves how they can accelerate the implementation of these reforms. I think it is in the interest of all that the entire membership be fully involved and take full ownership of the initiatives in this area.
An IMF focused on promoting the stability of the international financial system has to be pointed and rigorous in its assessment of the appropriateness of exchange rate arrangements in member countries. We also need to be able to reach clear conclusions about the right balance and sequencing between capital account liberalization and financial sector development. And I think the IMF has to be more proactive in the discussion of the appropriate regulation and supervision of international financial markets.
My discussions with private sector participants have confirmed that the crisis-prevention work of the IMF and the efforts to strengthen the global financial architecture will bear fruit. However, we have to be aware that crises can occur again in an open and dynamic global economy. Our work should make crises less frequent and less severe. And we should promote financial sectors that are able to absorb shocks.
For crisis resolution, the IMF needs to have efficient lending instruments and adequate resources to mount a credible response to crises. But its resources are limited, and, thus, the IMF cannot be seen as a lender of last resort. Therefore, it was important to conduct a comprehensive review of IMF facilities. The outcome clearly strengthens the catalytic role of the IMF and the revolving character of its resources. It demonstrates that the cooperative nature of the IMF is solidly rooted in its membership. With the set of differentiated, but streamlined and sharpened, facilities, the IMF is now better equipped to deal with crises and prevent contagion.
The rapid return of private capital to a number of crisis countries underscores that it makes sense to engage constructively with the private sector in both the prevention and the resolution of crises. Private investors know that they must assume full responsibility for the risks they take. There is broad agreement that the operational framework for private sector involvement should rely as much as possible on market-oriented solutions and on voluntary approaches. It is also undisputed that there may be exceptionally difficult cases that call for more concerted approaches to involve the private sector, including the possibility of standstills as a truly last resort. Judgment will always be a crucial element. We need to explore further the middle ground between these approaches to make the framework operational.
Poverty and debt reduction
The PRGF [Poverty Reduction and Growth Facility] is an innovative instrument in the IMF’s efforts to make globalization work for the benefit of all: first, because it aims at tackling poverty from its root causes; and, second, because its concessional character demonstrates practical solidarity with the poor. Disengagement from the poor countries would be inconsistent with the mandate of the IMF and it would also deepen the division of the world.
The PRGF is also a key vehicle to help make the HIPC [Heavily Indebted Poor Countries] Initiative a success. In no area is cooperation between the Bank and the IMF in the coming months more critical than here. The ultimate test of the success of this initiative is how effectively debt relief contributes toward poverty reduction.
A real breakthrough in poverty reduction will be possible only if private saving and investment take firm roots in these countries and if a much larger part of the savings generated in the world becomes available to them. In this context, credit is and will remain an important financing instrument for investment and is thus also crucial in any longer-term strategy for fighting poverty. Therefore, we must not lose sight of the need to preserve and build a sound credit culture. Trust in creditor-debtor relations is indispensable for a sustained flow of investment capital to the developing countries and—in a wider context—for the long-term stability of an integrated international financial system. This highlights even more the need for steady work on the ground to strengthen the institutional underpinnings for a productive private sector in the developing countries. Every day that passes unused for this work is a day lost in the fight against poverty.
IMF transparency and accountability
The IMF of the future should be a strong advocate of improved governance in all member countries. It is, therefore, only logical that the IMF itself has to be receptive to calls for increased transparency and accountability. There has already been a sea change in opening up to the public. And we have just decided to expand further our program of voluntary publication of country reports and staff assessments. Moreover, the Executive Board has now paved the way for making an independent Evaluation Office in the IMF operational [see page 307]. However, we also have to recognize that there are areas where a frank and candid discussion would be hampered if it had to take place in public. The IMF has to strike a balance between openness and the member’s desire for candid and confidential advice. And the IMF must explain itself better—what it is and what it does—particularly in program countries. Thus, the IMF has to expand its dialogue with the public and reach out, not least to civil society at the regional and local levels.
The IMF can make a difference for long-term growth to benefit all people of the world. For this, we have to be focused and concentrate, above all, on the stability of the international financial system. We will benefit from the enhanced partnership with the World Bank and cooperate closely with other institutions.
I see the discussion on changes in the IMF as a permanent process and consider it very important that these further discussions have their center within the IMF itself. I know that staff, management, and the Executive Board are deeply committed to the IMF’s mandate and want to give their best. I call on the membership of the IMF to make good use of this dedication and work with the IMF in a new spirit of global partnership.