From a speech by the United States Treasury Secretary delivered at the London Business School
RECENT EVENTS have reaffirmed that the IMF is indispensable. All of us involved with global finance would 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 to say that the IMF is indispensable is not to say that we can be satisfied with the one we now have.
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, 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.
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.
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 upending 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.
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 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. The IMF must be a last, not a first, resort.
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: programmes 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.
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 currency are essential to growth.
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. The approach looks to the IMF to continue certifying 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. If I have learned one thing in my 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.
- More about:
- Financial Crisis
- International Monetary Fund
- Loans And Lending Market
- London Business School