Contents

I.   Introduction

II.  The Role of the Bretton Woods Institutions

III. Safeguarding the International Financial System

IV. Providing Help for Self-Help

V. Conclusion

The critical debate on globalization, though temporarily subdued by the events of September 11, 2001, continues to raise issues that are at the core of national and international policy agendas. This note offers a conceptual framework for the IMF's involvement in the global economy. It describes what is being done by the Fund, within the framework of its mandate, to (1) safeguard the international financial system and (2) enable more countries to reap the benefits, while minimizing the risks, of globalization. At the same time, it recognizes that the IMF is part of a wider network of international institutions that each has an important role to play in making globalization work better.

I. Introduction

Globalization—the process through which an increasingly free flow of ideas, people, goods, services, and capital leads to the integration of economies and societies—is often viewed as an irreversible force, which is being imposed upon the world by some countries and institutions such as the IMF and the World Bank. However, that is not so: globalization represents a political choice in favor of international economic integration, which for the most part has gone hand-in-hand with the consolidation of democracy. Precisely because it is a choice, it may be challenged, and even reversed-but only at great cost to humanity. The IMF believes that globalization has great potential to contribute to the growth that is essential to achieve a sustained reduction of global poverty.

Globalization, or internationalization, is not a new phenomenon. The period through the end of the 19^th century was also characterized by unprecedented economic growth and global integration. But globalization was interrupted in the first half of the 20^th century by a wave of protectionism and aggressive nationalism, which led to depression and world war. International economic and political integration was reversed, with severe consequences.

Since 1945, democracy and capitalism have been embraced by an increasing number of countries—including, since 1989, by most of the previously communist world. As a result, the past 50 years have been a period of growing economic and political freedom and rising prosperity. Global per capita income has more than tripled, and most of the world has experienced a major improvement in life expectancy.

Many developing countries have already taken advantage of the opportunities of the global economy. More rapidly globalizing countries, such as Brazil, China, Costa Rica, the Philippines, and Mexico on average doubled their share in world trade and raised per capita incomes by two thirds from 1980 to 1997. Their experience demonstrates that integration into the global economy can bring major advantages for developing countries.

However, other countries have not done so well. A large part of the world's population—especially in sub-Saharan Africa—has been left behind by economic progress. As a result, the disparities between the world's richest and poorest countries are now wider than ever, with increasing incidences of poverty within countries. Poverty is not only unacceptable on moral grounds, it also forms the breeding ground for war and terrorism. It is, therefore, the greatest challenge to peace and stability in the 21^st century.

Reversing the process of globalization would not solve the problem of poverty—that was amply demonstrated by the events of the 20^th century. The world needs instead a new approach to globalization that exploits its enormous potential for improving human welfare. In order to carry the process forward, and build support for a better globalization, a common political understanding of how to maximize the benefits, while minimizing the risks, must be developed.

II. The Role of the Bretton Woods Institutions

The Bretton Woods Institutions—the IMF and World Bank—have an important role to play in making globalization work better. They were created in 1944 to help restore and sustain the benefits of global integration, by promoting international economic cooperation. Today, they pursue, within their respective mandates, the common objective of broadly-shared prosperity. The World Bank concentrates on long-term investment projects, institution-building, and on social, environmental, and poverty issues. The IMF focuses on the functioning of the international monetary system, and on promoting sound macroeconomic policies as a precondition for sustained economic growth.

The greatest asset that the Bretton Woods Institutions have in fulfilling these objectives is their culture of consensus-building, which is based on trust and mutual respect among the more than 180 countries—and their governments—that make up their membership. However, both institutions also recognize the need for change and internal reform. The IMF has implemented many reforms in recent years, designed to strengthen its cooperative nature and improve its ability to serve its membership. To mention a few:

• The IMF has increasingly become an open and transparent organization, as demonstrated by the overwhelming amount of information now available on its internet website. It is also encouraging transparency among its membership.

• It is taking action to strengthen economic governance. For instance, it is promoting the use of standards and codes as vehicles for sound economic and financial management and corporate governance.

• It is working to safeguard the stability and integrity of the international financial system as a global public good. In particular, the joint IMF-World Bank Financial Sector Assessment Program (FSAP) is at the core of efforts to strengthen financial sectors and combat money laundering in member countries.

• It is encouraging true national ownership of reforms by streamlining the conditions attached to IMF-supported programs. While conditionality remains essential, countries must themselves take responsibility for implementing the necessary reforms.

• Lastly, the IMF is an institution ready to listen and learn, and not just from its member governments. It recognizes and values the role of civil society organizations in articulating the moral foundations for collective action and building grass roots support.

III. Safeguarding the International Financial System

The IMF seeks to mitigate the negative effects of globalization on the world economy in two ways: by ensuring the stability of the international financial system, and by helping individual countries take advantage of the investment opportunities offered by international capital markets, while reducing their vulnerability to adverse shocks or changes in investor sentiment.

Private capital flows have become the most important source of financing for economic growth, job creation, and productivity. But they can also be a source of volatility and crisis. To address some of these problems, the IMF is encouraging its members to increase the transparency of their financial and corporate sectors as a means to reduce financial abuse, such as money laundering and fraud, and ensure a level playing field for all investors. It is also stepping up its surveillance of international capital markets, and is improving its ability to predict and preempt crises.

While improved supervision and effective analytical tools are important, the IMF recognizes that more fundamental reform of the international financial architecture may be needed. It has therefore devoted considerable resources over the past few years to ensuring greater involvement of the private sector in crisis resolution, but without deterring much needed investment in developing countries. As part of this work, it recently suggested the establishment of a sovereign debt restructuring mechanism (SDRM). If adopted by the international community, such a mechanism could help countries avoid costly and protracted defaults.

IV. Providing Help for Self-Help

Many countries are still in the earliest stages of integrating with the global economy. Even so, they must still shoulder the main responsibility for making globalization work to their advantage. A country opening up to the global economy should have the institutional capacity to implement necessary structural reforms (such as trade and capital account liberalization) and should adhere, as a general rule, to a flexible exchange rate regime.

But many poor countries simply do not possess the resources to start the process of fuller participation in the global economy. They need additional assistance from the international community. As a universal institution, the IMF is committed to maintaining its engagement with the world's poorest countries. As a guidepost for reducing world poverty, it has joined countries and other international institutions in supporting the 2015 Millennium Development Goals.

The fight against world poverty should be centered on the principle of "help for self-help". Poor countries must strive to establish peace, the rule of law, and good governance, as well as implement economic policies that encourage private initiative and integration into the global economy. Meanwhile, rich countries should be offering stronger financial support in the form of investment, official development assistance, and debt relief. Even more important, they should open up their markets in products where poor countries have a comparative advantage.

To further the process of help for self-help, the IMF and World Bank established in 1999 a new approach to their lending programs that gives a central role to a country-led process for reducing poverty. A key component is the country-owned Poverty Reduction Strategy Paper (PRSP). This approach has now been accepted as a promising way to design poverty reduction strategies that can command broad support, both within a country and among its development partners. However, there is clearly room for further improvement, not least, through deeper analysis of the root causes of poverty, and increased technical assistance from the IMF and the donor community to build institutional capacity.

To bring about a decisive reduction in world poverty, the efforts of poor countries must be matched by more comprehensive support from the international community. That is why the IMF and World Bank are spearheading an effort under the enhanced HIPC Initiative that has already provided $40 billion of debt relief to 25 poor countries. But debt relief is no panacea. Indeed, the resources available from further debt relief or outright cancellation are relatively small when compared with the potential for action by the rich countries in the key areas of trade and aid.

Trade liberalization is the best form of help for self-help, both because it offers an escape from aid dependency and because it is a win-win game; all countries stand to benefit from freer trade. The true test of the credibility of rich countries' efforts to combat poverty lies in their willingness to open up their markets and phase out trade-distorting subsidies in areas where developing countries have a comparative advantage—as in agriculture, processed foods, textiles and clothing, and light manufactures. The United States, the European Union, and Japan spent almost $270 billion in 2000 on agricultural subsidies alone.

The achievement of the UN target of 0.7 percent of GNP for official development assistance (ODA) should be viewed as a concrete expression of solidarity between rich and poor countries. Yet, today, the average level of ODA in the OECD countries is only 0.22 percent of GNP—an unacceptably low figure that translates into a shortfall of over $100 billion a year in aid flows. A successful effort to enact legislation in rich countries to meet the UN target within the next decade would, in the first year alone, generate enough new resources to meet the estimated $10 billion annual requirement for a new global effort at HIV/AIDS prevention and treatment.

Achieving these goals will require difficult political decisions on the part of both poor and rich countries. But if the international community decided to implement the necessary reforms, world poverty would be significantly reduced, and the 2015 Millennium Development Goals would come within reach.

V. Conclusion

The IMF believes that economic growth is the only way to improve living standards in developing countries, and that this is best achieved through globalization. It is doing its utmost, within the mandate given to it by its members, to safeguard the international financial system, and help its members take advantage of the opportunities offered by integration into the world economy, while minimizing the associated risks. However, it also recognizes that, while much progress has been made in making globalization work better, much work still lies ahead.