Speech

Multilateral Financial Cooperation and The Fight Against Poverty - The Role of the IMF, Statement by Flemming Larsen, Director, IMF Office in Europe

November 7, 2000

Mr. Chairman, distinguished members of the Haut Conseil de la Coopération Internationale, allow me first of all to express my appreciation for the invitation to participate in this hearing as the IMF’s permanent representative in Europe. I have been invited to discuss two aspects of the IMF’s work, i.e., multilateral financial cooperation and the fight against poverty.

The Role of the IMF at the Beginning of the 21^st Century

To appreciate fully the IMF’s role in the world economy today it is useful to look back at the past half century since we were founded. Clearly, the global economy has changed dramatically over this period, many would say beyond recognition with the world that emerged from the world depression of the 1930s and the Second World War.

Let me quickly summarize some of these changes (I will mention seven in total):

1. Technological innovation and increased efficiency have raised productivity and living standards substantially in large parts of the world. With higher living standards, in the old industrial countries, demand for services is now growing faster than demand for industrial goods-creating new activities and skill requirements nobody could have imagined 50 years ago.

2. Growing political and, associated with that, economic freedom around the world have increased the role of market forces tremendously. This has put a premium on flexibility as enterprises compete for market share. But rapid structural changes as a result of technological developments and increased competition have also occasionally had difficult social consequences even though society as a whole has clearly benefited.

3. While the state’s role in the production process has diminished considerably as a result of privatization, it has become even more important than before in other areas, including the establishment of sound institutions, the provision of public services and safety nets, and the maintenance of stable financial conditions.

4. National economic policies have also changed in many ways. Until the 1970s, the state was perceived to be responsible for full employment through the pursuit of active demand management policies. Today, the state is of course still responsible for full employment but is now expected to achieve this goal more indirectly through the maintenance of price stability and sound financial policies. While there is still some role for active fiscal policy, a key concern today is to avoid crowding out private investment through large fiscal deficits. Monetary policy also has an important stabilizing role over the business cycle but with much greater attention to price stability.

5. Perhaps the biggest changes have occurred in the area of structural policies where the emphasis in the past was often on the perceived need to regulate the economy. Today, the emphasis is on promoting competition based on the belief that the reliance on market forces is a much more efficient organizing principle for the economic system than government regulations and decisions by bureaucrats. Of course, it is increasingly recognized that market forces need to operate within clearly defined rules and principles in order to reduce the risk of excesses and market failures.

6. Domestic political and economic freedom has also stimulated external liberalization: trade barriers have been substantially dismantled in many areas, and capital flows almost freely today among most countries in the world. And the world’s key currencies are today freely floating against each other whereas they were pegged to each other until the early 1970s.

7. With the greater interdependence among nations and also greater complexity of the economic system, countries have found it increasingly difficult to solve their economic problems alone. This has led to growing international economic cooperation. It is probably safe to assume that this international cooperation will increase further in the decades ahead.

What do all these changes mean for the role of the IMF?

In fact, while the international monetary system has changed considerably since the Bretton Woods system, and is still in the process of changing, the role of the IMF has grown as our membership has expanded and as our members have sought cooperative solutions to their policy challenges. Besides as a forum to address new challenges, our member countries rely as much as ever on the IMF as a source of information and advice.

And here, I would like to focus on two particularly important financial and economic challenges facing our membership and the IMF today:

The first is the need for a robust international financial system—often referred to as the financial architecture—which can accommodate the continued economic and financial integration while lessening the risk of financial crises.

The second is the need to arrest and then reverse the growing income gap between the poorest and the wealthiest countries. This is a moral imperative. It is also likely to be an important precondition for peace and political stability around the world. I will discuss the role of the IMF in promoting these two objectives in turn.

Achieving a more Robust Financial Architecture

There is today a wide consensus amongst our member countries that the liberalization and integration of financial markets offers considerable gains in allocation efficiency, which are stimulating growth and raising living standards worldwide.

At the same time, recent financial crises have served as reminders both of the risk of market failures and of policy failures that can lead to building up of unsustainable financial imbalances followed by sudden and brutal reversals of market sentiment.

In the light of this experience, the IMF is redoubling its efforts in a number of areas:

— to increase the transparency of the soundness of countries’ fundamentals—especially in the financial sector;

— to strengthen our surveillance with the objective of identifying potential vulnerabilities as early as possible;

— to provide better advice to countries about how best to enhance their resilience in the face of external shocks, for example, by adhering to standards and codes of good conduct in a large number of areas;

— to understand better the forces influencing global financial markets;

— to help countries establish essential preconditions for a successful liberalization of their capital account, and to advise on the appropriate sequencing;

— to achieve a better burden sharing between the IMF and private creditors in crisis resolution situations to reduce the risk of moral hazard and to address the perception that the IMF’s financial assistance helps to bail out private creditors. (Such burden sharing may well be in the interest of private creditors since it should reduce uncertainty and the risk of panics.)

Throughout, the IMF is constantly trying to adapt to new realities and new understandings of the working of the global economic and financial system—which always seems to have surprises in store.

The Poverty Problem and the IMF

I will now discuss the poverty problem and the role of the IMF. I know that this issue is of particular concern to the Haut Conseil.

The causes of poverty

The IMF’s poverty reduction actions are based upon its analysis of the failure of many countries to benefit from the prosperity which the past half century has bestowed upon the rest of the world. The reasons for poverty are complex and vary from one country to the next—economic errors, institutional failings, political instability, chronic civil strife or armed conflict. All these problems have posed obstacles to the introduction of appropriate economic incentives in these countries.

The ineffectiveness of the financial assistance provided by the wealthy countries, for the most part during the cold war, is also a factor in this situation. External assistance surely played a key role in increasing life expectancy, which benefited the poorest countries as well. Too often, however, the generous aid proferred for years on concessional terms was not enough to put these countries on the path of sustainable growth.

The fear of globalization

The low level of direct foreign investment and other inflows of private capital in the poor countries, and their apparent inability to withstand ever increasing competition on export markets, are frequently cited when dismissing these countries as misfits in the globalization process that has characterized the past twenty-five years. While the relentless advance of a global economy driven by the laws of the market does multiply the opportunities open to countries that can fall back on sound fundamentals, some observers fear that it excessively penalizes economic weaknesses and deduce from this that it is preferable for poor countries to stay at arm’s length from the process. The widening gap between the rich and the poor probably further explains, at least in part, this hostility to globalization and to "Western values," which many wish to regard as the ideological foundation of the changes now in progress.

However, in the developing countries themselves, such rejection of globalization is rare. Indeed, in the vast majority of cases, the developing countries remain convinced that globalization is favorable to them, and that it is in this context that they will be able to put their resources to the best use.

The IMF’s commitment to combat poverty

Our meetings in Prague demonstrated to us that there is a solid consensus among our member countries—almost the entire world—that the IMF should continue to assist the poorest countries, in cooperation with the World Bank and other international organizations or bilateral donors. This thus constitutes a rejection of the arguments put forwarded by those who, in discussions on the international financial architecture, would like to see the IMF concentrate on resolving crises and on financial stabilization in the middle-income countries or those fully integrated in the global financial system, and, for the most part, disengage itself from the poorest economies.

In effect, there are multiple reasons why the IMF should stay engaged in the poor countries. First, our institution is universal and its mission is to serve all its member countries, including the poorest of them. Moreover, the poor countries have every bit as much need for macroeconomic stability—that is, low inflation, a responsible fiscal policy, and a viable foreign exchange regime—as do those that are better off, and it is the mandate of the IMF to advise its members on each of these points. Finally, our institution has an essential role to play in the new "enhanced" initiative in favor of the heavily indebted poor countries. The aim of the HIPC Initiative is to ease the debt burden of those heavily indebted poor countries which implement reform programs targeted at eradicating the entrenched causes for their debt and to see to it that the debt relief from which they benefit is effectively used to reduce poverty. The IMF concentrates primarily on the macroeconomic aspects of these efforts, and the World Bank on the measures to combat poverty. The national authorities and civil society, for their part, are called upon to assume greater responsibility in the preparation of the reforms. In this way, the parties affected by it will assume ownership of the fight against poverty.

Poverty reduction requires the commitment of all

For many years the IMF has emphasized (as has the World Bank) that the debts of many poor countries has reached unsustainable proportions. We have high hopes that the enhanced initiative implemented in 1999 to assist the most heavily indebted of these countries will prove to be a major step forward in this area. So far, ten such countries have met the conditions required to benefit from debt relief under this initiative. We are doing everything in our power, at the IMF and at the World Bank, to bring this total to twenty countries by the end of the year, and expect to go even further next year.

But while a significant easing of these countries’ debt is an essential dimension of the poverty reduction strategy, by itself it would not suffice. Other reforms are urgently required in the poorest countries themselves, which must consolidate their institutions, enhance economic incentives, and improve the management of public affairs. And in turn, the industrial countries must make greater efforts to fully open their markets to exports from the developing countries. Likewise, the advanced economies need to find a way to support the incomes of their farmers without resorting to export subsidies, which are an impediment to the establishment of profitable agriculture in many developing countries. These reforms, which have been put off for too long, would ultimately be of considerable benefit to the developing countries and the advanced economies alike. Finally, the industrial countries should improve—in terms of quality and volume—their official development assistance (ODA). At present this represents less than ¼ percent of GNP in the OECD countries and is will below the objective of 0.7 percent of GNP set by the international community itself. The gap between the promises made and actual ODA is on the order of $100 billion per year.

Unfortunately, if the creditor countries and numerous NGOs continue to focus solely on the issue of debt reduction, the other aspects of aid to the poor countries run the risk of not being implemented. In that event, the chance of this strategy being successful would be seriously compromised.
In the long term, the future of the poor countries will depend upon their capacity to take the opportunities that may be offered by gradual integration into the global economy and the assistance that the international community can extend to them in such an undertaking. We must act to ensure that globalization serves all countries, and particulalry the poorest. The IMF is resolved to contribute to this aim.