The gathering pace of globalisation, especially of financial markets; the transition of many countries from planned to market economies; and the longstanding plight of impoverished peoples offer never-ending challenges. What is the International Monetary Fund's role in confronting them? For 13 years I was privileged to lead an IMF whose strengths include fostering economic co-operation and providing advice and assistance to 182 countries as varied as the United States and the smallest Pacific island nation. The IMF does this on the basis of a clear, tried and tested mandate that is as relevant today as when the IMF was created over half a century ago.
Adaptability to change has always been a hallmark of the Fund. The IMF's focus remains on macroeconomic policies that foster sustainable growth. But in response to a need demonstrated by recent financial crises, the Fund now places stronger emphasis on developing sound financial systems, and on good governance and transparency.
Yet crisis management remains our best-known activity. This encompasses both headline-grabbing situations of imminent economic collapse, as well as less visible help to countries struggling to attain external viability and growth, or to countries seeking help before problems become a crisis. As a self-reforming institution, the IMF reviews constantly both the kinds of advice and loans it offers to support these countries. But when it comes to crisis, prevention is better than cure. So we are modernising our loans to serve our entire membership better and to avoid crises spreading.
Central to international monetary stability is the question of exchange rate regimes. A lively debate is now in progress, including the euro's role once it reaches its full potential as a major reserve currency. Related to this, and clearly a result of recent crises in Asia and other emerging markets is a broad effort to reform the architecture of the entire international financial system, an effort that must continue despite today's rosier global economic outlook. Here the IMF retains a key role in several areas. Creating the right conditions for global financial flows is vital. Thus the Fund promotes full and orderly liberalisation of capital movements, including by making changes to our articles of agreement. To avoid disorder, the Fund could be allowed to facilitate a stay of legal action by creditors in the most severe debt crises.
As hard as the IMF works to sustain economic growth and financial stability, systemic crises are still likely to occur. This raises the issue of the need for an international lender of last resort to provide liquidity in the event of a global credit crunch. Although the IMF is the closest that the international financial system has to such a lender, in the crises of 1997-98 its resources were stretched to breaking point. What might happen in a truly systemic global crisis? The IMF, like a central bank at the national level, could be authorised to use its own international reserve asset, the special drawing right, or SDR.
It could inject international liquidity through the creation and allocation of SDRs, and withdraw them when the crisis abated. An added systemic threat looms: that posed by poverty. In co-operation with the World Bank and member governments, the IMF established the Initiative for Heavily Indebted Poor Countries (HIPC) to provide large-scale debt relief to the poorest nations. The IMF has also introduced a new form of concessional lending, the Poverty Reduction and Growth Facility to bring international agencies together with governments and civil society in poor countries to devise policies to stimulate growth and reduce poverty.
One common element in all the issues is the need to find a global response to global problems. Ours is the first generation capable of influencing global affairs through voluntary international co-operation, without employing military or imperial power. But to achieve this goal unprecedented coherence in economic decision-making and political responsibility is required.
The risks of not grasping this opportunity are illustrated by the failure to launch the next round of trade negotiations at the World Trade Organisation meeting in Seattle. Industrial countries could not even take the small step of eliminating trade barriers to the exports of the poorest and most heavily indebted countries. That failure threatens to make a mockery of decisions by these same governments to write down the debt of the HIPC countries. Forgiving debt is not enough; the poorest countries must be able to export, grow, and reduce poverty. As I leave the IMF, one regret is that we have not made more progress in securing support for institutional changes needed to promote the better exercise and perception of the political accountability at the IMF. Creation of the International Monetary and Financial Committee, the ministerial body that meets for the first time in April, is a step in the right direction but the world deserves better.
Instead of a purely advisory committee, the full-blown council enshrined in the IMF's articles 25 years ago should be established. Here is a way for the IMF to secure, visibly, the legitimate political support of our shareholders. Another suggestion consists of replacing the G7 Summit every two years by a meeting of the heads of state and government of the approximately 30 countries that have executive directors on the boards either of the IMF or World Bank.
Collective decisions made under the aegis of international financial institutions must have public legitimacy. It is essential to understand the central role the IMF plays in defining the path taken so far in the search for greater prosperity and stability. The world must not lose sight of this as it strives to adapt global rules of the road and the institutions that oversee them.
Michel Camdessus has retired as managing director of the International Monetary Fund (IMF), having spent 13 years with the organisation.
Copyright: Project Syndicate, February 2000
