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Alan Larson, Under Secretary of State for Economic, Business, and Agricultural Affairs Remarks, Secretary's Open Forum, U.S. Department of State, Washington, DC, March 8, 2000

IMF Reforms and the Challenges of Globalization This Open Forum discussion is timely. There has been much debate about the IMF and, more broadly, globalization. The publication of the Meltzer Report will draw even more attention to this issue. Some would recommend radical changes, such as eliminating the IMF or sharply limiting its role. I support reform of the IMF, but measured reform. My motto would be "mend it, don't end it." Benefits of Globalization Let's talk about the IMF in the broader context of globalization. I think the benefits of globalization far outweigh its costs for the U.S. and other countries. Net direct investment in emerging markets increased from $31 billion in 1991 to $118.5 billion in 1999. According to the 1999 UN Human Development Report, the share of people enjoying what is known as medium human development rose from 55% in 1975 to 66% in 1997. At the same time the share of people suffering low human development dropped from 20% to 10%. President Ernesto Zedillo of Mexico, in remarks made at the World Economic Forum this January, had it right. "In every case where a poor nation has significantly overcome its poverty, this has been achieved while engaging in production for export markets and opening itself to the influx of foreign goods, investment and technology; that is by participating in globalization." The Role of the IMF I would argue that the IMF has been an indispensable part of the international financial system, and we have a major foreign policy stake in its future. By promoting an open, efficient international financial system, the IMF supports the growth of global trade, output and jobs. By pooling resources, it spreads the cost of sustaining global financial stability. The U.S. benefits from a more open trade and investment regime, and from the freer flow of capital. The IMF is the "first line of defense" against global and regional financial crises. Rescue packages organized, and partially financed, by the IMF helped keep countries from falling off the brink into financial disaster, with potentially serious foreign policy and national security consequences. Consider Korea. Our troops, along with our Korean allies, are quite literally on the front line of one of the tensest borders on earth. Having a stable prosperous ally is vital to our interests in the region. Two years ago, at a moment of financial crisis, the IMF played a critical role mobilizing international support and validating the economic reforms that the ROK proposed to make. Recovery has been nothing short of remarkable. After contracting nearly 6% in 1998, Korea's GDP grew by 9% to 10% last year and its output is about 4% higher than it was before the crisis. Then there is Turkey: A NATO ally for nearly 50 years, Turkey is equally important to us. In order to break a 25-year burden of high inflation, Turkey adopted an IMF-backed, pre-emptive disinflation program. The IMF's support -- $4 billion over the next 3 years, is playing a key role in underscoring the Turkish government's commitment to success. In fact, outstanding fiscal, monetary and exchange rate, and debt management results in the first two months of the program testify to the credibility of the government's actions and the critical function that the IMF can carry out. Mozambique's strong track record of economic reforms over the last decade, made in close consultation with the IMF, has led to economic growth of 8% to 10% per year over that period. Bolivia is another very poor and very indebted country that has benefited from IMF programs. In the 1970s and 80s Bolivia was known for drug trafficking, frequent military coups and world records for hyperinflation. Since it got on track with economic reform, following IMF advice, it has dramatically tamed inflation and restored economic growth. It is not mere coincidence that these steps have been accompanied by political stability in Bolivia and successful steps against drug trafficking. The Case for Reform The United States has been heavily involved in reforms to the international financial architecture, including reforms to the IMF. As a result, there is now far more transparency and accountability both within the IMF and in its relations with member countries. For example, 29 countries have participated in the IMF's pilot project to publish Article IV consultations so far. This administration will continue to advocate further IMF reform and greater transparency. We have worked to make good governance a core part of the IMF's operations. Most recently, we have led the call from the G-7 for reviews by the IMF to find ways to strengthen safeguards on the use of its funds in all of its lending activities. The G-7 has pushed the IMF to ensure that its macro-economic reform policies protect the poorest and most vulnerable members of society, which the IMF is doing. This means, for example, that in cases where fiscal austerity is called for, the IMF will pay attention to the quality of public spending -- that is, that appropriate spending be maintained. Further Reform Proposals There is a debate about the appropriate role of the IMF. Some would expand the IMF's role. Some have asked whether the IMF should become the lender of last resort. Some such proposals would grant the IMF the power to create SDRs, essentially "print money," for emergency use when needed to rescue the international financial system on a temporary basis. This proposal is probably more radical than the world is willing to accept. On the other end of the debate are those who believe the IMF has outlived its usefulness and should be abolished. They have two main concerns. One: The IMF encourages "moral hazard," the expectation that lenders will be bailed out for making risky loans to countries. This criticism is levied notwithstanding the fact that private lenders have been hit with big losses for risky loans, even to big IMF borrowers like Indonesia and Russia. Two: The IMF imposes onerous conditions that harm the poorest members of society. It is important to remember that micro-economic and structural reforms are a necessary response to an unsustainable economic situation. It is impossible to alleviate poverty without growth and growth is difficult to achieve without efficient and competitive domestic markets. There is an increasing IMF and World Bank focus on poverty alleviation. The Administration's Reform Proposals The administration has proposed five further core reforms of the IMF. The proposed reforms all stem from the new reality of the global financial system today, in which private capital flow now play the dominant role. One: 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 high quality information for investors, markets and the public as a whole. Two: IMF surveillance should pay greater attention to financial vulnerability as well as macro-economic fundamentals. In the wake of the recent crisis, we realize that the IMF (and probably everybody) needs to pay more attention to indicators of financial vulnerability. The IMF also needs to highlight the risks of unsustainable exchange rate regimes. Three: The IMF should focus its financing role more tightly on emergency situations. It should be at the forefront of international responses to financial crises, but it should not be a source of long-term low-cost financing for countries that cannot break the habit of bad policies. Nor should it serve as a source of low cost financing for countries with ready access to private capital. Four: the IMF should place a greater emphasis on catalyzing market-based solutions. Five: The IMF should, over time move toward a more representative governing structure. It should also move to a relative allocation of member quotas that reflects the changes under way in the world economy -- so that each country's standing and voice are more consistent with its relative economic and financial strength. Heavily Indebted Poor Countries (HIPC) Initiative Let me put in a plug for the enhanced HIPC initiative, for Heavily Indebted Poor Countries. It is important that we fund this program. The economic model promoted by the IMF has paid dividends over the years, but there are countries that have not benefited sufficiently. Whether due to bad luck, bad policies, or a series of bad decisions by borrowers and lenders, too many countries are mired in poverty and indebtedness. We need a more specialized approach to deal with the poorest countries that are mired in debt -- to "wipe the slate clean." The international community -- including the IMF -- has decided to reduce significantly the debt of the poorest and most heavily indebted countries as long as these countries maintain economic reforms, use the savings for social spending and poverty reduction, and take steps to combat corruption and improve the quality of governance. I would note that only about 4% of the debt owed by the HIPCs is owed to the IMF. This is about 5½% of the total loans the IMF had outstanding at the end of its 1999 financial year (April). It is important to realize that poor countries will take ownership of their development and poverty reduction strategy and civil society will also play a much greater role in the creation of a poverty reduction strategy. This last point is especially important. It makes governments more accountable to their people and recognizes that, As Secretary Albright has said, "economic reform is more likely to endure where it is built on a foundation of popular participation and democratic accountability." In conclusion, I would like to quote my boss, Secretary Albright one more time. "International relations, especially trade, never truly were and are not now a zero sum game. Beggar thy neighbors does not work. Prosper with thy neighbor does. America's exports cannot grow unless our partner's economies grow along with us. As economies and societies grow more open and more successful, they deny nourishment to the forces of extremist violence that feed on deprivation and despair." Ultimately, this is why the IMF and globalization are important to us. [end of document] All Remarks | Economic and Trade Policy | Department of State