Crisis and Beyond-The Next Phase of IMF Reform
Prepared remarks delivered at the event "The IMF in a Transformed World Economy" held at the Peterson Institute for International Economics
Good afternoon. It's a great pleasure to be here, to talk about the mandate of the International Monetary Fund (IMF). Before I begin, I would like to say a few words about the G-20 leaders' meeting in Toronto this past weekend. I have three main messages coming out of that meeting.
First, the collaboration that worked so well during the crisis is still alive. The great fear was that the spirit of cooperation-the willingness to work together that proved so effective during the crisis-would fade away as the recovery arrived and challenges became more complex. But this did not happen. Of course, cooperation does not mean uniformity, and it makes sense for diverse policies to respond to diverse challenges. With this in mind, leaders committed to both fiscal adjustment and growth, with the pace of adjustment reflecting country circumstances.
The G-20 had asked us to provide input into their Mutual Assessment Process, which is aimed at delivering stronger, more balanced, and more sustainable, global growth. Our analysis showed that cooperative action can produce real results-boosting world growth by 2½ percent over five years, creating 30 million new jobs, and lifting 33 million people out of poverty. So this talk of "global cooperation" is not just theoretical or at the margins of the discussions-it is central and essential, and it affects the lives of millions of people.
My second message coming out of Toronto is that G-20 leaders remain committed to financial sector reform. Again, the IMF has provided extensive input into this debate, calling for tougher and better regulation, for complementary financial taxation, and for collaboration among countries. On the specific issue of the financial sector tax, I think it is too early to write its obituary. Indeed, some major economies have decided to implement it. Progress is also being made on the regulation front, even if some of the key parameters-including the quantity and quality of capital-are still under discussion. I hope that these issues will be resolved shortly.
Third, I am pleased to say, Toronto also saw the G-20's continuing support for the IMF-including the commitment to completing important governance and quota reforms by the time of the Seoul summit in November. This is a difficult and complex issue, but I think we can make further progress. These reforms will help build a more relevant IMF, a more legitimate and truly representative IMF and, above all, a more effective IMF.
Drawing on the lessons from the crisis, the IMF is looking at how we might further clarify and improve our "mandate" and the way we work. The goal is to become even more responsive and effective in addressing the new realities facing our membership, especially in the world beyond the crisis.
The IMF in the Crisis
Let me start by talking very briefly about the Fund's response to the crisis. We acted as a vehicle for policy coordination and were among the earliest to call for a global fiscal stimulus-a globally coordinated effort that helped the world avoid a second Great Depression.
On the financing side, the G-20 leaders' commitment to triple our resources played a major role in restoring confidence. We committed over $200 billion, and pumped another $283 billion in Special Drawing Rights (SDRs) into the system. Our new Flexible Credit Line (FCL) provided a strong safety net for countries with a good track record. We tripled our concessional lending commitments to low-income countries, charging zero interest through 2012. And we enhanced country ownership by making our lending programs more flexible, streamlining policy conditions, and being responsive to the needs of the most vulnerable groups in crisis countries.
In these countries, output losses were smaller relative to past crises, and the kinds of wrenching adjustment seen in the past-large movements in exchange rates and interest rates-were avoided. Spreads narrowed for the countries under the Flexible Credit Line. And in most cases, including among low-income countries, fiscal policy was able to act as a brake on the economic downturn.
The crisis also changed the way the IMF works with regional entities. The first step was our close collaboration with the European Union in providing financing to countries outside the eurozone. Later, when the Greek crisis broke, the eurozone was-understandably perhaps-reluctant to entertain a similar IMF role. But it soon became clear that IMF resources, and above all experience in dealing with such crises, was needed, and so we stepped in, establishing a new kind of relationship with our European partners. I hope that we may be able to consider similar modes of partnership with other organizations throughout the world-perhaps, for example, with the Chiang Mai initiative.
This crisis has shown clearly that globalization is not merely theoretical. It is real. What starts in a single country can have repercussions far beyond that country, and we could even see an economic "butterfly effect" in action. This is why IMF support for Europe-or indeed any other region in the world-is in everybody's interest. Remember, the Atlantic Ocean offers little protection against serious economic disruption in Europe, which would have major consequences for American growth and jobs.
Because we adapted to meet the needs of our members during the crisis, the IMF played a useful role. But now we need to think about our role in the future-in "peace time," if you will, beyond the crisis-especially since globalization is here to stay.
Let me begin with IMF surveillance and our dual role as ruthless truth-teller and trusted policy advisor. Before the crisis, surveillance lagged behind global economic and financial developments. We did things pretty much as we always did, focusing mostly on individual countries rather than systemic issues. Even the format of our reports has barely changed over the decades, limiting their effectiveness.
We need a new toolkit for a new era. We have made a good start. Our revamped Early Warning Exercise-run jointly with the Financial Stability Board-looks more at systemic effects, tail risks, and vulnerabilities. But we need to put macrofinancial stability at the front and center of IMF surveillance.
Let me be clear-we do not aspire to be a global regulator, but we need a better understanding of the complicated nexus of exposures, cross-exposures, and the shifting pattern of asset and liability concentration across regions and institutions. To do this, we must improve access to necessary data, working with national supervisors and the Financial Stability Board.
We also need to beef up multilateral surveillance, to get a better handle on the interlinkages that underlie the global financial system. In systemically-important countries, domestic policy has consequences for the rest of the world. With this in mind, we plan to introduce new "spillover reports" starting with five systemic economies-China, the euro area, Japan, the United Kingdom, and the United States -over the next 18 months, to assess how their policies might affect regional and global stability.
Of course, we must not neglect bilateral surveillance, which remains the bread-and-butter of our work. Here too, I believe we can improve. In the past, our value added lay primarily in providing country-specific advice. While this remains relevant, we should focus more on our real value added today-the multicountry dimension. We can build on this-including, perhaps, through thematic multicountry reports that can better leverage the IMF's cross-county experience.
Let me now turn to our lending. Clearly, there are still gaps in the global financial safety net. The FCL was a successful step in the right direction, and we are considering enhancing it by expanding its duration and removing the cap on access.
To serve its intended purpose, the FCL must remain a "platinum" brand. But what about countries facing market jitters that do not qualify for the FCL and yet still have sound policies? Here, we are thinking about a new Precautionary Credit Line for these countries. The conditions for qualification would be a bit less strict than for the sister FCL, but in return, we would ask for some limited ex post conditionality.
It also might be useful to establish a framework for dealing with systemic crises-a coordinated mechanism to proactively channel liquidity to countries under pressure. To be effective, resources should be deployed as quickly as possible, and focus on countries that can propagate the shock, whatever its origin, across the world-to stop the falling dominoes. Of course, no country may want to move first, as that might risk sending the wrong message to markets. To get around this chicken-and-egg problem, we could think about providing multicountry assistance simultaneously.
The IMF is also exploring ways of cooperating more closely with regional financing arrangements, including in the context of global liquidity provision. This has the dual benefit of increasing the available resources and country ownership. Our recent partnership with Europe represents a new and innovative mode of cooperation, and could provide a useful precedent for working with other regions in the future.
A longer-term question relates to the composition of the supply of reserves. Certainly, the SDR issuance at the peak of the crisis provided relief. It makes sense to ask whether an enhanced role for the SDR would make sense in "peace time" as well. Of course, this is a longer-term issue, and there are operational difficulties to consider, but we need to start thinking today about the world of tomorrow.
What I have set out here is an ambitious agenda. For it to work, we need enhanced legitimacy. Legitimacy depends on a governance structure that reflects today's global reality. When the Fund was founded in 1944, we had 45 members. Today, we have 187. Back then, a small team of countries powered the global economy. Today, there are many engines across many countries. So obviously, increased effectiveness means increased legitimacy, and governance reforms are the key to unlocking legitimacy.
Reforming IMF governance goes hand-in-hand with modernizing our mandate. The 2008 Quota and Voice reform was a first step. We are now committed to a quota shift of at least 5 percent, to give a greater voice to dynamic emerging markets and developing countries. This must be done by the January 2011 deadline, which in reality means by the G-20 summit in Seoul in November.
Of course, quota reform is important, but it is not the end of the game. Other changes are also needed. We need greater ministerial engagement in our activities to enhance the traction of our advice and our accountability. We need greater emerging market and developing country representation on our Executive Board. We need an open and transparent management selection process, where merit matters more than citizenship. We need to improve diversity on the IMF staff to better represent our global membership.
I call upon our members to support these reforms. We must have the tools necessary to avoid future crises to the best of our ability and to address them effectively once they arrive.
Globalization must be underpinned by a vigorous multilateralism. The IMF was founded in 1944 and given a mandate for global economic and financial stability. But what was really behind that?
We were formed from the ashes of a ruined world, imbued with the determination of our founders to never again make the mistakes of the past-mistakes that led to economic nationalism and war. Our overarching goal is fostering better relations between countries and avoiding the economic roots of instability and conflict.
Our role begins with economic stability, but it ends with the goal of all multilateral institutions-a stable and peaceful world.
Thank you very much.