Global Economic Challenges for the IMF's New Chief

June 9, 2004

Unedited transcript prepared from a tape recording

1:45 p.m.	Registration
2:00	Keynote Address:	John Taylor, Department of the Treasury
2:30	Speakers:	John Lipsky, J. P. Morgan Chase
		R. Glenn Hubbard, AEI and Columbia University
		Kenneth Rogoff, Harvard University
		Edwin M. Truman, Institute of International Economics
	Moderator:	Desmond Lachman, AEI
4:00	Closing Remarks:	Allan H. Meltzer, AEI and Carnegie Mellon University
4:30	Adjournment

Proceedings:
MR. LACHMAN:  I'd like to start this seminar right now.  My name is Desmond Lachman, and I'm a resident fellow of the American Enterprise Institute, and it's my real pleasure to welcome everybody here today to this discussion, which is on the economic challenges facing the new IMF chief.

I'm sure everybody will agree with me that we've assembled here a group of experts who couldn't be better qualified to discuss the challenges facing Mr. Rato, and I'm very much looking forward to hearing the insights that they'll share with us about the IMF's future.  And I really want to thank them for taking the time to be with us here this afternoon.

Now, there's a question that one might ask:  Why are we having this seminar at this particular point in time, discussing the IMF's future?  And I'd suggest two reasons that I had in mind in arranging this seminar.  The first is this is roughly the 60th anniversary of the International Monetary Fund, its founding at Bretton Woods in 1944, and I'm sure everybody would agree that the world has changed, at least in the economic sphere, in a very fundamental way, away from the world of Bretton Woods, not least of which we no longer have a fixed exchange rate system, we've got a lot more capital flows, just to mention two points.  So I think it's time that we do have a discussion as to whether the IMF's original mandate is the correct mandate for today's world.

The second reason, of course, is this week Mr. Rato starts his job--Rodrigo Rato, the former Minister of Finance in Spain, starts his job at the IMF, and I think that that's a fitting time to be asking what has the IMF been doing that is right, what is it that it has been doing that has been wrong, and how should it be changing in order to become more efficient.

Before I turn to the speakers, I would just suggest that there might be four principal questions that one would want to address.

The first relates to the management of exchange rates in general, and I'd say that in today's world of very large global imbalances on the external side, as epitomized perhaps by the United States' record current account deficit, one might ask whether the Fund has actually been doing enough to uphold its mandate of promoting exchange rate stability, maintaining orderly markets, preventing competitive devaluations.  You know, what I've got in mind in particular is the case of where we've got large countries intervening unashamedly with the deliberate purpose of keeping their currencies cheap.  I think of Japan and China right now.  So that's the first set of questions that I think one would want to address.

The second relates to the IMF's lending policies, and I think in the light of the IMF's recent experience with Argentina and just looking at their balance sheet that has four countries accounting for something like 70 percent of the loans outstanding, one really wants to know how should the IMF be going about supporting countries in the future.  What should the IMF be doing?  You know, should we have another large emerging market crisis perhaps in a country like Brazil, is there a case for the IMF to be moving away from exceptional circumstance lending to a more traditional role where there were stricter access limits?

The third question would be in the light, once again, of the Argentine experience of this very protracted negotiations that's going on, or some would say non-negotiation that's going on with the private creditors, does the IMF do enough to facilitate sovereign debt workouts?  And, more broadly, what should the IMF be doing to address future such workouts?  Should there be changes in the IMF's architecture?

The final question that I would raise is that since Bretton Woods and certainly the last two decades, we've had enormous emergence of a lot of the Asian economies; we've had very rapid growth in India and China.  And maybe when you look at the IMF's quotas, they don't really reflect the membership.  So I would say that one really needs to ask:  Is there a case for changing the balance of the IMF to reflect more accurately the economic power of the different countries?  And that, of course, is related--a separate question, but I think it's much on the side, at least for the next four or five years.  Should the Managing Director's post at the IMF continue to be the province of the European countries?

The speakers, as I've mentioned, are very much better qualified to answer these questions.  I think I'm better at asking questions than providing the answers.  And amongst the speakers who is the most qualified to answer these questions--and we are very fortunate to have--is Professor John Taylor.  Professor John Taylor hardly needs an introduction, but I'll give one anyway.

He is currently on leave from Stanford University.  He has an international reputation as a scholar who has made major contributions in monetary policy theory.  He's had many posts at the highest level in the U.S. administration, so he's somebody--not only an academic but somebody with a lot of policy experience.  And his present job is that of Under Secretary for International Affairs at the United States Treasury.  Amongst some of his responsibilities are precisely that of the multilateral agencies.

So, without further ado, I'd ask John Taylor to talk.  He'll speak for around about 15 minutes and has graciously agreed to take questions at the end of his presentation.  Professor Taylor?

MR. TAYLOR:  Thank you very much, Desmond.  Somehow the title "professor" doesn't seem so natural anymore, but if I'm going to get behind a podium, of course, I feel okay about it.

I want to thank you very much for organizing this very timely conference.  It's a pleasure for me to participate.  And I also am very--it's a great pleasure to be here with John Lipsky and Glenn Hubbard and Allan Meltzer, and you're going to have Ted Truman--I don't know.  I saw Ted a few minutes ago--maybe Ken Rogoff will be--is that Ken in the back?  Anyway, it's good to be on a panel with so many distinguished economists who have had so many good ideas with respect to the international financial institutions.  And I have to say I've benefited a lot from talking to all of these people, not only on this job but before the job.  So it's a pleasure to be here with you.

I think this seminar obviously is timely.  As Desmond indicated, we have just two days a new Managing Director of the International Monetary Fund.  We're very happy to welcome him to Washington and to the Fund.  He's skilled, he's professional and experienced, and he'll improve the workings of the IMF, and he'll improve the well-being of the many millions of people around the world that are represented by the IMF.

I wanted to give you some opening remarks, I guess, for this conference and take a few questions, and then sit down and listen to the experts.  I thought my opening remarks might be a little bit broader than the IMF but think about the Bretton Woods institutions as a whole.  Obviously, they are both having a birthday this year.  And I think they're closely linked.  They were linked in the minds of the founders of the institutions, and they're still linked in our minds in many ways.  In fact, I think it's difficult to think about change in one institution without change in the other.

There has always been the idea of a division of labor between the institutions, and we like to emphasize the division of labor to prevent mission creep, overlapping responsibilities, which inevitably blurs accountability.  So I think it's natural to think about the institutions, to the extent we can, together.

When the institutions were founded 60 years ago, the founders, like all good founders, thought about the purposes of the institutions and laid out the roles, and it's interesting to go back and read Article I of the original institutions, and the other MDBs since then.  Read the first article of IDA, founded in 1960.  It's good to go back and read those.

When you read those, you see that the original Article I with the purposes and goals was oriented to the post-World War II world that existed then.  There was a lot on reconstruction.  But I think if you look through the basics of these principles and goals, you see things that have a more timeless feature to them, things that I think apply now and will continue to apply for many years in the future.

I think of it quite simply just in two terms:  one is that the institutions are supposed to find ways to improve economic stability, increase economic stability in the world economy; and, number two, increase economic growth in the world and, of course, thereby reduce poverty.

Those two goals, I think, if you look through all the details and all the specifics, are still there and they're the ones that I think guide us.  And I don't think there's any reason to change those goals.  They work just fine for us, and as economists, a macroeconomists, we always think of those two goals, anyway.

But as Desmond was indicating, so many things have changed in the world economy since the institutions were founded, some of the changes very recent, some of the changes in the last 15 years, that it's natural that the institutions have to reform and change.

Desmond listed a couple of changes.  I listed six here, just to keep note of his introduction.  Private cross-border capital flows have increased sharply.  They're now much larger than the transfer of resources from the international financial institutions.

The higher fraction of these flows is in the form of securities rather than loans.  That's a relatively recent development over the last 15 years.  It's an important development.

Remittances from people in developed countries back to their families in developing countries has skyrocketed.  We estimate it's at least $100 billion a year right now, from the developed countries to the developing countries.  That is, of course, many times the flows of transfers from the World Bank.

Markets are--I believe markets are more interconnected.  I think the reduction of barriers to trade and investment have been important, and I think information technology has been important.  And I do think there's a sense in which that greater interconnectedness leads to questions and concerns about volatility and contagion.

The end of the fixed exchange rate system, of course, reduced the need for balance-of-payments financing big time.  I think it's important to note that domestic monetary policies have improved tremendously, especially in the last 15 or 20 years, and that in turn has kept inflation low and had an amazing positive effect on both economic growth and economic stability.

It's important to note that poverty has been reduced significantly in the last 60 years.  There's just a tremendous improvement in people's lives, income per capita.  But at the same time, a lot of countries have been left way behind, so poverty exists still for billions of people.

And, finally, I would mention that the application of new kinds of management ideas to public institutions has moved ahead quite a bit.  Those of you who study central banking can see how institutional reforms, accountability, independence, et cetera, have changed in many respects the nature of central banking.  But it goes to other types of government institutions.  If you read former Mayor Giuliani's book, you can see he's talking about accountability, reinventing government, measuring results, right down to the precinct level in the police.  And if you look at the reforms in New Zealand, which ultimately was one of the reasons why the central bank of New Zealand went the way it did, it was because of the application of new, modern management techniques.  So I think that's a change that is also relevant for the international financial institutions.

So because of these changes, people have been thinking about reforms for many years, and my colleagues here at this conference have been leaders in thinking about these kinds of reforms.

I think that in the last few years we've been doing more than just thinking and debating the reforms.  I think that if you look at--and I'll try to explain this a little bit in these remarks.  I think you see some actual implementation of reforms, and I think there's a substantial--in some sense, it's changed the way--already beginning to change the way the institutions operate.

I'll just mention--I'm going to mention six things and then talk about a couple of them.  The six apply to both Bretton Woods institutions.

First of all, I would emphasize the introduction of collective action clauses in emerging market debt.

Second, I would mention the creation of clearer limits and criteria for exceptional access lending by the IMF, and this relates to one of Desmond's points.

I would emphasize, three, a more streamlined conditionality by the IMF, improvements there.

I would mention the introduction of a new system, entirely new system to measure results at the World Bank.  A measurable results system has been implemented in IDA13.

I would mention the creation of a whole new grant window at the World Bank, where the loans from IDA are replaced, at least in part, by grants to the very poor countries.

And, finally, I'd mention a greater degree of focus on core responsibilities at the IMF, and in turn at the World Bank, with an appropriate division of labor.

They seem to me six things that are noticeable changes that are for the good of the institutions and make them move effective.  And taken as a whole, they seem to me to be a substantial shift in the policy framework of the international financial system.  And I wanted to just talk about the first two and try to explain why I think it's a fundamental shift.  And we could talk about the others in the same way, but the first two are the collective action clauses and the endeavor to clarify limits on exceptional access lending.

It's now well known by historians that the number of financial crises in the 1990s was much larger than in previous decades.  For some reason, the number of financial crises and the magnitude of them increased.  That's what the data show.

I think these crises provided clearer and clearer evidence of the kind of changes that I mentioned, the list of things that have changed, such as securitization, were having systemic effects on the international financial system that needed to be addressed along the lines that I've indicated.

And I think if you look back at the 1990s and you look at the responses of the international financial institutions and at the official sector responsible for the institutions, there were responses, of course, to all these crises.  And, in retrospect, it's understandable that these responses took the form they did under the circumstances.

But if you trace through from Mexico on, you see--at least I think you see a pattern of continuing the same kind of an approach.  I would call that approach something that focused more on the short-term tactics rather than developing a longer-term strategy.  I think there was a focus more on what I would call discretionary changes in the instruments of policy rather than more systematic approaches.  I think the responses tended to be more government-focused than market-focused, emphasizing very large loans from the official sector, later government encouraged bail-ins by the private sector.  And I think as a result of this kind of a tactical approach, again, I think quite understandable under the circumstances, that many observers in this room became concerned that the use of these very large financial packages was having adverse effects on incentives and expectations.

If you think about this, then what was missing, what has been missing from the system is a more predictable framework for thinking about responses at the International Monetary Fund.  I would also add more accountability and a more systematic way to describe the policies.  I think more focus needed to be placed on what the public sector, the official sector was likely to do in a given circumstance and what accountability there would be for those actions, and, finally, on what the strategy or the principles behind the tactical actions were.

So I think to address this problem, that's how I would think of the problem, the need for more predictability, more systematic behavior on the part of the official sector, the way that this problem has been addressed in the last few years was to work together in the international community to make some changes.  Those changes were originally put forth in the international community in, I think, a very important G-7 action plan in April of 2002, and that plan called for, among other things, the introduction of collective action clauses in sovereign debt, in New York specifically, and clarifying the exceptional access limits.

We, the Bush administration, promoted the collective action clauses very actively, a very time-consuming process, and we had a lot of help from many people.  It was a great success.  It's hard for me to believe that it's just a little over a year ago t people were saying that collective action clauses would just not work and you're barking up the wrong tree.  And we kept on getting on the phone, kept calling ministers, kept calling our colleagues, and then thanks to our good friends from Mexico, they issued in New York, and it was a great success.  I think they got a better price than they would have without the clauses.  But then they just started--and now it's really the standard, it's the mode of operation.  So it's a tremendous change in just a little over a year.

Now, coupled with this change--and I would say I think this change, the purpose was to provide some predictability about what would happen in the case of a sovereign debt restructuring, workout, default--whatever the word is you want to use--because the clauses effectively make it more predictable about what's going to happen.  There's less of a black hole in the event of a restructuring.

I think that's important from the point of view of putting limits or clarifying limits on IMF support because it's easier to understand what's going to happen.  There's less uncertainty.  It's easier to say no.

And so that leads me to the second point on my list, and that's the effort to clarify limits on exceptional lending.  There are, I think, three elements of this that I would emphasize.

First was the effort to establish the presumption--it's a presumption--that the IMF, as distinct from the official creditor governments, would be the source of the exceptional financing.  And that was something that was put forth as an idea at the beginning of the Bush administration.  I remember, just as an aside, one of the very first meetings I had on this job was with the previous MD and the previous First MD, and the subject was Turkey and Argentina.  And in both those cases, we focused on the IMF as the lender, not adding to it--or subtracting from it, I suppose, from the official sector.  The idea was then to clarify a little bit what the limits were.  It's a little easier to anticipate if you know, at least have a good guess from the private sector what the official sector is going to do.  And I think the effort has really been successful because, for the most part, except for a four-day bridge loan to Uruguay, which I can give a whole other talk on, we maintain that presumption.

The second thing was to try to have ways to signal in advance the intent, and part of that is this clarifying the limits on exceptional access.  But I think one of the problems with tactical approaches which don't emphasize strategy is the private sector doesn't know exactly what--doesn't know what's going to happen; there's more uncertainty.  So to the extent that we can indicate signaling what the intent is, the markets can adjust more slowly or more gradually and, therefore, with less abruptness.

Desmond mentioned Argentina.  I think if you look at the reaction to the Argentina default in 2001 and compare that to the reaction to the Russian default in 1998, of course, the first had no contagion.  Argentina had no contagion and Russia had a tremendous amount of contagion.  I think that is, to some extent--many people can debate why that occurred.  I'm sure the experts will be debating it for years.  But I think to some extent, that was the result of an effort to signal and communicate about what was going on.  It was a drawn-out process.

Then, finally, the third thing I would say is the IMF Board last year voted to do two things about exceptional access.  One is to specify some criteria that a country must satisfy to have exceptional access and to hold to those criteria as best we can in the real world; and then also to require that an exceptional access report be submitted and made public in the event of an exceptional access.  An exceptional access report has the ring of a monetary policy report or an inflation report and, therefore, has the same kind of goals to provide accountability in the same way those kinds of reports do.

The purpose of these changes was just--of the collective action clause is to try to provide more predictability, to make it clearer to the markets what's happening, and to reduce some of these perverse incentive effects that we had worried about.

I would mention on the side that part of this is an effort to try to restrict the amount of arm-twisting, if you like, of the private sector to do bail-ins, because if you set your policies as best you can and define those, then there shouldn't be any extra need for arm-twisting of the private sector to do bail-ins.  And so that has not occurred either.

So I think this is my very shorthanded attempt to explain why two of the six changes which I think are fundamental are fundamental and to give some context to them.  Two of the countries which are already above exceptional access--Brazil and Argentina--remain above exceptional access, and their recent programs are an effort to eventually draw down that exceptional access to, if you like, unwind the previous large access.

When I think these reforms are important, I have to emphasize I think just as my reference to Brazil and Argentina hint at, that we need to do more.  I think of it as trying to find a way to lock in these kinds of reforms.  These are not changes in the articles.  These are votes by boards.  These are presumptions, if you like, so more effort to lock in these kinds of changes, to internalize them so that the staffs and the management think of them actively, along with the boards and the governments.

Then, more fundamentally, I think we need to do some more reforms.  I think now is an opportune time to move ahead, either to lock in, internalize, or to do some new reforms.

I believe that if you listen to my description of these changes, I think the recent progress could very well be generating some momentum for reform.  There's nothing like success to generate enthusiasm to do more.  So the fact that we were able to do--have a grants window at the World Bank or to have collective action clauses at the IMF has generated, I think, more of an enthusiasm or a positive feature that we can actually do additional reforms.

I would also say another reason to move ahead now is we currently do not have a major financial crisis around the world, so we have a little breathing time to do some good things.  And then, finally, as Desmond indicated, the 60th anniversary is an important event, as is the appointment of a new MD.

Secretary Snow, thinking about all these things, of course, the Secretary of the Treasury has called on the G-7 to initiate a strategic review of the recent reforms, to think about what more might be done.  We've been communicating this to management, staffs, and other shareholders.  It's not meant to just be the G-7 that does this, of course.  It's a wide open process.

I think there's already been a positive response of the Secretary's call for additional actions.  More consultations are underway, of course, but I think a number of ideas in my consultations with people are already beginning to generate some positive support and I think certainly merit further discussion.  And I would mention two.  One is to develop a new non-borrowing program for the IMF.  I didn't talk about the rationale for grants so much here today.  That is a whole other story.  But it's not just the World Bank that makes loans to very poor countries, which then lead to debt sustainability problems.  The IMF also makes loans to very poor countries, which leads to debt sustainability problems.

So if there is a way to have programs which don't necessarily entail additional lending, but have the other good things that the IMF can do and the wonderfully skilled staff at the IMF can provide for poor countries, it would matter a lot.  So new non-borrowing programs I think is a reform that I've heard a lot of positive response about, especially from the very poor--the HIPC countries.  I don't think I've met a HIPC Finance Minister who's not been enthusiastic about a non-borrowing IMF program.

Then the second idea which is getting a lot of interest, I think, is to try to find a way to enhance the surveillance skills at the IMF.  And there are some ideas here:  trying to create more independence between the work on debt sustainability and the work on providing loans.  I think there's an idea of having very explicit country-led kind of programs, that the country puts their plans forward and the IMF is asked to monitor and work through those.  And there are some things that are happening already in Nigeria and Indonesia that are of that flavor.

I think there should be more focus and surveillance on contagion types of issues.  If you look at contagion issues systematically, looking at fundamentals, you frequently find much less reason for contagion than there otherwise would be.  I know we've always emphasized that in the Bush administration, and I think possibly as a result of that emphasis, and that of others, markets discriminate more and there has been less contagion.

So however you want to do it--and these are some ideas--I think a better surveillance at the Fund along with a non-borrowing program would be a good idea.  We have other ideas for the World Bank, but that's another day, and these are just examples.

So we really look forward to working with Rodrigo Rato on these kinds of reforms, other kinds of reforms, and I look forward to the rest of this discussion.

Thank you very much.

[Applause.]

MR. LACHMAN:  I won't refer to him as "Professor Taylor."  Under Secretary Taylor has agreed to take a couple of questions, so perhaps that gentleman?

MR.           :  Ernie  (?)  , Manufacturers Alliance.  The private sector and the Congress actually issue [inaudible, off mike].  So when you talk about improving the surveillance [inaudible] unprecedented violations [inaudible].  Wouldn't this be an area where systemically the IMF should [inaudible]?

MR. TAYLOR:  No, I think exchange rate monitoring and evaluation is one of the core responsibilities of the IMF, and I think there's one improvement I would note, I did note in my list, but it's worth noting again:  the move towards flexible exchange rates has been a very positive change for the international financial system.

I think it's actually not jus those flexible exchange rates but the monetary policy focused on inflation and sensible adjustment of the instruments of policy that has made it work, because, of course, many countries have chosen not to have flexible exchange rates.  Greece, for example, decided to join the EMU, and they're doing fine because they've basically adopted a policy of the ECB.  So that's a positive change.

With respect to the examples you mentioned, we consult with the IMF a lot.  We have to do a foreign exchange report to the Congress twice a year about exchange rates.  And one thing I would say, a fixed exchange rate per se--because many countries in the world have fixed exchange rates, especially small countries find it easier, for good reason, to have a fixed exchange rate.  That's not a violation of any IMF rule, of course.  There used to be many countries with fixed exchange rates.  But it's important if you have a fixed exchange rate to have a real permanence to it, if you like, to generate credibility.  So dollarization has worked well for countries--El Salvador--or joining   (?)   has worked well.

So I don't see anything in the IMF articles or approach that would address the things you're mentioning.  That's probably all I should say about it right now, anyway.

MS.           :  Thank you.  I wonder if you could just elaborate a bit on Argentina and how--what you see the role of the Fund going forward now that the negotiations appear once again to be at a standstill with the private sector.  Does the IMF--please.

MR. TAYLOR:  Yes, well, the IMF program has provided a framework for the negotiation, and it's basically specified the primary surplus has to be greater than 3 percent, specified monetary policy, and other aspects of fiscal policy.  And the idea is that with that framework, Argentina would negotiate with their creditors in a good give-and-take fashion.  So that's basically what the program requires.

The current program has had two reviews so far, first and second review, and the second review entailed some specific ways to judge the notion of the give-and-take in the negotiations.  And then there will be a third review that will be coming up at some unspecified date.  So at the time of that third review, the IMF will go and see has Argentina followed the plan, is it on track with the plan; and if they have, then there will be the additional disbursements as usual.  But if they haven't, then, of course, like in any other IMF program, you wouldn't have the disbursement.  So that's the approach.

The idea here is to allow for the negotiation but not to be in the middle of the negotiation, not to be in the middle or choose sides.  That's for the creditors and for Argentina to work out.

MR. LACHMAN:  We'll just take one last question, and then we'll move on.

MR.           :  Mr. Under Secretary, my name is  (?)  of the Russian Embassy.  What do you think about the role of the International Monetary Fund in the rescheduling of Iraqi foreign debts?  Thank you.

MR. TAYLOR:  Well, Iraq's debt is very, very large, and you can find that out just by looking at some--just numbers, you know, $125 billion in debt, GDP is something like $25 billion, so that's a huge percentage of GDP.  You can just calculate yourself what it would take to get the debt-to-GDP ratio to be one-half, 50 percent, with those numbers.  It's a large, large reduction.

The IMF has a role now--to answer your question specifically--to do debt sustainability analyses of these, and they have done that.  They're doing that and they're discussing that with members of the Paris Club this week.  So that process is going on, and I think when you look at those kinds of debt sustainability analyses, you get a more complicated, more detailed description of the numbers that I just gave you.  But it does require a very large, substantial decline in the debt.  And that's what the international community is working on now, to find the best way to do that.

MR. LACHMAN:  Okay.  Thank you very much.

If I could ask the panelists to take their seats, we'll move on.

[Pause.]

MR. LACHMAN:  What I've done is I've asked each of the panelists to talk for around about 10, 15 minutes to the issues that we raised at the start of this discussion and that Professor Taylor has elaborated on.  And I'm going to ask them to talk in the order in which I'm introducing them.

Sitting towards the end of the table, second from the end, is Ken Rogoff, who is currently a professor of economics and public policy at Harvard University.  Once again, he hardly needs an introduction, a leading scholar on international finance and exchange rates, made many original contributions, and has a real insider's knowledge of the Fund having been economic counselor and head of the Research Department of the IMF until very recently.

At the end of the table, Ted Truman, who is currently a senior fellow at the Institute of International Economics.  We're really fortunate to have somebody who's got real wide experience on international finance, it has to be Ted Truman, who served at the highest level of the staff of the Federal Reserve at the FRMC, and his last assignment in government was Under Secretary for International Affairs, so you might have some sympathy for John Taylor.

Then Glenn Hubbard, who is, once again, a highly distinguished scholar in finance, whose most recent appointment is--he now is dean at the Graduate School for Business at Columbia University, and, once again, really does know policy, having served until recently as Chairman of the President's Council of Economic Advisers.  Economic policy might have been different, otherwise.

And, finally, John Lipsky, who's sitting to my right, is a very well-known Wall Street figure, currently chief economist at JP Morgan Chase.  Before that, he was chief economist at Salomon Brothers, and he has had much experience at the International Monetary Fund in their various area departments and was the IMF's resident representative in Chile some years ago.

So I'll ask Ken Rogoff if perhaps he can kick off the discussion.

MR. ROGOFF:  Thank you very much, Desmond, and thanks to this audience for being here.

Desmond posed a question about whether the International Monetary Fund should change from the vision that was set out after the Bretton Woods Conference at the end of World War II.  And, of course, the International Monetary Fund and also the World Bank have really thrived by changing all the time.  If they didn't change, they would be irrelevant.  They were making loans to England not so long ago in terms of global history and have constantly had to adapt to needs simply to remain relevant.  So, of course, they should.

Now, Mr. Rato takes office in a situation where the global economy is very strong, certainly in 2004, and I think higher risk but still likely to be good in 2005.  But there are significant risks that may fall in his lap, and I think you're all aware of them.  First of all, emerging markets still have very high debt levels, external debt levels, public debt, government debt levels, and the spreads have gone up a bit.  But we're still in a very benign environment where interest rates are very low.  A variable which explains emerging markets spreads better than any other are world interest rates, and as world interest rates rise, that poses risks to emerging markets, especially those that are heavy borrowers and relatively light traders.

There are other risks to the global economy, and I would list very high on those the situation with the U.S. current account.  And there are those that point to the 1980s and say, look, after Ronald Reagan cut taxes and ran twin deficits, there was a big current account deficit.  The exchange rate ballooned up.  The current account went down.  The exchange rate plummeted, as you all know, by 40 percent.  The trade-weighted exchange rate wasn't so bad, and so why should we worry about it?

I think there are a couple answers to that.  One is that I'm not sure that the end of the 1980s wasn't so bad.  I'm not sure you couldn't link the asset bubbles, the easy monetary and fiscal policy that occurred in Japan later to what happened with the U.S. current account and exchange rate.  But I think more importantly, the 1980s may be no better a precedent for how the U.S. current account will unwind than the 1991 Iraq War was a precedent for the war that we saw in this decade.  And I think we have to be concerned that the U.S. current account might unwind in a situation that looks more like the Vietnam era of the late 1960s and 1970s, when, again, the U.S. was borrowing very heavily from the rest of the world, with high expenditures, and that didn't play out so benignly.

Another problem, of course, is China, and I think here the risks to China are probably overblown in that they could have a horrible crisis, but it's certainly not as high a probability as suggested by many reports.  But I think this is clearly an issue that the Fund has to take up, and I'll say more about it.

I would just mention parenthetically, many people have said if the Fund isn't exercising influence in China by saying that China is violating the Articles of Agreement by keeping a low exchange rate, then it's not doing its job.  I mean, that is--I don't think that argument holds any water.  The Chinese, it's true, intervene very heavily in holding down their exchange rate, but, goodness, they have capital controls that force their citizens' savings into these bankrupt state banks.  And, believe me, if they release those capital controls, a lot of money would fly out of the country.  And those capital controls hold the exchange rate up.  So are they holding the exchange rate up illegally?  Or are they holding the exchange rate down illegally?  I think it's a complicated issue.

And, of course, finally, and immediately, Mr. Rato has to face the issue of Argentina where there's simply huge stakes for the international financial community.  Argentina has huge stakes because it needs to reach an agreement which offers it sustainability.  Argentina certainly falls in a category of countries that have been serial defaulters, that are very vulnerable to default and restructuring, and become vulnerable to debts and restructurings at much lower debt ratios than, say, the 60-percent guidelines we see in the Maastricht Treaty.  And to simply reach an agreement that's going to have to get renegotiated in catastrophic circumstances in another six months is no good for Argentina.  At the same time, the international financial community, the IFIs and the bondholders, don't want to set precedents.  They don't want to create a new benchmark that other countries seek, the bondholders and allowing a bigger haircut than they have in other situations, and the IFIs don't want to either compromise their senior creditor status or engage in programs that are so long horizon and so soft that they're the moral equivalent of that.  So there are very, very large stakes, and these are some of the problems he faces.

Now, I think stepping back from these immediate problems and looking at sort of the big picture of what Mr. Rato needs to do, I think the single thing I would highlight the most is that he should avoid getting painted into a box where the Fund's role is strictly to bail out middle-income emerging markets.  I think it's important that the Fund play a leadership role in the entire global financial system, in the entire global economy--the surveillance of exchange rates, the surveillance of deficits in large countries, not just in smaller countries.  If we look at some of the episodes where the world's really sunk into deep problems--the Great Depression, the 1970s--that didn't come from emerging markets.  That came from the major countries, and that is one of the major reasons we need an International Monetary Fund.  And, of course, there are going to be political pressures not to do that, to be quiet, to not complain policies are inappropriate in the industrialized, the rich countries, and I think that's wrong.

It's true that it's important to be politically sensitive in his position.  He's not simply a technocrat but a world political leader.  But it's very important for him to have a long-term vision.  Many of his counterparts are in office for shorter periods than he is likely to be.  I think some of them have very long-term vision.  Nonetheless, I don't want to paint them all with the brush of short-term-ism.  But, nevertheless, there are pressures of the G-7.  The other developing country political leaders that he interacts with are often shorter-term, and the Fund needs to think about what are people going to be saying in 10 or 15 years.  Did we point the global economy in the right direction?  And I think that's terribly important.

The question of redoing the quotas was raised by Desmond.  I think they have to be redone.  There's just no question about that.  I think Europe would be much more effectively represented by a single Chair, the counterpart to the United States -- [tape ends].

-- but the U.S. would certainly not wield the power that it does if you divided up the vote, some from California, some from New York, some from Massachusetts.  They'd all disagree with each other.  After all, the United States is virtually split 50/50 in the presidential election, so it would be much less effective.  And I think that's a very important challenge.

I also think--I mean, people have said this a hundred times, but I just want to say it, too.  In the maturing of the Bretton Woods system, it's really time to end the presumption that an American heads the World Bank and an European heads the International Monetary Fund.  It's a complete anachronism.  I think technical excellence is an important quality.  Mr. Rato is excellent.  But I think as we look forward to the next Managing Director and, more immediately, the next head of the World Bank, it's important to expand the vision.

Now, John made a point that I was going to emphasize--it's a very good point--that you cannot think about the International Monetary Fund separately from the World Bank, that there's an awful lot of interlocking responsibility, much as one or the other may try to avoid it at times.  And I really want to commend John and, I'd say, the current administration for really doing a very thoughtful job in where the World Bank should go.  I think a lot needs to be done, still, but for one thing, I have long thought, I have long written, for more than 15 years, written about the fact that I think the World Bank should be converted completely to grants, outright grants and not loans; that the idea, the way it was set up after Bretton Woods, that there were these great investments in the poorest countries, they would repay quickly, and you could have recycling funds is utterly misconceived, leads to a lot of policy errors.  And that's something the administration has pushed for against quite a bit of resistance, particularly by its European counterparts.  I think that's very important.

You need to find some way of having accountability for the World Bank.  What does it do as its goals become softer?  How do you measure the outcome?  How do you judge what's an appropriate size of the staff?  And I think that the administration has really made important gains in this.  And the Millennium Challenge Account, which, admittedly, is still a work in progress and subject to much debate, I really think has a lot of these elements right, of wanting to make grants not loans, wanting to make them in circumstances where you're clearly not doing harm, that that should be the first thing someone should think about.

And so I think the broader issue of what to do about the World Bank is important.  There have been some good movements, but there is still, I think, a long ways to go in trying to figure out what the World Bank really ought to be about.  So we need to think about them together.

Parenthetically, also, I wrote maybe 15 years ago that I thought the World Bank--I wrote an article in the Journal of Economic Perspectives, the World Bank should be converted to a grantmaking institution.  I should mention I thought in that same article the Fund shouldn't have any money, that all its programs should be these no-funds programs that John is talking about, and I think that's clearly the future of the International Monetary Fund.  If you look at the size of its funds right now, $150 billion with maybe another 30 to 40 that it could add by begging in extreme circumstances, they're simply not adequate to meet some of the problems that we might imagine--China.  There's no way that the Fund has adequate funds to deal with the real problem in China.  I've actually also written about the idea that I think China should be put in the G-8.  I very much support Secretary Snow's suggestion.  Part of the reason is really from the Fund's point of view that I simply think the Fund doesn't have resources to bail out China, but China, with $400 billion, does have resources to bail out the Fund.  So why not move China--

[Laughter.]

MR. ROGOFF:  --over to the other side of the balance sheet and make it work.  And I also think it would make more sense in terms of the future of the international system.

I don't really think access limits is going to do it until the funds go down to zero.  There's always going to be reasons found why a country is too nuclear to fail, too Islamic to fail, et cetera.  And it is simply not going to hold water.  And, of course, there could be changes in administrations in major countries, and they may just not be interested in the access limits.  There's very little commitment level to this.

And just a couple of final points.  I think it is a problem for the IMF to think about in the future of how to deal with the problem of serial defaults.  There are a number of countries that repeatedly slide into problems.  Right now the IMF is really not supposed to take into account how many past programs you've had, your past behavior, in deciding on your next program.  That's just absurd.  It's not really in anyone's interest.  I think it would be good for all parties, including the borrowing countries, if it became more difficult for them to borrow because it was more difficult to rely on the IMF after several defaults.

If we look at what's been done over the past few years in terms of making things better, the move to flexible exchange rates in more places, this is huge.  The fixed exchange rate is the big problem in the international system.  It was the big problem in the Asian crisis.  Yes, opening up capital markets was a problem.  There were other problems.  But the fixed exchange rate was the ultimate problem.  John answered a question absolutely correctly saying that fixed exchange rates are not a violation of the International Monetary Fund's Articles of Agreement.  Well, they almost should be.  It at least should--the IMF should have some way that it commits not to giving funds into sustaining a fixed exchange rate for an extra few weeks or an extra couple of months, which has been the source of most of the major trauma that it's faced.  And, of course, if it didn't have funds, then that would be solved.  But as long as it does, I really do think they have to be put in a totally separate category.

I'm glad that Asia is building up these reserves, but at the same time, they've moved to fix exchange rates.  And I promise you, they will find these reserves a Maginot Line--I'm referring to the French attempting to defend themselves in World War II.  They will find it a Maginot Line when the speculators come once a situation is reached where people decide that the exchange rates are way overvalued instead of way undervalued.  Europe had ample reserves to protect itself in the crisis in the European monetary system, but there are many reasons that we know that it can't.

So let me conclude by saying there have certainly been a number of other small positive steps that have been taken, but I think the overarching one, in addition to flexible exchange rates and trying to avoid bailing out fixed exchange rates is to think of a way to have international bankruptcies be less painful, something that we allow more easily.  I think some of the biggest mistakes that have been made in the international financial system is in not letting countries renegotiate their debts more easily than they presently do.  And whether or not--what this system should be I will not presume, and you shouldn't take my comments as endorsing any particular proposal.  But I think that's where we'll be in 25 or 30 years, and the sooner we get there, the better.

Thank you.

MR. LACHMAN:  Thank you very much, Ken.

Before we turn to Ted Truman for his comments, I wonder if you could just make one point of elaboration.  You said something at the start that was rather important from the global system.  You mentioned the U.S. current account deficit being a huge threat to the system, and you're saying that Rato shouldn't be allowed to paint himself into a box where he only deals with emerging markets, if I understood that correctly.  I wonder whether you could indicate, you know, what you think he can do on dealing with the problems that are posed by countries intervening, you know, that are thwarting the international adjustment process and just delaying the problem down the road, if I got that being the drift of what you were saying.

MR. ROGOFF:  I wouldn't have thought that the solution was unidimensional.  I mean, U.S. saving is low.  Growth in Europe is low.  I can't say Japan anymore.  Growth in Europe remains low, and so the exchange rates are a piece of it.  But, you know, of course, with respect to the rich countries, the IMF has technical expertise, is basically a bully pulpit, and you have to use it.

MR. LACHMAN:  Thank you.

Ted?

MR. TRUMAN:  Thank you, Desmond.  I don't know whether you promoted or demoted John when you called him "Professor," but I know you've promoted me since I did not hold John's position, but I held--was the Assistant Secretary of the Treasury.  I may have had less hair than John, but I was--

MR. LACHMAN:  You're amongst the first people--person to correct me for having given them a more elevated title.

MR. TRUMAN:  I'm a strange fellow, Desmond.

[Laughter.]

MR. TRUMAN:  It's a pleasure to be here.  This is an important topic.  I think if the Fund wasn't in existence today, it would be impossible to re-create it from scratch. and hope to do half as much as it now does in terms of effectiveness.

I see--and maybe I disagree implicitly or it's a difference in emphasis between my views and some of the ones you have heard or will hear, maybe.  I think of the Fund's role as being one of--well, this is actually not a difference, I suppose.  It's one of evolution rather than revolution.  Maybe it's my--don't laugh too much, the people who know me.  It's my mild personality that I think of it as being more in terms of sort of--less involved in regime shifts and more involved in silent revolutions in terms of Jim Bouton's excellent piece on the history of the Fund.  And it's important to recognize that it operates by consensus and mutual education, but also should and does act decisively.

I'd like to talk about seven challenges:  one having to do with the mandate; one having to do with the principal immediate challenge that Ken mentioned, Argentina; a long-run challenge having to do with what I would call its universal membership, which Ken also pointed on, what we're supposed to think about is G-7's strategic review; its core responsibilities; governance; and its internal management.

The mandate, I can be brief.  I think John was absolutely right.  The core mandate of the Fund is the same as it was 60 years ago.  To encourage its members not to resort to "measures disruptive of the national and international prosperity," I think that is the same language that was in the articles at the beginning.  And I link that, however, to a concept of the Fund that does differ a little bit maybe from some others as being really a collective action body designed or intended to correct and address market--in the broad sense of that word--failures in three areas.  One is collective action with respect to the policies of individual countries, if you want.  That has to do with our budget deficit.  Second is collective action with respect to the membership, members who need help; that has to do with Uruguay, if you want.  And a third is collective action in members in dealing with markets, and that may have to do with Argentina.  And I think if the Fund abandons any of these roles, the system will suffer.  I see the Fund as part of the solution rather than part of the problem, in general, which is not to say that it doesn't make mistakes.  We all make mistakes.

Now, as Ken mentioned, clearly Mr. Rato's principal immediate challenge is Argentina.  This is not the place to rehash that.  I think one needs to acknowledge it.  And I think the framework that was set out by Anne Krueger in her summing up in March is still applicable, which called for an early, comprehensive, and sustainable sovereign restructuring that attains the highest possible creditor participation, reduces the risk of protracted litigation, and restores debt sustainability.  That's the test.

That does not mean that Argentina should mindlessly promise to pay what it can't pay.  It also doesn't mean that it should focus on the debt issue to the exclusion of other policies which are also important and, as John pointed out, are also not necessarily fully up to snuff.

However, that framework, at least as far as the debt issue, is what's on the table, and that's the IMF test.  And I think, quite frankly, Mr. Rato should tell Mr. Kirchner, sooner rather than later, whether what's now on the table meets that test.  I don't think it meets that test.  I am not saying--let's make it clear where my position is.  I am not saying the Fund should get in the middle of the negotiations.  I am saying that the Fund should help to explain to Mr. Kirchner that the world is round rather than flat.  And he doesn't have to issue a press release in the process.

Third, the principal long-run challenge of the Fund--and this touches on something that Ken said--is that it is how to be a Fund for all members.  The Bretton Woods concept was that the Fund would be a revolving Fund, with members alternating between being borrowing and lending.  And so it worked more or less for 30 years.  But since the last 25 years, no industrial country, at least in the original definition of that word, that term, has borrowed from the Fund.  And, meanwhile, the membership has expanded to 104 countries.

The consequence is a question of what should be the Fund's focus.  It has four types of members:  it has industrial countries, who don't draw and upon whom the Fund has limited leverage; it has the poorest countries, who draw from the PRGF, and maybe the Fund has too much leverage; it has the large emerging market economies, which is the focus of most people's attention on it because although it's not necessarily--where they draw more rarely; and then it has another large group of developing countries that you might call traditional borrowers.

Moreover, these categories are not cast in stone.  Korea was considered an industrial country in the OECD sense of that word, as was Mexico at the time that they needed the Fund.

So I think the challenge is to maintain and sustain its universal character, and I have three suggestions, modestly.  One is I think one route is surveillance, and I'm not paid to be--I'm not paid to be outrageous, if I may put it that way, and I used to be paid not to be outrageous.  But the one idea I've had is that when countries go through their Article IV surveillance procedures, part of the Article IV mission statement, the report, should be what needs to be done.  If you, the United States, came to the Fund tomorrow for a loan, this is what we would say you had to do before you--as the conditions for a loan from the Fund.  I think that would actually help the Fund to think about problems before they happen, issues of debt sustainability and so forth.  And it would actually put together, marry the program of surveillance with programs, rather than the tendency now to try to separate these things and say that surveillance should be over here and programs should be over here and they shouldn't contaminate each other.  Contaminate each other [inaudible].

I do think the Fund needs to be more proactive on the issue of exchange rates.  We can debate whether--I don't want to debate whether China is or is not violating the articles.  What China is doing is violating the spirit of the articles in terms of its social responsibility.  And certainly, likewise, with Japan.  And, conceivably, one might argue--though I wouldn't.  You could say, you know, the United States allowing the exchange rate to fluctuate by 50 percent, plus or minus, is violating the articles.  So I'm saying there is a role for the Fund in this business.  And I think it should avoid putting countries in boxes in these four--that third suggestion, these four categories:  industrial countries, poorest countries, emerging market countries, and other developing countries.  In particular, we would like in the long run for all those countries to be industrial.

Fourth point.  I think Mr. Rato has what I would describe as a process challenge, no offense intended, but in shorthand that means living with the G-7.  The G-5 or the G-7 have long functions as the Executive Committee of the IMF membership.  It is not a balanced group.  It is excessively eurocentric.  It's not always effective.  One of the problems today is there's a high degree of lack of consensus among the G-7 in recent years, and that's a problem for the Fund and for Mr. Rato.

I'm a little nervous about the G-7 strategic review.  Many people, I think, are exhausted and rightfully skeptical that the review will produce much.  We have just finished dealing with issues of international financial architecture.  But I also want to say, to make sure that people don't misunderstand me, I think the Fund's role should be continuously reviewed in some sense.  I think the four principles that have been endorsed in this area--accountability and good governance, transparency, clarity of objectives and responsibilities, and effective working with the markets--are perfectly good principles.  In fact, I think they've guided much of U.S. policy in the last 15 or 20 years in this area.

So what's going to happen with the review?  The most likely thing that's going to happen is nothing.  The least likely thing that's going to happen is we're going to invent a better mousetrap.  And in the middle, there will be--we'll refight old battles, which has the associated risks:  access limits, bailouts for long borrowers, mindless neoliberalism, so-called mindless neoliberalism, and so forth.  Not to say that any of these issues aren't important.

And I think the biggest risk, quite frankly, is this review will undermine U.S. political support for the IMF, and I am distressed to see that the Fund is now the--the U.S. policy towards the Fund now puts it in the same category as some other U.S. policies, which essentially deserves "starve the beast" treatment.  Which means no further quota increases ever and liquidates the financial side of the Fund.

I think it's important to define the IMF's core responsibilities or think about the definition of core responsibilities.  Some believe that the core responsibilities of the Fund stop at the water's edge.  Even for landlocked countries, they stop at the water's edge.  The current view and the consensus view currently is that it should focus on issues critical to a program's macroeconomic objectives:  monetary, fiscal, exchange rate, debt, financial sector policies.  And no doubt there have been excesses in this area in the past, but I think I would make four qualifications.  It is very difficult to judge what is critical.  And the Argentine case reveals what is critical, especially after the fact; it involved many things:  bankruptcy laws, utility rates, fairness in dealing with FDI investors and the long--you can have a long, long list of things, things that don't fall in those first four categories.  And, ex ante, it's even more difficult than ex post.

And I think it's important to remember that the Fund is a collective action organization with near universal membership.  So when issues arise that require a collective response, the natural place to turn is to the International Monetary Fund.  That is why the United States has to the International Monetary Fund to take a larger role in anti-money laundering.  It is why it has turned to the International Monetary Fund to take a larger role in countering terrorist financing.  And it is natural, within certain limits, that it do that.

So I think one should monitor and control mission creep, if I may put it that way, and certainly I'm in favor of differentiating the Fund and the Bank as much as possible, but let's not lock in stone.

Sixth point, governance.  One of the--I guess I will read--in short, I will say I agree with Ken on this point, both parts of it.  It's a specific challenge for Rato because he's a European and, you know, the voice and the vote of the Europeans is excessive.  Twenty-five countries control or are heavily involved in the election of 10 of the 24 EDs.  They have among them seven of the EDs and five of the Alternate EDs in those ten constituencies.  They have 32 percent of the votes and effectively control 12.5 or more percentage of the votes.  And in a body that runs basically by--operates basically by consensus, that is just too much voice, as well as too much votes, and as Ken pointed out, you can reduce the vote to--relatively easy in the case of Europe, more difficult, I think, in the case of the other IFIs in the short run.  But that should be the objective.

The Europeans know this, and they're divided, and Rato needs to work on it.  The United States needs to work on it.  And it should be done ultimately--ultimately clean up--first clean up the constituencies to put out--exclude non-EU members; secondly, consolidate them; third, go to one Chair.

Lastly, internal management issues, I guess--I don't know whether Glenn has--did you ever work at the Fund?  Well, you and I never worked at the Fund, so it's easy to talk about management issues if you didn't work there, but a couple points.  I'm the only person you know who ever worked for the Fund for free, C20(?) days, but I did work there in that sense.  The IMF is a strange institution.  It's got its Governors.  It's got its board members.  It's got a management which is sort of separate from the staff, sort of the executive role.  It has entrenched department heads.  It has an international staff.  And it is no longer small, and it faces legitimacy issues.

The problem is, therefore, arriving at and shaping an IMF view on things is very difficult, and my sense is that the system fundamentally is broken.  And it's hard to know what the IMF view is.  It is also difficult for an outsider to make specific suggestions, so I'd just flag this challenge.

I do think--oh, I feel I know more about one other aspect of this issue, and that is, as I stressed at the beginning, the IMF is in the business of mutual education.  And that means it's important to maintain and strengthen the role of research in the Fund.  It's defined as identifying and learning from mistakes, like the excellent WEOs that were produced under Mike Mussa's leadership and also under Ken's leadership.  That's one example.

There was a challenge to sort of--as there always is in this world, a tension between what is relevant and what is flashy, but I think it is very important that the Fund do this.

So my conclusion is, to bring me back to where I started, the IMF is an institution of collective action and mutual education, and to do its job well, it must identify the important issues, get the diagnosis right, execute and promote the right responses, and evaluate and then learn from its inevitable mistakes.

Thank you.

MR. LACHMAN:  Thank you, Ted.

Glenn, would you like--

MR. HUBBARD:  Thank you very much, Desmond, and thank you, John, for those very good remarks to set the stage.

I think it's clear that Mr. Rato faces a number of very important challenges, but I think going back to John's remarks, it's instructional to step back and think about this in part as a problem of institution design.  And here there are big differences in lessons around the world from thinking about monetary policy institutions as opposed to budget policy institutions.  For a variety of reasons, not just here in the United States but around the world, we have converged to a low-inflation equilibrium.  The exceptions from that are relatively rare in the current period.  Indeed, there are parts of the world in which deflation remains a discussion.  This is in part because the technical aspects of monetary policy have been gotten right, if you were, and communicated among a fraternity of folks who do that.

It's also clear that goals for monetary policy have been standardized.  It is relative uncommon to hear central bankers talk about much else than low and stable rates of inflation, which, after all, should be their jobs.  And in most of the world's economies, there's increasing accountability of central bankers.

Now, in contrast to this institutional design advance in monetary policy, one can't really say the same thing about budget policy around the world.  We see pockets ranging from the poorest countries of the world to, indeed, some of the most advanced countries in the world in which sustainability issues arise.

Now, I put these two institutional design questions on the table, to get back to something Ken said, but it is important to think of a collective institution that can bring about, if it successfully can, a long-term vision to think about these problems.

I have a question, though, about how practical it is to imagine that this big country or emerging market surveillance from the IMF will be terribly valuable.  For big countries, there are many occasions--we can come back and talk to it--at least in my own view as an economist, where the IMF's answers are wrong.  They're also duplicative.  The OECD, of course, is doing the same sort of surveillance, and as regards problems like the U.S. current account deficit, the IMF attack is much the same as going to lunches at the OECD on consecutive days, where the first day's lunch is all about the evils of the U.S. current account deficit, and the second day's lunch is about what more the U.S. could do to get the world economy growing.  And, of course, those two are related.

The area in which I think the IMF could be more productively spending its time is to think about the problem of asymmetries of growth around the world and how to promote policies for sustainable economic growth.

Now, I wanted to spend time on the questions that Desmond put on the table because I thought they were very good ones, and first the question of management of exchange rates.  Here it seems to me that, in general, we have had an advance of moving toward flexible exchange rates, and a key issue is how to encourage the right policy mix accompanying flexible exchange rates.

As regards Japan and China, I may be the odd man out, at least from the way Desmond asked the question.  I think in Japan, if you ask most economists what they would have wished the Bank of Japan to do now for many years, it would be to pursue to a more inflationary monetary policy in Japan.  All other things equal, that policy and the continued pursuit of that policy would lead to predictable movements in the value of the yen.  I don't think of that as currency manipulation.  I think of it as the pursuit of a sound policy.

Now, in the Japanese case, because the Government of Japan chose to talk about this as currency intervention rather than pursuing a better monetary policy, it perhaps has led to confusion, but I don't see this as manipulation.

On China, inherent in the question of manipulation is, Aha, I know the right exchange rate.  Well, in what equilibrium?  An equilibrium in which world growth prospects don't shift, Federal Reserve policy doesn't shift?  Even holding those constant, there's considerable disagreement, not least of which, of course, is the big question of how one would even change the exchange rate system in a country in which the financial system is archaic and, frankly, a dangerous allocator of capital.  An economy saving 40 percent of GDP is systematically wasting a great deal of that.  I wouldn't be worried as much about exchange rate issues as about the financial system.

Now, the question of IMF lending policy, I think in John's remarks and throughout the discussion the issue of access limits has gotten attention.  And I view this as a very positive development because access limits have always, in my view, been the elephant on the room.  They've been talked about in oblique ways--restructuring mechanisms and so on.  But access limits and the lack of a boundary on the role of the global taxpayer in international bankruptcies has been a big problem.

Now, I agree, though, with Ken's remarks that it's one thing to say access limits are important; it's another thing to live them.  And I would go a step forward, and I realize that this is controversial.  Desmond noted in his introduction that there is a substantial concentration of risks in the IMF's portfolio.  For the budgets of many contributing countries, including here in the United States, the IMF is pitched for budget purposes as a riskless transaction; that is, typically in the U.S. budget, if one makes a risky loan, the loan subsidy is scored and presented as an appropriation of members of Congress.  This is not a riskless transaction, and I think one way to bring teeth into access limits is to bring it into the congressional budget process.  And if that's starving the beast, then I guess I'm guilty.

I think it's very important to tie those meaningful access limits to accountability.  Things like an exceptional access report are very good, but I think ultimately you still have to get to the budget.

This is all important in IMF lending policy because there is often not a definition of what appropriate lending policy should be.  When I reviewed Bob Rubin's book, I asked the question:  When we would you not do a bailout?  It's an exciting read to read of the heady times of bailouts, but there's no sense in which I wouldn't have done any of them.  There's no sense in which there's a standard that has to be met.  It is always tempting to save the world, but the question is:  What's the right lending policy?

As to the Argentine experience, again, unclarified official financing remains the elephant in the room.  Yes, Argentina is doing a lot wrong but, of course, there has been a great deal of problem in unclear official financing as complicating renegotiations.  One thing we are learning in the Argentine setting is that it is possible to think about some renegotiation among creditors, and it's a very good example of why a very dirigiste SDRM just would not have been appropriate.

The Argentine situation I think calls to mind for the future the need to think about a restructuring process that involves more richly the private sector.  John quite rightly emphasized contractual provisions, but I would add to that a voluntary dispute resolution forum as opposed to the mandatory SDRM idea from some time ago, and, again, clarified official access linked to discipline in the budget process.

The question Desmond asked about rethinking, you know, one obvious area is the quotas, and I don't think I can add much more to what Ken said.  Clearly, the quotas were designed in a world in which we don't live and need to be reviewed.  I think there is, though, an appropriate time for the administration and for the G-8 to step back and say what exactly are the missions of the Bretton Woods institutions.  I think it is possible to define such a mission for the IMF in encouraging sustainability, and I don't mean in a spread sheet economics way of picking parameters and then marching ahead, but asking what economy and equilibrium could actually hit these.

The World Bank, frankly, I'm not as sanguine.  I think the administration's leadership on the Millennium Challenge Account is great.  It is a work in progress.  I think it's the future.  I'm less persuaded that there's a large and expanding role for the World Bank in this world.

MR. LACHMAN:  Thank you very much, Glenn.

John?

MR. LIPSKY:  Thanks, Desmond.  And thanks for the invitation.  I'll start by saying it's a real thrill for me to be on the program with some of the economists I've long admired the most.  And you might ask what can I add to this crew or, more bluntly, why am I here.  I run the risk of being contradicted by Ken, but I think other than Desmond, I'm probably the only one up on the panel who's actually been there and seen it and done it with regard to an IMF program negotiation, several times.  Or did you get involved when you were head of research?

MR. ROGOFF:  A little bit.

MR. LIPSKY:  Okay.  And, naturally, these--you've heard a lot of ideas from our speakers, and many of them I would have covered, but this is the risk of coming last, so I will try to approach this in a way that I'll just skip over them rather than simply repeat that I agree with so-and-so and so-and-so, and try to put things in a slightly different perspective.

I'm going to run through the story historically because I'm a little bit surprised, to be honest, that there are a couple issues that I had really expected to have come up that haven't come up, and I'll make it clear.  And maybe this will come through if I tell the story historically.

We've heard first from--John Taylor started by explaining that what's motivating--one of the motivations here has been the change in the world as we know it, especially the change in financial markets, the collapse of the centrally planned economies, et cetera, et cetera, growth of securitized finance, and the overwhelming dominance of private capital flows, except, of course, to the very poorest countries where that is not the case.

In this story, in this version of the history, there's the pivotal role of the Mexican crisis in 1994 because what it showed definitively was that the Fund's standard operating procedures that had evolved in the post-Bretton Woods era of the 1980s no longer worked, because in a world of securitized finance, the Fund had no leverage to compel bail-ins from the private sector, as had been the case in a world dominated by bank finance.

As a result, what we learned in the Mexican crisis was that the Fund can't compel private flows, either formally or informally, and, moreover, what we saw in spades was the systemic risks of foreign currency-denominated debt by emerging market countries.

That called up--at that time, 1974, the subtext of the Mexican crisis is, well, then, what is the Fund supposed to be doing?  And, actually, there was a response at that time.  The response was on the side of the private sector a criticism of the risk management procedures of the private lending institutions that has produced some systematic improvements, an emphasis on greater international coordination.  And the item that I was a little surprised we didn't hear about previously was an agreement that what was needed as forming a basis for approaching this new world was to clarify the role of the Fund with regard to private capital flows, and the specific decision was that the Articles of Agreement should be altered to incorporate what I'll call capital account convertibility as one of the primary goals of membership in the IMF, equivalent in status to current account convertibility, the idea being that that is not a panacea for some kind of easy solution or silver bullet.  But what it did do was started the Fund--started the process down the road of clarifying the Fund's role in this process.  After all, this whole proposal was tarred subsequently as the notion that the Fund would insist that every country immediately move to capital account openness or liberalization instantaneously, without recognizing that, in fact, there is a relatively interesting analogy to the Fund's initial purpose, which was the initial signatories to the Articles of Agreement by signing agreed that they would over time, under the good offices of the IMF's Executive Board, eliminate any current account restrictions as defined under the articles.

What's interesting to note is, of course, at the time that the articles were drawn up, almost no one was free from sin.  In essence, the signatories admitted their status as sinners, but pledged to make themselves free from sin with the blessing of the Fund's Executive Board.  And the amazing thing is it worked, so much so that we almost take for granted the idea of current account convertibility as the norm and not the exception.

The decision was made that that approach should be extended to capital account controls and that, by implication, the goal of membership in the Fund was open and liberalized capital accounts, but that the process would, like in the process of cleaning up current account restrictions in the post-World War II period, would be inherently a gradual one but that the Fund would have a legal responsibility for approving any capital restrictions.

Now, it's astonishing that we--that actually was endorsed in Hong Kong by the Interim Committee and, in essence, was endorsed by the senior membership of the Fund as the way forward.  In fact, it was overtaken by events, namely, the Asian currency crisis of '97-98, in which we were overwhelmed by what we called at the time or what was often called at the time contagion.  But I maintained then and today that it really represented a failure of, among others, the IMF but everyone, most everyone else to grasp the importance of the regional interconnections that had grown up, especially in the Asian region.  As I like to put it, if you insist on the data, if you ask the data whether or not the world has become more globalized, the data will tell you yes.  But if you ask the data has the world become more regionalized than globalized, the answer is yes.  But that had not been really taken into account.  Just as the Fund had failed to come to grips with the emergence of what Ron McKinnon (ph) has labeled "the East Asian dollar standard," in other words, the emergence of a kind of a proto-monetary system in Asia, but one that had many problems.

In practice, in the wake of the '97-98 crisis, the Hong Kong provisions or the decision of the Interim Committee simply was conveniently forgotten, and you've heard a new chorus of voices, especially in the academic community, extolling the virtues of capital controls.  What it meant also was that the Fund was condemned to its current practice of one-off mega-deals to try to come to grips with the problem of its inability to compel private funding.  In other words, what went on, as we find out in Brazil and Turkey and Argentina, astonishing amounts of other people's money becomes available so that policymakers don't have to find out what the downside would be of failure and default.

We talked in the wake of that--remember the talk of new international financial architecture.  That was the talk.  But the practice was what Barry Eichengreen called--I think he's the one who said we may talk about architecture, but what we really need is better plumbing.  And, in fact, that's what we got.

But one of the parts of the plumbing which is interesting was the creation of the International Capital Markets Department at the IMF, with the notion that the IMF had better get itself some expertise in what's going on in private capital markets.  Growing out of that whole effort, of course, was the initiative on CACs, collective action clauses, that John Taylor described that, in fact, John Taylor had a very large role in bringing to fruition.  The discussion that you've heard referred to in somewhat indirect fashion between the Fund's proposal for an SDRM, a sovereign debt restructuring mechanism, and the counterproposal by private institutions of a code of conduct, that process still underway.

Underneath all this was, I think, a change that also hasn't been discussed here in a very direct fashion, and that is the recognition that was discussed in some detail recently by Alan Greenspan that these changes in the international financial practice has meant that the standards of sustainability of the current account have been in great flux, and, therefore, the old rules of thumb about what's good and what's bad, what's sustainable and not sustainable, have come under great question.

The next signpost or benchmark here in my historical story is Argentina, of course.  A new challenge.  The Fund's position in Argentina has been criticized and/or discussed in kind of the controversial--has created great controversy.  Let's put it like that.  The Fund's position has been an interesting one but understandable, namely, since it can't compel private sector capital flows and since it had outstanding exposure to Argentina, the sense of the stabilization program negotiated with Argentina was to say, well, what would be required on the part of Argentina that would justify the maintenance of the Fund's own exposure?  And since there's no right or wrong, then the private sector, negotiating directly with Argentina, would determine what the amount of adjustment on the private sector would be, additional adjustment required by the private sector would flow from that.

Of course, the interesting intellectual question would be, well, if the Fund had no exposure, pre-existing exposure in Argentina, does that mean they would have had nothing to say about Argentina's policies?  Is the Fund's role simply to protect its own exposure?  And if not, how are things going to work in the current environment?

Put it this way:  Something also that we need to think about --

[End of Tape 1, begin Tape 2.]
 Then the question is, if this is the reality, that you have to pay to play.  Or, will you be heeded if your money is not needed?  Not completely clear.

Looking forward, what are the important issues?  And I'll try to hurry through and get to the end.

It strikes me that what is the Fund's role, what are the questions about the Fund's role relative to private markets?  And I've viewed this in a kind of hierarchy of seriousness, starting from the--well, that sounds wrong.  Let's call it "hierarchy of difficulty," starting from the easiest, which is that the Fund has a role to improve the transparency of the system, first by collecting data and ensuring that economic, basic, fundamental data is available broadly.

Second is the still-uncertain question of whether the Fund's policy analysis--i.e., the Article IV policy reports, staff reports--should be made public as a matter of course.

Third is the level of surveillance that is justified on the part of the Fund, because that brings them potentially into conflict, for example, with the practice of the individual countries' regulatory bodies.

Should the Fund be publicly discussing the guidance that they would give to countries' policies?  It strikes me what we heard was a tendency to say yes, the Fund should be public about what it's telling these countries they ought to be doing.

And finally, should the Fund be providing funding, and if so, in what remark?

And I think--it's surprising, when you step back, that there's quite a limited amount of consensus on almost all of those topics.

In the near term, measures that I think either have happened or are on the table.  We'll call them "plumbing" because no amendments to the Articles of Agreement are needed.

One, the CACs--that's already happened.  Second is the code of conduct that I already mentioned.  Third, we've already discussed non-borrowing programs, and my only remark here is the Fund used to do non-borrowing programs back in the '60s.  And there was a policy decision in the '70s to stop them.  I think it's a great idea that they are started again.

I'll stop on these because these really--all these issues have been discussed.

There are three fundamental measures that have not been discussed, and they do involve architecture and not plumbing.  I've already talked about the issue of capital account convertability, which I happen to think is the right approach and think it should be back on the table.

Another issue that hasn't been discussed here, that surprises me, is the role of the SDR, the Special Drawing Right.  Should the Fund continue with this program?  If so, what's its role?  And if it has no role, why does it exist?  That seems to have been silent in the discussion, not just here, but in general.

And finally, the obvious--my elephant in the room--it was alluded to--number one is we are quickly evolving a dual reserve currency system.  And the Articles of Agreement don't seem to contemplate this in any way, shape, or form.  And you can tell, because the representations at the executive board simply don't conform to the monetary reality.

And finally, I've already alluded to but I think is going to be the big challenge, and that is the monetary arrangements in Asia as a successor to the East Asian dollar standard.

All of these strike me as important and pressing, and it surprises me that some of them have been left almost undiscussed--I'm not talking about today, but in general in the public debate.

Thank you.

MR. LACHMAN:  Thank you very much, John.

I think we've really had quite a number of ideas thrown out that aren't exactly mainstream, and I'd like now to turn it over to the audience.  If you've got a question, if I could just ask you to identify yourself, and if you could also indicate to whom you are asking the question.

QUESTION:  Martin Jankovski [ph].  I have a quick question to Ken Rogoff.

You mentioned that the World Bank should be trying to think about focusing on extending grants rather than loans.  I was wondering what would be the benefits of this approach, versus a -- status quo, and from this point of view, how would you also look at the role of the IMF?  Thank you.

MR. ROGOFF:  I think the main case for focusing on grants instead of loans is there's an incredible amount of evergreening in the World Bank's balance sheet and the IFI's balance sheet, and forcing the G7, forcing the executive board of the World Bank to recognize that when it's making a loan, that it's going to have to make further loans in order to get it repaid.  That's the core of the problem.

Now, you can say the World Bank loans always get repaid, but I think it's much more complicated than that.  I think a lot of aid funds get channeled into making repayments for the World Bank.  There have been many studies, including my own, that look at this.  I mean, I think that's really the core case.

It's not something, actually, the World Bank can do.  The countries that fund the World Bank have to decide.  If the World Bank has to work with its charter, the World Bank can't unilaterally decide to do this or all of a sudden Mr. Wolfensohn will get called to task for bankrupting the institution aggressively.  So it's really something for the global community to think about.

MR. LACHMAN:  Ken, in that regard, would this mean that the World Bank would be operating with fewer countries, that some countries that currently receive loans wouldn't receive loans?

MR. ROGOFF:  Nobody would receive loans.  I mean, calling yourself a bank makes you think you should give more money to the richer countries, as opposed to be a poverty-reduction agency.  I mean, that's the core of it.  And it doesn't--I think it's a little absurd that the World Bank's making big loans into China, that has $400 billion in a space program.  But even the middle-income countries probably shouldn't be getting loans from the World Bank in the level they have, although there may be cases for grants.

QUESTION:  [Inaudible.]  1870 to 1914, we had a system where this was all done by the private sector.  And you chose your London merchant bank, and they then gave you an economic policy.  And it worked quite well, particularly in Latin America, where Argentina is still as rich as it was in 1913.

My question is, does the panel think that the IMF has a net benefit at all, given, first, that it's a public sector monopoly, and second, that by the subordination of its debt, of other people's debt to it, it's imposing moral hazard on the system?

MR.       :  Well, you know, to ask whether something's a success means you have to have an objective.  When I began my remarks, I'm not quite sure I--even on this panel, people may have different objectives in mind for the IMF.  I think in the fanning of moral hazard, if that were an objective, the IMF is clearly successful.

There have been clear episodes of IMF good works in financial crises, but again, I think you need an overarching objective to define success.  And I'm not sure what it is in the past 20 years.  In the immediate post-Bretton Woods period, balance of payments adjustment issues among industrial countries, I think the IMF did very, very well.

MR.       :  I think--as I guess was implicit in my remarks, I think the critical role of the Fund is not a lending role or anything of the sort--was to set the international rules of the game in the international financial system.  And what the--  [Loss of sound.]

--and point to the fact that that is also consistent with the quotation I gave from the IMF Articles.  I mean, it was--the world has been fabulously successful, right, in its macroeconomic development over the past 60 years.  And you might argue about how much the Fund has contributed to that.  But I think you're hard-pressed, partly for reasons like that and others, to say without the Fund, things would have been better.  I just think that is just not possible to sustain that.  Not to say it wasn't mistakes made, right, but I think through all the ups and downs and whatever you think about the nature of the interventions they've made and how much they encourage moral hazard and so forth and so on, I think in your heart you are hard-pressed, it seems, to make another case.

And I don't think it--I think there are important issues in terms of your second question about the Fund's--that's where one of the tricky points on the access-limit issue comes in, is, you know, you've lent too much, you are driving out the market.  The private market, however, in general, right--in August of 2001, the private market applauded the $8 billion that the Fund put on the table for Argentina.  In general.  There were a few people who didn't applaud, it's fair to say, within the private market context.  But the private market in general applauded it, right, because they thought that it was either going to help them get out sooner, or they thought that it was going to get them through this rough patch.

So in general--I mean, and I think there are a lot more in the second category who were not eligible to get out, if you want to put it that way.  It was probably the private market applauded.

So I think that issue, which is a real issue, is a little complicated.  Yes and no.

QUESTION:  This is a slightly indirect approach to asking about [inaudible].  Mr. Hubbard took a shot at the Rubin/Summers crisis management.  I wonder if you could say how you would have dealt with, how you would have proposed dealing with the Asia crisis?  And if we have time afterwards, I'd love to hear Mr. Truman's response to your suggestions.

MR. HUBBARD:  Sure.  I think the clear thing is to start with an objective.  And it strikes me that any intervention that would be sanctioned by our government, which is critical to any IMF intervention in practice, should meet one of two tests, from an American perspective:  Either that it's actually consistent with sustainable long-term growth--not in a spreadsheet-economics sense, but the actual plan could in equilibrium happen in the long term; or that the intervention is in the strategic interest of the United States, in which cases, more candidly, we might want to do it on our own account, but we could certainly as a country lobby the IMF in a principled way.

Those are the two standards that I would have put on the table.  You know, we don't have to go through all the mechanics of what went right and wrong in the Asian crisis, but I think it is clear that some of the IMF advice was probably not consistent with long-term economic growth.  It was probably more consistent with the repayment of creditors than with the advancement of economic growth.

MR. TRUMAN:  Well, first of all, on the last question I just said that obviously the IMF has done a lot of good things.  On the other hand, I don't think it's hard to make a case that it hasn't worked equally well for everyone.  Latin America's per capita GDP per adult in 1950 was a little over 25 percent that of the United States.  Latin America's per capita GDP per adult today is a little over 25 percent of the United States.  There hasn't been much catch-up, and I think repeated financial crises have played a role in this.  There's a lot of blame to spread around.  But that's something that the Fund hasn't--and the international community--hasn't successfully stemmed.

I wouldn't just look at the Asian crisis.  I'd go back to the Mexican crisis.  That's regarded as a signal triumph of big bailout policy.  I think that's not so clear.  I think that one can argue that the Asian crisis, the intensity of it, partly reflected an echo of what happened in the Mexican crisis.  [Loss of sound.]

--vowed it was okay, these are risks you can take.  I mean, it's a complicated question, but I think that Glenn made a very good point about, you know, it's really easy to look at any individual case and say we should give a ton of money in that case, we can help a lot of people.  But I consider the moral hazard problem way underrated by many people.  Many people pooh-pooh it.  But I think it in fact has been a problem.

MR.       :  Well, I think it may just illustrate the problems of getting involved in this.  I think, actually, the interventions of the 1990s met Glenn's test, and I don't think it was spreadsheet economics.  If I really wanted to be nasty about this, I would say Glenn must have been infected by Joe Stieglitz to think that what was done in Asia was the wrong thing, in terms of overall policies--as opposed to not--you know, the alternative here is don't lend; the Fund should not lend.  And there just two issues--the Fund should not lend, nor is it wrong policy.  I think that, actually, is wrong.

And I think it is important--just to go back, if I may, along two points of history that were raised.  One is that collective action clauses came about because, if you want to put it that way, which I think is wrong, there was no leverage in the case of Mexico.  It is true that when one faced Mexico, there was not an obvious way of doing something else in a reasonably clean way because there had not yet been any sovereign bond defaults in recent history, except for a few that were swept into the bank operations in the 1980s.

And one reason, of course, for why we were there--though it might be stretching things slightly, but not a lot--is that the previous great invention was to the [inaudible] bonds, in which the U.S. government went along with the proposition that these things should be signed in blood to say that we would never reschedule them.  And that led to the Rey Report that proposed collective action clauses.  I think in the absence of that report--and I think John won't disagree with this--that it would not have been so easy to have gotten as quickly to where you were.  Because a lot of minds were dead set against collective action clauses as of 1996, when that report came out, and a lot of minds, quite frankly, within the G7 were dead set against that, starting, in particular, with the German government [inaudible] looking at the private sector.

So I think, you know, these things are evolutionary, and I really applaud the fact that they came along and that John was able to finish up on what had been started seven years before.

On the comment about--just to come back to Bob Rubin and Larry Summers and to pick up the point about no leverage.  The truth of the matter is there was leverage.  There was a default, if you want to put it that way, that was enforced in Korea.  There was one in Russia.  There was one in Pakistan.  There was one in Ecuador.  There was one in Ukraine.  And there was one in Romania.  So the notion that policy under Bob Rubin and Larry Summers was one of bailouts up and down the street, right, and never saying no, and never saying no on the grounds of unsustainability of policies or debt is just not true.  It cannot be sustained by the facts.  I would say that list is six times that that team said no.

And we're not keeping score, but I think the point is there were six times that they said no as part of--and quite importantly--as part of trying to change the way the financial system operated.  Because we were operating, as of 1994, under a regime in which the financial system believed that sovereign debts, marketable debts could not be and should not be and would not be rescheduled.  And even if you thought it should happen, you still, I think, as a responsible official, have to ask yourself whether the way to bring it about is to do it through a few setups of mechanisms and then warn the market, as was done by the G7 shortly after the Halifax G7 meeting, that sovereign bonds were no longer sacrosanct if you thought they were.  That is important.  I mean, that is as important as any of these other steps that have been taken.

MR. LACHMAN:  I suspect you would nonetheless think that there is moral hazard within the system because of--

MR.       :  There's moral hazard when I take the Metro in the morning, if I may put it that way.  Sure, there's moral hazard.  We're not going to get rid of moral hazard.  I mean, as long as there are governments, as long as--there's going to be moral hazard.  The issue is whether it was increased by Mexico and--Ken and I have our disagreements about this, and there are a lot of good economists who argue both sides of that issue.  And I'm not saying it doesn't exist, because it certainly does exist.  Almost every governmental intervention involves a degree of moral hazard, I mean, in a sense, because it is a type of payoff on a type of insurance policy, whether it's explicit or implicit.  The questio