Rodrigo de Rato, International Monetary Fund
Edwin M. Truman, Peterson Institute for International Economics
Peter B. Kenen, Princeton University
Mohamed A. El-Erian, Harvard Management Company
Peterson Institute, Washington, DC
April 20, 2006
IMF Managing Director Rodrigo de Rato led the discussion at the release meeting of Edwin M. Truman's edited volume Reforming the IMF for the 21st Century. Subsequent comments were made by Professor Peter B. Kenen of Princeton University, from an academic viewpoint, and Institute senior fellow Edwin M. Truman, on the basis of this new book.
Book: Reforming the IMF for the 21st Century
Special Report No. 19
edited by Edwin M. Truman
Speech: Progress Report on IMF Reform
Edwin M. Truman, Peterson Institute
Speech: Comments on the Address of the Managing Director of the IMF
Peter B. Kenen, Princeton University
Speech: Remarks on Proposals to Reform the IMF
Mohamed El-Erian, Harvard Management Company
Question and Answer Session with IMF Managing Director Rodrigo de Rato
IMF Managing Director Rodrigo de Rato's remarks at the April 20, 2006 meeting are available on the IMF Web site.
C. FRED BERGSTEN: At the outset I offered or threatened, whichever it is, to give the managing director a chance to respond to any of this, and I will do that. But before I do, I am going to abuse my position as chairman to add very quickly two other items to the agenda. One is very short run and operational; one is more fundamental and perhaps even philosophical.
The immediate question relates to—as I understood the managing director's proposals—his two-step process on governance. As I understood him, he is thinking of seeking a mandate this weekend, so that come the annual meetings this fall, he could put on the table a proposal for some selective quota increases for countries which clearly are now underrepresented in the International Monetary Fund (IMF). Down the street, President Hu Jintao of China is having lunch with the president and several hundred guests at the White House. We all know that though there are several countries that are underrepresented at the Fund and in global governance more broadly, the key is China, and because China is the emerging superpower, we all believe China should play a more central and important role in the governance process, and one place to start would be an increase in its shares at the IMF.
But then I think comes an immediate operational problem. There are a number of people around the world, but I'll focus on this city and even some who work in this building, who believe that China is not adequately fulfilling its responsibilities under its obligations in the International Monetary Fund. There is even new congressional legislation—not proposed by grandstanding politicians but by the chairman and ranking minority member of the Senate Finance Committee, the most responsible and respected member of the Congress on this whole range of issues—which would require the US government, if it found China to have a fundamental currency misalignment, which would be hard not to find these days, to vote against any increase in China's quota at the IMF. And since this is one of those decisions that requires an 85 percent vote, it would require the United States to veto the managing director's proposal.
So I want to ask the managing director that one—how he sees his way through that very potentially difficult operational question, which tries to relate China's rights to China's responsibilities. One might equally argue there should be some deletion of US votes since the United States may not be carrying out its full responsibilities and policy as well—but, for better or for worse, that is not on the table. What's being talked about is a quota increase for China and a few others. That's an operational question to you.
I then want to back off and ask a little more fundamental and philosophical question because I think it goes to the heart of this whole debate. I think you were quite right, Mr. Managing Director, at the outset of your remarks today to focus on this question that has been raised of the Fund becoming the umpire in a more operational sense. Call the foot fault or not, call the ball out or in. Make some public judgments as to whether countries' policies are correct, exchange rates are misaligned, or whatever. You seem to find that inconsistent with the Fund's role as a trusted adviser to governments. My question to you is whether it is really inconsistent or whether a way might be found to reconcile the two objectives. To be sure, the Fund wants to remain a trusted adviser to governments and one taken into confidence by them. At the same time, I agree with those who call for the Fund to be more of an international whistle-blower and to call a spade a spade and publicly suggest that steps need to be made in a multilateral context to improve the prospects for global prosperity and stability.
Is it really contradictory to play the insider role and the outsider role? Individual government officials have that problem all the time as they try to steer between making decisions on a confidential basis inside governments, working with the outside in a transparent, democratic way, and helping shape public opinion, which in turn feeds back to affect importantly the internal decision-making process. In a way, I am urging you to think further and harder on what is admittedly a very, very difficult trade-off and set of issues, but I would invite you to say anything further on that.
Mr. Managing Director, with all of our deep appreciation for launching this and putting such a thoughtful set of proposals on the table—for Truman's rating almost tripling your grade in six months—the ball is back to you.
RODRIGO DE RATO: Thank you very much, Fred. As well, I want to thank the three speakers for their remarks and what I understand is a positive attitude toward looking into the future of the Fund and more specifically into what we call the strategic review of the Fund.
Let me try to answer some of the questions, not all of them for sure. I totally agree with Mohammed El-Erian that implementation is key right now. I tried to explain that at the end of my speech. This is a very important debate, and it has a lot of conceptual questions that probably never are going to be settled although Fred seems to think that the only table in the world is here. Let me tell this old story about the Spanish toreador who is from Sevilla, and he goes to Bilbao, which is in the north of the country. He is having lunch with the people of Bilbao, and they are all the time telling him over lunch how far away is Sevilla, how good that you come over here, how long a trip it is. After two hours of listening to that, he said, Well, sirs, what is far away is Bilbao. Sevilla is where it should be.
Fred, sir, when you tell me about the table here, who sits at the table depends on where you sit, but the table is here and in many other places, and they see things in a different way. So when you tell me that legislation here that is proposed, do you know how much legislation is proposed in the world? You don't and I don't. But I can tell you that it is a lot. From the time the legislation is proposed to when legislation is imposed, a lot of things happen, and so let's see how things evolve.
Implementation is key. Conceptual debates about the Fund are going to continue, and if they don't continue it is because the institution will not be relevant. So questions of governance, questions of how the Fund has to react to the public good in which the Fund is engaged —which are very, very important and at the same time not easy to implement—are going to be a very important part of discussions in the future The Fund should be engaged in those discussions and should promote those discussions.
But as I tried to explain to you, and I think that the three speakers agree with me, we have immediate challenges. This is not a question for two years from now or three years from now. We have to respond to the challenges that are on the table for countries now, and that is the strength of the Fund. It is an actual and practical institution. We have to face practical issues, and at the same time we have to respond to conceptual issues. That is going to demand implementation of this strategy now and discussion going forward on many other issues.
That is not to say that everything has to be left for tomorrow and nothing can change. I think a lot of these questions that I am proposing, once they are implemented, there is going to be a big change. To have multilateral consultations is going to be extremely challenging, extremely challenging, Countries are going to face a new set of discussion about the policies, and they are going to face consultations about how the policies affect others and how they should change those policies. That is completely new. We are coming into new scenarios in which countries are not used to it, and we are not used to it either. It is going to demand a lot of research and a lot of talent, and a lot of political capital is going to be used in this operation.
Political capital, like any capital, is limited, and you have to choose where you spend your time and your political capital. My personal impression is that what is needed now in the global economy and in the Fund is for the Fund to respond to global issues. Governance issues have been raised by some of you, especially by Peter Kenen and by Ted Truman. They are very important. My previous life in politics tells me that political arrangements—and governance is political arrangements—are never perfect. You might choose one system. We have a system now in which governments are seated around a table of 24 chairs, and of course we represent governments, and at the same time they are representing the institution. The other arrangement will be for governments not to sit around in these chairs and have people who do not represent governments discuss issues. Don't believe that the second proposal is perfect and the first proposal is not. It's not true. The only thing is, the second proposal is new and the first proposal is not, but it is not perfect. One proposal has some advantages, and the other has other advantages, and there is a trade-off.
Should we want to keep governments at a distance at a moment in which we want to get governments inside a multilateral consultation? That is the question I am asking myself, and that is not a theoretical question. That is the practical question I have to resolve when I open the shop on Monday. When you go back to your things, I have to open the shop on Monday, and I have to answer the question: When am I going to bring six, five, or seven governments to a multilateral consultation—and the ones who are not coming to the multilateral consultation are asking themselves, what is my role in this process? When is the time to tell governments, “You come back every six months”? I have my doubts. I don't see that game. It is not that the arrangement is not good, it is that I don't know if it is the moment to implement it because, I might be completely wrong, but the challenge of moving from the G-7 type of global relationships to the multilateral consultation is not at all an easy road, and I am not very sure that this is the moment of also introducing other changes that might be extremely biased. But government arrangements are about equilibrium of power. That is the basis of any government arrangement. You have to know what you give and what you take out. If not, you don't have a government arrangement.
The people who created the Fund 60 years ago decided on some equilibrium of power. Should we change—not that we are also changing our relationship with governments and introducing a variable that goes far beyond bilateral consultations—and introduce the variable of multilateral responsibility and the spillovers and linkages? I have very serious doubts, very serious doubts.
Implementation is going to be key. I am not saying that the Fund is just an insider. In fact, I have said clearly that we need to reach out, we need to be part of the debate, we need to explain not only globally but also in countries that our advice and our point of view is based on reasons, and those reasons are deep and we believe in them, because that is the only way we can be part of the change of culture that will allow ownership of economy policy. There is no way you can have changes in macroeconomic policy at the national level unless societies change. That is true everywhere. Nobody has accepted outside advice on macroeconomic policy that I know—nobody. Unless you have a homegrown attitude that accepts what that advice represents, there is no way you are going to change. That is true here in the United States about tax revenues, and it is true in China about flexibility of the markets, and it is true in Europe about structural reforms, and it is true everywhere. So we have to be part of the debate.
What I have tried to say is that we are not just outsiders. Our role is not just to describe reality, and blame this or that, and say this is wrong. It goes beyond that, and that is the important thing.
It is not that I do not understand perfectly clearly that there is a very fine line between speaking out and being a trusted adviser, to the extent that I have said something that many of you think is not important, but it has a lot of importance. I will be very happy in this debate about being an umpire if some of the countries of the people who are proposing it will allow us to have a press conference after the Article IV consultations in those countries.
It might just seem unimportant. Who cares about that? But let me tell you, when you find out that the most important countries—and I am not going to say the names—that represent us make public Article IV either at 10:00 p.m. their time or just in the middle of a holiday, you can be sure that we can do something a little better in terms of outsiders. So maybe we do not need big changes in the Articles of Agreement, we just need to do press conferences at the time the newspapers are open. But the problem is that we are not the ones on this table who make that decision.
So there are several practical issues that change things, very practical issues, and that is one, for instance, that we make very clear: the umpire role. Very easy, very cheap, very clear. We do not need big things, but we just need not to publish news when everybody is in bed.
On the question of precautionary arrangements, I know that is a very challenging issue, and Professor Kenen had very important reasons. Nevertheless, that is an issue we have to respond to. Some of the big changes we are seeing in front of our eyes are changes in the role and in the status of emerging economies. I agree with those who think that financial challenges lie ahead, and they are probably going to be bigger than we expect. Certainly, they might be more sudden than we expect. We have to face other challenges that Professor Kenen and others put on the table, questions of moral hazard and others. But I truly think that we have to respond to what we see also as a policy that many emerging markets are trying to implement, which is a policy of insurance in precautionary situations. That policy, only based on accumulation of reserves, is, first of all, very inefficient. Second, I think it will impede the resolution of global imbalances because it will not make those economies with $1,300, $2,000, or $3,000 per capita use incredible amounts of money in their own development by fostering better domestic economies that will make those account surpluses diminish. Unless we see that, this prosperity we are seeing in the world is inevitably going to get into the crisis in the event, not only economically, but, very importantly, politically because these societies with $3,000 and $2,000 per capita are not going to understand how they can have at the same time such an incredible amount of reserves that are not needed from the point of view of what is needed for the country. And certainly the solution of sending some trucks to the central bank and getting the reserves out and spending it, we all know, is not the solution that will make lasting growth. We need other solutions.
So it is clear that, let's call it excess, cannot be the way emerging economies insure themselves, and it doesn't make any sense. So other avenues have to be found. And as interest rates go up, this system is going to get even more expensive. So the Fund should be thinking about that, and I am just proposing some issues in which I think we can play a role.
MR. BERGSTEN: Mr. Managing Director, let me just assure you, if you ever need a neutral venue for a prime time release of your Article IV on the United States, you've got it in this room. The floor is open for questions or comments. Bill Cline in the back, Don Johnston, director general of the OECD, let me ask each of you to go to a mike. Don, you can go up here. Identify yourself first. We will take several questions, and then we will ask the managing director or anybody else on the panel to come back.
WILLIAM R. CLINE: I would like to comment on what I consider to be a red herring and its relationship to what I consider to be the core question we face now and ask for more concrete thoughts on the action.
The red herring is the notion that the reason Korea, China, Malaysia, and Singapore have such huge reserves is that they are terribly fearful that they could be thrust into a 1997 crisis. This is such a red herring that it is enormous. The reason for these large reserves is essentially what in the interwar period was called competitive devaluation, and it is the reason we established fixed exchange rates at Bretton Woods. We now have to look at how we address the problem of competitive devaluation in a floating rate regime.
The answer to that is collective action. Korea doesn't want to appreciate all it has, China doesn't want to appreciate, and Malaysia, the Philippines, whatever, do not want to appreciate in isolation because of the “prisoner’s dilemma” problem of losing competitiveness with other countries. So it seems to me rather than focusing on creating yet another Contingent Credit Line under the misleading argument that only if we do that will we resolve the imbalances because otherwise China will continue to accumulate huge reserves, we should focus on—and I would say, by the way, that the supplementary reserve facility to me seems perfectly adequate to take care of the crisis situations—we should focus on how do we get the collective action consummated.
I would like to hear more concrete detail on the collective or on the multilateral surveillance. One can imagine a multilateral surveillance that makes the Fund the aggressive leading actor in a Plaza II at which this time, not just Germany and China are going to intervene, but a whole series of major developing countries will stop intervening and allow their currencies to appreciate jointly in a collective-action process.
But from what I have heard so far, it seems to me there is a long gap between that and the steps toward collective surveillance or multilateral surveillance that you've suggested, especially when we consider that over the past several months we seem to have heard out of the IMF a series of statements being very reluctant to take on such countries as China’s undervalued exchange rates.
DON JOHNSTON: As you know, I'm stepping down from the OECD as secretary general in about a month's time, and when I look at this reform of the IMF for the 21st century it reminds me that I also thought about how the OECD should be reformed for the 21st century and how the World Bank should be reformed for the 21st century. In fact, how should the international architecture as a whole be reformed for the 21st century? Who is going to do that? Where are the ideas going to come from?
To me, we're allowing for this to proceed on a very ad hoc basis. We now have the Financial Stability Forum, which grew and was seen as an absence on that front, but that can be debatable. We have the G-20 finance ministers. We have the IMF, we have the OECD, we have the Bank. We talk about trusted advisers to governments. The OECD is often thought of as being an organization of the rich man's club, but that is no longer the case. We are deeply engaged with China. We have done an economic review, we have done a regulatory reform review, we have done an investment review, and so on.
So who are the trusted advisers to governments? How many can we have? Don't we have to put something into the system that makes more synergies between us? What's happened is thattax policy, this is taking place. And we know how important tax policy is to emerging markets and to all our markets. We have created an international tax dialogue; the IMF, the OECD, the United Nations, and the World Bank working together.
But when you talk, for example, about a new steering committee for the world economy, it strikes me that maybe that's what we should be talking about. I don't have any views on the governance of the IMF because I have never been that deeply engaged in it. I have a lot of views about the governance of the OECD and a few about the governance of the Bank, but I really think that this discussion could be broadened, and who is going to do it, and at what level is it going to be done, but I think it has to take place.
MORRIS GOLDSTEIN: I am pleased to see that the Fund's surveillance over exchange rates gets a more prominent place in the revised medium-term strategy than in the initial one. But I guess I'm still puzzled by two things. The managing director has indicated he doesn't feel comfortable with having the Fund play an umpire role. Again my question is, if the Fund doesn't do that, would he be comfortable with some other institution playing that role? Most games that I'm aware of have two teams, two coaches, and at least one umpire. They don't have two teams and three coaches and no umpire. So the question is, how are you going to maintain market access or even increase it in industrial and emerging economies alike and have large changes in governance if there is a perception that there is unfairness in exchange rate policies? That's the first question.
The second one is about these multilateral consultations. I don't understand why they should have such a big effect or why they should be a revolution. We already have all the countries that are members of the Fund around the table regularly, we have the IMFC, we have discussions of the World Economic Outlook, and the Financial Global Stability Report. They are interactive. They discuss spillovers. This has been discussed for years and years. Why will it make a great difference if we have some of these meetings in another location or we have them around a particular subject? If representatives don't want to talk during a meeting or be more forthcoming, I assume they won't be any more forthcoming wherever the meeting is held unless the Fund itself takes a much more active role in what others have called ruthless truth-telling.
STEPHANY GRIFFITH-JONES: I would like to start with a rather modest proposal. There has been a lot of excellent work including here in this building on the possible impact of an abrupt unwinding of global imbalances, but I think there hasn't been enough work on how such an unwinding could affect the rest of the world, including the developing world. I think that the IMF will be ideally placed to do rigorous analysis of this kind under different scenarios, such as those Ted Truman and others have constructed about how this would affect the rest of the world, what would then be the role for the IMF, how developing-country governments should prepare themselves. I think this could perhaps be a useful instrument to further multilateral surveillance.
I also wanted to just raise the issue of conditionality, which interestingly has not actually been discussed today. At the moment, for example, countries don't use the Compensatory Financing Facility against shocks because the terms of trade on the whole are not a problem. But in recent years and even before the boom of commodity prices in a lot of countries, nobody has used the Compensatory Financing Facility since its last reform in 2000, because it has such a high conditionality that it is like any other facility of the IMF, and therefore there is no incentive for countries to use it. And if the IMF is, from its institutional perspective, asking itself why countries don't borrow more, I think that may be part of the answer. I have never understood why a facility that is supposed to help countries deal with absorption of shocks—and it is not their responsibility if the country pursues good policies—should therefore be willing to [inaudible] conditionality. I think this complements very well with what the managing director has so eloquently explained about a successor to the Contingent Credit Line.
ADAM LERRICK: At the last meeting in September, Fred came up to me afterwards and said, you didn't say anything, and he was very disappointed.
MR. BERGSTEN: I didn't say that. I was making a positive, not a normative comment.
MR. LERRICK: I was hoping I was going to disappoint you again because I actually agree with much of what has been said today, and maybe that just proves I'm getting old and tired.
But I would like to comment on one thing that has come up two or three times, and that Morris just brought it up, which is the role of the IMF in exchange rate determination. The managing director said at the beginning of his talk a statement that I think to me is impossible to imagine the managing director of the IMF saying 30 years ago, which is that markets determine prices. I think that this is a great achievement in the views of the world in the financial system.
But that seems to contradict a lot of the discussion that the Fund should somehow be setting reference exchange rates for countries. My question is, and this comes back to the question of an umpire, what is the Fund going to do if they determine a reference exchange rate and the country disagrees? In a game, the umpire can actually eject the player. What would be the enforcement mechanism, assuming that the Fund is good at determining exchange rates, which is a totally different question? But let's assume it is good. I have my doubts about that. But let's assume it is better than the market at determining exchange rates. What is the Fund going to do if a country says no? The Fund says, the exchange rate is 20 percent undervalued; the country says, that's your opinion. Does the Fund propose having sanctions for the country? Because if it cannot impose sanctions or impose its view, it then will lose credibility in the markets and with its members going forward.
MR. DE RATO: On reserves—I totally agree that, of course, one reason for reserves is current account surpluses. But you hear also that the reason you have high current surpluses is because of high deficits in other places. So it is going to bring about a more complicated discussion than you are putting in this place because when you discuss collective action as some of you have, some countries are going to talk about exchange rate flexibility, others are going to talk about savings, others are going to talk about lack of growth, and others are going to talk about the need to increase domestic demand. All that is going to be discussed. But if you believe that the discussion is going to just stay on flexibility in exchange rates and the rest of the world is not going to give any other opinion, you are completely wrong, and you should start looking elsewhere because that is not going to be the discussion.
Certainly there is an argument that the Fund is defending emerging economies by letting market forces determine more forcefully the value of the currencies. We believe that it is in [the emerging economies’] interests to have that, and we see changes in Asia and in Latin America in that direction, but it is certainly a discussion we will have with those governments.
At the same time, we are discussing with other governments that they should face the factors that are also affecting their exchange rates, savings, investment, lack of growth potential, and structural reforms. You really truly believe that when we discuss exchange rates, we're only going to discuss one point of view? Do you really think so? Because if you think so, I can tell you, you have to start thinking more because that is not going to happen. Not at all. Many people in the world are not seeing things in that way. Let me tell you a secret. Everybody sees things the way they think it favors them more.
That is the basic principle of these discussions, and everybody has very thoughtful people who give them arguments. So this is going to be a very important discussion. Some of you think that it is going to be a repetition of bilateral Article IVs. It's not. It should not be. There is not going to be a single-view discussion. We are not going to get people, governments, into multilateral consultations and tell them offhand that the only way to see the problem is this one. Then those people are not going to sit at the table. No way.
So prepare for that discussion. There is some thinking that exchange rates can be seen from many points of view, and it is not going to be an easy discussion for the ones who are going to have to face it because the linkages and spillovers by definition are going to be seen from many different points of view. If we really want to make countries rely on the need to have a more flexible market-determined exchange rate system, you need to be ready also to listen to those countries telling you some changes in other countries' macroeconomic framework and be ready to listen to those countries talking about protectionism, because all those things are going to be put on the table. If you don't want to listen to those things, you’d better not sit at the table because those things are going to be put on the table, among others, by the IMF.
When you're asking the IMF to be an umpire, it is not going to be only from one point of view because we don't have only one point of view. That's why we are a global institution, and those things are more complex than they look. So collective action is needed, and the IMF has to play its role.
Let me tell you another thing. We are not governments. There is another responsibility here, that there is not a possibility to be a substitute, and that is a fact. There is no such thing as a world government, and certainly if it were, it is not the IMF. We are a public institution in that we provide surveillance and other public goods, but we are not governments, and the decisions have to be taken by governments, and governments have their own agendas. This is going to become a more complicated game because there are other players and because, as some of you have said, the markets are also playing their own game.
Should the IMF establish reference exchange rates? First of all, we recognize that values are technically arguable numbers. You can have different values even if you take into consideration short-term inflationary needs in terms of monetary policy and medium-term, and you have very clear examples in very important developed economies and also emerging economies. But what we are going to do here in our twice-a-year exercise on analyzing the theoretical equilibrium value of exchange rates, which we have been doing for more than a decade on industrial countries, we are going to start doing that immediately on emerging economies, too, and that is going to be another source of discussion with countries.
It is not at all agreed that that is going to be a public discussion. I cannot promise you that will be a public discussion. Public discussions about exchange rate values, reference values, are a very difficult issue, and I have to accept that, and I believe it is.
We have done some work on describing what will happen if imbalances go wrong. Last year, World Economic Outlook (WEO) in September I believe did very good work on that, and we did different examples of different things going on in the world and how imbalances could change with different policies in different parts of the world. So we have done part of that work, and we will continue doing that part of that work.
If this conditionality affects the fact that some of our instruments don't have demand, I think it is conditionality and its price. The private markets are able to finance almost everything, anything, and everybody. That is what you call asset bubbles in the private sector; you can call it the same in the public sector. There is easy money. Ted is completely right. This is going to change, and that will have effects, and of course we will adapt to that. But at the same time, I think our insistence on looking at our instruments to respond to crises shows that we are also looking at other issues apart from money and whether it is cheap or not, and it is not cheap.
Synergies between international organizations are key because I haven't seen even a minimal sign of an international organization relinquishing its powers and giving it to another. So, as I haven't seen that, synergies are going to be very important. We do have, and the secretary knows very well, very good work with the OECD, and I think we know that they have a lot of areas on which we rely on their thinking. But at the end of the day, we have our own responsibility and we have to fulfill it, and we work with the OECD, and we work certainly with other regional organizations as we work with development organizations.
MR. BERGSTEN: Mr. Managing Director, we thank you very much for spending so much time with us, for taking such an activist and imaginative approach to the topic, and we look forward to continuing the discussion with you.