Mr. President, Distinguished Colleagues, Ladies and Gentlemen,
The last decade of the 20th century has seen a remarkable step forward
in the evolution of
financial intermediation. Investment and saving habits are changing worldwide—as
we can see
from proliferating securities markets, diverse financial instruments, and
large flows of foreign direct
and portfolio investment. These have been—and have all the potential to
be much more—essential
instruments of this explosion of international transactions of the last
15 years, a major component
of globalization with all its opportunities and risks. During the last
two years we had a vivid
illustration of these risks and of the virulence of the crisis which is
the other side of the glittering
promise of globalization. The worst of this crisis being now over, and
being a member of the team
of firemen who had to contain and extinguish them and at the same time
being active in the
workshop where the new architecture of the international monetary and financial
system is being
designed, I believe that I can perform no better service this morning than
to bring you up to date
about the work governments and financial institutions are undertaking to
adapt this system to the
globalized world of the 21st century. I would be delighted if this could
be of some help for you to
better identify the broad framework in which your ambitious but indispensable
efforts for
establishing a stable and efficient financial system could find their full
efficiency.
I am immensely grateful to the organizers and particularly to Michel Prada,
the Chairman of your
Technical Committee, for providing me with the opportunity so symbolic
of the need for this new
world for stronger link among international agencies in general, and between
the IMF and the
standard-setting agencies in particular. I will restrict myself to identifying
the key elements of this
new architecture and to providing you with a few preliminary reflections
on what could be our
interaction in the future.
* * * * *
As the world emerges from a period of intense turbulence, what kind of
economic and financial
system can we expect to develop?
The emerging markets crisis revealed deficiencies in the international
financial system both on the
debtor side—in the national policies and institutions—as well as on the
creditor side, notably in the
capacity of investors to undertake adequate risk assessment and of supervisory
authorities to
monitor properly their activities. The cost of it was high: the most severe
worldwide crisis of the
last 50 years. Was that a reason to abandon globalization with all its
promise for a more
prosperous world, in favor of the old models of protectionism and state
intervention? There was,
on the contrary, a very broad consensus for embarking on a major and immediate
cooperative
effort simultaneously to contain the crisis—a task now well advanced—and
to reform the
"architecture" of the system. This had to entail in reality a very profound
change in what has been
the relationship among governments, banks, and enterprises in promoting
economic development
during the last 30 or 40 years. The emerging consensus reaffirms a world
economy based on free
market mechanisms—on open trade and capital movements—buttressed by sound
national
financial systems and by good public and corporate governance. This would
be a system that
fosters the private sector—both domestic and foreign on a truly equal footing–as
the primary
source of investment and growth. It would require establishing an arm’s
length relationship
between governments and markets, neither too close nor too distant. It
is a partnership that
demands good governance, transparency and disclosure of information, and
a respect for
standards and codes of good practice that are consistent across countries.
Investors should be able to assess risks realistically, and operate within
a clearly defined, but not
oppressive, framework of laws and regulations. And, even if it almost goes
without saying, a
consistently stable macroeconomic framework will be asine qua non for national
and global
stability. All countries must compete for excellence in their macroeconomic
and financial
policies—not to mention the special responsibilities of the G-7; we know
too well now the
systemic cost of a serious crisis in a middle-sized economy as Thailand.
It would also be a world
that benefits from the existence of international institutions with well-defined,
but constantly
evolving, mandates that promote the smooth functioning of markets and economies,
and as far as
the IMF is concerned, could strengthen and, if needed, broaden further
its surveillance to better
promote the stability of the global system.
In other words, this crisis is obliging us all to imagine new ways in which
economic dynamism and
financial stability should be reconciled in the future. This is what the
so-called new architecture is
all about. Let me tell you about the four domains where we see progress,
and where conceptual
and practical work is no doubt still required.
* * * * *
I. There is a strong consensus for making transparency the "golden rule"
of the new international
financial system. On that I can be very brief, merely to underscore that
it is absolutely central to
the task of civilizing globalization. In fact, improving transparency lies
at the heart of many elements
of the debate. A lack of transparency has been found at the origin of each
recurring crises in the
emerging markets, and it has been a pernicious feature of the "crony capitalism"
that has plagued
most of the crisis countries and many more besides. Markets cannot work
efficiently, and they will
remain vulnerable to instability in the absence of adequate, reliable,
and timely information from all
quarters. Here IOSCO has been on the forefront, not only developing principles
for the securities
markets, but also working together with other agencies, for instance the
IASC (International
Accounting Standards Committee), to develop proper accounting and disclosure
rules. But the
world was very far removed from this! So it may seem like a very tall order
to change the culture
and attitudes of many decades. But in fact considerable progress is being
achieved in defining new
standards and establishing new practices. We are at the point now where—let
me be a little bit
impertinent—central banks no longer compete on their reputation for secrecy—but
instead on
transparency—and the IMF will be invited soon to establish transparency
reports.
A second domain where major efforts are deployed with a particular sense
of urgency and where
public and private forces must join hands is in preventing and resolving
crisis. This is a must, of
course. We no longer want to see in this globalized world innocent bystanders
paying suddenly for
the mistakes of others. But this is the most complex area of the debate,
and although considerable
headway has been made, there is still some way to go. The focus should
be on preventing crises.
Just as the public sector is being asked to adapt its culture, so too the
private sector will have, I
think, to increase its own transparency, to use internationally accepted
standards, to promote an
arm’s length relationship with government, and, as far as financial institutions
are concerned, to
have a much more careful evaluation and management of their risks, while
developing a more
mature partnership with their clients. This should lead, when crisis does
strike, to an active
contribution to their resolution. In the past two years, we have all learned
from the experiences of
involvement of the private sector in a number of country crises, such as
Korea, Thailand,
Indonesia, and Brazil. In moving forward, we need a creative approach that
draws on a mature
partnership between the public and private sectors.
On the public side, this effort expected from the private sector should
be accompanied by
powerful interventions to help contain the crisis, re-establish confidence,
and provide the countries
with the temporary financing that they may require during the phase of
adjustment and reform. You
recognize here a contribution orchestrated by the IMF. The four countries
I have just mentioned
are, I think good examples of this kind of post-crisis international support.
But more innovative
and more promising is the IMF’s recent decision to contribute to the prevention
of crisis through a
new mechanism, the so-called Contingency Credit Lines (CCL). Why this new
instrument? The
past two years have confronted countries with situations where contagion
is such that they can
encounter severe external financing pressure even when they have basically
sound economies. This
new mechanism, approved about a month ago, represents a substantial change
in the way in which
the Fund interacts with its members and the global financial community;
it shifts the emphasis from
curative medicine to preventive medicine. Existing IMF facilities help
countries that are in a weak
condition and experiencing an actual balance of payments need—because of
policy shortcomings
or adverse external developments. By contrast, the CCL is designed to help
countries that are
strong—with sound macroeconomic management, strong financial systems, applying
internationally
recognized standards, and having established responsible relationships
with their international
creditors—withstand the pressure on their balance of payments that might
arise from a sudden loss
of confidence caused by the contagion from crises in other economies. In
such cases the amount
of the support of the IMF would have no rigid pre-determined quantitative
limits.
Other initiatives are also being considered to help the orderly workouts
of crises if they do occur.
These could entail introduction of collective negotiation clauses in bond
contracts and definition of
appropriate arrangements in extreme situations for allowing a stay to be
organized to help
creditors and to arrange orderly workouts in their mutual interest.
A third domain where we are actively working to establish a proper balance
is in the fundamental
question of the freedom of capital movements. Here we must reconcile a
freedom from which
many countries have benefitted so much, with the precautions needed to
preserve stability. The
breakneck pace of development of the international financial markets during
the decade preceding
the Asian crisis raised questions about the appropriate approach to the
liberalization of the capital
account, and, of course, we have learned many lessons from the emerging
markets crisis.
Recognizing that de facto capital liberalization is under way—and without
doubt potentially most
beneficial—are we prepared to accept a haphazard, piecemeal and potentially
volatile process, or
should we try to manage the process in a way that increases economic stability
and growth? This
calls for a judicious approach on the part of both debtor and creditor
nations. Debtor nations will
need to satisfy two prerequisites: one, a sound, internally consistent
macroeconomic framework;
and two, a robust financial system with sound institutions and a good regulatory
and supervisory
framework. It is easy to imagine that these conditions cannot be met overnight
in many countries.
This means that creditor nations and institutions need to pay attention
to assessing and managing
risk. Of course, it is the investor who has the primary responsibility
for assessing risk. But
regulators in the industrial countries need to ensure that financial institutions
participating in the
global financial markets are subject to appropriate safeguards.
Should there be a formalized institutional approach to capital account
liberalization? In Hong
Kong, at the IMF Annual Meetings in 1997, the international community,
through a statement of
the Interim Committee, declared that "[it] is time to add a new chapter
to the Bretton Woods
agreement". The Fund’s Executive Board was invited to propose "an amendment
to the Fund’s
Articles of Agreement that would make the liberalization of capital movements
one of the purposes
of the Fund, and extend, as needed, the Fund’s jurisdiction through the
establishment of
carefully-defined and consistently applied obligations regarding the liberalization
of such
movements." It is significant that this statement was made after the crisis
had begun to emerge and
it is even more striking that, as the full scale of the crisis became evident,
how few countries
reversed direction. Although it was understandable that the crisis made
the international community
think twice before proceeding, I believe it is now time for momentum to
be re-established. The
reason is simple: as confidence returns to world markets and financial
flows are starting to grow
again, undoubtedly new forms of innovation will take place. It is vital
that these next stages of
integrating global financial markets take place within the framework of
"carefully defined and
consistently applied obligations" rather than accepting the risks of a
return to the piecemeal
approach of the past decades. We need a constructive means of helping countries
that wish to
access capital markets, do so in a way that protects their stability and
economic security. This is
the work we will try to advance this summer.
This objective will be made much easier to reach by what I see as the fourth
domain where a
consensus is clearly crystallizing and where our cooperation will be important—the
need to
establish at the international level the discipline that has progressively
come to prevail in domestic
markets. It was time to admit, as a matter of fact, that governments had
not devoted enough
attention in order to secure such a civilized environment. In the international
markets we were
already living in the 21st century but with an absence of universally accepted
rules and standards
that was reminiscent of the domestic environment that prevailed at the
end of the 19th century in
the industrial countries. Messrs. Bill Gates, George Soros, and others
were operating
internationally in a framework that was not far from the one described
by Balzac and Zola in my
own country at the end of the last century. No wonder that a number of
countries hesitated to
expose themselves to such a risky environment. This had to be corrected.
Consequently, tremendous effort is under way to establish standards and
codes of good practice
at the international level that build on and offer the potential to globalize
the standards that exist
within the most advanced nations. New standards are being defined and existing
ones refined. The
IMF has been formulating standards or codes of good practice for governments
in its core domain
of responsibilities, which are already well advanced or being implemented.
Many agencies, several
of which are represented here today, have been working to develop standards
in their areas of
expertise: accounting, auditing, corporate governance, payment and settlement
systems, insurance,
and bankruptcy. 1 IOSCO has been in the front rank. It was among the first
agencies to make a
concerted response to the crisis, rapidly bringing to completion in Nairobi
last September a set of
"Objectives and Principles of Securities Regulation" that provide a pragmatic
launching pad for
national regulators to establish codes tailored to their own countries.
What is more, the objectives
on which those principles are based—protecting investors; ensuring that
markets are fair, efficient
and transparent; and reducing systemic risk—can serve as a guide for all
of us working on
standards and codes of good practice.
In the critical area of financial sector strengthening, the IMF and the
World Bank are cooperating
closely to help promote stronger financial systems, based on the internationally
accepted Basle
Core Principles. But there is scope for even deeper international cooperation,
and the Financial
Stability Forum that has just been established to encourage dialogue among
the many relevant
national and international agencies will make an invaluable contribution.
II. This is the domain where the perspectives for the expansion of our
cooperation in the near
future are the most promising. Let me provide you with a few preliminary
thoughts about it.
What are the implications for the IMF? Our activities are being affected
in some quite profound
ways. At one level, we have been asked to take the initiative to define
standards in three areas:
First, the Fund began to formulate standards for data dissemination shortly
after the onset of
the Mexican crisis. These are now fully operational, and the more demanding
Special Data
Dissemination Standard (SDDS) has now been adopted by about one-quarter
of the
membership, the large majority of those countries participating in capital
markets.
Second, in April 1998, the Interim Committee adopted a Code of Good Practices
on
Fiscal Transparency. Since then, we have made this code operational through
the
preparation of an implementation manual and development of a questionnaire
that a number
of countries are now using to assess the transparency of their fiscal systems.
Third, the Fund—working together with the BIS, a representative group of
central banks,
the World Bank, and the OECD among others—has prepared a draft Code of
Good
Practices on Transparency in Monetary and Financial Policies. The unusually
broad
participatory approach 2 used in this case will continue through consultations
with the public
and other agencies, with a view to finalizing this code before our Annual
Meetings in
September. We are grateful to IOSCO for its contribution during the preparation
of this
code, and we hope to draw on expertise again as we develop a supporting
document to
this code.
Looking to the future, new priorities are emerging for the Fund. With many
agencies now
preparing or updating their standards, principles, and codes of good practice,
the attention is
shifting to the high challenge of implementation. There are no special
difficulties within the domain
traditionally covered by the IMF surveillance, but the question arises
beyond that as many
agencies do not have the capacity to conduct the country-by-country consultations
that will be
necessary. Although the Fund does not yet have the expertise to assist
in implementing many of the
new standards, it turns out that it is in a unique position to contribute
to their dissemination and
with the help of the standard setting institutions, to contribute to their
implementation. The Fund’s
mandate enables it to have regular—usually annual—contacts with all member
countries for policy
discussions. This has led to a number of calls for the Fund to use its
surveillance to play a
significant role in encouraging the implementation and monitoring of observance.
But for that we
will need your cooperation.
The precise mechanics of this have yet to be worked out, but it will clearly
build on the experience
that we will gain in implementing the standards that are the direct responsibility
of the Fund (data
dissemination, transparency in fiscal, monetary and financial policies).
It will also build upon the
collaborative approach with the World Bank under the Financial Sector Assessment
Program that
we have recently formalized. Another proposal is that countries should
prepare "transparency
reports". In a first experiment, three countries—Argentina, Australia,
and the United
Kingdom—have volunteered transparency reports, each with a quite different
character. We will
continue to work with our members on this most promising avenue.
A further reason for the Fund to become involved in encouraging and assessing
the implementation
of standards arises from the important adaptation in our functions that
follows from
newly-established Contingency Credit Lines. Among the five criteria for
access to the CCL is the
country’s "progress in adhering to relevant internationally-accepted standards"
and clearly
judgment calls will have to be made by the Fund.
In executing these new tasks, it is quite evident that the IMF will have
to enhance and supplement
its in-house expertise by relying heavily on the skills, resources, and
advice of the many agencies
engaged in defining standards. But, even more, we would look to the standard-setting
agencies to
play an active role in developing methodologies for assessing observance
of their standards. We
shall have to develop with IOSCO and organizations like it a high degree
of collaboration. As we
proceed, the most pressing needs will be for technical assistance in countries
adopting new
standards, and the human resource constraint may well be the largest challenge
we face, since in
some areas, there are simply not enough people with adequate skills to
go around. An uncommon
degree of cooperation among the many international bodies and national
agencies is now essential
to meet this challenge.
* * * * *
I believe we are here at the beginning of one of the most difficult aspects
of reforming the
international financial architecture. The standards and principles now
being formulated at the
international level must be turned into more precise standards in individual
countries and
implemented systematically. This will be a technically complex, time-consuming,
and at times even
politically sensitive task. The challenge for the international community
is to ensure that the benefits
for all countries are evident and substantial. A firm start has been made,
but our journey together
will be long, indeed. We must make it a success.
1In addition to the work underway by IOSCO on securities markets standards
are being prepared
or updated by: the Basle Committee on Banking Supervision on banking; the
International
Association of Insurance Supervisors (IAIS) on insurance; the International
Accounting Standards
Committee (IASC) and the International Federation of Accountants (IFAC)
on accounting and
auditing; the United Nations Commission on International Trade Law (UNCITRAL),
the World
Bank, the IMF, and the International Bar Association on bankruptcy; the
OECD, World Bank
and the BCBS on corporate governance; and the Committee on Payment and
Settlement Systems
(CPSS) on payment systems. This work is summarized in the IMF publication,
Experimental Case
Studies on Transparency Practices: Developing International Standards-Progress
Report.
2 Public comment is being invited on this code, which may be viewed on
the IMF ’s website at
www.imf.org/monfintransparency. Comments are invited by June 15.