Address to Council of the Americas: Köhler stresses need for national commitment and international support for Americas

Following are edited excerpts of an address given by IMF Managing Director Horst Köhler to the Council of the Americas on May 7 in Washington. The full text is available on the IMF’s website (www.imf.org).

Abstract

Following are edited excerpts of an address given by IMF Managing Director Horst Köhler to the Council of the Americas on May 7 in Washington. The full text is available on the IMF’s website (www.imf.org).

On balance, I assess the situation in Latin America and the Caribbean as being fundamentally better today than it was 10 or 20 years ago. Countries throughout the region have clearly embraced democracy, open markets, and macroeconomic stability.

It is clear that Latin America and the Caribbean still face difficult challenges. In particular, too many people still live in poverty. Steps to strengthen governance and fight corruption have often lagged behind other reforms, undermining credibility and investor confidence. And because many countries are major borrowers in international capital markets, they are particularly vulnerable to volatility in the markets. A strategy to meet these challenges is to promote transparency, competitiveness, and sound democratic institutions. Because the people in this region—as in the rest of the world—strive for a better future, this will pay off in more investment, stronger economic growth, and better social development. This will also pave the way for better access to capital markets. In this regard, efforts to strengthen the soundness of banking sectors have already put many Latin American economies in a better position to withstand external shocks.

IMF and crisis prevention

Recent developments in international financial markets have clearly demonstrated that the IMF needs to work even harder to put crisis prevention at the heart of all its activities. Highest on our agenda for the coming months will be further work on early warning of potential crises. For this, we need to combine quantitative indicators of vulnerability with judgment from the field and from the markets. This should involve cooperation with the private sector. 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 and with due care that our warnings about potential crises do not become self-fulfilling prophecies.

As part of this effort, the IMF also needs to do a better job of keeping up with developments in international capital markets. The new International Capital Markets Department will help the IMF deepen its understanding of, and judgment on, capital market issues. Our informal but regular dialogue with senior representatives of private financial institutions, through the Capital Markets Consultative Group (CMCG), will further strengthen our work on crisis prevention and resolution.

The philosophy behind the IMF’s Contingency Credit Lines (CCL) is that good policies are still the best precaution that our members can take against crises. This IMF lending facility is designed to reward countries that have established a strong track record of good policies in normal times and help them resist contagion. Mexico could be one of the first countries to make use of the CCL.

No matter how much effort goes into crisis prevention, we must recognize that economic disruptions and crises cannot be ruled out in an open and dynamic global economy. Therefore, our objective should not be to have more and bigger rescue packages, but to reduce the frequency and severity of crises.

But I also want to emphasize that the IMF’s track record in crisis management has not been all that bad. In this region, for instance, the IMF played an important part in Chile’s successful transition from economic and institutional disaster to democracy and sustained growth. More recently, the IMF’s contribution was crucial in enabling Mexico and Brazil to overcome their crises and resume strong economic growth. Since then Mexico has repaid all of its borrowings from the IMF, and Brazil almost all, and both are sticking to good policies.

I am also confident that Argentina and Turkey will weather the storm. Both of them have taken strong ownership of measures to address their problems, and both have chosen a market-oriented approach. These efforts deserve strong support. And let me make clear that the IMF stands ready to help any member country that is willing to adopt the right policies.

Promoting growth, reducing poverty

Because private flows are an indispensable source of financing for development, another crucial function of the IMF’s new Capital Markets Department will be to strengthen our ability to help countries gain access to international capital markets.

Only by getting access to investment capital from the rest of the world will the IMF’s poorest member countries be able to make a real breakthrough in poverty reduction. The IMF should therefore be ambitious in assisting them in this process. This is one of the reasons why the IMF must stay engaged with poor countries. At the same time, it is clear that the IMF must remain focused on its mandate—promoting sound macroeconomic policies and domestic and international financial stability as preconditions for sustained growth.

Bolivia, Guyana, Honduras, and Nicaragua are benefiting from debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative. But the most important thing we can do to help fight poverty is to empower poor countries to help themselves. Crucial for this is increased access to markets in the industrial countries, in particular for products that matter the most to the HIPCs, such as agricultural products, textiles, and other manufactured goods. Here, no industrial country is free from sin.

The expansion of international trade has been one of the channels through which globalization has contributed to unprecedented world prosperity in our lifetimes. Other channels have included technological innovation—especially in transportation, communications, and medicine—rising standards of education, the spread of democracy and free markets, and the growth of international capital markets. Of course, each of these phenomena poses both opportunities and risks. Indeed, 10 years after the end of the Cold War, a plethora of new challenges is confronting us, and there is a vigorous debate about the advantages and disadvantages of globalization. In my view, the opportunities clearly outweigh the risks. And I would much rather face these challenges than the problems of the Cold War.

The Americas are well placed to lead by example and to demonstrate how to secure a good future for all people of the world. The IMF looks forward to supporting them in this effort.

IMF Survey, Volume 30, Issue 10
Author: International Monetary Fund. External Relations Dept.