Speech

The International Monetary Fund: Increasing Economic Opportunities and Meeting the Challenges in the Global Economy -- Remarks by Michel Camdessus

April 11, 1996

It is a great pleasure to have this opportunity to visit Chicago and to talk to you about the activities of the International Monetary Fund. Let me begin by sharing with you a very simple observation about your city: what strikes me about Chicago is that even here, in the center of the world's largest domestic market (in terms of purchasing power), international economic trends are critical. You, the entrepreneurs of Chicago, know this very well. You witnessed the global inflation of the late 1970s and the ensuing economic downturn in the early 1980s, as industrial countries made the inevitable policy corrections. I suspect that you also remember rather clearly how the exchange rate levels of the early- to mid-1980s affected the region's exports! In more recent years, strong growth in world trade and a constellation of exchange rates generally more in keeping with economic fundamentals have contributed to the region's economic rebound. Likewise, the surge in international financial market activity has helped make the "Second City" "first" among the world's foreign exchange futures markets.

Clearly, international economic developments matter here, as the visionary founders of your committee understood quite well thirty years ago. Maintaining a stable and growing U.S. and world economy, expanding world trade, establishing a reasonable degree of exchange rate stability--these issues are fundamental to business here. They are also the fundamental objectives of our business at the IMF. Today, I would like to discuss how the Fund promotes these critical objectives and where some of the remaining challenges lie.

The IMF was founded at Bretton Woods, New Hampshire in the midst of World War II--in the hope that establishing a permanent forum for cooperation on international monetary problems would help avoid the competitive devaluations, exchange restrictions, and other destructive economic policies that had contributed to the Great Depression and the outbreak of war. The international economy has changed considerably since then, and so has the IMF. Its membership, for example, has grown from just 39 countries when the Fund first opened its doors in 1946 to a total of 181 today. But its primary purposes remain the same; they are (and here I quote from the IMF's Articles of Agreement):

• "to facilitate...the balanced growth of international trade, and to contribute thereby to...high levels of growth and real income";

• "to promote exchange rate stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation"; and

• to provide members "with opportunities to correct maladjustments in their balance of payments, without resorting to measures destructive of national or international prosperity."

All of this may sound rather esoteric. But, in fact, the IMF's basic approach to these tasks is quite straightforward: it is to encourage all members--large and small--to pursue sound domestic economic policies and to open up their economies to trade and investment. And what are these policies? Broadly speaking, they consist of:

• disciplined and predictable fiscal and monetary policies. Among other things, this means ensuring that prices are reasonably stable, which, in turn, requires reducing government deficits to a point where they can be financed in a non-inflationary way--and without crowding out productive private investment;

• liberal trade and exchange regimes that facilitate international trade and increase private sector opportunities;

• sound financial systems and flexible markets that promote an efficient allocation of resources;

• transparent regulatory systems that establish clear rules under which the private sector can flourish;

• appropriate social policies that protect the most vulnerable segments of the population; and finally,

• "good governance"--that is, transparent and accountable governments that follow the rule of law.

How does the Fund go about promoting such policies? To begin with, at least once a year, and more often if necessary, the Fund staff reviews all aspects of each member's economic policies and performance--your country is no exception. It then provides its candid assessment to the entire membership. The results of these reviews are discussed by the IMF's Executive Board, which communicates its views back to the country concerned, generally with recommendations as to how the member's policies and performance could be improved. We call this process "surveillance"--and cooperating in this process, by providing the necessary data to the Fund and holding frank discussions with Fund staff, is one of the basic obligations of all IMF members.

Is this surveillance effective? Certainly, the Fund cannot force a country to change its policies. Nevertheless, IMF surveillance has the merit of increasing the transparency of countries economic policies--by bringing key policy issues to the attention of the full membership, providing a forum for a frank exchange of views, and allowing members to assess the impact of one another's policies on their own economies and on the international economy at large. Through this process, the membership can exercise considerable peer pressure and moral suasion over the direction of individual countries policies. And the Fund can identify emerging imbalances and suggest corrective action before an actual crisis develops.

In fact, we have strong evidence that IMF surveillance does work--and it comes from you, the private sector. Countries as diverse as Chile, the Czech Republic, Indonesia, and Korea--and the many other countries around the world that follow the policies advocated by the Fund--are attracting substantial amounts of private foreign investment.

Nevertheless, there are always countries encountering balance of payments problems--whether due to inappropriate policies, adverse developments beyond the control of governments, or a combination of the two. In such cases, the Fund agrees to make its resources temporarily available so that the member can correct the problem without inflicting undue harm on itself or its trading partners. In fact, there are currently over 70 countries that have Fund-supported programs in place or are in the process of negotiating one.

In order to borrow IMF resources, a member must agree to undertake a series of economic reforms. But the specific reforms are chosen by the member, and we attach high importance to the fact that the reform program is "home grown,"--that it is the member's own program. The IMF's job is to ensure that the policy changes contained in the program are sufficiently bold to overcome the member's payments problem and to allow the country to return to a sustainable economic growth path. This is indeed a difficult job, as we almost always intervene in crises, when governments tend to be more attracted by quick fixes than by fundamental reforms. But these are circumstances when complacency would be the greatest disservice to a country. When we are satisfied on these points, the loan is disbursed in installments--usually over one to three years--conditional on the country's meeting agreed performance targets. Often, the Fund reinforces these reform programs by providing technical assistance in the areas of our expertise--such as tax administration and expenditure management, central bank operations, and bank supervision.

The process of economic adjustment is inevitably hard, but the resources provided by the Fund allow the member to make this adjustment more easily and in a more orderly way than would otherwise be possible--without, for example, imposing exchange restrictions or cutting off imports when foreign exchange reserves run out. This is also beneficial for the rest of the world because it minimizes the adverse effects on trade and economic activity on which the health of the international economy depends. Moreover, the fact that a country has a Fund-supported program in place is seen as a signal that policy improvements are underway--giving domestic residents, foreign investors, and others the confidence to bring additional capital into the country.

Perhaps you wonder how all of this is financed? The IMF is not an aid agency, as some suppose--it is a financial cooperative. On joining the IMF, each member country subscribes a sum of money called its "quota." Members normally pay 25 percent of their quota subscriptions out of their foreign reserves, the rest in their national currencies. When a member "borrows" from the Fund, it exchanges a certain amount of its own national currency for the use of an equivalent amount of currency of a country in a strong external position. The borrowing country pays interest at a floating market rate on the amount it has borrowed, while the country whose currency is being borrowed receives interest on the amount of its currency that is being used. You may be interested to know that providing financial resources to the Fund has involved little cost, if any, to the United States. In fact, in many years, the U.S. has actually made money on its net position in the IMF through the interest it receives on other members use of dollars and exchange rate gains.

The IMF has separate arrangements for countries that are unable to pay market interest rates. Specifically, a broad range of countries have provided loans or grants that the IMF uses to make very low interest loans available to our poorest members. We are now examining ways to put these arrangements on a self-sustained footing.

So this, in a nutshell, is how the IMF works. But the question remains: how effectively does it work? Let's consider some of the benefits to date.

First, by encouraging sound economic policies--in both industrial and developing countries--the IMF promotes strong and sustainable growth around the world. As perhaps you know, it was the strong growth in 35-40 developing countries, following policies endorsed by the IMF, that helped cushion the global effects of successive recessions in most industrial countries in 1991-93, permitting world growth to average nearly 2 percent instead of a negative figure. Moreover, having economically healthy and creditworthy trading partners contributes to the export opportunities and general economic prosperity of all members, including the United States. But let's look at more concrete cases.

Promoting sound policies is precisely what the IMF has been doing, for example, in helping the countries of central and eastern Europe and the former Soviet Union in their transition from central planning to market economies. And in most of these countries, growth has now resumed. Moreover, nine of the transition economies--including Albania, Armenia, Croatia, the Czech Republic, Lithuania, Mongolia, Poland, Romania, and the Slovak Republic--are estimated to have grown by 5 percent or more in 1995. In Russia, inflation has been sharply reduced, and there are signs of recovery in industrial activity. As you may know, the IMF Executive Board has recently agreed to provide Russia with roughly $10 billion over the next three years in support of further economic stabilization and far-reaching structural reforms; these include tax reform, trade liberalization, the reinforcement of property rights, privatization, banking sector reforms, and an overhaul of Russia's social protection programs. Certainly, helping Russia establish a stable and growing market economy will improve the prospects for peace and prosperity--and not just in Russia.

Second, when countries follow sound policies, exchange rates tend to be more stable. This, in turn, helps reduce business uncertainties and the cost of doing business abroad. I don't need to elaborate; you will be more interested in knowing that the IMF has been instrumental in the elimination of foreign exchange restrictions--so that today, payments for goods and services are fully convertible in 114 IMF member countries. This has facilitated a tremendous expansion of world trade, which over the last quarter century has grown at 5 1/2 percent per year, far outstripping the 3 1/2 percent annual growth in world GDP. Beyond that, we are striving to establish freer capital movements. Indeed, more than sixty IMF members have eliminated controls on capital transactions. This means that when you put your money into a country, you can get it out again. This has also helped spark the rapid growth of the international capital markets--providing new opportunities for investment abroad, and additional sources of capital for productive activities.

Finally, time and again, when crises have arisen, the IMF has been ready with its support. It has seen as its responsibility providing the expertise and vision needed to come up with pragmatic solutions--and bringing together the financial resources to make them work. This was true during the energy crisis in 1973-74, when the IMF established a mechanism for recycling the surpluses of oil exporters and helping to finance the oil-related deficits of other countries. It was true in the mid-1980s, when IMF-supported reform programs were the linchpin of a new strategy that allowed debtor countries--many of them U.S. neighbors in Latin America--to grow out of their debt problems. It was true in 1989 and after, when the IMF helped design and finance a massive effort to help the 26 transition countries cast off the shackles of central planning. And it was true last year, when the IMF came forward with the largest loan in its history to avert Mexico's financial collapse-and to prevent the crisis from spilling over into the markets, forcing other countries to resort to exchange controls and debt moratoria, and possibly causing a dramatic disruption in private capital flows to developing countries. Because of IMF support, Mexico's markets remained open and capital continued to flow. And on all these occasions the United States was able to leverage every $1 of its own support into $4 of support from other IMF members. There is no denying that each of these crises has been difficult--especially for the IMF members most adversely affected--but without Fund assistance, things would have been much worse.

What of the future? If the past quarter century is any guide, we can safely predict that crises will continue to arise--and that they may be sudden and largely unforeseen. Mexico, in particular, was a stark reminder that we have entered a new era--an era in which shifts in market sentiment can have sudden and destabilizing effects; in which countries tapping the international capital markets must be much more careful that their policies are sufficiently strong to keep the market's confidence; and in which the IMF must be equipped to minimize economic and financial disruption.

What will this entail? To begin with, the Fund must be in a position to make accurate and timely assessments of countries economic problems. To this end, we have intensified our dialogue with member countries so that we will be in a better position to detect emerging problems before they become full-blown crises. We are also paying greater attention to the soundness of banking systems, to financial flows and their sustainability, to the problems of countries at risk, and to countries where financial market tensions could spill over into other countries markets. At the same time, the Fund has developed a set of data standards to guide member countries in providing greater economic and financial information to the public, so that markets will be better informed--and less prone to surprises. We are encouraging all member countries to provide basic information to the public. At the same time, we are urging countries that tap the international financial markets to meet a more demanding standard with regard to the coverage and periodicity of the data they release. The more demanding standard is expected to go into effect shortly.

These steps are important, but they are not sufficient. We must also have the cooperation of our member governments. They must be prepared to provide the IMF with accurate, comprehensive, and up-to-date data, and listen to the views of the Fund and its membership, just as the Fund must be willing to listen to them. We also need to stay in touch with the private sector, because, as I noted earlier, the private sector's response to IMF-supported reforms is a bellwether of their effectiveness. Finally, we need to ensure that our capital base is strong--so that we can continue to support our members, when the need arises. To this end, our Executive Board is in the process of reviewing the adequacy of the Fund's quotas. The membership is also engaged in discussions on increasing the lines of credit on which the Fund can draw.

In a world of increasing economic and financial complexity, the Fund continues to perform fundamental--and essential--tasks: promoting stable, non-inflationary domestic economic policies; encouraging countries to open their economies to trade and investment; and, yes, helping to deal with international monetary problems when they arise. Thus, the IMF is helping to develop a stronger and more stable world economy and, in so doing, helping to expand economic opportunities for Chicago, the United States, and the rest of the world.