Journal Issue

Interview with IMF Managing Director: Major players must tackle global imbalances or markets will do it for them

International Monetary Fund. External Relations Dept.
Published Date:
November 2004
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IMF Survey: You’ve commented on the vital need to correct global imbalances among the major players—the United States, Europe, Japan, and emerging Asia—if global growth is to be sustained. What does each of these parties need to do? And how does the IMF fit in?

De Rato: Governments have two choices: one is to address the issue with a change in policies; the other is to let market forces resolve the problem for them, which could be much more costly and risky. The United States needs to speed up reduction of its public deficit, and we hope that this will be reflected in the new administration’s policies as soon as possible. Europe has to accelerate its growth potential and its actual growth; 2004 will again be a year in which growth in Europe was too weak. The same goes for Japan, which has to accelerate its reforms if it hopes to perform in a more dynamic way. The emerging market economies of Asia have to move toward exchange rate mechanisms that better reflect economic fundamentals and help them absorb changes in the world economy or external shocks. If these major players adopt these policies, which are quite reasonable, the global imbalances could be reduced in a positive way.

How does the IMF fit in? These imbalances are a global surveillance issue, and these days, we’re much more conscious of systemic risks, which affect not just individual countries but much of the world or major regions.

IMF Survey: In the media, there is now talk of a possible 20 to 40 percent decline in the value of the dollar. What is your reaction to this type of speculation? What would such a decline mean for the global economy?

De Rato: The debate is out there, and we’ll hear a lot of predictions and analyses. But the fact is that there is a basis for the debate—people aren’t just speculating in a void. Of course, it’s very difficult to make predictions about the evolution of currencies, especially about when exchange rates will move and how sharply. That said, the U.S. current account deficit is very large, and it’s in everyone’s interest that the deficit be reduced in an orderly manner. If we look at the different possible scenarios, we see that there are scenarios in which there is a gain for everyone, and there are scenarios in which there is a loss for everyone.

IMF Survey: Is the massive buildup of foreign exchange reserves by Japan and key Asian emerging market economies in the interests of these countries or the international system? Can it continue?

De Rato: It’s the will of these countries—they’re independent economic players—and if they want to build up reserves, it’s a strategy to gain independence and limit risks. But like everything else in economics, such a buildup has its limits, and at a certain point, it complicates monetary policy and anti-inflationary policy. We’re advising the countries to be aware of these limits, although they’re already very aware of them. We’re also advising them, as mentioned, to move toward more flexible exchange rate mechanisms.

As for the global economy, up to now these countries have been the ones financing the U.S. current account deficit, which has been the main engine of growth for the world. So, on balance, we can’t complain too much. The question is whether the buildup is sustainable, and there’s growing evidence that the buildup is very big and the markets are asking for a change in policy. I don’t think it’s a traumatic situation, but I do think a change in policy is needed to avoid getting into a traumatic situation. And now is a good time for most of the players to make such a change, as their economies are in an upswing, although it’s a little less vigorous because of oil prices.

IMF Survey: How worried are you about the impact of continued high oil prices on global growth? Any advice for the oil-importing and oil-exporting economies?

De Rato: We’ve said from the beginning that the high oil prices are demand driven, which is very different from previous oil price hikes. That doesn’t mean there aren’t supply constraints in some areas or that there isn’t a lack of transparency in the markets. But even taking all of this into consideration, the price of oil is high because more people are consuming oil. It’s as simple as that. This means that the world economy is doing a much better job of absorbing shocks caused by supply constraints. It also means that it’s going to be a more permanent situation—that is, the oil price floor has risen because of the demand—a reality that oil consumers will have to accept. And policymakers in oil-importing countries will have to carefully review their energy policies, focusing on conservation and efficiency.

In oil-exporting countries, policymakers will need to recognize that previous hikes in oil prices haven’t always been a blessing. They often resulted in big disruptions in macroeconomic balances, inefficient public expenditure, and greater economic vulnerability, without enhancing development and reducing poverty. Of course, this isn’t a universal truth, but it has happened enough times so that we should be very aware that high oil prices are a double-edged sword. For that reason, the IMF is advising these countries to save for the future, reduce debt, and spend on infrastructure and social needs today, but to do so with greater transparency and efficiency in allocating resources and selecting projects.

IMF Survey: You returned from the Middle East just a few weeks ago. What is the economic prognosis for the region?

De Rato: The region is at a good point, in the sense that the macroeconomic picture in many countries has strengthened, and new and old economic teams are very clear on the policies needed for macroeconomic stability and reforms. Moreover, the region will benefit from the higher oil prices, with some of the countries big winners. The challenge is to use the oil wealth wisely to help reduce macroeconomic imbalances, spur growth, and lessen dependence on oil for growth. The region also needs to cope with the challenge of regional integration, both in the Gulf and in North Africa. In all of these areas, the IMF can help with policy advice and technical assistance.

IMF Survey: With the 60th anniversary of the Bretton Woods institutions and prompting from the major industrial countries, the IMF is undertaking a strategic review of its work. Can you fill us in on how this review is coming along and what we should expect from it?

De Rato: First, the IMF is responding to what is clearly a demand by many countries and by public opinion to think about its role and work. The IMF is proving both that it has the capability to do so and that it’s open-minded enough to take on board what others think. Second, an international institution that deals with macroeconomic and financial issues has to be very aware of the depth and speed of changes in the world and how those changes affect it. So it isn’t that the IMF is looking for a job, but rather that the job is changing—over the past 10 years, we’ve seen a change in the strength of international markets, the demand for technical assistance, and the way we can prevent and resolve crises. This is a very good exercise, and it’s not a theoretical one.

IMF Survey: When should we have some results?

De Rato: By the time of the IMF-World Bank Spring Meetings. I’d like to try to float some ideas by that time.

IMF Survey: Do you expect any changes in the way the IMF does its work as a result of the review?

De Rato: Why not? I don’t think we have to be afraid of changes. We just have to be sure of two things: that what we do makes a difference and that we’re good at what we do. And I believe in these two things. I would hope that there are changes in how the IMF performs its work as a result of this analysis; after all, that’s what it’s all about.

IMF Survey: Any preset changes that you expect?

De Rato: I don’t want the exercise to be determined by any one person’s preferred changes, even my own. It should be a collective analysis that draws on all of the IMF’s intellectual resources and is shared and understood by everyone. I will be a part of it, but just one part.

IMF Survey: In Africa, many leaders are raising the question of giving African countries a stronger voice in the IMF’s operations and policies. In Asia, also, many countries feel that they are underrepresented in the IMF because their quotas are out of line with their current economic importance. Do you think the legitimacy of the IMF is being threatened by the failure of the membership to reach agreement on a reform of quotas and representation?

De Rato: I don’t think our legitimacy has been threatened, because we’re operating on an agreed system. But there are a lot of voices asking for a new agreement to reinforce our legitimacy, and it’s a very serious problem.

IMF Survey: What would it take to get an agreement?

De Rato: Political consensus. I don’t think it’s a technical issue of finding more appropriate quotas or voting weights. It’s a question of countries being willing to sit down and make this issue a priority. I think it’s a priority, and I said that in my October speech at the Annual Meetings.

IMF Survey: One of the IMF’s top priorities is helping the poorest countries—most of which are in Africa—reach the Millennium Development Goals [MDGs]. Jeffrey Sachs argues that what Africa really needs is “a big push”—a flood of foreign aid. Is that the answer to ending its desperate plight? What do you say to those who say that there is too much focus on the MDGs, given that we need to be concerned about post-2015 also?

De Rato: We agree that more and better aid is needed, and it’s needed now! We urge governments to realize that aid has to be increased, that it has to be more predictable, and that donors should improve their coordination to ensure that their respective requirements do not impose excessive burdens. We also need to strengthen our work, such as supporting countries in their preparation of Poverty Reduction Strategy Papers, which underpin debt relief and IMF and World Bank lending programs. These papers are extremely useful in helping countries develop good and sustainable strategies for poverty reduction that are homegrown.

Is there too great a focus on the MDGs? I don’t think so. They’re very useful because progress toward them is measurable. In fact, the IMF is closely involved in the international community’s effort to monitor progress toward the MDGs.

IMF Survey: Over the past six months, you’ve visited all of the regions in the world as part of a “listening tour.” What are the most important things that you’ve learned?

De Rato: The trips over the past five months have been very enlightening. I’ve been able to meet with many heads of state, prime ministers, finance ministers, and central bank governors, along with IMF staff who work in the field. This has allowed me to broaden my perspective on problems and listen to different approaches to solving them. The trips have certainly reaffirmed the idea that national ownership is an essential element in the design of economic policy—an idea that I already had before I came to the IMF, based on my own experience. They have also reaffirmed that our advice, along with sound macroeconomic policy, does help countries better position themselves to cope with challenges.

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