Focusing the Fund On Financial Stability
Following a string of financial crises from Mexico
through Asia to Argentina, the reputation of the International
Monetary Fund has taken a severe beating. IMF Managing Director
Horst Köhler admits the fund may have made mistakes in the past,
but he is determined to restore its standing
cover-dated June 14, 2001
JUST OVER A YEAR into his job,
International Monetary Fund Managing Director Horst Köhler spoke to
the REVIEW's deputy editor, David Plott, and contributing editor Tom
Holland about the future of the IMF, Asian monetary union and new
hope for the Japanese economy. Excerpts:
WHAT DO YOU SEE AS THE ROLE OF THE IMF GOING FORWARD?
After the crisis in Asia it was clear the IMF had to rethink its
role. In future the fund should refocus on macroeconomic stability,
on financial, monetary and exchange-rate policies and on
It will not be possible to avoid every crisis in the future
because dynamic capital markets are a major source of growth,
productivity, job creation and income creation. Emerging market
countries in particular should make the best use of this potential
source of growth and prosperity. But that means living with
So we need to find the right balance: Let the global capital
markets work to the benefit of the people, but on the other hand,
try to contain some of the downside risks.
WHAT LESSONS HAS THE FUND LEARNED FROM THE ASIAN CRISIS?
One lesson is that we need to synchronize the opening of capital
accounts very carefully with the development of financial
sectors--including the development of prudential supervisory
frameworks and institutions--because capital inflows should be based
on sound internal structures which are able to absorb them.
Another lesson is that we need to rethink our concept of
conditionality. Conditions are and should remain a core principle of
financing from the fund. But in the past our conditionality
overstretched our expertise. In future the fund will focus only on
the areas where we have expertise: macroeconomics, financial markets
and the financial sector, not on areas where we do not have
expertise, like energy markets, specific privatizations or trade
HOW DO YOU RESPOND TO CRITICISMS FROM MEMBERS OF THE BUSH
ADMINISTRATION THAT THE IMF IS A SLUSH FUND FOR BAILING OUT POORLY
MANAGED ECONOMIES AND THE IMPRUDENT WESTERN INSTITUTIONS THAT LEND
We take these concerns seriously. But we were working on them
before the new U.S. administration came in. In my annual meeting
speech last September I made clear that crisis prevention is at the
heart of the IMF's activities.
We are aware of failures in the past and we accept that we may
have made mistakes and that we have to learn from those mistakes.
But it is not right to make the IMF the culprit for everything that
went wrong, including here in Asia.
Countries have demonstrated that they want to have ownership of
their policies. So we will not lecture and we will not dominate. But
it is our role to give frank, candid advice. If countries feel they
should not listen, that's their sovereign right. But it's my belief
that we should be candid.
DOES THAT INCLUDE BEING CANDID IN PUBLIC, WITH THE RISK THAT
YOU BREED THE CRISIS YOU FEAR?
This is a very difficult issue. We are working now on developing
ambitious early-warning systems. But if early warning means we blow
the whistle in public and risk triggering a crisis--that is not what
We need a better dialogue with governments and the private sector
about how to draw conclusions from vulnerability indicators at a
very early stage, so we can discuss the right policy responses on a
That means the first round should be confidential because this is
a process we need to work on, and it's not yet clear what we should
If we can agree vulnerability criteria, we should publish them in
normal times so people are able to recognize the signs of an
emerging crisis. But when a crisis is already emerging, we will need
to pay more attention and be very sensitive that we do not aggravate
There's no quick fix, but it's our clear intention to put early
warning and crisis prevention at the heart of our activities.
WHY SHOULDN'T COUNTRIES IN ASIA GO AHEAD AND ESTABLISH AN
INDEPENDENT ASIAN MONETARY FUND, NOT LINKED TO THE IMF?
If Asia has the political will, who can prevent it?
But I hasten to add that Asia should think very carefully about
what is really in its interest. Asia is a major beneficiary of
globalization. Asians export their products to global markets, so it
is clearly in the interest of Asia to make globalization work for
the benefit of all, and not just to see things in the more limited
context of the region.
Our advice is to pursue regionalization, not in opposition to the
IMF, because the IMF is a global institution, but to do it in a
complementary fashion. That is exactly what is happening now and it
makes a lot of sense.
To exploit the full potential of globalization you need
regionalization. With regional integration, your home economy
becomes more competitive and is better able to cope with
So, for example, we wholeheartedly support the Chiang Mai
[financial cooperation] initiative, because we feel that Asia can
and should do more in terms of regional cooperation and integration.
Asians should do everything, even up to monetary union, to
enhance and to accelerate regional cooperation and integration.
YOU WOULD EVEN SUPPORT ASIAN MONETARY UNION?
Of course. I am a European. Why should I oppose monetary union
But, with the benefit of experience, I can say that monetary
integration should be based on convergence, on real convergence, and
that starts with free trade, with the harmonization of statistics
and tariffs and things like that.
It would be an ambitious project. To promote convergence, my
advice would be to establish the vision of monetary union today.
It's a long process, it took Europe 50 years, but why should the
Asians wait to start?
WHAT'S YOUR IMPRESSION OF THE STATE OF BANKING-SECTOR REFORM
AROUND THE REGION?
On the whole the banking and financial sectors in Asia are now
much more resilient than they were three years ago.
This gives me some comfort, but of course, I can't say I'm wholly
satisfied. The current slowing of the global economy and the Asian
economy will be a test of financial-sector resilience and we will
have to wait to see the outcome. But I am quite confident that the
Asian region will withstand this test.
HOW IS JAPAN FARING WITH REFORM?
If the indication is the amount of nonperforming loans still
existing, Japan is a bit behind the curve.
IS THAT A EUPHEMISM?
Yes. The new government--and Prime Minister Koizumi has already
made some promising announcements in this direction-- should
accelerate reforms in the banking sector and the corporate sector.
This should be its focus.
ARE YOU CONFIDENT THAT KOIZUMI'S GOVERNMENT WILL BE ABLE TO
ACHIEVE REFORM, GIVEN THE LEVEL OF RESISTANCE?
I am more confident than ever before. I have talked at length to
the Financial-Services Minister [Hakuo Yanagisawa] and he impressed
me very much. He's really on top of the issues and he's committed to
DOES THE FUND PRESCRIBE CLEARING UP BAD LOANS EVEN AT THE COST
OF INCREASED BANKRUPTCIES AND ECONOMIC CONTRACTION IN JAPAN? IS
RECESSION THE NECESSARY PRICE OF REFORM?
I would not say it is a necessary price. Certainly the process
of restructuring will cause pain, but I don't think it will
necessarily cause a deep recession.
The core problem in Japan is the lack of confidence--the lack of
consumer confidence, even the lack of entrepreneurial confidence.
There is no quick fix, but with a convincing reform programme
people will look to the future with new optimism, and the short-term
negative impact of restructuring will be compensated for through
better spending and better investment.
Japanese households are not poor, but they are hesitating to
spend because they are concerned about their future, their jobs,
their pensions. If tackled with convincing reforms, this lack of
confidence can be overcome, so there is no need for a recession.
I would even dare to say that if Koizumi delivers bold reforms we
will see early growth, rather than Japan just muddling through
JAPAN SUFFERS PERSISTENT DEFLATION. CAN RECOVERY BE ACHIEVED
WITHOUT PRINTING MONEY AND DEPRECIATING THE YEN?
The new monetary policy framework decided upon in March,
together with the confidence-building reform concept and gradual
fiscal consolidation, gives the right combination for the
I do think growth will pick up, because Japan has the technology,
Japan has the educated labour force and Japan has the financial
potential. Why should it be impossible?
WHAT DO YOU THINK OF THE SACKING OF THE THAI CENTRAL BANK
GOVERNOR AND THAI PRIME MINISTER THAKSIN SHINAWATRA'S IDEA THAT
HIGHER INTEREST RATES [ON DEPOSITS] COULD ACTUALLY HELP THE ECONOMY?
I must say personally I find it difficult to understand this
right away. We need to listen and to understand better the rationale
behind this idea of raising interest rates for depositors. But small
and medium-size enterprises are interested not in higher rates--for
them it's a cost factor--but in lower rates.
It seems to me that the basis of this is in the personal climate
between the actors. The IMF is interested in good policies, not in
personal matters, therefore we should see more details. Then if we
feel it is not the right way, then we shall speak up.