The Halifax Summit Review of the International Financial Institutions:
Halifax, June 16, 1995
The Principal Challenges
Constraints and Other Considerations
Economic Policy and Exchange Market Cooperation
Promoting Financial Stability in a Globalized Economy
Strengthening Financial Market Supervision and Regulation
Special Drawing Rights
Other Institutions and Issues
At the Naples Summit, G7 Leaders agreed that the Halifax Summit should focus on how to "assure that the global economy of the 21st century will provide sustainable development with good prosperity and well-being of the peoples of our nations and the world" by identifying the framework of institutions required to meet these challenges.
This paper examines the need for changes to the architecture of the international financial institutions -- i.e. International Monetary Fund, the World Bank Group, and the regional development banks.
Broadly speaking, the international financial institutions have demonstrated an exceptional degree of flexibility in adapting to changing demands. Nevertheless, there remain a number of areas where improvements are both possible and desirable.
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Today's world is very different from the one in which the Bretton Woods institutions were created.
These changes leave the international community with a variety of continuing challenges: promoting economic policies that ensure sustained non-inflationary growth and correct imbalances that engender financial and exchange market instability; adapting institutional mechanisms to a world of large and highly mobile private capital; and promoting more effective sustainable development and poverty reduction.
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In exploring potential institutional responses to these challenges, several general considerations need to be kept in mind. Although donor countries face fiscal constraints, which not only limit their ability to finance new institutions or new pools of resources, but have increasingly put pressure on the financing of existing obligations, efficient and effective international institutions will continue to merit our financial support. This strongly argues that the primary focus should be support for existing international financial institutions and the need to mobilise their resources more effectively. It also means that the needs which are identified must be consistent with the magnitude and the specific nature of the resources available to address them.
The existing complement of international institutions has grown to a point where the international community would benefit from a concerted effort to eliminate unnecessary overlap, consolidate functions in the institutions that are most effective, and focus their activities more clearly on private sector development, while continuing to play a vital role in those areas where the private sector cannot or will not play a role. In the future it will be beneficial to encourage the emerging economies to assume a degree of global responsibility which is broadly in line with their contribution to the world economy.
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Close consultation and effective co-operation on macroeconomic policies among the G7 are important elements in promoting sustained non-inflationary growth, avoiding the emergence of large external and internal imbalances, and promoting greater exchange market stability. We have adopted a number of changes to the structure of our consultations over time in order to strengthen policy co-operation. Specifically, the process of consultation with the IMF has been enhanced and the focus of discussions extended. These changes are designed to improve our capacity to identify, and better respond to, potential risks.
Appropriate structural policies contribute to the effectiveness of sound macroeconomic policies. Structural policies that increase the flexibility and dynamism of the supply side of economies limit the persistence of macroeconomic imbalances and accelerate the response to macroeconomic policy adjustments. Such policies also enhance the longer-term potential of economies to grow and create secure, high-paying jobs.
The most effective route to greater exchange market stability lies in the pursuit of sound domestic monetary and fiscal policies. Further progress in achieving a non-inflationary environment and reducing inflation differentials will mitigate one important source of exchange rate variability. Further substantial progress in reducing fiscal deficits and increasing national savings will also contribute to greater exchange market stability. Early policy action to avoid large external imbalances would help reduce the likelihood of large and potentially destabilising exchange rate adjustments.
In addition, continued co-operation in the exchange markets can be a useful and effective means for moderating exchange rate movements that are not driven by fundamental changes in economic conditions or policies. Close monitoring and co-ordinated responses in the exchange markets can be necessary and desirable when exchange rates get out of line. And, if volatility increases substantially, or if what appear to be major misalignments re-emerge, stronger co-ordinated action might at some point be warranted.
Administrative measures, such as selective taxes or controls on capital transactions, are an ineffective and very costly means to attempt to limit exchange market volatility. Since it would be impractical to implement such controls across geographic areas and financial instruments, they would merely shift the location of activity or the financial vehicle for the transactions. Controls would also tend to hamper investment and capital flows that are productive for growth and reinforce stability.
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There is a need to ensure that the economic advantages made possible by integrated, flexible financial markets can be enjoyed around the world while, at the same time, more effectively managing financial developments with potentially broad economic implications. In the past, this challenge has been met through a network of institutions and arrangements, which include the IMF, BIS, G7, G10 and OECD. These groups have significantly strengthened co-operation and information-sharing among policy makers and financial market supervisors and regulators. They have also developed a complex set of formal and ad hoc financial facilities that have been used to respond to financial market crises which threatened to have major economic consequences.
The international community must also improve its ability to address the risks inherent in the dramatic growth in private financial flows, the increased integration of domestic capital markets, and greater recourse to financial innovations. Episodes of financial market distress, as most recently experienced in Mexico, illustrate both the potential dangers and challenges these institutions must be prepared to meet.
A number of interrelated elements are required to effectively deal with these challenges:
Timely and comprehensive data are the backbone of an effective surveillance process in the multilateral institutions. Properly constituted, surveillance serves three key functions: it provides the discipline needed to ensure that economic developments are systematically reviewed by the multilateral institutions and their implications clearly identified; it provides an opportunity for governments to deliver collective advice to one another with respect to economic policy measures, past or prospective; and it permits the private sector to make informed decisions and perform its role more efficiently.
Minimising the occurrence of financial shocks requires improved transparency -- i.e. that all countries publish timely and reliable data on a broad range of economic and financial indicators. Quick and widespread access to such information will allow financial markets to better perform their role as the primary conduits by which capital moves from savers to borrowers. Of particular importance is the role that continuous and comprehensive data publication can play in minimising the scope of abrupt shifts in financial market sentiment in response to unwelcome surprises. Well-informed and well-functioning financial markets are the best line of defence against financial crises. To this end, the IMF should:
G7 Finance Ministers and Central Bank Governors conduct regular, detailed surveillance discussions, with the input of the IMF, which are primarily focused on their own policies and prospects. More broadly-based surveillance is carried out by the IMF in the context of its annual reviews of economic performance in member countries. The IMF also conducts broader assessments of economic policies, developments and prospects from a global perspective in its World Economic Outlook, which it publishes twice a year.
Given its global mandate and the expertise of its staff, the IMF should continue to be the focus of surveillance. However, the IMF's surveillance activities should be improved in four specific ways:
Some of these objectives conflict, to some degree, with one another. Most importantly, any surveillance process faces a tension between the desire to function as a co-operative process and the frequent need to deliver a sharp, unambiguous policy message to national authorities. In carrying out this task, the IMF obviously needs to be selective. In practice, this means focusing particular attention on countries with a potentially large impact on the world economy.
Should bilateral surveillance fail to achieve its desired effect on the policies of certain member countries, a direct, but private, dialogue with national authorities should be encouraged.
In a well-functioning system, a country would begin taking policy actions to correct external or internal imbalances as soon as these materialise. The international financial institutions are set up to facilitate this process in several ways. The IMF, for example, undertakes a regular process of consultations with all member countries. These consultations provide an opportunity to candidly review the current policy stance of members and discuss prospective problems before these arise. The timing of such consultations should be flexible and responsive to changes in country policies and the external economic environment.
In cases where external financing is required to support early policy actions, the Fund is able to provide financial support through a variety of facilities. These differ largely in terms of the nature of the macroeconomic and structural problems they seek to address and the degree of conditionality attached to them. The IMF and MDBs also provide significant financing for structural reforms. Such reform programs are designed to reduce major economic distortions with a view to creating more dynamic economies, which are better able to cope with external shocks should they arise in the future.
The international community's ability to respond to short-term liquidity needs and medium-term balance of payments difficulties in individual countries is centred principally on two institutions, the IMF and the BIS. At times, these have been supplemented by ad hoc bilateral and multilateral mechanisms. The IMF has at its disposal a number of financing facilities, each of which generally requires the negotiation of an acceptable economic policy program as a prelude to disbursement of loans which, in turn, are predicated on the fulfilment of the agreed policy commitments and targets.
Should the financial need of one or more member economies be sufficiently large to strain the IMF's regular resources or threaten the functioning of the international financial system, the G10 countries stand ready to provide loans to the IMF through the General Arrangements to Borrow (GAB). To bridge the gap between the urgent liquidity needs that often arise in a time of crisis and the weeks or months that may be required for the IMF to begin disbursing its loans, the monetary authorities of the G-10 countries have found it necessary on occasion to extend short-term credits, either directly or through the BIS.
A key question should be what constitutes the right mix of surveillance, adjustment and financing -- rather than viewing the crisis as the consequence of inadequate financing. The Mexican crisis clearly illustrates that the vast financial flows that are now commonplace in private markets pose important new challenges. It also illustrates the importance of strong policy action in responding to such crises, and the crucial need for any financial support to be conditional on that. While this episode points to a need to review both the size and the speed of access to the financing mechanisms, it is also understood that there can be no presumption that multilateral financing will be provided in every instance of local or regional financial crisis.
This episode also highlights the necessity for international financial institutions and major economies to be able to respond rapidly and in a well co-ordinated fashion, when confronted with a problem that could have adverse economic consequences for a significant number of countries or pose a significant threat to the stability of the world's increasingly integrated financial system.
Issues pertaining to financing mechanisms can be identified in terms of the means by which funds can be made available and the sources of such funds. The IMF's facilities continue to represent an important source of financing for macroeconomic stabilisation in many countries. Moreover, an IMF arrangement is an essential element for any agreement with the BIS and creditor governments on a short-term bridging facility. In the aftermath of Mexico, attention might usefully be focused on the adequacy of the Fund's current mechanisms (including use of the "exceptional circumstances" clause on a selective and ad hoc basis).
The IMF presently has adequate usable resources to finance its commitments to Mexico and other projected lending without a significant increase in its liquidity. Nevertheless, in order to support the above-mentioned new standing procedure, we would propose:<\p>
Should financial market crises arise, it is important that we improve existing mechanisms for sharing our analyses and strengthen our ability to co-ordinate a quick response. A willingness to co-operate is obviously essential but this must be backed up by fast and reliable channels of communications at all levels of operational responsibility.
In essence, the methods of co-ordination and co-operation among the major industrialised economies and the multilateral financial institutions, must be modernised and brought into line with the growing speed and breadth of financial market integration. Since these groups have at their disposal the same information technology that markets have exploited, further improvements in these capabilities appear both feasible and desirable.
Solid progress on the elements discussed above should significantly improve the international community's ability to cope with future financial crises. Nevertheless, these improvements may not be sufficient in all cases. In line with this, and recognising the complex legal and other issues involved, we would encourage further review by G-10 Ministers and Governors of other, market-based mechanisms that might also usefully be considered for an orderly resolution of crisis situations.
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The growth of financial markets, the development of new instruments, and a desire for diversification of investment have spurred global integration of national markets and increased liquidity. These developments have led to a more efficient allocation of capital and thus greater growth of economic activity. At the same time, with today's highly integrated financial markets, there is a greater potential for the rapid transmission of financial disturbances. Close international co-operation in the regulation and supervision of financial institutions and markets is essential to the continued safeguarding of the financial system and to prevent erosion of necessary prudential standards.
Continued strengthening of these efforts has the full support of G7 Finance Ministers and Central Bank Governors. We look forward to the development and further enhancement of concrete international understandings, where necessary and appropriate, on the safeguards, standards, transparency, and systems necessary to reduce potential risks. In this context, we recognise the important initiatives being undertaken separately and jointly by various committees under the aegis of the BIS and the International Organisation of Securities Commissions as well as by national authorities.
We also recognise that international financial fraud is a growing problem. We are committed to improve communication between regulators and law enforcement agencies.
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We re-iterate our support for a one-time special allocation of SDRs, through an amendment of the Fund's Articles of Agreement, to reduce inequities in the current system by allowing new members, particularly the countries of Central and Eastern Europe and the former Soviet Union, to participate fully in the SDR system. This approach would also provide additional SDRs to other countries, particularly the poorest countries with the greatest need. The broader question of the appropriate future role of the SDR in the international monetary system should be the subject of a separate study as agreed at the last meeting of the Interim Committee.
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The multilateral development banks -- i.e. the World Bank and regional development banks -- must continue to play a key role in the promotion of sustainable development. In recent years, the MDBs have been broadly responsive to emerging challenges and have adopted an impressive set of operational and administrative reforms. This is most clearly evident in their ongoing response to the historic challenge of transforming the countries of Central and Eastern Europe and the former Soviet Union from centrally-planned to market-based economies.
The MDBs have also learned valuable lessons from past successes and failures, which provide clear evidence of the complexity of the developmental challenge. The international community has a shared interest to ensure that these institutions continue to adapt to the challenges of today's world and contribute efficiently to the development process of poor countries. In line with this, the following areas deserve closer examination.
Greater attention needs to be paid to the use of increasingly scarce public resources. Budget constraints in many donor countries are leading to growing pressures on concessional programs. As a result, priorities must be sharpened and difficult choices made concerning both the sectoral and country focus of assistance efforts and we re-affirm our support to the MDBs' endeavour in this regard.
A number of key development challenges have their root causes in poverty. The international development institutions clearly have an essential role to play in reducing poverty through direct interventions and the promotion of sustainable, labour-intensive growth.
The MDBs have responded well to the challenges of integrating sound environmental principles into their operational policies. Nevertheless, there continues to be concern about the implementation of these policies. This being the case:
There is also considerable public scepticism about the overall quality of MDB projects and whether the MDBs are contributing to effective development, particularly in regions such as sub-Saharan Africa. Clearly, there is a need to better demonstrate results "on the ground" and to continue to press for higher quality projects.
Developmental effectiveness can also be improved through efforts to strengthen policy co-ordination. While the traditional division of labour between the IMF and the World Bank makes good sense, operations would be improved if joint missions and program preparation were the norm both in areas of shared responsibility, such as financial sector reform and budget exercises, and where macroeconomic and structural issues interact.
Looking ahead, the MDBs will need to do more to better customise their services to meet the changing needs of many of their borrowing members. A key challenge will be to continue to increase the capacity of the private sector to provide services which, in most countries, have previously been provided by governments.
Turning to debt, considerable progress has been made on the international debt strategy at recent Summits. Nevertheless, significant debt overhang problems clearly persist in a number of the poorest countries. Last December, as called for at the Naples Summit, the Paris Club of creditor governments agreed to increase the level of debt reduction to (up to) 67 percent for the most severely-indebted, low-income countries and to operationalise a "stock of debt" approach. We welcome the Paris Club's progress to improve the treatment of the debt of these countries and urge the full and constructive implementation of Naples terms, a step that is in the interest of both debtors and creditors.
There is general agreement that measures have to be taken to ensure that the burden of multilateral debt does not impede the growth prospects for the poorest countries. Exit strategies need to be found for countries with particularly high levels of multilateral debt, but with good track records.
Disasters and other crises have demonstrated gaps in the institutional machinery. To help resolve emerging crises, the Bretton Woods institutions should establish a new co-ordinating procedure, supported as necessary by existing resources, to facilitate a smooth transition to the rehabilitation phase in countries emerging from economic or political crisis and co-operate more effectively with UN agencies and donor countries.
A number of key governance mechanisms of the international system have become less effective in recent years. There is a clear need to redesign and refocus a number of these mechanisms if they are to have a more meaningful role.
Consideration might be given to two options to reinvigorate the Interim and Development Committees. The first option could be to create a new forum with a broader mandate than the current Interim and Development Committees. Under this option, the Interim and Development Committees could be reconstituted into a single joint Fund-Bank Committee to focus on global financial and development policy issues.
An alternative option might be to transform the Development Committee into a more effective policy steering committee with a relationship to the World Bank Group analogous to that of the Interim Committee to the IMF. Under both cases, it could be recommended that Ministerial attendance be limited to the Annual meetings. Discussions at the Spring meetings could then be at the level of senior officials.
The time has also come for international financial institutions to better prioritise their activities. In particular, these institutions need to actively address the growing overlap and unnecessary duplication of many of their activities. Not only would policy actions in this area yield welcome savings, but they could also contribute to greater policy coherence throughout the IFI system.
Finally, there is a need for these institutions to clearly demonstrate their commitment to cost effectiveness.
Such plans could help to reinforce the pressure on many of these institutions to better prioritise their activities. It should also be stressed that these savings need not necessarily come at a cost to the services that are provided to borrowing members, if this leads to the creation of leaner and "smarter" institutions.
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The broader Halifax process will also need to review the coherence of the overall system of international institutions. The international community has a strong interest in eliminating duplication between the IFIs and the UN system and operating these institutions on as cost efficient a basis as possible.
Attention also needs to be paid to the synergies, as well as potential overlap, between the World Trade Organisation and the various trade-related activities of other international institutions.
Source: Released by the Halifax Summit, June 16, 1995
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