Presider: Paul Volcker, former chairman of the Board of Governors, Federal Reserve System (1979-87)
Speaker: Rodrigo de Rato, managing director, International Monetary Fund
Council on Foreign Relations
New York, N.Y.
September 20, 2004
PAUL VOLCKER: The title of this program is "The IMF [International Monetary Fund] at 60: Evolving Role, Current Challenges." For me, that puts it in perspective. I was involved— sometimes I thought closely involved— with the Fund for about 30 years. I saw a listing of the managing directors— I have worked with five of them— but I've been away for a while, and I realized our guest tonight will be the first managing director in 40 years that I have not met until this morning, so this is a special opportunity for me.
There are certainly challenges for this institution, challenges for its new leadership. I will not get into those; we know the challenges are not easy. Indeed, they go to the very being and purpose of the IMF. You all have, I think, the biography of the new managing director with you, and I'm not going to repeat that. Let me just say I am personally delighted, as I'm sure you are, that he has agreed to be with us this morning. I introduce to you Mr. Rodrigo de Rato, managing director of the IMF. Please take the stand and tell us how you're going to meet all these challenges. [Applause]
RODRIGO DE RATO: Thank you very much, good morning. It is for me a great pleasure to be here this morning and to have the opportunity not only to give you my views, but also to listen to yours. This 60th anniversary of the history of the International Monetary Fund, and that date, to have 60 years, has certainly given a lot of opportunity for new ideas to be brought into the debate for the future of the Fund, and a lot of reflections regarding what the Fund has done up to now.
Let me just share with you some of the insights of how we see things inside, and how we see them in relationship to the challenges that we are facing, both in the global economy and the financial system, but also as the role we play with other international organizations in the development of low-income countries, and how we try to respond to our core business of surveillance.
The Fund is not an organization that has not faced the changes in its history Since 1944, the type of economy the Fund has been working with, and even the constituency that it had to respond to, has changed very, very dramatically. Once the breakdown of dollar-centered Bretton Woods system, the shift to a system in which member countries chose their own exchange rate regimes— although it might sound now very familiar— but it brought a very new mandate to the Fund to exercise surveillance over its members' exchange-rate policies and to their macroeconomic policies more broadly.
Also, membership has changed very much along the years in a very positive way. We have more membership— much more membership in following the path of history in which new countries appear, and not only the appearance of new nations in the developing world, but also the disappearance of the so-called Soviet Bloc [that gave] new membership— you want to call it "new blood"--to the International Monetary Fund constituency.
And this expansion is a very important one— up to 184 countries right now— has brought new imperatives to the organization, [which are] related to the structural impediments to external viability and sustainable growth suffered by many countries, including the economies in transition to market-based systems for central planning. At the same time, the Fund met the need for concessional lending to members who could not afford to borrow under standard terms; that is, could not afford to borrow from the markets. And also the Fund has been adapting to a very fundamental transformation in the scale and nature of international capital flows in recent decades. These shifts have acquired a sharper focus on crisis prevention and capital account risks, and have demanded new thinking about the objectives on design on the Fund's lending operation for members confronting capital account crisis.
So this is an organization that has been facing most, if not all, of the changes of the modern world, both in political and economic terms. Now looking forward, there are, of course, many things that we cannot foresee, but there are also some things that we can anticipate. Continued expansion of linkages among the economies and financial systems would provide important benefits in terms of more efficient allocation of global savings, but also we'll continue to decrease systemic risks and risks related to spillovers. Broader economic changes, including the expanded share of the merging markets in international economy and the challenges from aging populations— particularly in many industrial countries, but not only industrial countries— will also have important implications for the Fund's work.
And certainly we will need to continue working with broader international community to support low-income countries that are forced to set the basis for sustained, rapid, and poverty reduction, and there are, of course, significant challenges— all of this.
What is the global outlook we are facing right now? Let me tell you that we are at a context of a period of relatively robust growth and low inflation, but we have significant risk and vulnerabilities. In many emerging market economies, there has been important progress in addressing vulnerabilities that contribute to the crisis of the last decade. Reserves levels have increased, providing repercussion against internal shocks. Current account positions have strengthened. In many cases, the flexibility of exchange rates have increased, and notwithstanding the recent tightening of U.S. interest-rate policy and movements in all prices, its present emerging markets instruments have remained moderate, with increased sophistication and differentiation in market assessments.
We are also seeing in today's world, progress by many emerging-market countries in reducing fiscal imbalances with a greater recognition of the risks inherent in large public and external debt shocks. In many low-income countries, we are seeing improvements in the macroeconomic foundations for broader development efforts to achieve sustainable growth and poverty reduction, with debt-relief efforts creating a space for more productive expenditures and a stronger economic growth. Particularly welcome is the fact that the growth in Africa this year seems likely to be the strongest since the mid-1990s.
This relatively benign global outlook provides an important window of opportunity for further progress in addressing global imbalances and reports in the basis for more balance in sustainable global growth. And from the Fund, we believe that this window of opportunity doesn't only apply to developed economies. It certain[ly] applies to developed economies, which are probably the ones that right now pose the biggest threat to the world economy: the United States to reduce its financial external deficits [and] the European Union and Japan to promote more vigorous growth [towards] structural reforms and a few of them to really be committed politically to the opening of their markets.
In middle-income countries, continued efforts are needed to deepen progress in reducing vulnerabilities, and to set the stage for sustained growth and output, job creation, and poverty reduction. And in low-income countries, all of us— that means [the] international community, the countries themselves— should work for faster progress and reinforcing the framework for growth and poverty reduction that was defined at [the International Conference on Financing for Development in] Monterrey two years ago.
Progress in all of these areas must be driven by countries' own policy efforts. But the Fund must also continue to ensure that our policy advice, our technical assistance, and our financial operations are as effective as possible in supporting the efforts of all our members. Next week we will have the annual meetings, and that will be a very important moment to hear the reflections of all the members' countries.
Let me now talk about some key themes. Financial stability will be the first. Increased interdependence of economies and stronger dependence on capital markets mean that it is more important than ever for the Fund to help countries implement policies that would reinforce domestic and global prosperity. To do that— to be effective doing that— the Fund needs to provide objective advice built upon the best analytical tools possible, and based upon a clear understanding of the specific circumstances of each country, as well as the linkages across economies implied by the financial integration. We need to identify and balance the vulnerabilities to allow for corrections before they can create harm, and we need also to communicate our position clearly— both [to] policy-makers, but also to the public and to the markets, and reinforce initiative for countries to undertake pre-emptive correction actions. The Fund is continuing what has already been an important transformation of its crisis-prevention efforts over the past decade. We are working to ensure our advice is focused on the issues more central to the Fund's mandate, including very clear and candid discussions on exchange rate policies, and a strong focus on financial sector vulnerabilities, as well as balance of payments and fiscal sustainability.
We are working to integrate more fully our advice at the global, regional, and country levels, recognizing that 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. We are actively monitoring capital market developments, and continue to sharpen our tools for assessing vulnerabilities, including through an increasingly systemic assessment of their sustainability— systematic assessment of their sustainability, and strengthen[ing] focus on national balance sheets. And also, we are undertaking, in collaboration with other financial institutions— most
importantly the World Bank— more rigorous assessments on the health of financial systems.
But strong advice is not itself sufficient. The advice is to influence [in order] to be really sufficient. In that respect, transparency is a key question. Seventy percent or more of our documents— country documents— are now published, and the ones that are not published are because of government restrictions in that. So that supports accountability from the countries, for the governments, and also for the Fund, and supports better risk assessment by policy-makers but also by the public and the markets. Further efforts to reinforce the Fund's policy dialogue with its member countries— to enhance outreach to parliaments, media, and civil society— are certainly important, and we are looking at how best to reinforce countries' performance outside the context of the Fund's financial arrangement through mechanisms to signal policy commitment.
We will also continue to consider the role for precautionary arrangements in promoting incentives for actions to address vulnerabilities. In this context, we should explore how linkages between acts and resources, and also performance, including in the context of responsiveness to surveillance of others' standards and codes, can reinforce such incentives. But no matter how good and strong our crisis-prevention efforts are, there are going to be crises, and we must be sure that we have tools and designs to make our assistance appropriate to the full range of challenges that any of our members might face.
Over the past decade, we have gained a stronger appreciation of the importance of a clear understanding of the complex political factors that shape countries' willingness and capacity to implement necessary forms in the context of Fund programs. It has become increasingly clear that success depends not only on the design of sufficiently strong policies, but also upon the underlying reforms being owned by the borrower. In this context, by providing an objective, well-articulated outside view, the Fund may be able to help muster the domestic political consensus required to push forward changes that are necessary and desirable. Without this domestic political consensus changes just don't occur.
And over the past decade, we have also recognized that the nature of capital account crisis included the important questions raised by confidence effects and the response of capital flows, [which] create specific challenges for designing effective support. Ongoing work to reinforce the analytical basis for programs to have better understanding of the potential effects of crisis on macroeconomic developments and on domestic financial systems is essential in this regard.
[Deciding] whether and when the Fund should provide life skill assistance is also critical. Exceptional excess must be constrained, but we also need to recognize that large support packages cannot and, indeed, should not be ruled out. [In] countries like Mexico and Korea, the Fund assistance supported a rapid turnaround in confidence and economic performance. We are also seeing important progress in more recent cases like Brazil [and] Turkey. But the Fund must also be prepared to say no on the basis of clear and objective judgments grounded in a clear understanding of government decisions.
The expansion and increased diversity of private creditors and the increase in the volume of capital --the volume of private capital— has also created new challenges in the orderly resolution of capital difficulties. The recent introduction of collective action clauses for sovereign bonds issued under New York law and the work toward a code of conduct, we believe are important and, over time, will make an important contribution to addressing collective action issues critical to efficient and timely debt restructuring.
The Fund also has an important role to play in helping members seeking to re-establish macroeconomic stability and growth in the context of a debt crisis, recognizing the need to ensure that its policies provide a predictable guide to decisions of the Fund, as well as to the responsibility of debtors.
Let me now turn to another issue, which is our policy [toward] low-income countries. I am very much looking forward to the meetings this afternoon at the United Nations, organized by President [Luiz Inácio] Lula [da Silva of Brazil], in cooperation with the governments of France, Chile, and Spain, where important issues related to the fight in poverty and hunger will be discussed.
While it is important to recognize the much broader development mandate of international institutions, the Fund has an important role in low-income countries focused on supporting the macroeconomic policy reforms and financial stability needed to achieve high growth and, through that, poverty reduction. The Fund's efforts are most effective when they are focused on issues central to its mandate, through the provision of macroeconomic and financial policy advice and technical assistance. And there is, of course, an important role for Fund financial assistance provided on concessional terms for limited periods for low-income members facing shocks, including from natural disasters or conflict, or macroeconomic imbalances rooted either in weak policies or in reform efforts.
And for the countries moving away from a need for Fund financing, also the Fund has a role to play through signaling to the donor community the quality of macroeconomic policies.
We also continue to work in partnership with other official creditors to support low-income countries' efforts to achieve and maintain robust debt sustainability, including through the continued implementation of the HIPC [Heavily Indebted Poor Countries] Initiative. The Fund itself will also need to play an active role in providing recipients and providers the information they need to ensure the new assistant is provided, is predictable, and it doesn't include too much administrative cost. And these are provided so in appropriate terms to ensure continued sustainability.
I welcome your questions and comments, thank you very much. [Applause.]
VOLCKER: Well, join me, Mr. Managing Director, and—
DE RATO: It will be a pleasure.
VOLCKER: --we will attempt to clarify, expand, question.
In reading your remarks, I was struck by your emphasis in some areas, particularly concluding comments, about low-income countries. There has been some criticism, from some quarters anyway, about the Fund in recent years as becoming, in effect, an aid agency instead of what was considered its principal responsibility when it was started, as an overseer of the exchange rate system, relationships among developed countries. How do you answer that? Is that real or unreal?
DE RATO: Well, I think that, of course, critics always have to be heard. But when you are facing low-income countries, the difficulties to overcome poverty reduction, macroeconomic policies, is not something strange. In fact, without good macroeconomic framework, good financial systems, low-income countries don't have many chances to overcome their problems.
So that's why I think the Fund's role in low-income countries is very well-defined. And of course, it has to not so much overlap, but it has to collaborate with other efforts of other agencies— international agencies like the World Bank and the development banks. But our main job in low-income countries is to help them to design and then keep a good macroeconomic framework to strengthen their financial systems, their banking sector, to develop efficient budgetary policy, and to reduce the debt vulnerabilities they have.
At the same time, I think that we provide the donor communities with clear signs of what to expect from a country's macroeconomic policy. And in that respect, we help the donor community to make decisions.
VOLCKER: You, in effect, speak in a kind of advisory, consultative role with these countries, but in fact you have leverage on them.
DE RATO: No, no— I— as friends— no. They're member countries. I speak with them the same as we would with others. With some of them, there are of course financial arrangements.
VOLCKER: But at the end of the day, you have a certain influence because they may get in trouble, and they might have to go to you for financial assistance. It's been a long time since a big country has gone to the Fund for financial assistance. How do you judge your influence on the major countries of the world— the United States, not alone, Western Europe, Japan? In this kind of system, well, they are not relying on the IMF, or they don't see themselves as relying on the IMF.
DE RATO: It's true in the sense that we don't expect they will come to the Fund for financial assistance. But I think that the role of our surveillance and crisis prevention is of special importance right now with the so-called developed countries. The macroeconomic situation of the three main developed areas— that is, the U.S., the European Union, and Japan— is something in which we are working, and we have used our Article IV positions [to assure orderly exchange arrangements], but also our continuous public statements, to emphasize the medium-term risks of the world economy as it's related to the balances that are produced through the macroeconomic policy of big countries, rich countries, developed countries— call them what you want. What is our influence on that situation? Well, I think the influence is especially to the markets of public opinion. I think that we have credibility, and we have to show that credibility is focused, and we have to give signs to the world public opinion and to the markets that some imbalances in the developed economies are a threat to them and to others. And I think I've said that before, but if I haven't said it before, I'd just say it right now.
VOLCKER: It takes a certain amount of courage when you are addressing major countries that are not particularly anxious to change their policies in the direction that you would like. But I'd just leave that for whatever. [Laughter.] I will ask— I'll just make one other comment and then open it up and get your response.
You say, you know, we've shifted to a system in which member countries choose their own exchange rate regimes. I have some fundamental difficulty with that kind of statement, because I don't think any country can pick its own exchange rate regime, because it depends upon what other countries do.
DE RATO: That's true.
VOLCKER: And I wonder—
DE RATO: But even that constraint, they choose. There is a constraint. That you choose doesn't mean that you do it without constraints. But they choose.
VOLCKER: Right. Some countries think they do it without constraints. [Laughter.]
DE RATO: Yeah, well.
VOLCKER: And to put it strongly, too strongly, more strongly than other people put it, doesn't the IMF have to search for more responsibility for getting more stability in the exchange rate system than has been characteristic over the last 30 years?
DE RATO: But it has to do with imbalances. I mean, the exchange rate system is not an isolated question that depends only on, let's say, even monetary policy of countries or the way that their exchange authorities behave. At the end, the currencies reflect the reality of economies and the reality of international flows when you're talking of international currencies. So that's why one of the risks that the actual imbalances in developed countries poses to the world economy could materialize through exchange rate shock movements that could be very bad for their interests and for the interests of others.
VOLCKER: Well, I'd just question whether some of these movements— when exchange rates move by 50 percent, whether they're reflecting underlying realities or exaggerating underlying realities. But be that as it may.
Yes, sir? Just wait for the microphone. It's coming.
DE RATO: Well, the situation in Argentina is that you cannot, because of a continuous failure in this macroeconomic policy in a very bad situation in which one of the consequences was to stop payment to the creditors— but not the only consequence. Forty-six percent of the Argentine population lives under poverty. And I don't think there is any country right now that longs to be in that situation. That's my impression. So I think that people are a little more aware of the complexities of the crisis than just the fact that you don't pay. I think that might be good for a newspaper headline, with all due respect for newspapers, but it's not what you find on the streets of the countries. So people are aware that this is a very costly and dramatic circumstance.
But I also think that people— not only governments— maybe more people than governments— are aware that when you stop servicing your debt you lose all the credit, and there is no normal relationship with the world economy. And I think that people inside Argentina and people outside are very aware that the Argentinean problems cannot be surmounted— even after two good years— without Argentina regaining a normal status in the world economy. And that means many things. One of the important ones is for Argentina to regain a normal relationship with creditors and new investments. And I think that certainly, we are very aware of that challenge. We have communicated that challenge very clearly to the Argentinean authorities. We have communicated that challenge very clearly to the Argentine public opinion. And I have to say that my impression is that the Argentinean authorities are very aware of it. So I don't think that there is an aim to be in that situation. No, I don't think so.
QUESTIONER: Thank you. Benn Steil, [senior fellow in international economics at the] Council on Foreign Relations. I'd like to ask you about another country that has some rather worrisome macroeconomic imbalances: the United States. Over the course of the 1980s, the gold price declined from $615 an ounce to $387 an ounce. Over the course of the 1990s, central banks around the world seemed to react to this development by shedding gold reserves. And they contributed enormously to the drop of the gold price to $279 an ounce. Now currently, foreign exchange reserves of central banks around the world are about two thirds denominated in dollars. But over the past four years, in conjunction with the rise of the budget deficit and current accounts deficit in this country, the dollar has declined by 20 percent, and we can see foreigners perhaps getting a bit edgy about this. Now, do you think this could lead to a large-scale sell-off in dollar reserves around the world if the United States does not get some control over its budget and current account deficit? And would a diversification into euros actually be a positive or negative development for the world economy?
DE RATO: Well, let me answer not so much making predictions— [laughter]--as to how we see things right now. I think we are all well aware— we might judge it differently— but we are all very aware that the United States' monetary and fiscal authorities have made an extraordinary effort to turn around the crisis of the [inaudible]. We are seeing right now a clear position by the U.S. monetary authorities to reverse that extraordinary influence or stimulus to a normal path. And I have to say they've done it with a very good communication strategy to the markets.
It is important— it is very important— that the fiscal authorities do the same. I mean, the U.S. cannot keep an imbalance of such strong fiscal stimulus for very long, and it will damage the U.S. perspectives, but it will damage also the world economy. And I think that is one of the issues right now.
But of course, saying that, the responsibility is also shared by others— certainly by the lack of growth in Europe, because I think that plays a role. At the same time, the recuperation of the U.S. has been made mainly by domestic demand, in part because of lack of growth in some countries. And one of them certainly is the European Union.
So to have a world currency means also to have world policies. And I think the European Union needs certainly to tackle the problem of growth, and not try to rely on fiscal stimulus as a way to go. I think that would be a big mistake for Europe.
And of course I think that also Japan has to play its role as one of the big countries, the leading countries. It's true that the Japanese situation has been much better this year than in the past decade. There are signs that deflationary pressures in Japan are being rooted out— although not yet. And that is going to demand, if everything goes well, to a very substantial shift in Japanese monetary and budgetary policy too.
And I think those three issues together analyze the risks that are facing not only those countries, but also the world economy.
VOLCKER: If we've got something over in the right— I don't want to— I guess not. We'll go to the center.
QUESTIONER: Thank you. In light of the past two—
VOLCKER: Identify yourself.
QUESTIONER: Oh, Andrew Quale [of] Sidley Austin [Brown & Wood, LLP]. In light of the enormous cost of financial crises, I'd like to return or maybe regress to Argentina for a second. The Fund has been criticized, as you know, for its lack of resolve with respect to Argentina. You were describing that it's important for the Fund to have policy guidelines which will identify and give some predictability to how the Fund will react to different things that a country will undertake. I wonder if you could describe your disappointments with how either the Fund has effectively dealt with the Argentine crisis, bearing in mind that right here in this house [Argentina's] Minister [of Economy and Production Roberto] Lavagna said that he wasn't interested in the concerns of the Fund— he said semi-publicly— because he didn't need the Fund's money, and that in the next few years, foreign investment will come back, and indeed foreign investment was coming back. I'm not sure I agree with that, but that's what he said.
DE RATO: I'm not going to get into a debate with Mr. Lavagna, so—
QUESTIONER: If you could address how maybe the guidelines that you established going forward would help us deal with a country such as Argentina in a crisis of this magnitude.
DE RATO: The Fund, because of my predecessor's decision, had a very transparent analysis of its past policies. In fact, I think that we have done the most comprehensive analysis and critical analysis of anybody over the last years in Argentina. That should be read. But at the same time that should be read, everybody should realize that that's the Fund's role. But in the Argentina picture, all the people have all the roles, and most importantly, the Argentinean government.
That said, I think that our mistakes have already been made public by our analysis. And in that respect, I think we are showing that, as a public institution, we are accountable, and we are willing to analyze what has been our policies— not only the Argentinean case, in Indonesia and the poverty reduction strategies and many, many issues in which we are providing world public opinion and national public opinion with independent analysis of our own behavior.
Coming to the present, as I said, we strongly believe that the objective you described is to regain a normal situation in the financial markets. That's a prerequisite for Argentina to be able to surmount this tremendous punishment it has inflicted on itself. And even the last two years there has been positive growth. It has not even regained the situation of the last years or the past decades. So I mean there is a long way to go— a long way to go.
So the resolution of its relationship with its creditors is certainly one thing. The establishment of a credible macroeconomic framework with reforms in the financial system and the banking system and a sustainable policy of debt reduction is very needed for Argentina. As Mr. Lavagna says very openly, and he's right, even if all the leaders will accept the actual offer, Argentina will still have 80 percent of its GDP in debt. So Argentina has to have a policy of reducing its vulnerabilities, and also have a policy to regain not only credibility through a financial arrangement with its creditors, but also to regain credibility for future investments in Argentina— in the utility sector, in the financial sector, the industrial sector. And to do that, the stability of the law, and a friendly environment— legal, political, and social— for new investments— domestic and international— in Argentina is going to be essential for Argentina to regain rates of growth of the ones we've seen in the last two years. But that cannot be only based in the fact that the Argentinean GDP [gross domestic product] decreased 20 percent two years ago. It has to be based on a continuous growth.
So the challenge is on the efforts of the Argentinean present, and future governments are going to be very important, and we are certainly willing to assist them and give them our advice. And we will make that very clear. We owe that to the Argentinean people, to say clearly what is the future and what has to be done in the future.
VOLCKER: I think I'd appreciate a non-Argentine. You've got a non-Argentine question? OK.
QUESTIONER: You gave us a nice tour d' horizon of the current issues on the agenda at the Fund, but could I ask you to talk a little bit more about the evolution and look to the future? If we were convening a new Bretton Woods conference today, what would you like to see come out of that conference? What are the constraints you face in your charter in the current set up, and what would you like to see different?
DE RATO: Well, conferences are a consequence of political agreements, and political agreement are consequences of political interests. So, I mean, it's not so much what I want or I don't want; it's what are the political agreements and willingness of countries to have political agreements.
I think the Fund as an institution not only has played an important role, but has a lot of roles to play in the future. Globalization is certainly a very strong reality. So a global institution that manages financial stability and vulnerability I think is an essential. So the first thing that I would like to see is political commitment of member countries to continue this type of work, and two, if you want to follow our advice or at least to listen to our words regarding not only specific countries that have programs, as Mr. Volker pointed out before, but also countries that are moving out of financial problems with us, or that have not had them for a long time, to really engage in a clear debate of global and regional issues. Regional issues are becoming more and more important, and in that respect, I think that the Fund has to be very much aware of that. And there is room enough in the charter to do it, but that will be certainly one issue to contemplate.
The macroeconomic role, or the role of macroeconomic policies in poverty reduction, should be clearly defined as to avoid, in my opinion, the usual debate of saying the Fund is not an aid agency. We are not an aid agency. We don't provide that. We provide something that is essential for poverty reduction, which is macroeconomic advice and financial advice.
The role [of] confidence between the governments and the Fund, is essential, because our partners are governments. But also, the transparency of some of the issues is a very difficult issue, but it's one that has to be taken into consideration. And certainly the member governments— not the Fund in itself, but the member governments— have a debate that has not been resolved, which is the debate of how our quotas and voting system reflects the new world in which we live today, instead of the world of 60 years ago. That's a very important issue right now in many areas of the world for different reasons. Certainly in Asia it's an issue. Certainly in Africa it's an issue. And maybe that could be one of the topics of the new political agreement.
VOLCKER: The lady on my right.
QUESTIONER: Elizabeth Becker, The New York Times. I wondered if you could address—
VOLCKER: Are you a member?
QUESTIONER: Yes, I am, sir. [Laughter.] Regarding Mr. Volcker's questions on exchange rates, I wondered if you could respond to the growing furor in Washington over China's exchange rate. Just recently, some businesses and labor unions petitioned the United States government to ask the WTO [World Trade Organization] to do something about China's exchange rate, because they complained the IMF was doing nothing.
DE RATO: Hmm. [Laughter.] My first visit as managing director was to Asia in June, and my first stop was Japan; my second stop was China. So I had the chance of talking and discussing with the Chinese authorities about their macroeconomic policies. And certainly the public position of the Fund is that not only China, but some Asian countries, should be moving to a more flexible exchange rate to provide them better tools to absorb different shocks, and that that didn't— does not mean that they should lose total control of the capital accounts, given the weaknesses in some of the financial sectors. We have insisted also very much, as much or more, to the Chinese authorities to face their banking restructuring needs.
So in that respect, our position regarding the need for the Chinese authorities to contemplate right now— and we believe this is a good moment for them, given the strength of their economic situation— to move to a more flexible environment of exchange rates is our policy. We have recommended that to the Chinese authorities, and we do recommend that to the Chinese authorities.
VOLCKER: Mr. Soros.
QUESTIONER: George Soros. Is one of the features of the global financial system, as it currently operates, that developed countries [that] are dependent on the financial markets can't engage in counter-cyclical policies because the financial markets wouldn't tolerate that? Now, this puts, let's say, Mexico at a considerable disadvantage, and its imbalances in the global economy partially is responsible for depending on the U.S. consumers to keep the economy going. Now, is this something that is at all on the agenda of the IMF, or would you like to see it on the agenda of a Bretton Woods conference?
DE RATO: The capacity of a country to perform counter-cyclical policies, of course, depends on the outside but also depends on the domestic sector. Structural reform, broad tax bases— [inaudible]--it is very important to be able to do that. When your tax revenues don't even come to 15 percent of GDP, your budgetary policy is extremely weak, and your capacity to do counter-cyclical policy is just very, very narrow. And when your liberalization of key centers of the economy to provide new chances of growth like the energy sector and others just hasn't happened, your capacity to do counter-cyclical policies is also very narrow.
So I agree that there are certain external constraints to do that, but I also think that there are very important domestic constraints to do it. And reform against this— not just in one country but in many countries— is a very, very important tool to gain independence— a very important tool. But that of course means that those reform agendas are kept, and that, of course, sometimes might be the responsibility of international authorities, but many times are the responsibility of parliaments.
VOLCKER: Yes, sir.
QUESTIONER: John Mbiti from Mayer Brown [Rowe and Maw, LLP]. I'd like to follow up on the issue of the HIPC initiative. When the HIPC initiative was promulgated, the idea was— the rationale behind it was to— that developed countries could not be expected to develop their economies if they spent a significant proportion of their GDP on debt services. Unfortunately, though the HIPC initiative was developed so that, if they met certain criteria, they would be able to have a large proportion of their debt wiped out, unfortunately, over the last two years, very few countries have actually qualified. And my question to you is: Is the IMF contemplating reforming the qualifying criteria so that a lot more countries can actually qualify?
DE RATO: Not so much, because I think that about half of the countries that could qualify have qualified, and the other half— most of them— are working with us to develop policies that will arrive them to the completion point.
The whole debt relief effort is based on many things. One of them, as you very clearly said, is the belief, which is true, that some very low-income countries just cannot pay their debt and, at the same time, have a meaningful economic policy. To do that, you have to have had many tools. I don't think that you have one tool to— one is certainly debt relief. At the same time, you have macroeconomic policies that will not engage in a new situation that will bring you back to that situation. So vulnerabilities have to be reduced. That's a question of the broader domestic policy.
At the same time, you have to keep up with international grants— mostly grants of very nonconditional aid to have those countries develop, and that is one of the big debates right now— how the world community will keep up— add, enhance, increase its development aid, and that is certainly a very, very important issue right now, because without that, the effort on the HIPC initiative will not be sufficient to turn things around.
And the fourth issue is certainly trade— certainly trade. The cotton issue is the very clear one in Africa, but not [the] only one.
And the fifth issue that is coming right now is that some of those countries are going to have a very important opportunity with the prices of raw material right now— oil and others. And there is going to be a very important challenge domestically to rationalize the use of those external resources that are, in some cases, going to be tremendous.
So the agenda of development of very low-income countries is very broad, and I don't think HIPC has been a mistake at all. No, I don't think so. And I don't think the conditionality— because we could argue, case-by-base, and there is always room for adapting policies to reality. But I don't think conditionality is totally based on the Monterrey Consensus. I mean, countries need aid, but also need good governance. And I think conditionality has to strengthen the good governance part of it.
But the other issues moving— well, the impetus of debt relief would not be sufficient, I agree with.
VOLCKER: One last question.
QUESTIONER: David Malpass with Bear, Stearns [& Co., Inc.]. Mr. de Rato, thank you for speaking to us this morning. Could you discuss the current account deficit? I think it reflects the favorable demographics in investment trends for the U.S. and can be addressed by growth abroad. But some think the dollar has to weaken. Do you have a view on that? You said exchange rates need to flex with imbalances.
DE RATO: Well, if— our analysis is that the U.S. current accounts' actual trends will stay in the realms of four percent of GDP for the next few years, and that, with some corrections, is the fiscal situation. So that shows that some correction in the value of currencies will make sense from the point of view of fundamentals.
But I insist that, given the role of the U.S. economy and the U.S. currency and the world economy, the balances produced by the account deficits, the U.S. account deficit, has also been contemplated from other roles, like the European and the Japanese. And, certainly, the increasing savings in the U.S. economy should occur in many areas, but certainly the public sector.
So to be practical, what is clear right now from the point of view of the U.S. imbalances, is that the correction to more neutral situations in the monetary policy has already— is happening— [and] the U.S. has clearly to start happening strongly in the budgetary side.
VOLCKER: The complexity of this exchange rate question reminds me of a conference I went to recently. A very distinguished analyst started off with an American giving a very persuasive argument as to why the U.S. dollar had to depreciated substantially, followed by the European commentator who said, "Given the sluggishness of Europe and difficulties of its market and a lack of flexibility, Europe could not stand a further appreciation," followed by the Chinese representative who said, "I will tell you one thing with great assurance, that the Chinese yuan will not be changed in the next year. I will bet my hat on it, or my future on it." So all of this was rather surprising to a Japanese representative who said, "We're increasing a little now, but I'm concerned about the outlook, and I think the outlook is for a depreciation of the Japanese yen." [Laughter.]
So I'm not sure where that left us on the exchange-rate point— [laughter]--but I think one thing we can conclude with this meeting, Mr. Rato, is you are leading an organization with very large challenges, with no very easy answers, but I'm sure we all take away a feeling that the organization is in good hands, in competent hands, and very well-informed hands. Thank you very much for coming.
DE RATO: Thank you very much. Thank you. [Applause.]
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