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Investing in Better Globalization

Speaker: Horace Kohler, president, IMF
Presider: Richard W. Fisher, managing partner, Kissinger McClarty Associates
September 19, 2002
Council on Foreign Relations

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New York, NY

M: So on foreign relations here in Washington, D.C. it is my distinct pleasure today to welcome you to the kickoff of our Peter McColough series on international economics. As we began to think about how we wanted to do our economic programming this year and this fall in particular, we tried to think of what figure would be best to begin with. And it is no surprise to many of you I think that we decided that the person we would like to kick off our international economic series with is in fact Horst Kohler.

I will introduce Dick Fisher to preside over this meeting. One quick note about Dick, a long-time member of the Council on Foreign Relations, known to many of you here in Washington. He's a managing partner at Kissinger McClarty Associates, but I think most of you in this room would know him from his days at USTR, though I see some of you who know him from his private sector activities as well.

I just want to welcome you to the council and to promise you all that you will see a lot of high quality, economic related programming this fall, and I can't think of a better way to start it than with Horst Kohler. (Applause)

Horst Kohler [HK]: Thank you.

Richard Fisher [RF]: Thank you. I'm Richard Fisher and it's a pleasure to introduce Horst Kohler, who is a terrific public servant and the eighth managing director in history to speak to the Council. This is a moment, as we were just discussing upstairs, in time when every institution and almost everything that we have taken for granted for so long has been stood on its head.

Consider today's headlines: The United States is a hyper power but it is under siege by terrorists. The German Chancellor thumbs his nose at the President of the United States. Moscow is an ally and not a mortal enemy. Japan had arisen to be number one, according to some of our academic friends, now struggles with a credit rating on par with Nigeria. China is the hottest magnet in the world for foreign direct investment. The euro is not just a reality but is now an expensive currency. Debt funds trade at one percent range, plus, the ten-year bond is trading below four percent, stock markets are under the worst downside selling pressure since 1929.

So different and so turbulent is the world we now live in that National Public Radio airs ads that utter the words, Britney Spears and foreign affairs in the same sentence. (Laughter) Yet while almost every institution and operating assumption we have grown used to since the Second World War has changed. The Bretton Woods institutions still stand, like formidable peers in a turbulent sea. The GATT has evolved into the WTO, something I spent many years working with at USTR, plays a critical role in the globalization process. The World Bank continues to play an important albeit challenged role in the development process. And the IMF, head by our distinguished speakers, about to hold its 57th annual meeting, will thrash out international solvency procedures and other issues vital to the balance of payments process and international financial stability.

Some 57 years ago when John Maynard Keynes was negotiating the preconditions for the Bretton Woods institutions, with Lord Halifax, the British Ambassador, at his side, he grew increasingly exasperated at what he described as then the cowboy attitudes and nouveau riches tactics of the United States.

Halifax slipped him a piece of paper with a little ditty inscribed on it, which said, In Washington, Lord Halifax whispered to Lord Keynes, The Americans have the money, but we have all the brains. (Laughter) Well, the IMF has money and brains. (Laughs) And just last week our distinguished guest did something utterly uncharacteristic of powerful institutions, almost completely unprecedented in Washington, D.C. In an article in the September 11th Financial Times titled, "The IMF is more humble, says its chief," it was reported that Horace Kohler said yesterday that the IMF "has a lot to learn."

So it sounds like a perfect luncheon date. Someone who is rich and who is brainy and humble. (Laughter) And how privileged we are to rendezvous with this person in a session where we can set aside the usual rules, we can actually discuss it in public, and the meeting will be on the records, what I call the O'Neil rules no longer apply.

Mr. Kohler, we're delighted to have you here. Welcome. Horst Kohler. (Applause)

HK: Thank you. Members, John, ladies and gentlemen, it is a pleasure to be with you here today, with the Council on Foreign Relations. I appreciate the contributions that the council has made over the years to the development of US foreign policy and to the debate on international economic and financial issues. And of course I appreciate your work making it possible for my being here today.

I have put my introductory remarks under the headline, Investing in Better Globalization. Investing in better globalization. And I shorten my text because I am sure you are more interested to ask questions, and I should then try to answer it. What's the status of the global economic and financial outlook? The global economy has shown remarkable resilience in the face of multiple shocks over the past two years. Shocks, enterprise shocks, the burst of the IT bubble, equity prices, September 11th scandals.

Nevertheless, in spite of this resilience, nevertheless indeed we need to be concerned about the strength and durability of the ongoing economic recovery and the stability of the international financial system. Risks to the global economic outlook today are clearly tilted more to the downside than they were a few months ago. These include continuing fallout from the collapse of the equity price bubble, and corporate scandals, difficulties in some emerging market economies, regional political tensions, and volatility (Inaudible) oil prices.

But on balance, we in the arena, and I personally, feel that we still should expect that the recovery will continue. The probability of sliding back into recession here in the US in our view is not high. The major industrial countries have on the whole reacted responsibly to the global slowdown. The effects of earlier relaxation of monetary policy are still in the pipeline, and improved technology holds the potentials for new products, new services, and greater productivity.

Moreover, I do have some trust in the forward-looking optimistic way of life exemplified by the American people, one of the causes why I am cautiously optimistic. Crucial at this moment for safeguarding is action in particular to build confidence, confidence that each country is acting to put its own house in order by tackling the underlying problems, structural reforms, and so strengthening growth fundamentals. Second, confidence also in the institutional framework for market economies, including accounting and corporate governance, and third confidence that nations remain committed to effective international corporation and are prepared to take concrete actions to strengthen it.

A process of confidence-building requires in particular strong leadership from the advanced economies. This means, amongst many other things, that the United States should beware of falling back into chronic public sector deficits. It means that Europe and Japan have to be more serious about accelerating structural reforms, its structural reforms, and again structural reforms, which are needed to unlock self-sustained growth. It also means that Japan should act decisively to bring an end to deflation.

I also think that the advanced economies have a particular responsibility now to lead by example and work for a successful conclusion. The talks and the spirit of the talks in itself should be and can be a confidence-building factor.

The critical debate on globalization—I welcome the ongoing critical debate about globalization as an opportunity to clarify its costs and benefits, and also as an antidote to complacency. Let us not confuse ourselves on the other hand. The people of the world, to give them the prospect of a better life need more globalization not less. But it's also clear that we need to work harder to make globalization more inclusive and seek a better balancing of the risks and the benefits. This means that integration in the global economy must be accompanied by investments in making integration pay off for the people of the world, and not least and especially for the poor. Investments and better policies and regulatory frameworks at the national level, to safely take advantage of the opportunities of the global market place, and investments and more international cooperation to guide and shape the process of the organization.

The IMF is in the process of change. I am strongly convinced that the IMF must play an active role in the search for better globalization. There is clearly a need for an institution that is based on cooperation and mutual trust between its members, and we have 184 nations as our members, encourages sound macroeconomic policies in its member countries, and looks after the stability of the international financial system. These two things try to work for sustained global growth and try to work and to safeguard the stability of the international financial system. These are the core tasks of the IMF.

And Ambassador Fisher has hinted to that while the IMF is far from perfect we do try to learn from experience, and do adapt to the needs of a changing global economy. Since the nation's crisis in particular, the IMF has been in the process of considerable change, to name only a few of the reforms. I must be honest, this reform process did not start while I have been at the IMF, that is two and a half years. It started before. But we've accelerated this process and, as I see it, we give it a new spirit and direction.

I want just to name a few of these major changes. There has been a near revolution in transparency at the IMF. This approach has given markets better tools for accessing risk. Second, the IMF, with the World Bank together, are focusing on helping member countries to build sound financial sectors and developing rules of the game for the global economy through our work on standards and codes. We have created an international capital markets department and capital markets group to enhance the IMF's capacity for monitoring and analyzing developments in international financial markets. Because here the volatility on the one hand is a big problem, on the other hand, the potential of markets is really a prospect for the future.

We are taking steps in the fund to streamline and focus IMF conditionality, what to get rid of conditionality because I think our lending operations should be combined with conditionality, but to make it work, and that means that we foster, promote ownership of reforms, not just imposing what the nations, parliaments and governments have to do, but that they understand it's in their interest to do that.

As part of the culture of creators, we have stepped up our corporation with other organizations and our outreach to civil society. I believe, ladies and gentlemen, it is also essential for the IMF as a universal institution to be actively engaged in the fight against world poverty. For this purpose we are closely working with the World Bank, which has the lead role in poverty reduction. I also think it is right for us to speak out on behalf of the poor for better market access and a facing out of trade-distorting subsidies, for more aid, efficient aid, and for doing more to build local capacities.

Like in America, clearly of concern for us and for all of politicians, the public, who have an interest of stability, the reforms introduced since the Asian crisis have made a difference for growth and stability in the global economy at a particularly difficult time. But they have not prevented the emergence of new strengths in a number, in particular of Latin America countries. To an extent, this reflects a generalized increase in risk aversion around the world. It's the big problem.

Some critics, on the other hand, say it has been excessive neo-liberalism which created the current problems in Latin America. I disagree with this kind of criticism. As the former president of Mexico and Ernesto Zedillo recently wrote, the main problem in Latin America has not been too much reform, but too little, and a lack of consistency in reforms. It is clearer than ever that strong institutions and good governance are indispensable for sustained growth and financial stability. That means corruption is effectively an enemy for stability and growth.

Reducing glaring inequalities in income, like they exist in Latin America, should also be an essential part of an economic ... of any economic reform strategy. The IMF is strongly engaged with our members in Latin America. We give it enhanced attention, because they deserve it. There is a lot what has improved in terms of democracy and stability, therefore we should not write them off. Our strategy is to tailor our advice and financial support to the particular circumstances of each country. Despite all of the difficulties in Latin America, we always need to be aware the differences between the countries and not just put them all in one basket.

And to help them also means for me the IMF has to take reasonable risk. That's part of our mandate—Where there are governments that are living up to their own responsibility and committed to working with the international community, our members all over the world, 184 but particularly also in Latin America, can count on the fund's assistance in restoring the conditions for sustainable growth.

So looking forward, what's the agenda for further reform? The latest experience in Latin America should make us indeed more humble about our own performance. The IMF too has a lot of unfinished business. We clearly need to implement forcefully the initiatives that are already underway. In doing so, I am absolutely convinced that over time these reforms will pay off in greater financial stability and stronger global growth.

In addition, however, I believe that further reform is required in four crucial areas. First, we must do more to improve the IMF's operations capacity for crisis prevention. Here we must combine, it's very important to see this, we must combine ambition to prevent crisis with a recognition that some degree of overshooting and correction, and thus some risk of crisis, is inhabitable in a market economy as part of the competitive search for better results, better products, and higher productivity. There is no free lunch to get dynamic growth and innovation.

We need to be aware there is a risk in this. But we need to work so that crises are less often, less severe. Strengthening our continuous policy dialogue with member countries or IMF surveillance is key for improving here our performance. We must help member countries to put in place for instance shock absorbers to cope with risks, including better debt and reserve management, more flexible exchange rate machines, sound budgets that leave some room to maneuver in difficult times. Efficient and diversified financial systems and more effective, indeed more effective, social safety nets.

Beyond improving the quality and coverage of our advice, we should also become more effective in convincing member countries to take early, preemptive action, in addition where a country has established a good track record, the IMF should have the capacity for a rapid and flexible response to help sustain a sound policy for growth against turbulences in the global economy. While the IMF's so-called contingent credit lines have no so far been utilized, I still believe that the underlying concept of using IMF financing to, if you want to reward good policies and help countries to stay the course, is right and should be now made operational. And we are working on that.

Recent developments, ladies and gentlemen, have made it clearer than ever that efforts at crisis prevention must pay as much attention to risks and vulnerabilities arising in the advanced economies as they do to problems in emerging markets in developing countries.

So I want to be clear, the IMF is not just an institution to deal with emerging markets, risks and vulnerabilities for the stability of the international financial system can have also their source in the advanced countries. We need to think creatively about ways to deal with excessive productivity in international capital flows... we need to think creatively about ways to strengthen self-correcting forces in markets and the role of regulation. Transparency is one major way to ... which we need to further develop in order to get this done.

I see a need that the responsible institutions at the national and international level concentrate on refining and harmonizing accounting standards, enhancing corporate disclosure and ways to align management incentives better with shareholder objectives to reduce the potential for conflicts of interest. We are in the language of the fund's thinking about a so-called element report on the observance of standards and codes and element about corporate governance. And not just in the emerging market countries, but also in the bonds countries.

As a second major element in our reform agenda, the IMF must continue working to strengthen the framework for crisis resolution. We are working toward and integrated approach, combining access policy, that means how far, how much countries get access to IMF resources, combining systematic debt sustainability analysis. We need to have a better capacity to judge when a debt situation has become unsustainable. We need to have a greater selectivity in IMF lending. We need to be able to say no when we have clear indication there is no commitment and no will to implement right policy or to cooperate with the international community. And also we need to have better debt restructuring mechanisms.

A natural counterpart to an emphasis on self responsibility and to improve the pricing of risk and minimize moral asset we intend to make our policy on access to the IMF's resources clearer and more predictable. That means also we want to set up clear limits to the access of the IMF. But more important is for me the predictability and the clarity about how to get access to this. While there might still be cases on which exceptionally large financial support is granted, and I don't hesitate to say for instance like Brazil, we need to ensure that exceptional access is truly exceptional. In parallel we are working to improve the basis for inherently difficult judgments about debt sustainability.

My strong advice to our members is that they work as much as possible, and as long as possible, if you want, so with voluntary or negotiated market solutions in case a debt situation is not sustainable. I would expect that private creditors in turn will act responsibly in recognition of their own interests in stability and growth in the global economy. When I look to the situation just now I have sometimes the feeling now in all the banks and other financial institutions they see more the risk, we need to have entrepreneurs also in the banking sector to look where is still an opportunity to make money, and not just to streamline, to scale back, to cut back, because everybody is frightened. I think we need entrepreneurs in this particular situation of which are international financial markets.

On the basis of these principles there is also broad agreement I think with the public and private sector that as a truly last resort we need better ways to deal with cases in which sovereign debt burdens have become unsustainable. We have here a collective action problem and we need to have a system to restructure debt more promptly and in a more orderly manner while protecting asset values and creditor rights.

The IMFC, that is International Monetary and Financial Committee, of the IMF has asked the fund to pursue two tracks: to improve the tools for dealing with the most difficult cases of unsustainable sovereign debt, and in particular, to help coordinate action among diffuse and diverse groups of creditors. We are seeking to promote the use of collective action clauses in debt contracts. We are strongly seeking that. We are also working on some form of sedentary sovereign debt restructuring mechanism, which would enable a sovereign debtor and a super maturity of its creditors to reach agreement binding on all affected creditors. We understand these approaches as being complimentary. I expect, based on the progress already made, that the annual meeting will give further impetus to our efforts to resolve these issues by the time of the IMFC meeting next spring.

I assume a question comes up, I can already assure you, it is never the appropriate time to discuss this kind of matter. But I think we must pursue and we have to pursue to sort it out now.

A clearer more predictable role for the IMF in the resolution of crises will strengthen incentives for proper risk management by borrowers and lenders. I am confident that improvements in IMF surveillance will also help to make crises less frequent and less severe. At the same time, however, the case of Brazil demonstrates that the international community must have the fire power to provide whole-hearted support for good performance, or to support a good policy trend. I do think that Brazil is in a good long-term policy trend. And I include in this also the smooth, orderly development of the presidential election. We should not take it as being granted that everything is smooth in a democratic election process, but it runs, I think, orderly in Brazil. And therefore, I do think we need to give this country all our possible intention.

The authorities have demonstrated continued responsibility and maturity through a credible reinforcement of their policy framework. And the fund has shown its readiness to work with any government committed to sound economic policies while avoiding outside interference in the democratic process. I think it is not appropriate if the fund would be an active instrument or would have an active policy to take the choice who will become the next president. If it's an orderly democratic process we should offer our means, our instruments, our advice, to all reasonable candidates. That was done. And the response to this was encouraging because all the major candidates have confirmed that they would continue some basic important features of the existing economic policy in Brazil.

On the basis of Brazil's strong track record and policy program, our exceptionally large financial support for Brazil was justified and needed. I am confident that Brazil will stay the course of some policies, and the full confidence of international financial markets and resume a strong profile.

Ladies and gentlemen, the broader lesson is that we will need to create a global economy with large and volatile capital flows, both self-responsibility, very important, never we can forget about that primary responsibility lies with the countries themselves, but both self-responsibility and international corporation take on added significance. Countries seeking access to international capital markets thus need to bend over backwards to follow sound policies and address actual or potential sources of vulnerability. If a country is not committed to working with the international community, we must be prepared—I already said it—to say no to its request for financial support.

But where a country has been doing all it reasonably can to cope with the risky global environment, the international community should have the capacity to provide effective support. Failure to have any kind of safety net could undermine trust among nations and confidence in the global system which would have implications going well beyond the economic sphere.

The IMF is not a lender of last resort, because it does not, and in my view should not, have access to unlimited liquidity. But the international community looks to the IMF for crisis management, and our ability to protect good performers from circumstances beyond their control is a confidence-building anchor for the international financial system. This does not mean that the fund should seek to match the scale of private financial flows. Indeed, the fund has adequate liquidity for the immediate future. So I am not nervous about this for the time being.

But markets and political processes are forward looking. It would not be prudent to allow the size of the fund to shrink in relation to the size of the global economy. That a crucial third element in our reform agenda should be openness to an increase in the IMF "resources" at the appropriate time, as an investment in better globalization. I underline that, again, investment in better globalization, we reap all the benefits of stronger growth if we are prepared to invest.

Last remark, a final area for further reform is our work to enhance governance and accountability in the IMF. This should include consideration for a more open and transparent process for selecting the IMF's managing director. So I would be prepared (Laughter) to go to hearings, make my case on my position clear. I think that's healthy. I don't expect that the big power shareholders will give up their interest in influence. But I think it's healthy for the institution, for the spirit of confidence and cooperation that this election process is done in a more transparent way with the participation or some participation of the public.

I do think we have room to improve, to think further how we can make better use even of our executive board. I do think a mature board, executive directors with stature, the ability of judgment, enabling them to find the right balance between their interest as national executive directors, but also their obligation to look to the international mandate and to find the right balance this needs personalities who have judgment, who are experienced, who are mature. This is not their area, I also do think that the executive board of the IMF should be more active in stepping in the public dialogue for instance about globalization with parliaments and so on.

Then last but not least, I do think that it is also a reform task to revise quote shares within the fund. I share the view that the current distribution of quotas in the IMF needs to be reconsidered, especially to correct the under representation of a number of emerging market countries, particularly in Asia. We should also consider ways to strengthen the voice of African countries in the fund. Addressing these issues would clearly serve the interests of developing countries. But it would also benefit the entire membership by reinforcing the cooperative nature and perceived legitimacy of the IMF, which are crucial counterparts to the insistence of the international community on the funds central role in crisis prevention and management.

I hope we can count on the Council on Foreign Relations to help generate constructive discussion of these and other ideas for reform in the period ahead. And now, ladies and gentlemen, Ambassador, I would welcome your questions. Thank you very much. (Applause)

M: Thank you. It's usually the chairman's privilege to ask the first question. I'm going to ask the last question. We will conclude promptly at two o'clock. I already see some hands being raised in the audience. Let me remind you, by the way, those of you that have cell phones or what Laura Bush calls'hell tones', please turn them off the remainder of the session. It's typically at the end if the go off.

So let us start right there. Perhaps the best procedure would be for you to call on questioners.

Yes.

Also, by the way, let me ask you to keep your questions short, not to make speeches. Ask a question and let him make the speech. Thank you.

(Background Conversation)

Martin Hutchinson ... Go ahead.

Audience, Martin Hutchinson [MH]: Yeah, that's better. Martin Hutchinson, the United Press International. Isn't there an underlying structural problem which itself increases moral hazard in cases like Argentina, and the IMF being a public sector monopoly and indeed the World Bank too? I mean, in Latin America, the economic performance was quite a lot better in the 50 years up to 1914, when you had the IMF's role being carried out by the London Merchant Banks, which were private sector, and there were lots of them. So, you know, there was a certain amount of choice among which economic policy followed.

HK: Well, I do think that at the end it is crucial that the private sector has the environment, has the judicial, political environment, where it is a directive to invest. That is crucial. And we have to work together so that this environment good investment climate is preserved.

On the other hand, there are issues where there is a need for defining some role for the public sector. For instance, when a country comes into a balance of payment crisis, you need to have someone who steps in. I also do think that the economy in the early 21st century is different to the economy in the '50s and '60s.

The difference is indeed this huge increase in global private capital flows. On the other hand, the volatility in this context, markets by itself don't say, Do everything to the good by itself. There is a need also to give markets guidance, to have rules, regulation. And in our view it is also on the whole demonstrated the status of democracy, market economies in the global world, early 21st century is much better than in the '50s where we had a lot of say centrally of economies, where we had a lot more dictatorships and authoritative regimes. So all this together is improved and I do think that the fund has a fair share in this improvement.

Audience, Teresita Schaffer [TS]: Teresita Schaffer from the Center for Strategic and International Studies. You mentioned briefly the need for a social safety net, and yet the fiscal resources that it takes to develop a social safety net are typically the first thing to go when an austerity program is put in place. I wonder if you could say a little more about how you think countries facing a financial crisis can preserve a social safety net and what the fund's role is in doing this.

HK: First, we have to work as early as possible, and that means before any crisis, on establishing social safety nets. I myself come from a country, Germany, Second World War, everything was destroyed. And then people defined the so-called social market economy. That means that you need to be aware that if there is no social peace so that everybody in principle has access to some improvement in living standards, then there is not a good investment climate. Therefore, you need to work as early as possible on this social safety net.

In case there is a crisis, we have to face tough choices. And of course the issue is how to come back to sustained growth, because growth makes it much more easy also to finance a social safety net. My idea is not to cut back social safety nets if they are well established, but in, if you want so, Argentina, it's not cutting back a social safety net, because all over these decades of good development, they ignored really working consistently on building up a social safety net. And then in time of crisis where there is a need to balance again liabilities and assets, you have no choice but to come back to fiscal discipline. Then people cry out and say that is cutting on social safety nets. That's neither fair nor helpful.

At the end, the social safety net should be established early, it should be the last, say, source for regaining fiscal solidity. But I can't avoid to tell you in crisis situation, there is neither a quick fix nor someone who gives you everything which is smooth. Therefore, early decisions and early consistence reform is the answer.

Audience, Richard Gardner [RG]: Richard Gardner, Columbia University. Joseph Stiglitz and George Soros, among others, have criticized the fund for pressing capital account convertibility in Hong Kong I guess five years ago, and attribute to that part of the cause of the Asian financial crisis. I'd be interested to know your reaction to that. And perhaps even more relevant, what is the IMF's policy today on capital account convertibility?

HK: Clearly, the Asian crisis, one of the causes for the Asian crisis was that the opening of capital accounts was in some cases done too quickly. It was done before the domestic infrastructures, sound banks, sound regulatory banking and supervisory frameworks, had been in place. That was clearly a mistake. And we have drawn out of this the lesson or the conclusion it's no need to rush to open the capital account. It is a need for a sequence opening of the capital account. That is in ... if you want some parallel progress regarding internal structures, I would not today even say regarding also the building up of local capital markets, don't just rely on external finance, also try to build up local financial markets, capital markets, and on this basis build up.

But I would also like to say in this context, the people who criticize the IMF in this context are sometimes the people who have been partly in charge of this what we call institution building. Because the regulatory supervisory framework, building up sound banks, central banks, is not just an issue for the banks ... for the IMF, sorry.

Audience, Hazel Denton [HD]: Hazel Denton, formerly of the World Bank. You spoke about the increased transparency of the IMF. I'm wondering what the reaction of some member governments has been to the publication of formerly sensitive information, and also whether there have been any negative impact on the way in which the IMF works now.

HK: Well, I mean, this is a kind of work in progress. There are members who are less open to openness than others. But I recognize today they are more open to openness and transparency than some years ago. And this has two major reasons. First, markets itself, investors ask for transparent reliable data and openness. And we are moving in this direction. And secondly, the policy environment is today different in the world and in our countries.

People, parliaments, ask for more transparency and therefore this all works in the direction of more transparency. There is a debate about market-sensitive information, where people don't want to see it at the market, and I think this is understandable. We always have to find the right balance, not to disclose things where it really could damage countries. We have also to find the right balance between on the one hand candid advice, be open, be very clear in your advice, but on the other hand not damaging a country publicly in its reputation, its own self responsibility and ownership.

My line is that in principle I rely not on voluntary approaches and continuation and progress in transparency. And we have for instance made considerable progress, for instance not least with China, who joined the IMF's special data dissemination system, which discloses in the area of financial data whatever country is joining this instrument. We are making progress and that is promising.

M: In many years since the ... oh, I'm sorry. Thank you. The fund these days—as I don't have to tell you—lends almost entirely, entirely to developing countries and emerging markets in particular, in contrast to the early years of the IMF and probably to the expectations of Keynes and Wiseman thought it would probably be lending to industrial countries as well. I just wondered what your attitude is, what you'd have to say, about the relationship of the fund to the industrial countries, and what influence the fund might have on the policies of industrial countries in the situation where they are dependent on the fund for borrowing.

HK: Well, the first very concrete and trivial answer is if you have no excess in terms that a member wants to get your money, then you have less leverage. That's clear. So we have more leverage in countries who ask for money than those who have ... who we don't want to have our money. But second—and this is at least my line—I think we have to work on creating a climate of awareness that globalization means in substance interconnectedness. And financial markets, environment issues, even migration problems, all demonstrate that advanced countries, industrialized countries, can't anymore cut off their policy environment, their room for consideration and reform, from the rest of the world.

This say awareness of interconnectedness should create a climate of corporation and mutual interest. In financial market issues, it is clear, and demonstrated unfortunately through the scandals now here in the US, that there is an impact from financial markets' problems here on for instance that in America or other countries people are getting now much more risk adverse after the bubble had burst and they are now all a bit shaky, what will be the next balance sheet disclosure.

So I think through awareness creating, through openness, what is my line to our major shareholders, like current account deficit discussion, like fiscal deficit discussion here in the US, but also like in Europe their lack of structural reforms, and of course Japan also, where we are actively working with them, it is very difficult because the political system is very slow in Japan. But we have to try. On the other hand, the fund is not an institution which has all the ammunition to tell Japan now or never. So we need to convince them, persuade them.

Audience, Deborah Burien [DB]: Deborah Burien, Think International Micro Finance Provider. I was thrilled to hear you talk about making the integration of the globalization pay off for the poor through investments through better policy and regulation. What will the IMF be doing to help national governments develop a financial system that actually delivers financial services to the poor?

HK: Well, we have an approach. And here the leading institution is the World Bank. But we have joint approach. It's called Poverty Reduction and Spenching Paper Process. And that is that we define the elements or the fundamentals for long-term growth in poor countries. And then have a tradition of labor, who is in charge of what. Beyond that is working on macroeconomic stability, and also in case of advanced developing countries, to support them building up financial sectors.

I myself initiated two things in the last year, so-called private investor councils. We set them up in Tanzania and in Ghana. Their private business people meet with the presidents or high officials and talk about the investment climate in Tanzania and in Ghana. Not bureaucrats, not academics or everywhere, but business people, to official legislatures and governments, so that governments and legislatures know how a business man is thinking. On this basis I hope that investment climate effort will gain progress.

The second element is we need to be aware often it is not so much lack of political will, that in developing countries things are improving. Often it is a pure lack of capacity, of administrative capacity, of intellectual capacity, of skills, and therefore we for the fund decided to set up a regional, technical assistance centers in our core areas of expertise. And all this fits together to help them to pave the way at the end, how I see it, to get access to private capital markets. Because all improvements in official development aid never will do the job. It has to be private money and we have to work to create the conditions for that. The IMF has a targeted role in this. And I think we should be active in this.

Audience, Enfif Anuso [EA]: This is Enrif Anuso with Turkey CNBC Television. Turkey has been a problem country in the last two years. How do you evaluate its progress in implementing its program recently? And how would the upcoming parliamentary elections affect that? Thank you.

M: I'm sorry ...

HK: You're not talking about Turkey?

M: Yeah, Turkey.

HK: Turkey. Well, as you know, Turkey, the fund is highly exposed with lending, but most important is that this country embarked and implemented a reform program which is nearly unprecedented in terms of that they have taken top choices, for instance, regarding fiscal consolidation, that they have—very ambitious and successful process of cleaning up their banking system, that they are in a business of decoupling politics from economics. And this all happened in just one or two years. Remarkable progress, the inflation rate comes down more than we expected in the program, the exchange rate now is stable, the interest rates came down, and drove this recovery. So all this is good.

I do think that the election, which should take place as scheduled in November, will create further clarity of the course of this country. And I expect at the end that this election will also endorse, if you want, so the continuation of the economic program, which worked up to now successfully. And I am looking forward to further progress in Turkey. There are uncertainties but the progress is clearly visible.

M: Yes.

Audience, Sidney Weintraub [SW]: Sidney Weintraub. I'm with the Center for Strategic and International Studies. One of the criticisms you hear frequently on the fund in developing countries is that your conditionality as often as not forces a pro-cyclical policy, that is if their economy is declining you force it to go down further by the kinds of fiscal monetary discipline you ask for. Your argument generally is, Yes, this has to be done, but this improves the conditions in the medium term. How would you judge your record on improving the conditions in the medium term in a lot of the major programs that you've run in recent years?

HK: I came into the fund two years ago, two and a half years ago. One of my first decisions was to go travel to Latin America, Africa and Asia. It was done in spring, summer and fall, 2000. And the outcome of this traveling exercise was that I heard a lot of criticism. One criticism was for instance ISPEL, IMF has said, meaning what is said, secretive, arrogant and dominant. (Laughter)

But at the end, even this person who told me so, a very intelligent person, at the end said, But nevertheless we want you to stay engaged in Africa. First thing. Second thing, there are clear success stories in Africa now. For instance, Tanzania, Mozambique, Uganda, Cameroon, Benim, Ghana, good process. There is not just everything bad. If you talk to these people who have embarked with the IMF, in poverty reduction strategies, including to build up the environment for sound fiscal ... for fiscal budgets, and no inflation, they are telling you now it's right that we made with you this path. That is what I heard in Mozambique.

The recognition is that at the end high inflation hurts most the poor. Fiscal cowardice at the end, and corruption, hurts the poor. The Africans themselves have now developed a program, and the big point is they themselves set up this agenda, called NAPOT, New Partnership For the Development of Africa. And this NAPOT, I couldn't have said it better, is built on two pillars, if you want. So first self responsibility. They are saying, We are in charge for good governance, the respect for the law, fight ... tackling the issue of arms conflicts in Africa and corruption. They know it's their job, they have to deliver on good governance.

But based on that they are asking for more better, more rapid support from the outside community. I think this approach is right. In the context of this approach the fund has reviewed its conditionality concept. I do think, not only from the Asian experience but also from the experience in Africa, we have probably been too ambitious to ask for structural reforms nearly overnight. We need to tailor better and sequence better what we ask as conditionality, so that we know it is built in their political process. It makes no sense that the fund sets up fiscal guidelines after the budget is just a week ago agreed in parliament.

We need to reduce the set of conditionals. But where we feel conditionality is indispensable we should be clear they have to implement it. That is our approach. And on this basis I do think we have a good chance to see more progress. But I also want to say you can define the IMF as the scapegoat for everything.

But if there is no change in the attitude of the advanced countries, for instance in their trade policy, then you look what happens with cotton in Africa, sugar in Africa and in the Caribbean, and the subsidies highest in Europe, but also very high in the US and in Japan. If there is not a substantial change, I can't see that these countries grow out of their misery with growth. And therefore, most important than any criticism of IMF is open your markets, phase out great distorting subsidies.

Audience, Howard Wearta [HW]: Howard Wearta from CSIS. It was striking how much of your agenda really focuses on political issues: governance, civil society, transparency, even poverty alleviation is as much a political issue as it is an economic issue. So I'd like to ask if you could tell us how much expertise the fund has in the fields of international relations or political science or governance, let's say, and if you think the fund is really equipped to tackle what are really very complex and difficult political issues, as distinct from economic and finance issues.

HK: Certainly we have not enough experience, and also equipment in terms of resources, and therefore one of the conclusions out of this is that we reduce, streamline, focus our conditionality on areas where we have the expertise. That is in macroeconomic issues, financial sector issues, policy, and monetary policy, and all of this. Institution building, that's mainly an issue for the World Bank. Therefore, we are in the process, have already made progress, to agree how we incorporate better so that IMF and World Bank are complimentary to each other. We also need to work together with the United Nations. We are not an institution which knows everything.

But I think you need not to be a politician nor say an academic trained in political science to understand, and I think economic economies are able to understand it, that if this degree of income inequality continues, we will not for long have a safe place even in the advanced countries. Because the negative things swap over via, I said it already, migration, via diseases, via violence. And therefore an economist should stick to its training, but he should also have open eyes.

M: Since we're out of time here, about to be out of time, remind the last questioner that our speaker played a critical role in the reunification of Germany, in the Maastricht Treaty, in the European Central Bank, and also in financing ... in negotiating the financing of the gulf war for his government. So certainly the person of our speaker has considerable political experience. So let me ask you this, Horst, in conclusion. Which of those jobs is the most difficult, and which is the most fun? (Laughter) (Pause) We're out of time. (Laughter)

HK: I must say the IMF job is the most fascinating one. It is the most ... say you need to have very comprehensive eyes open attitude. It's a lot of pressure. You are surrounded, at least in the world today, six billion people. So you have 5.9 billion people who know everything better. (Laughter) In this environment, you need to find the line. It's fascinating, it's difficult, but it's possible, it's fun, so I like the job.

M: Thank you very much. (Applause)

HK: Thank you.

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