Speech

Working for a Better Globalization -- Remarks by Horst Köhler, Managing Director, IMF

January 28, 2002

Working for a Better Globalization
Remarks by Horst Köhler
Managing Director, International Monetary Fund
Conference on Humanizing the Global Economy
Sponsored by the Canadian Conference of Catholic Bishops,
El Consejo Episcopal Latinoamericano, and
The United States Conference of Catholic Bishops
Washington, DC, January 28, 2002

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1. Cardinal Law, ladies and gentlemen, distinguished representatives of the faith community and civil society. It is an honor to address this conference on humanizing the global economy.

2. The critical debate on globalization has been subdued since September 11. But the important issues it raises have not gone away, and need to remain at the core of national and international policy agendas. The tragic events of September 11 have surely widened public understanding and shaken the complacency that led many to behave as if developments in remote countries and societies could be safely ignored.

3. Globalization—the process through which an increasingly free flow of ideas, people, goods, services, and capital leads to the integration of economies and societies—is not simply being imposed upon us. It is the product of forces for change that are deeply embedded in human nature—the desire for a better life, for new and better ways of doing things, and for expanded horizons and freedom of choice. It also reflects political choices in favor of more openness, which for the most part have gone hand-in-hand with the consolidation of democracy.

4. The global economy was actually more integrated at the end of the 19^th Century than it is today. But globalization was interrupted in the first half of the 20^th Century by a wave of aggressive nationalism and protectionism, which formed a breeding ground for depression and world war. Since World War II, democracy and free markets have gotten back on track—even more so with the ending of the Cold War. As a result, the past 50 years have indeed been a period of growing economic and political freedom and rising prosperity. Global per capita income has more than tripled, and most of the world has experienced major improvements in literacy and life expectancy. Among the biggest gainers have been developing nations that are home to half of the world's population, which moved to take advantage of the opportunities of the global economy over the past two decades. These countries—whose ranks include Brazil, Chile, China, India, Korea, and Mexico—were able to double their share in world trade and raise per capita incomes. Their experience demonstrates that integration into the global economy can bring major advantages for developing countries.

5. But there is equally clear evidence that far too many of the world's people have been left behind. The disparities between the world's richest and poorest nations are wider than ever. Nearly three billion people who are trying to survive on less than $2 a day deserve the chance for a better future. Poverty is not just the greatest challenge to peace and stability in the 21^st Century, but our greatest moral challenge as well.

6. Trying to turn back the clock and reverse the process of globalization will not solve the problems of the world. Integration into the global economy still has a huge potential for improving human welfare. Realizing this potential obliges us to work for a better globalization—one that is more inclusive, and seeks a better balancing of the risks and benefits. There is an urgent need to develop a political concept for one world, to guide and shape the process of globalization.

7. Most of all, globalization requires cooperation, along with institutions to organize many of its forms. And to engage the true commitment and support of the world's people, that cooperation needs to be based on shared principles and rules. What is most important?

• First, all countries need to have trust that their voices will be heard, and their interests recognized. As Pope John Paul II said at the gathering of religious leaders in Assisi last week, listening to one another "...serves to scatter the shadows of suspicion and misunderstanding."

• Second, there must be trust that each country will live up to its own responsibilities and take into account the effects of its actions on others.

• Third, international decision-making should be seen to respect national and local responsibilities, religions, cultures, and traditions. And in this context, the Catholic Church can be a leader in building bridges of tolerance between peoples and religions of the world. Wherever possible global action should be built upon a foundation of inclusion, broad participation and local initiative.

• And finally, a global economy needs global ethics, reflecting respect for human rights but equally recognition of personal and social responsibility. No matter what their religious convictions, people living together in local communities have always recognized and responded to common moral principles, such as sharing with those who have less, and protection of the vulnerable. As the world has become more integrated and interdependent, the scope for applying such fundamental values has widened.

8. In my understanding, the Bretton Woods Institutions—the IMF and World Bank—are part of the workforce to make a better globalization. They were created in 1944 to help restore and sustain the benefits of global integration, by promoting openness, trust, and international cooperation. And despite all the criticisms, if these institutions did not already exist they would need to be invented. They pursue a common objective of promoting broadly-shared prosperity, with a good division of labor and close partnership to increase their joint effectiveness. The World Bank thus concentrates on long-term investment projects, institution-building, and assistance in dealing with social, environmental, and poverty issues. For its part, the IMF focuses on the functioning of the international monetary system, and on promoting sound macroeconomic policies as a precondition for sustained growth. Private capital flows have become the most important source of financing for growth, productivity and job creation. But they can also be a source of volatility and crisis. This obliges the IMF to help countries take advantage of the opportunities of global capital markets while minimizing the risks, and to work for the stability of the international financial system.

9. The greatest assets that the Bretton Woods institutions have in fulfilling these objectives are their global membership and their culture of consensus-building, trust and mutual respect. Particularly since the Asian crisis, the IMF is in a process of reform and change, designed to strengthen its cooperative nature and improve its ability to serve member countries.

• The IMF has gone from being a relatively closed organization to one that is overwhelmingly open and transparent, as anyone who has looked at our Internet website over the past year can testify. Equally, we are encouraging and promoting transparency in member countries.

• The IMF has led a conceptual sea-change in economic governance, based on using standards and codes for sound economic and financial management and corporate governance, along with its annual surveillance of member countries, to create a level playing field for the global economy.

• We are working on a comprehensive strategy to safeguard the stability and integrity of the international financial system as a global public good. In particular, the joint IMF-World Bank Financial Sector Assessment Program (FSAP) has become the core of our efforts to strengthen domestic financial sectors, combat money laundering, and help to thwart the financing of terrorism.

• We are taking steps to streamline IMF conditionality and make room for true national ownership of reform programs. Conditionality remains essential, because good policies are necessary for stability and growth. But this does not mean we should lecture or dominate our members. Sustained progress of programs requires that countries take responsibility for them, which means they themselves must believe that reforms are in their best interest.

• Finally, more than ever, the IMF has become an institution that listens and learns, and not just from its member countries. We recognize and value the role of religious and civil society organizations in articulating the moral foundations for collective action and building grass roots support.

10. 2001 was a very difficult year by any standard. Even before September 11, economic activity was weakening throughout the world, and the terrorist attacks and their aftermath have deepened the risks and uncertainties. The good news is that, due also to the initiatives taken by the IMF, both individual economies and the international financial system as a whole have so far demonstrated great resilience. The bad news is that the global downturn has made life even more difficult for vulnerable countries, while also threatening to further marginalize the world's poorest nations. This is why I have called strongly for the industrial economies, in particular, to do everything in their power to restore the momentum of global growth.

11. We at the IMF are deeply concerned about the social turmoil and hardship in Argentina. We augmented our financial support for Argentina twice in less than 12 months. By late last year, however, it had become clear that there was not the necessary political unity in Argentina to implement the strategy that they themselves had chosen. I am prepared to discuss the IMF's role in this tragedy. But we need to be careful: the core problem, and thus the key to a solution, clearly lies within Argentina itself. During the past decade, there were important reforms and achievements. But reforms were not pursued consistently or comprehensively. In particular, there was not a sound fiscal policy, and the institutional framework for state and society remained too weak. I trust that President Duhalde recognizes the causes of the crisis. His intention to move to a unified, floating exchange rate, backed by sound monetary and fiscal policies, is good news. At the same time, there have been other signals that are confusing to investors and to the Argentine people. Clearly there is a need for a comprehensive and coherent plan to overcome the economic and social crisis, although we should also be aware that not everything can be remedied in a few weeks. My conclusion out of this is that the Argentine authorities should work even more closely with the international community. For the IMF, it goes without saying that we want to help Argentina find its way out of this crisis. Within our mandate, we stand ready for dialogue, technical assistance, and also financial support.

12. There are clearly lessons for the IMF from the experience in Argentina and other crisis countries. First, going forward, the IMF needs to concentrate even more on crisis prevention, and improve its ability to generate preemptive policy action before a crisis can unfold. Second, we need better ground rules for the respective roles of the IMF and the private sector in dealing with crises. As part of this, the IMF has suggested the establishment of a Sovereign Debt Restructuring Mechanism—a sort of Chapter 11 bankruptcy procedure for countries with unsustainable debt situations. Third, reform and structural change are crucial for sustained growth, but they need to be broad, well grounded, and socially equitable. Fourth, and related, a country opening up to the global economy needs to have the domestic institutional capacity to handle this in a productive manner and, as a general rule, should adhere to a flexible exchange rate regime. Altogether a market economy, integrated into the world, must possess healthy institutions and a supervisory and regulatory framework that safeguards competition, promotes equity, and fosters good sovereign and corporate governance. And this means also that the IMF has to cooperate even more effectively with the World Bank and the regional development banks, which are mainly responsible for institution-building and social protection.

13. I do think it is right for the IMF to remain strongly engaged with the world's poorest countries, because it is a universal institution dedicated to helping all its members. As a guidepost for reducing world poverty, we have joined other nations and international institutions in supporting the United Nations' Millennium Development Goals for 2015. While these goals are ambitious, in my view they can and must be achieved. But for this to happen, the international community can't continue with "business as usual!"

14. The fight against world poverty will only be successful if it is based on the political will and capacity of "self help"—the efforts of poor countries to establish peace, the rule of law, and good governance at home and unlock the creative energies of their people. It requires investment, not least in human capital and infrastructure, as well as economic policies and institutions that encourage private initiative and healthy integration into the global marketplace. I am encouraged to see this approach reflected very concretely, for instance, in the New Partnership for Africa's Development (NEPAD). The greatest asset we have in fighting world poverty is the political will and determination in developing countries to tackle these issues.

15. To make the fullest possible use of this asset, the IMF and World Bank have worked to establish a country-led process for the development of poverty reduction strategies. Earlier this month, our International Conference on Poverty Reduction Strategies brought together several hundred representatives from the official community and civil society, to assess the first two years of experience with the PRSP process. The Conference demonstrated that the PRSP approach is accepted as a promising way to design poverty reduction strategies that can command broad support, both within a country and among its external development partners. But participants were troubled by the inherent tensions in the process and the administrative burdens that it generates. The proposals they made at the Conference will be key inputs for our Executive Board's review of the PRSP process, and the IMF's Poverty Reduction and Growth Facility, this March. I see clear room for further improvement, not least, through deeper analysis of the root causes of poverty, and increased technical assistance from the IMF and the donor community to build institutional capacities.

16. But self-help, while essential, is only half of the equation. To bring about a decisive reduction in world poverty, the efforts of poor countries must be matched by stronger, faster, and more comprehensive support from the international community. Thanks in no small measure to the strong interest and support of civil society and faith organizations (including the Church), it was possible to build consensus among wealthy nations to finance increased debt relief for heavily-indebted poor countries. Now the IMF and World Bank are spearheading an effort under the enhanced HIPC Initiative that has already provided $36 billion of debt relief to 24 poor countries. Jim Wolfensohn and I have pledged every effort to make it a success, by working to see that the resources are used effectively for poverty reduction, and by doing our utmost to ensure that the benefits reach the remaining eligible countries—including difficult post-conflict cases.

17. But debt relief is no panacea, and the campaign for debt cancellation must not detract from decisions that are needed for durable progress in reducing world poverty. Countries will not escape the poverty trap without developing the legal and institutional foundations of a modern economy, including the ability to borrow and lend safely. Moreover, the resources available from further debt relief or outright cancellation do not measure up to the potential for action by the wealthy societies in the key areas of trade and aid. As we prepare for the United Nations Conference on Financing for Development in Monterrey, and the Johannesburg Conference on Sustainable Development, I would urge the faith-based and civil society organizations to bring the same energy and commitment to a new campaign for increased aid and better access to international trade, that they have shown in advancing the case for debt relief.

18. The achievement of the UN target of 0.7 percent of GNP for official development assistance should be seen as a concrete expression of solidarity between wealthy nations and the world's poorest citizens. Today the average level of official development assistance in the OECD countries is only 0.22 percent of GNP—an unacceptably low figure that translates into a shortfall of over $100 billion a year in aid flows. And the United States is at the bottom of the list, with official development assistance of only 0.10 percent of GNP. A successful effort to enact legislation in wealthy countries to meet the UN target within the next decade would, in the first year alone, generate enough new resources to meet the estimated $10 billion annual requirement for a new global effort at HIV/AIDS prevention and treatment.

19. Trade liberalization is the best form of help for self-help, both because it offers an escape from aid dependency and because it is a win-win game. In my view, the true test of the credibility of wealthy nations' efforts to combat poverty lies in their willingness to open up their markets and phase out trade-distorting subsidies in areas where developing countries have a comparative advantage—as in agriculture, processed foods, textiles and clothing, and light manufactures.

20. It is unconscionable for the United States, Japan, and the European Union spend hundreds of billions of dollars on agricultural subsidies to maintain marginal activities for the benefit of a small segment of their population, while undermining agricultural sectors that are central to peace and development in poor countries. Yet this is exactly what is happening now.

• For example, in the United States, price support payments for cotton cost more than $2 billion a year. This is larger than the annual cotton production of all of sub-Saharan Africa. Subsidized US production has taken over 30 percent of world cotton exports, while cotton sectors that are crucial for economic life in some of the world's poorest countries, like Benin, Chad, Mali, and Togo, are devastated.
• In the European Union, governments spend over $2 billion a year to buy up excess domestic sugar production, and the resulting surplus is dumped on world markets. A few developing countries get preferential access to the EU market, under a quota system, but this just means that other sugar producers in Latin America, Asia, and southern Africa lose even more.
• Japan's agricultural subsidies are the highest of any advanced country, so that rice prices, for instance, are 8 times as high as the world market price. This means that developing countries—especially in Asia—lose major trading opportunities.

The United States is a leader in promoting free trade and democracy. If it could exercise this leadership also in the phasing out of such unsustainable subsidies, it would pay off, not just for poor and vulnerable countries, but for the American people.

21. I am convinced that globalization provides the incentive, the obligation, and the opportunity to make the world a better place for all its people. The IMF and the Catholic Church are global institutions with their own areas of expertise and influence, and wherever possible they should work together to build a better globalization and fight world poverty. I realize that we may not always agree on every issue. But I believe that well-informed dialogue and advocacy is essential, not least when it includes suggestions for improving the IMF. And so I urge you to keep pricking the world's conscience, to keep looking for practical ways to put solidarity into action—not least, by pressing for action on increased aid, trade, and more rapid structural change in the advanced economies. Cardinal McCarrick once told me that the poor and the rich should be partners in making a better world. The IMF wants to be a good catalyst in that partnership.