Rodrigo de Rato, managing director of the International Monetary Fund (IMF), discusses progress in reforming the IMF in advance of the IMF/World Bank annual meetings, which were held in Singapore in mid-September. Mr. de Rato addresses specifically the IMF's governance structure, reforms of surveillance, the IMF's role in emerging markets, and its engagement with low-income countries. Looking beyond the annual meetings, Mr. de Rato discusses plans to further adapt the IMF to the new global economy. The event is part of the Brookings Institution's 90th Anniversary Leadership Forum series.
Susan M. Collins
Senior Fellow, Economic Studies
Professor of Economics, Georgetown University
Previous Position(s): Associate Professor of Economics, Harvard University; Senior Staff Economist, President's Council of Economic Advisers (1989-90)
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Rodrigo de Rato
Managing Director, IMF
Rodrigo de Rato assumed office as Managing Director of the International Monetary Fund on June 7, 2004. This followed his selection by the Executive Board of the IMF, on May 4, 2004, to serve as Managing Director and Chairman of the Executive Board.
Prior to taking up his position at the IMF, Mr. de Rato was Vice President for Economic Affairs and Minister of Economy for the Government of Spain, a post to which he was appointed in May 1996. In his capacity as Minister of Economy, Mr. de Rato was also Governor for Spain on the Boards of Governors of the IMF, the World Bank, the Inter-American Development Bank, the European Investment Bank, and the European Bank for Reconstruction and Development.
He regularly attended the European Union's Economics and Finance Ministers meetings, and represented the EU at the Group of Seven Finance Ministers meeting in Ottawa, Canada, in 2002, when Spain held the EU Presidency. He was also in charge of foreign trade relations for the Government of Spain, and represented Spain at the World Trade Organization's ministerial meetings in Seattle, United States, in 1999, in Doha, Qatar, in 2001, and Cancun, Mexico, in 2003. He was a member of Spain's parliament from 1982 to 2004.
President of the Brookings Institution, Deputy Secretary of State in the Clinton Administration, former Washington bureau chief of Time magazine, and author of The Russia Hand: A Memoir of Presidential Diplomacy.
The issue of IMF reform, especially with regard to governance and quotas,is very much back in the forefront of discussion, andthat is in particular in the context of how we can ensure the financial stability of the newglobal economy. As Managing Director of the Fund, Mr. de Rato is working to retool theFund to make it more effective for the 21st Century and modernize its core functions. Hepersonally epitomizes the Fund's commitment to working boldly to build a broadconsensus for change in Singapore, which is an important task and no easy one, and weappreciate very much his willingness to come here and preview some of the issues and,with Susan's help, to discuss it with all of you.Mr. de Rato, the podium is yours.Good morning. First of all, I want to thank the Brookings Institutionfor giving me this opportunity and to Strobe Talbott for his very kindintroduction and in advance to Susan Collins for moderating the discussion that will follow.This is the first day after Labor Day, and we don't have to tell our children whatthat means, but for us also, I think it is a good moment to take stock for a fresh start andto look at our work and the agenda that each of us has set for the next future.Regarding the Institution I have the honor of leading, the International MonetaryFund is also going through a very exciting time, and we will be hosting the AnnualMeetings in Singapore in around a week from now. This will be the first time since 1997in Hong Kong that the Annual Meetings of the International Monetary Fund and theWorld Bank will be held in Asia, and I believe this is a very good opportunity. Asiancountries' commitment to openness, trade, and private sector development has made theregion the most dynamic in the world. The two principle items on our agenda inSingapore are discussions of the developments in the global economy and also a stock-taking and some decisions on implementation of our Medium-Term Strategy, which isthe plan that we lay out for the Institution to adapt to what our members need in the 21stCentury and what globalization is demanding.Today, here in the Brookings Institution, I want to focus mostly on two aspects ofthe Medium-Term Strategy: proposals for reform of the Fund's governance structure andthe changes we are making in the way we conduct surveillance. But before doing so, letme say a few words about the global economy.The global economy has been resilient in the past year, even with high oil pricesand some other macroeconomic disturbances and a change in monetary policy in most ofthe main areas of the world. At the same time, we have to say that growth prospects arestill good, not only for 2006 but also for 2007.Starting here at home in the United States, the speed of expansion is moderatingbut certainly to a more sustainable path that largely reflects the change in the monetarypolicy that has been taking place and also some slowdown in the housing market.Elsewhere in the world, growth prospects are encouraging. We see Japan appears to haveput deflation behind it; China and India continue to be engines of growth; and many othercountries, including Sub-Saharan Africa, are enjoying a continuation of the strong growththat we saw in 2004 and 2005. At the same time, we also see a stronger recovery thanexpected in Europe. In that respect, we expect next year to be another solid year ofgrowth in the world with expansion in Europe and Japan supporting global demand evenas the U.S. moves to a more moderated situation.Nonetheless, there are more clouds on the horizon than there were a year ago.Inflation risks are a concern as output gaps narrow; high oil prices could adversely affectboth inflation and growth; and there has been a major setback in the Doha Round. Ofcourse, global imbalances continue to grow and could be exacerbated by the previousrisks that I just mentioned. So, in this respect, one of the messages I want to give topolicymakers a week from now in Singapore is that the world is facing an increasinglychallenging environment and that policymakers in different countries with differentagenda should be proactive in addressing the risks.Let me now move to the central theme which is the progress in implementing twovery important aspects of our Medium-Term Strategy, relating to our own governanceand also to surveillance. Our Medium-Term Strategy, approved by the member countrieslast September and with some proposals implemented last spring, was motivated by thecentral insight that the world is changing very fast and that the Fund needs to adapt toreflect the changes that we are seeing today and that those changes are posing newchallenges to our membership. New economic powers are rising, especially among theemerging market economies. Financial globalization creates tremendous economicopportunities but has also changed the nature of risk.How should the Fund react to these new realities? I believe that the changeddistribution of the economic weight in the world demands that we reform our governancestructure. The distribution of quotas which largely determine voting power in ourInstitution and, at the same time, influence the amount that members can borrow from ushas changed only gradually over time. We know, if we look at the numbers, that it hasnot kept up with the changes in the relative position of countries in the global economy.So, in that respect, I see a clear need for rebalancing of quotas to reflect changedeconomic realities, especially the increased economic weight of major emergingeconomies but also of other economies in the world.I also see, at the same level of importance, the need to protect the voice andrepresentation of low income countries. Their voting power has been eroded over time,in part because other countries' relative importance in the global economy has increasedand in part because basic votes . an equal allocation of votes based on the principle ofequality of states that was made when the Fund was founded . has become relativelyless significant with each new increase in quotas. This gives rise to concerns about theadequacy of voice and representation for a number of countries that continue to borrowfrom the Fund but that have only a limited share in Fund voting.Why are these issues important? The Fund has a global membership and a globalscope of responsibilities. It is the most important and sometimes the only forum forcollective action on complex macroeconomic problems. Increasingly, the Fund is also avehicle for promoting cooperation between groups of members, most recently through theinitiative on multilateral consultations to which I will refer a little later.The Fund has legitimacy and a record of effectiveness, but if it is to retain itslegitimacy and maintain its effectives and be a useful vehicle for promoting internationalcooperation, all of the Fund's members must be confident that they have a fair share in itsdecision-making and that their voice will be heard. This is certainly a challengingprocess for the structure of a multilateral institution. There are many interests at stakeand also as many principles that can be invoked to defend those interests.I want to say that I am thankful for the attitude of many, many countriesgovernments. I have to say I have witnessed that they have taken a broad view of theInstitution's interest and not just looked at their own narrow, legitimate but narrow,interests. As a result, I can report that the members of our Executive Board have risen tothe challenge and have agreed on a package of measures that will be recommended to theFund's Governors in Singapore.One element of this package will be implemented very quickly. This is anincrease in quotas for four countries that are clearly under-represented by any standardyou want to use: China, South Korea, Mexico, and Turkey. This increase would bedesigned in part to rectify the most extreme distortions in the representation. It willcorrect about one-third of the actual under-representation, but its greater significance isan initial action in a broader process of reform. This will take place over the next twoyears with discussions beginning very soon on a new quota formula designed to capturemore accurately members' positions in the global economy, so that . if possible by nextyear in 2007 at the Annual Meetings here in Washington or at the latest, in 2008 . theBoard will agree on a new formula and recommend further ad hoc increases in quotas fora broader range of members, based on this new formula.There is also agreement that we should ensure that quota shares continue toevolve in line with the changes in members' positions in the global economy, whilecontinuing to ensure that the Fund has enough liquidity to achieve its purposes.The Board will also ask Governors in Singapore to agree in principle to anamendment of the Fund Articles to at least double basic votes, so that the existing votingshare of low-income countries as a group is protected, and to add a provision in theArticles of Agreement that the share of basic votes in total voting power should remainconstant in the event of any future changes in total voting power. It takes time to amendthe Articles of Agreement of an institution with 184 country members . in manycountries, we need legislative approval . but the plan is that these changes be made atthe same time as the second round of quota increases.In addition, right away, I will ask the board to increase the staff in the offices ofExecutive Directors who represent a very large number of countries, like is the case forAfrica, to help them continue to make their voices heard effectively.This is a package that I have taken some detail to explain to you, and I apologizeif some elements I have described seem arcane. The principles behind the package arenot arcane. They are based on fairness, and their impact will be large. They will allowthe Fund to remain an effective and credible participant in the global economicdiscussion. They underpin all of the other elements of the Fund reform.Now, let me turn to the second issue. One of the most important functions of theFund is surveillance of the international monetary system and of the global economy. Bysurveillance, I mean both monitoring of the global economy and the Fund's discussions,called consultations, with individual members on their economies, which are doneusually once a year. In proposing changes in this area, we are building on reforms thathave been underway for many years, especially the increased emphasis that we haveplaced since the late nineties on promoting internationally agreed standards and codesand on a greater transparency in our operations and assessments. But the Medium-TermStrategy goes further with the aim of adapting the Fund's surveillance to a new world offinancial globalization with all of its attendant opportunities and risks.One change that we have already begun to implement is the introduction of a newtool to which I have referred before, multilateral consultations, in which particular issuesof global or regional significance will be taken up collectively with some members and,where relevant, with entities formed by groups of members. Multilateral consultationsare an example of the Fund's increasingly important role as a vehicle for internationalcooperation. The aim is to provide a vehicle for analysis and consensus-building and aframework that helps our members overcome some of the hurdles to individual action byemphasizing the benefits of joint action for all.Our first initiative on multilateral consultations has already begun, and it wasagreed last spring here in Washington and focuses on narrowing global current accountimbalances while maintaining robust global growth. Fund staff have already heldbilateral discussions with the participants in these multilateral consultations on globalimbalances . there is China, the Euro Area, Japan, Saudi Arabia, and the United States. and over the coming months, we will hold roundtable meetings with all of theparticipants together. The consultation in this case is focusing on the spillovers andlinkages among these and other economies and on actions that could sustain growth andpromote an orderly unwinding of the imbalances.I don't want to go into much detail of these discussions as these consultations arestill at an early stage. It will also take time both to complete the consultations and foractions taken to produce effects on the global imbalances. Global imbalances have beenbuilt over a number of years and will not be reduced to sustainable levels quickly unlesswe have a crisis. However, I hope that the consultations will produce (a) a sharedanalysis of the nature and consequences of global imbalances, (b) a commonunderstanding of policies designed to make things happen in several countries together,and (c) understandings of the role the Fund can play as a forum for implementing thecommon approach, a forum in which all of the international community is represented.Another part of the reform of the Fund's surveillance is a review of thefoundations of our surveillance, embodied in past Executive Board decisions, to ensurethat they are clear and relevant. We are sharpening our focus on exchange rates. Arecent study we made of our staff reports on 30 large economies revealed that mostprovided assessments on the adequacy of exchange rate regimes and exchange rate levels,but we can improve our analysis further. We are in the process of extending to thecurrencies of the major emerging economies, the analysis the Fund currently does toassess whether the exchange rates are broadly in line with fundamentals, as we doregularly with developing economies. This is something that needs to be handled withcaution, given the methodological difficulties and sensitivities, but I think it is a veryimportant step on global surveillance.We are also intensifying our efforts to integrate our financial sector framework,including on capital and financial markets, in our regular surveillance activities. Theincreased importance of financial markets for growth and development for all countries isa major feature of the new world globalization. It is of particular importance foremerging market countries which have a lot to gain from financial integration, but manyalso become more vulnerable in integrated global markets. The Fund has been placingincreased emphasis on identifying the strengths and vulnerabilities in the financial sectorfor many years, including through the launch of the Financial Sector AssessmentProgram in the late nineties.Where we are now advancing, it goes a little further. In our surveillance of theglobal economy, we have already begun to devote more attention to the linkages betweenthe financial sector and the real economy. The linkages work both ways. We areexamining the implications of financial sector changes for countries' economies,including in a chapter of the World Economic Outlook that will be released tomorrow.Risks to financial stability are addressed in the Global Financial Stability Report that willbe released on September 12th.In our surveillance of individual countries' economies, we are enhancing theanalysis of financial sector vulnerabilities and ensuring that this is reflected in ourmacroeconomic analysis and policy advice. In Article IV consultations reports, we willincreasingly cover the implications of such vulnerabilities for macroeconomic aggregatesand capital flows and for domestic and external spillovers. The bottom line is that in thepast, nasty surprises in the financial sector have had even nastier effects on the realeconomy. To avoid such surprises, we are devoting increased resources to financial sector surveillance.I have focused particularly on surveillance work today because it benefits all ofour members and it is at the heart of our responsibilities, but the Medium-Term Strategycovers many other aspects of our work besides surveillance, and let me mention verybriefly two areas where I expect some changes over the coming months.I think we need to improve the usefulness of our support for emerging marketeconomies. After very heavy borrowing for a period of years, not many of our emergingmarket country members borrow today. This is partly a reflection of the good conditionsin financial markets but also of improved economic management in those economies.But I want to make sure that if financial market conditions worsen, the serves we offer toour members are sufficiently useful that they will come to us for support if they need it.For this reason, I have proposed that we develop a new instrument to provide liquidity foremerging market countries that have strong fundamental but remain vulnerable to shocks.The aim would be to provide assurances that substantial financing will be available intime of need, a framework for policy commitment and monitoring, and a signal to the markets.Our Executive Board discussed this instrument for the first time last week. I lookforward to further discussions on this issue in Singapore and after Singapore. Givenmembers' support, we would work on these issues in the coming period, and I hope thatwe will be able to make concrete proposals in the next six months by the Spring Meetingshere in Washington in 2007.Let me now turn to low income countries. Over the past year, the Fund hasmoved quickly to implement the Multilateral Debt Relief Initiative, wiping out the debtowed to us by some 19 poor countries, and other international organizations havefollowed us. We have put in place a new subsidized lending facility for low incomecountries hit by shocks and a new instrument to support policies in those countries that donot need Fund financing, but it is clear that the challenges are very big and we need to do more.Mahatma Gandhi is reported to have advised "Think of the poorest person youhave ever seen and ask if your next act will be of any use to that person." This iscertainly a very high standard to meet, but it gives us the standard we must try to meet.I have proposed a Medium-Term Strategy that the Fund renew its commitmentand improve its effectiveness in helping low income countries meet their MillenniumDevelopment Goals, by focusing on what we do best and on tasks where we can makethe greatest contribution. These includes helping countries reap the benefits of higher aidand debt relief and avoid a new buildup of unsustainable debt, promoting macroeconomicstability which is the prerequisite for sustainable growth, and providing support in policyareas where the Fund has expertise and that are critical to growth; for example, tradepolicy and financial sector issues. In all of these areas, we also need to work closely withothers, such as the World Bank but also the donors and most importantly, with thecountry governments and civil society of those countries.To sum up, we have, as I said, a very exciting and important agenda before us inSingapore and beyond. The International Monetary Fund has made good progress in thepast year on measures to improve surveillance, measures to help low income countries,and others aspects of our Medium-Term Strategy. We have a more clear picture than wedid a year ago of the direction that those reforms should take, and we have taken stepsalong the way.I hope that in Singapore, our Governors will support the planned changes in Fundquotas and endorse our plans for continued reform of surveillance. I also hope that theywill indicate their support for the future work, including that on crisis prevention andFund income that we are planning in the coming months.We have a long journey ahead of us. I am sure it will be exciting and sometimesmay be difficult, but we approaching it with the determination and with the convictionthat the Fund can help our members meet the challenges of globalization, so that thepeople of the countries can enjoy the benefits.With that, I certainly thank you for your attention. I invite your comments andquestions. Thank you very much.(Applause.)