November 24, 2008 Assistant Secretary for International Affairs Clay Lowery New York - I want to thank the Reinventing Bretton Woods Committee for holding this conference on the International Financial System. Your timing couldn't be more impeccable. Just over a week ago, leaders from 20 of the world's largest advanced and emerging market countries – representing more than 85 percent of global economic output – met in Washington, D.C., to address the current crisis and lay the foundation for reforms that could help prevent a similar crisis in the future. The work plan that came out of the Summit on Financial Markets and the World Economy reflects strong consensus on three critical priorities:
In other words, we all must continue to take actions to stabilize our financial systems, promote economic growth, and assist each other and those less fortunate. I think of this as pragmatic as opposed to profound thinking, and I think of this as working on the plumbing and the carpentry as opposed to creating some grand international financial architecture that can grab a newspaper headline but can't be explained with any substance. Given the sponsor and the context of this conference, I wanted to focus my comments on the reform and role of the International Financial Institutions, or "IFIs," in responding to the crisis. On the eve of a political transition in the United States, and amid a global financial crisis, it's worth evaluating the IFIs' abilities to respond to the current crisis and their roles going forward. I offer these remarks having been closely engaged with the IFIs from the time I first arrived at Treasury in 1994, and now having been part of two Presidential Administrations that prioritized work with the IFIs and periodically pushed for various reforms. Instead of focusing on Bretton Woods II or some grand agenda, I thought it would be helpful to present a framework for these institutions in a world in which access to capital will be strained, private sector finance of trade and infrastructure will be lacking, and economic growth will deteriorate. In this Framework, I'll focus on some of the variables of reform that we have tried to implement over the last few years as well as the constant lessons that we simply need to continue to remember. I hope this will help in considering how we should think of the IFIs in the current storm and what the damage and implications we will likely need to face as that storm continues and as it subsides. Reform Variables Upon taking office, the Bush administration developed a set of priorities for IFI reform to preserve the institutions' relevance and improve their effectiveness. In particular, the United States insisted that the IFIs focus more clearly on their respective missions and demonstrate measurable efficacy in doing so. For instance, our reform agenda has taken these institutions to new frontiers on measuring and achieving development results, securing grant finance and debt relief for the poorest countries, enhancing accountability and transparency, and improving their identification of emerging vulnerabilities and macro-financial linkages. At the International Monetary Fund (IMF) for example, the United States led the charge to improve country surveillance. Former Treasury Under Secretary for International Affairs Tim Adams made headlines when he charged the Fund with being "asleep at the wheel" when it came to IMF exchange rate surveillance. This emphasis was related to a growing vulnerability – global financial imbalances – that is one of the underlying causes of today's problems. Today, thanks to the efforts of Tim and others, the IMF is making progress toward more consistent and candid assessments of its members' exchange rate policies. However, more work remains to be done to ensure the Fund is willing to make tough judgments and increase its candor and clarity on external stability and exchange rate issues. This is not about pointing fingers, it is about calling the situation as you see it. At the Multilateral Development Banks (MDBs) we have championed development effectiveness by urging the banks to provide resources to better performing countries, to monitor and measure the effectiveness of projects, and to expand the transparency of their operations. At the same time, we've pushed them to provide sustainable finance through grants and debt relief to the poorest countries, recognizing that high debt levels are a key obstacle to development. I think it is arguable that these initiatives in support of the more important efforts of many of the poorest countries to implement sounder economic policies has made the fallout from the past year's turmoil much better than it otherwise would have been. The United States has been a leading voice on governance, making clear that these institutions must reform to remain relevant. Reform will not be easily accomplished, but as witnessed by the Summit, there is a growing recognition that governance issues are central to institutional legitimacy. Emerging markets must have a seat at the table to reflect more adequately the changing economic weights in the world economy. We fought hard to increase emerging markets' representation at the IMF, and we while we supported the recent quota reform, it should have been even more ambitious. We've also strongly advocated a smaller and more focused IMF Board and called on other nations to work with us to reduce the number of chairs from 24 to 20 by 2012, with no loss in the number of emerging market or developing country chairs. And just last week, Secretary Paulson called on the IFIs to explore the possibilities of moving toward non-resident boards. However, governance reform extends beyond the board room and must include more transparency and accountability at these institutions and better efforts to fight corruption. "Constant" Lessons We have been working on these initiatives for years, and I believe they have improved the way the IFIs do business. However, as the Summit underscored, there is more to do especially in the context of the current global financial crisis. Lessons are already emerging from the current crisis that will shape our approach and thinking going forward. As a policymaker, I'd suggest there are a few constant lessons that we need to keep reminding ourselves of:
Addressing the Current Global Economic Crisis Knowing some of the variables of reform and the constants does not necessarily provide us a sound equation for how to think the IFIs should deal with today's crisis. In fact, we do not have the luxury of waiting for further reforms to take hold. The emerging market and low income countries are now facing the knock-on effects of a crisis that first metastasized in the industrialized world, and it is the IFIs that are the frontline responders to the fallout from the crisis. So while reform is critical, we need to think about how to best mobilize these institutions to address the current situation. With this backdrop, I offer a set of principles for IFI engagement in the current environment:
Looking Ahead: Taking the Long View However, as past crises have shown, our policy response to the current crisis will have far ranging consequences in the distant and not-so-distant future. I see four implications of the principles just outlined:
Conclusion The United States must continue to lead on issues of institutional reform. This Administration has been a strong supporter of the IFIs, especially the concessional lending windows, as an effective tool for leveraging U.S. resources in promoting development and stability. And if you believe, as I strongly do, that our constructive engagement with the IFIs is in our own national interest, then we need to ensure that we are in a position to constructively support further reforms. This is no small challenge, but a challenge we must meet. While I cannot speak the next administration I am confident they will continue to support and maintain U.S. credibility and influence at these institutions. This will require continued pressure on the institutions to make good on their commitments to enhance legitimacy, transparency and effectiveness. It will also require more prominent roles for emerging market economies (accompanied by emerging markets taking more responsibility within the global financial system). Finally, it will require that we are mindful that the actions we take today to address the crisis will have implications for the success of any future reforms. -30- |
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