Lawrence H. Summers, U.S. Secretary of the Treasury
Remarks to the IMF Advisory Committee
Washington, DC, December 18, 2000
Released by the Office of Public Affairs
U.S. Department of the Treasury
Thank you. I welcome the opportunity to meet with this Committee today and hear your views about how reforms are progressing at the International Monetary Fund (IMF).
As you know, this Committee was created as part of the bipartisan agreement to support U.S. participation in the IMF quota increase in the fall of 1998. At that time, the financial crises that began in Thailand in the summer of 1997 were still very much with us. And it was widely agreed that while the experience in responding to those crises had reaffirmed the central importance of the IMF, it had also shown the need for significant institutional reform. Accordingly, the legislation laid out a range of policy priorities that needed to be promoted more vigorously at the IMF, many of which were consistent with reform efforts that the Treasury had pursued within the IMF for some time. These priorities include: promoting open markets, strengthening financial sectors, reducing corruption, increasing transparency, advancing core labor standards and establishing a process for evaluating the IMF.
Over the past 15 months, Committee members have had the opportunity to examine and discuss the progress made toward promoting these priorities, and thus enhancing the effectiveness of the IMF. And the Treasury Department has also invested considerable time and effort in monitoring progress toward the key goals identified in the legislation: including through an internal task force, focusing specifically on policy mandates relating to the IMF, which has been in operation for nearly 2 years.
Just over a year ago in London, following on the measures highlighted by the Congress, I highlighted several further priority areas for reforming the IMF. The guiding theme of my proposals was to equip the IMF for the challenges of the modern capital markets: specifically, by increasing the flow of information to markets, streamlining IMF lending tools, focussing more carefully on financial vulnerabilities in the emerging market economies, and modernizing the IMF as an institution.
To be sure, we still have a great deal of work to do if we are to build the IMF that we would all like to see. But we can take some satisfaction from the progress that we have already achieved.
I would like to spend the rest of my ... today outlining the most recent developments in the reform of the IMF in six areas that were highlighted in last year's speech in London: enhanced transparency and accountability; streamlining of IMF lending tools; more effective surveillance of financial vulnerabilities; promoting market-based solutions to crises; and putting growth and poverty reduction at the center of IMF policies.
I will conclude by seeking your views on key questions regarding the IMF that the U.S. will need to address in the years ahead.
I. Progress on Key Reform Priorities
1. Enhanced Transparency and Accountability
There has truly been a revolution in the past few years in the degree of transparency in the IMF. Only 3 years ago, almost every document produced by the IMF, whether it related to policies, programs, or surveillance, was shrouded in secrecy and the Fund website had hardly begun. Today, the web site receives more than 100,000 hits a day, and carries a constantly updated range of documents covering nearly every aspect of the IMF's activities.
-- Most country Letters of Intent are released (90% between June 1999 and July 2000).
-- Since 1998, Public Information Notices (PINs) have been issued following Article IV consultations about 80% of the time.
-- The IMF publishes its Financial Transactions Plan quarterly.
-- IMF officials have also instituted a regular weekly press briefing session.
-- As of this summer, IMF has made permanent its pilot project for the release of Article IV staff reports a permanent program, so as to encourage the publication of staff reports on the use of Fund resources and to adopt a more systematic approach to the release of policy papers and PINs.
This is not to say that our work is done. We continue to press for broader acceptance of the notion that information should be released unless there is a compelling reason not to do so. In particular, we strongly believe that all countries benefiting from Fund financial assistance must make public the nature of their reform programs and commitments, including Letters of Intent, Memoranda of Economic and Financial Policies and Technical Memoranda of Understanding.
Accountability -- and effectiveness -- also depend on a credible mechanism for examining the Fund's record and identifying lessons for its operations going forward. That is why the creation of an independent evaluation office has been a key plank of our strategy for reforming the IMF. In this context I am glad to say that with crucial help and advice from outside experts, including several American Non-governmental Organizations (NGOs), we have been able to agree the terms of reference for such an office, and we expect it to become operational early next year.
2. Streamlining IMF Lending Tools
It has been a central part of our vision for a modern and effective IMF that it should seek to be lending only on an emergency short-term, emergency basis, encouraging countries to develop sustained access to private sources of finance and to avoid repeated reliance on IMF finance.
In line with these goals, we believe that it is important that the terms and conditions of IMF lending provide both strong incentives for countries to adopt strong policies and are consistent with both the modern realities of global capital markets, and the short-term character of IMF finance.
The streamlining measures that were agreed by IMF Executive Board shortly before the Annual Meetings last September are consistent with these objectives. Among other things, this agreement: -- Limits medium-term lending and establishes an expectation that borrowers will repay non-concessional resources early.
-- Introduces higher interest rates for borrowing above threshold amounts.
-- Enhances the Contingent Credit Line as an incentive for countries to adopt strong policies before crises strike.
-- And strengthens post-program monitoring. We believe the result of these changes will be a stronger and more resilient IMF going forward: one that supports and does not supplant access to private capital markets; and that lends, for the most part, on a short-term basis, with pricing to discourage casual or excessive use of IMF funds and to enhance the incentive to repay as quickly as possible.
3. Reducing Financial Vulnerabilities and Preventing Crisis
The IMF's engagement with member countries goes well beyond emergency lending. Indeed, it is almost certainly the IMF's other forms of engagement -- its ongoing surveillance and policy advice to member countries -- that hold out the best prospect for helping to reduce countries' vulnerability to crises down the road. To that end, we have advocated a shift in the nature of surveillance to focus more carefully on a range of financial vulnerabilitie, whose dangers have been highlighted by recent crises. This is an important complement to ongoing work, in cooperation with the World Bank, to assess and strengthen financial sectors.
Here let me just highlight progress in three key areas.
First, Vulnerability Indicators
In light of recent crises, we believe that indicators of liquidity and balance sheet risks for countries that have access to international capital markets need to be an essential component of IMF surveillance. In large part as a result of US efforts, the IMF has now made progress in incorporating indicators of these kinds of liquidity and balance sheet risk in Article IV staff reports. However, we continue to advocate more systematic use of these indicators and greater consistency in their application across countries -- and a process for making the indicators more widely available.
Second, Liability Management
Another key lesson if the need to pay special attention to managing the risks to a government's balance sheet created by a large stock of liabilities with a short residual maturity. This is especially true if the stock of maturing obligations is large in relation to levels of liquid reserves: as we saw, for example, in Mexico, with the increasing resort to issuing dollar-indexed Tesobonos in the lead-up to crisis, and in Thailand, with the tax breaks for offshore foreign borrowing and the government's decision to mortgage its reserves on forward markets. In this context I am glad to report that the IMF and World Bank are working together on a set of debt management guidelines to help countries recognize and manage these types of risks.
Third, Codes and Standards
In many respects, this is the new frontier for surveillance: to establish a framework of codes and standards that can lays down minimum performance benchmarks in key areas such as financial regulation and supervision, data transparency, macroeconomic policy, and institutional and market infrastructure. While substantial progress has been made in developing standards themselves, it is fair to say the critical task of encouraging countries to implement them remains.
In the longer term we hope and expect that the most important tool for encouraging countries to implement codes and standards will be market discipline. But for market discipline to be effective, and for the larger international community to be better informed of progress made -- or steps still needed -- transparency and disclosure are required. The IMF coordinates assessments of countries' performance in this respect through its Reports on Standards and Codes (ROSC). A number of such ROSCs have been made public, and we are working toward a presumption of disclosure of these assessments.
In this context let me note that we attach particular importance to assessment of the quality of bank supervision and securities market regulation, which are integral elements of strong financial systems. The joint IMF-World Bank Financial Sector Assessment Program (FSAP) provides a critical vehicle for undertaking such assessments and identifying vulnerabilities as well as developmental needs. Going forward it is very important that countries be allowed to share their Financial System Stability Assessments with a wider audience.
4. Promoting Market-based Solutions to Financial Crises
Given the scale of private flows in today's global financial system, the IMF always needs to focus on promoting market-based solutions to financial difficulties. And appropriate private sector involvement in responding to financial crises is important, because the official sector often cannot and should not handle the financing alone.
In this context, the ... in its Spring meetings laid out a set of operational guidelines to orient its approach to those cases where a debt restructuring is needed. These emphasized the need for the IMF to place strong emphasis on a borrower's medium-term financial sustainability and to aim to strike an appropriate balance between the contributions of official external creditors, including the IFIs, and private external creditors. Going forward, we will work within the Fund to make this approach operational, focusing in particular on improving the process for restructuring official debt -- including steps to make it more transparent to private creditors -- and on developing criteria to help better assess a country's underlying financial situation, prospects for rapid return to the markets, and medium-term financial sustainability.
5. Putting Poverty Reduction and Growth at the Heart of IMF Policies
The goal of IMF programs is not to restore economic stability for its own sake. It is a means to the ultimate objective of raising economic growth and the living standards of the population as a whole. And while economic growth is the most potent weapon for combating poverty ever invented, experience in Asia and elsewhere reaffirmed, and they should be consistent with key global concerns such as core labor rights and standards or the protection of the environment.
As a result of US pressure, the IMF has sought to ensure that essential adjustments in macroeconomic policies are mitigated by measures to strengthen a program country's social safety net. We have seen results of this effort in programs this year: most notably, in Indonesia, Ecuador and Colombia.
A key element of the legislative mandates regarding U.S. policy priorities in the IMF is promotion of core labor standards (CLS). The United States has built a consistent record of support for CLS and related issues in the IMF, including in Board discussions as well as policy statements at the IMF's biannual meetings. We have also gained support for CLS and the International Labor Organization (ILO) in recent Economic Summits. The IMF has raised labor issues in its policy dialogue with a number of countries (e.g., Korea, Indonesia). And we are working toward greater cooperation between the Fund and the ILO. However, some issues, notably including labor rights and standards, are regarded by many at the Fund as outside its expertise and mandate. Thus our success in advancing U.S. policies depends on our ability to convince others that issues are important to macroeconomic stability and growth in individual country cases. This is not an easy task, but our efforts continue.
Of course, these efforts have been accompanied by a broader global effort to put growth and poverty reduction in the poorest countries at the top of the international community's agenda. This effort has been reflected in the creation of the Poverty Reduction and Growth Facility, as well as in the Fund's participation in the enhanced Heavily Indebted Poor Country (HIPC) initiative.
While, the new Poverty Reduction and Growth Facility (PRGF) program is still in its early stages, I am glad to report that we are beginning to see a sharpening of focus on growth and poverty reduction, with poverty reduction strategies -- prepared by countries with the help of the World Bank -- playing an important role. And as you may be aware, the IMF and World Bank are making substantial progress in moving ahead with HIPC debt reduction for qualified countries. In these countries and in the poorest countries more generally, we have also supported moves toward a more effective division of labor between the two institutions, with the World Bank taking more of a leadership role.
II. Looking Ahead: Issues for the Future
We all know that building on the progress we have already made will require ongoing engagement with the IMF and its shareholders and constituents. This makes the input of Committee members, both with respect to what we have done and what we plan to do, especially valuable. In that spirit, let me conclude by highlighting a few additional questions for the Committee on some of the central challenges ahead.
Advancing U.S. Priorities in a Consensus-Based Institution
Achieving our goals within the IMF will always be a challenge, because it is an institution based on consensus, and success depends on our capacity to persuade others of our position. This is a reality of our participation in the IMF and is a routine part of U.S. engagement in the institution. One way we have sought to address this is by encouraging others expand their thinking about the role of the IMF. For example, in advancing labor issues, we have encouraged closer cooperation between the IMF and the ILO in order to pursue our goals, while at the same time respecting the view of others. Are there other approaches or strategies that we should explore to enhance our capacity to persuade other members of the IMF and build a favorable consensus?
The IMF is now undertaking a review of program conditionality. This affords an important opportunity to learn from experience and better equip the IMF for future challenges. In considering this issue, we believe we should be guided by the basic principle that the effectiveness of IMF programs at times of crisis depends on their being focused on the reforms that are necessary for restoring market confidence and growth, rather than changes that are merely desirable from the standpoint of long-term efficiency. But clearly, this principle is easier to state than to put into practice. What are your views about the appropriate balance to be struck in the design of IMF conditions, between the necessary and the more strictly desirable?
Enhancing Public Understanding of the IMF
The crises of recent years have helped demonstrate the fundamental importance of the IMF -- both for the stability and strength of the global economy we have today, and the global economy that we are working to build for the future. Specifically, it seems to us self-evident that successful global economic integration will depend on there being greater financial stability within countries, and a well-functioning system for the flow of capital between them; and that is precisely what the IMF was created to achieve. Yet it is equally apparent that the role of the IMF can be difficult to explain to a broader audience and often controversial. Do the members of the committee have thoughts on how we might better express to a broader public both the importance of the IMF, and the need to equip it more effectively for the future?
With that, let me once again thank you for being here today and for all the work you have done over the past year. I look forward to today's discussion on this crucial topic. Thank you.
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