IMF surveillance consists of confidential policy advice, coupled with peer pressure from other countries. “But peer pressure can also mean peer protection,” de Rato said. In a world increasingly defined by financial globalization, it is no longer enough simply to focus on individual countries and their exposure to crisis. “Even if a country is not itself at risk, it may be contributing to global imbalances and placing the rest of the world at risk.” In this respect, he called on the United States to reduce its deficit and on Japan and Europe to promote economic growth by reforming their economies.
Large loans may still be necessary
De Rato also responded to those who have criticized large loans to emerging market countries such as Korea, Brazil, and Turkey. “Some large IMF-supported programs raise concerns because they appear to suggest that a country’s geopolitical importance or other factors play a role in IMF loan decisions,” he said. But while such loans draw a lot of attention, “the IMF has also given major support to countries whose situation does not pose systemic risks or which may not rank high on the geopolitical agenda of our largest shareholders.”
The IMF’s lending decisions must reflect the principle of uniformity of treatment. And since no country is exactly like another, the IMF has developed financial arrangements that meet different needs. In most cases, the normal access limits that apply to IMF loans are sufficient, but in some rare cases, “exceptionally large access to IMF resources can be necessary to guard against risks to the global financial system,” de Rato said.
Large loans are made necessary by financial globalization, a process that should mostly be welcomed because it provides opportunities for private capital to finance investment in countries that can use the money productively. But according to de Rato, promised gains from financial globalization have yet to be fully realized. In fact, in many emerging market countries, capital flows have themselves been a source of volatility. This has created a new breed of shocks that are much harder to manage than the current account imbalances the IMF has traditionally dealt with.
Korea is one example of a country that required a substantial loan from the IMF to help it restore financial stability. The IMF’s $21 billion loan package to Korea in December 1997 was a very large loan by any standards, but it paid off: the country experienced strong economic growth by 1999 and even managed to repay the IMF ahead of schedule.
But while exceptional situations may require exceptional steps, “we also clearly need an IMF that can say ‘no’ selectively, perhaps more assertively, and, above all, more predictably,” de Rato said. If countries knew that the IMF might decline to lend in some circumstances, they might adopt better policies in the first place. “To do this, we may have to think of ways of linking access to IMF resources more explicitly to a country’s policy efforts before the crisis,” de Rato said.
Coordination is key
The IMF should also review its work in low-income countries. De Rato hoped that an upcoming report by the IMF’s Independent Evaluation Office on the Poverty Reduction and Growth Facility (the IMF’s primary facility for lending to poor countries) and on Poverty Reduction Strategy Papers (which all poor countries receiving assistance from the IMF are required to submit) would help shed light on how the IMF can become more effective in its dealings with low-income countries.
The IMF should ensure better coordination with other international institutions such as the World Bank, various United Nations agencies, regional development banks, and the World Trade Organization, de Rato also said. This particular challenge is present in all the IMF’s work, “but is especially important for our work in low-income countries, where we are only one partner among many in helping them achieve their longer-run development goals.”
IMF Managing Director Rodrigo de Rato’s speech, “The IMF at 60—Evolving Challenges, Evolving Role,” was delivered on June 14 at a conference entitled “Dollars, Debts, and Deficits—60 Years After Bretton Woods,” organized jointly by the Bank of Spain and the IMF. The full text of the speech is available on the IMF’s website (www.imf.org).