Old Neoliberalism in A New Package: US Treasury Sec. Summer's Proposals of "Supposed" Reform of IMF

[Michael Givel]

The Right Kind of IMF for a Stable Global Financial System

Treasury Secretary Lawrence H Summers - Remarks to London Business
School

EMBARGOED UNTIL 6:00 PM (LOCAL TIME) December 14 1999

Text as Prepared for Delivery

These are challenging times for the international community. That
globalization offers enormous potential for raising global living
standards and opportunities is not in question. What is, in many ways,
the public challenge of our time is showing all of the world's citizens
that international integration will work for them.

No part of that challenge will be more important for global prosperity
than helping countries to develop the capacity to realise the benefits
of a global flow of capital and to manage its risks. This is the goal at
the heart of the global initiative that has come to be called the reform
of the international financial architecture, which will take another
step forward this week in Berlin as finance ministers and central bank
governors from key industrial and emerging market economies gather for
the first regular meeting of the G20.

There are many aspects of financial architecture. Today I would like to
draw on recent experiences and the active debate that these have
provoked to consider the future role of the IMF. This seems an
appropriate occasion to focus on the IMF because, for the moment, the
crisis of recent years has passed, and the prospect of new leadership at
the IMF is drawing near.

Recent events have reaffirmed that the IMF is indispensable. We would
all of us involved with global finance be breathing less easily this
holiday season if the IMF had not taken the steps that it did in
response to the crises in Asia and elsewhere. But as I have said many
times, to say that the IMF is indispensable is not to say that we can be
satisfied with the one we now have.

The founders of the Bretton Woods institutions more than half a century
ago were right to recognise that there could be no successful global
integration without financial stability within countries and a
well-functioning system for the flow of capital between them. This was
the painful lesson of the 1930s, when the absence of an effective
international response to financial panics helped pave the way for
deflation and depression – and ultimately, World War II. The same lesson
has been taught again and again in the postwar period.

While that insight remains valid today – indeed, has been pointed up by
recent events in Asia and elsewhere – a great deal in the global economy
has changed since Bretton Woods. The framing new reality of the late
20th century global financial system is that the private sector is the
overwhelming source of capital for growth.

This has been true domestically and increasingly in the flow of capital
to emerging markets:

In the 1990s, nearly $1.3 trillion in private capital has flowed to the
emerging market economies, compared to around $170 billion in the
previous decade. In 1990, one emerging market economy issued a sovereign
Eurobond. In 1998, nearly twenty did.

As we have seen in so many areas – ranging from mortgage finance in
industrial countries to building bridges and roads in the developing
world – as private capital markets develop, the role of the public
sector increasingly shifts from providing finance to providing a
framework for strong and sustainable private sector flows.

The IMF must reflect that change, with a focus on promoting financial
stability within countries, a stable flow of capital between them, and
rapid recoveries following any financial disruptions. Apart from the
question of concessional finance for the poorest countries, an issue to
which I will return, a reduced emphasis on the provision of finance is
desirable. It is also inevitable. The IMF cannot expect its
financial capacity to grow in parallel with the growth of private
sector capital flows.

The best organisations are constantly reinventing themselves. The same
should be true of international organisations. This is a matter of
policies and procedures, but also and perhaps most crucially of culture
and orientation. We believe that to maximise the IMF's
effectiveness, consideration should be given to six critical areas:

A greater focus on promoting the flow of information from governments to
markets and investors.

Attention to financial vulnerability as well as macro-economic
fundamentals.

A more selective financing role that is focused on emergency situations.

Greater emphasis on catalysing market-based solutions. A more limited
role in the poorest countries focused on growth and poverty reduction.

Modernisation of the IMF as an institution.

We will be outlining these proposals in more detail to the members of
the IMF going forward and working with them to build the consensus
necessary to bring about real change.

I. Promoting the Flow of Information to Markets

In a more integrated global capital market, IMF surveillance needs to
shift from a focus on collecting and sharing information within the club
of nations – to promoting the collection and dissemination of
information for investors and markets.

If one were writing a history of the American capital market I would
suggest to you that the single most important innovation shaping that
capital market was the idea of generally accepted accounting principles.
Countries all over the world need that kind of
infrastructure, and the IMF needs to promote that goal in its dealings
with member governments.

Notably:

The IMF needs to encourage more countries to adopt and comply with the
Special Data Dissemination Standard, including its new provisions
relating to the reporting of
reserves. We also need to add to the SDDS both strengthened standards
for reporting external debt and indicators of financial sector
soundness. It needs to: encourage countries to implement the many
international standards and codes for sound policies that are being
developed; assess, with the World Bank and others, countries' compliance
with these benchmarks going forward; and release these assessments
publicly. It needs to pay more attention, not just to the quantity of
information disclosed to markets, but also to its quality. In the
context of countries receiving IMF finance we believe it is
appropriate that independent external audits of central banks and other
relevant government entities be required and published. This should be
something that private capital markets come to expect – and look to the
IMF to promote in other contexts.

More generally, we are learning that transparency and the closely
related issues of governance and corruption are fundamental to
maintaining financial stability – indeed, they may be as important as
the details of the budget. Substantial deficiencies in the accuracy and
quantity of data that a country discloses should be noted in the course
of IMF surveillance, and highlighted in the way that more conventional
macro-economic deficiencies are highlighted. It should no longer be
tenable for countries to block the release by the IMF of key data that
would help investors make better-informed decisions.

II. Not Just Macro-economic Fundamentals but Financial Vulnerability

Just as the goal of IMF surveillance needs to change, so too must its
content. Every crisis teaches lessons of emphasis. Refining our
understanding of what makes countries vulnerable to modern-style crises
and helping countries to guard against those risks will be a central
focus for the G20 as it carries forward its work. And here too,
the IMF can play a critical role.

The series of crises that began with Thailand in the summer of 1997 -
and the Mexican crisis of 1995 - each had a variety of elements. But
looking back we can now see that central to all of them was a sudden
loss of confidence and large-scale withdrawal of capital by domestic and
foreign investors, initially out of a concern about the
fundamentals, but increasingly out of a concern not to be the last out.
A kind of bank run psychology took hold, and the opportunity to fix the
problems that had triggered the crisis, without up-ending the economy,
drained away.

In the wake of these events, the IMF needs to focus its attention on
countries' vulnerability to this kind of dynamic. It should no longer be
possible to joke, as I have done in the past, that IMF stands for It's
Mostly Fiscal.

Two changes in IMF practices will be essential.

A greater focus on the strength of national balance sheets

While it has become fashionable to blame capital account crises on a
voracious global capital market, a large part of the problem in these
crises came from governments' own efforts to attract short-term inflows
that could not reasonably be sustained. We saw this, for example, in
Mexico, with the increasing resort to issuing dollar-indexed
Tesobonos in the lead-up to crisis; we saw it in Thailand in tax breaks
for offshore foreign borrowing; and we saw it in Russia, in the
government's efforts to attract foreign capital to the domestic bond
market.

In light of these experiences, the IMF should actively promote a more
fully integrated assessment of a country's liquidity and balance sheet.
Governments need to think long and hard about their approach to
financial liberalisation – and, in particular, the dangers of opening up
to short-term capital in the presence of too many domestic guarantees.
And they need to manage the government's own debt in a way that best
insures them against future risks. The most sophisticated debt managers
are not those who achieve the lowest possible cost of borrowing.

What you count, counts. We believe that the IMF should work with member
countries, including through the G20, to develop and publish a set of
explicit quantitative indicatos that provide more meaningful guides to
the adequacy of country's reserves than simply their size relative to
imports. For example: the maturity of the sovereign's debt
and any worrisome deterioration in it; the scale of foreign currency
related claims on the official sector; and the scale, maturity and
composition of aggregate external claims on the financial and corporate
sectors.

Highlighting more clearly the risks of unsustainable exchange rate
regimes

These crises have reaffirmed the impossibility of maintaining both a
fixed exchange rate and substantial discretion in domestic monetary
policy. The IMF must increasingly bring to the fore in its discussions
with countries the implications of this fact when it comes to the choice
of an exchange rate regime.

Countries maintaining a fixed exchange rate should be expected to make
explicit the extent to which monetary policy is to be subordinated to
the exchange rate objective. And those using fixed exchange rates as a
tool of disinflation should be expected to disclose the nature of their
exit strategy. The presumption needs to be that countries that are
involved with the world capital market should increasingly avoid the
"middle ground" of pegged exchange rates with discretionary monetary
policies, in favour of either more firmly institutionalized fixed rate
regimes or floating.

III. Focusing Finance on Emergency Situations

International financial institutions, no less than private companies,
need to focus on core competencies. Going forward the IMF needs to be
more limited in its financial involvement with countries, lending
selectively and on short maturities. It can and must be in the front
line of the international response to financial crises. It should not
be a source of low-cost financing for countries with ready access to
private
capital, or long-term welfare for countries that cannot break the habit
of bad policies.

This suggests a number of core imperatives:

A more selective financial role

The IMF must be a last, not a first, resort – and its facilities and
approaches should increasingly reflect that. We believe that the IMF's
shareholders and management need to review carefully and comprehensively
the myriad lending facilities that have been
established over time. That review should be guided by the principles
that official finance should be a backstop, not an alternative, to
private sector finance.

In our view, a necessary result of this kind of streamlining would be
that longer-term lending would be phased out as a normal part of IMF
operations and that the IMF would come to rely on three core instruments
for the bulk of its lending. These would be:

The new Contingent Credit Line, to help countries ward off external
contagion.
Short-term stand-by arrangements for countries with non-systemic balance
of payments problems.The Supplementary Reserve Facility (SRF), for
countries suffering systemic capital account crises, to be lent on a
very short-term basis at prices to encourage rapid repayment.

The question of the pricing of these facilities needs careful
consideration. The agreement on premium finance for the SRF in 1997 was
an historic step. Going forward it would be appropriate to introduce
significantly higher charges for normal standby loans to deter excessive
recourse to the core IMF financing arrangements. We also believe that
it makes sense to consider making the terms of the CCL more attractive
than those of the SRF – so as to motivate countries to invest earlier in
policy changes that will better protect them from contagion.

As we said many times in 1998, when the world faces a truly exceptional
systemic threat, it is vital that the IMF continue to be in a position
to provide very large scale financing to respond to that threat. But the
overwhelming presumption must be that, in all but a fraction of cases,
normal access limits will apply.

Effective conditionality

When crises come, there can be no hard and fast rules for an effective
response. The sources of crises vary, and so must the solutions. But it
bears emphasis that those who have carried out consistently their
programs with the IMF – Mexico, Thailand, Korea, and more recently,
Brazil – have all seen very strong results. By contrast, the more
dramatic failures of this period have followed countries' unwillingness
to follow through on commitments in their programs – as in Russia in
1998 and Indonesia the previous year.

In the wake of recent crises there has been and will doubtless continue
to be great debate about the appropriate scope for IMF policy
conditions. The basic principle is clear: programs must be focused on
the necessary and sufficient conditions for restoring
stability and growth. Intrusion in areas that are not related to that
goal carries costs that exceed the benefits, and may undermine the
legitimacy of the IMF's advice. But the stability of banking systems,
issues of social cohesion and inclusion, and the capacity to enforce
contractual arrangements – these will all, in many cases, be critical to
restoring confidence, and they can and should be addressed as a
condition for IMF support.

In thinking about conditionality, we should never forget that financial
stability is only a means to the ultimate objective of restoring growth.
Austerity can never be an objective for its own sake. But avoiding
hyperinflation and maintaining confidence in a country's currency are
essential to restoring growth. The IMF staff is to be commended for
altering initial judgments about the need for contractionary fiscal
policy in Asia as the depth of the recession became more evident.

We can never guarantee that the right balance will be struck in every
case. But let us be clear: the success of a government in implementing
its program with the IMF will and must be judged by the restoration of
sustainable growth.

A clear path toward graduation

There is no economy too prosperous to benefit from the analysis and
insights afforded by regular consultations with the IMF. But the IMF
should not and need not be financially involved in countries forever.
In 1976 people were not surprised when the UK turned to the IMF. Today
it is inconceivable. The IMF's goal now must be to mark a path for the
graduation of the emerging market economies, so that they too will reach
the point when calling on the IMF for financial support is unthinkable.

Achieving this will involve a number of reforms. A reduced willingness
on the part of the IMF to offer long-term finance is one. Higher pricing
to deter prolonged use would be another. Going forward the IMF should
also be insisting on stronger prior actions in
countries with a record of missing targets and not completing programs –
and considering other ways that repeated resort to the IMF might be
discouraged.

IV. Supporting the Right Kind of Private Sector Involvement

In a world of private capital flows the IMF has not, cannot and should
not aspire to having financial capacity that is proportionate to those
flows. That goes to the need for rapid graduation of countries from IMF
support. It goes to the need for constant vigilance about the scope for
alternative private sources of finance. And in times of crises – it
points up an important role for the IMF as a facilitator of more
market-based solutions.

In order to play this role more effectively we believe that the IMF
should establish a Market Conditions Advisory Group to help it have a
deeper knowledge of the private sector systematic access to market
trends and views. In the context of individual crises, the official
sector should also stand ready to facilitate coordination among debtors
and creditors, including through creditor committees, where these are
appropriate.

We all need to recognise that a capital market depends on the idea that
debtors must meet their obligations if they can, but that there will be
times when debtors cannot meet their obligations. A global capital
market in which dozens of issuers are issuing at spreads of hundreds of
basis point can only function if there is the capacity for managing
situations where debts cannot be serviced in full and on time.

In its response to crises, several basic presumptions should now be
guiding the IMF's approach with respect to the private sector.

IMF lending should be a bridge to and from private sector lending not a
long-term substitute. Official lending along with policy changes can be
constructive
in helping to restore confidence in situations where a country does have
the capacity to repay. Where possible, the official sector through its
conditionality should support approaches – as in Korea and, more
recently, Brazil – that enable creditors to recognise their collective
interest in maintaining positions, despite their individual
interest in withdrawing funds. Such agreements should have the maximum
feasible degree of voluntarism, but they should not fill short-term
financing gaps in a way that promises renewed problems down the road. As
we have seen, for example in Pakistan and Ecuador, it will be necessary
in some rare cases for countries to seek to change the profile and
structure of their private sector debts. In exceptional cases, the IMF
should be prepared to provide finance to countries that are in arrears
to their private creditors: but only where the country has agreed to a
credible adjustment program, is pursuing a cooperative and transparent
approach with its creditors, and is focused on a realistic plan for
addressing its external financing problems that will be
viable over the medium and longer term.

We have become convinced that it is not appropriate for the official
sector to mandate the terms of debt contracts between countries and
their creditors. But lenders and borrowers alike must recognise that if
they choose contractual arrangements that are costly and inefficient in
the event of failures, the official sector will not be prepared to
shoulder the consequences.

V. New Focus on Growth and Poverty Reduction in the Poorest Countries

The focus of my remarks has so far have been directed at the IMF's work
in emerging markets. Different issues are posed by the poorest
countries, which cannot attract significant private capital, and can
borrow from the official sector only on concessional terms.

Helping these nations has rightly been high on the global agenda in
recent months in our efforts to translate debt relief for the Heavily
Indebted Poor Countries into concrete reductions in poverty. As part of
this effort, we have worked closely with the UK and others to establish
a fundamentally new framework for the international community's efforts
to combat poverty, one that gives the World Bank the lead and the IMF a
more tightly focused role.

The premise for this new approach is that macro-economic stability may
be necessary, but it is far from being sufficient to creating lasting
and inclusive growth. The approach looks to the IMF to continue to
certify that a country's macro-economic policies are satisfactory before
debt is relieved or new concessional lending is advanced. But
much of the dialogue between countries and the official sector will
centre on issues relating to poverty that have not traditionally
received the attention they deserve.

As a result of recent agreements among the G7, I am confident that a
number of countries – including Bolivia, Uganda, Mozambique and
Mauritania – will be able to benefit from the Cologne initiative very
early in the new year, with a number of others also benefiting before
the Spring meetings of the World Bank and IMF in Washington. What
will be critical will be effectively implementing the new framework for
official support in these and other countries, so that the poorest will
also see rapid results.

VI. Institutional Reform

Finally, if the work of the IMF is to change, its nature may need to
change in the 21st century as well.

It should move over time toward a governing structure that is more
representative and a relative allocation of member quotas that reflects
the changes under way in the world economy – so that each country's
standing and voice is more consistent with their relative economic and
financial strength. It should deepen the commitment to transparency that
is built into the IMF's own operations, especially by making the IMF's
own financial workings clearer and more comprehensible to the public.
For example, there is no reason why there should not be regular
publication of the IMF's operational budget. And it should become more
attuned, not just to markets, but the broad range of interests and
institutions with a stake in the IMF's work. Just as the institution
need to be more permeable for information to flow out, so too must it be
permeable enough to let in new thoughts – by maintaining a vigorous
ongoing dialogue with civil society groups and others.

This seemed a propitious moment to focus on the IMF. But as our
international discussions on these issues continue, it will be important
for its shareholders to consider not just the role of the IMF, but the
World Bank and other development institutions and also how these
institutions relate to each other.

VII. Concluding Remarks

Let me re-emphasise the observation with which I began. As important as
it is, the IMF is just one component of the international financial
architecture. Indeed, if I have learned one thing in my seven years in
government, it is that national policy shapes national outcomes. The
international community cannot want reform and stability in a country
more than its own government and people do.

But international institutions do matter, and so do the individuals who
lead them. Michel Camdessus's imaginative leadership has made its mark
in helping the IMF prepare itself for a 21st century global financial
system. What is critical is that we maintain the spirit of change and
adaptation in the months and years ahead.

Thank you.
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