Interview with IMF Managing Director Rodrigo de Rato

Following is the full text of an exclusive interview with IMF Managing Director Rodrigo de Rato by Tang Yong, correspondent of the People's Daily stationed in Washington DC, US.

Question: First let me congratulate that you have been elected as the IMF Managing Director. You visited Japan, China, Singapore and Vietnam in succession not long after you were sworn in as IMF Managing Director. Does your decision to choose Asia as your first destination of visit indicate the fact that Asia is becoming increasingly important in the world economy?

Answer: Asia is an increasingly dynamic force in the world economy. In Japan, growth has recently accelerated and there are mounting signs that the recovery is durable. The rest of Asia has been the fastest growing region in recent years, accounting for about 40 percent of global growth. With the world economy remaining buoyant, Asia is poised again to grow by over 7 percent in 2004.

Sustaining strong and balanced growth in the region, and increasing the resilience to shocks, requires policy actions in several key areas. These include achieving greater exchange rate flexibility, furthering structural reforms - particularly in financial and corporate sectors - strengthening fiscal positions, and further advancing poverty reduction.

Question: Before your departure to Asia, Kenneth Rogoff, former IMF chief economist and Harvard University professor of economics, once predicted during an interview that your agenda of priority in Asia would be to talk with Asian leaders to help decrease the tremendous deficit of American current account. Can you tell me if the above-mentioned four Asian countries have achieved consensus on that agenda? What responsibilities USA should shoulder in order to maintain the stable development of the global economy?

Answer: My visit to Asia offered an important opportunity to exchange views on a wide range of issues. No single issue took priority. I was very pleased with my discussions with senior officials in all four countries, and I was especially happy with my meetings in Beijing.

Emerging Asia, particularly China, is becoming an important source of demand for the world economy. But for the region to continue to expand its contribution to world growth, it will need to nurture additional domestic demand growth that will attract more imports from all countries.

US economic policies have played an important role in the past few years in supporting the global economic recovery. But the IMF does have some concerns about the medium-term implications of the US budget and current-account deficits. The US administration's commitment to reduce the budget deficit by half over the next five years is a welcome step, and I have no doubt that additional measures will be taken to address these imbalances.

Question: The RMB currency exchange rate has long been a hot topic in the world economic sector today. A popular viewpoint that IMF and many prestigious economists both agree with is that there is no specific evidence to show RMB has been dramatically undervalued. Furthermore, China is gradually adjusting its exchange rate policy according to international standards. The ongoing argument about RMB exchange rate policy is focused on whether China should dismantle the RMB peg to US dollars in proper conditions and shift the peg to a package of currencies such as Euro and Yen. How does IMF think of this issue?

Answer: The IMF has long advised that greater exchange rate flexibility is in China's best interest. More flexibility in the exchange rate would enhance China's ability to pursue an independent monetary policy, increase resilience to external shocks, and facilitate adjustment to the major structural changes underway in the economy. It would also contribute to the orderly resolution of global imbalances. While large capital inflows potentially complicate the initial move, introducing flexibility is best done from a position of strength. The precise timing should be left to the Chinese authorities to judge, but a move should be made in the near term.

Question: As far as exchange rate is concerned, some economists maintain that with the increasing globalization of the world industry, the free-floating exchange rate policy is no longer valid. They assert that policy has led to economic crises and afflicted many countries with enormous losses. In addition, the instability of currency exchange rates make multinationals feel extremely difficult to rationalize their investment. Can IMF offer a solution for this?

Answer: It often seems to observers that economists and policy makers are unable to agree on the "optimum" exchange rate system. However, there is no question that there are many examples of countries with successful floating exchange rates. Each country needs to determine the appropriate exchange rate regime based on its own circumstances and choice of policies. The priority for policy makers is to achieve sustainable and stable economic growth. That means that it is crucial to put in place the appropriate economic policies to support a floating exchange rate regime-or any other regime. An exchange rate system is only as strong as the fiscal and monetary policies that a country pursues. With the appropriate mix of policies producing sustainable and stable growth, corporations then will be in the best position to devise the most effective business strategies.

Question: At present China has witnessed partial overheated economy. The Chinese government has adopted a series of macro-regulation measures and policies in order to cool down the economy. What do you think is the root of the overheating? Are the measures Chinese government has implemented so far appropriate and effective? Do you have any suggestions on how China should bring its economy to a soft landing? What is the IMF prediction about China's short-term and long-term economic growth?

Answer: China's overall growth momentum remains strong, led by continued high rates of investment growth. Overinvestment in some sectors-particularly metal production, automobiles, and real estate-is a concern. If left unchecked, this runs the risk of creating a more generalized overheating of the economy. The authorities are well aware of the problems caused by overinvestment and are working hard to achieve a soft landing. They have been taking measures to reduce credit growth and curb investment, especially in those sectors experiencing overinvestment. To ensure a soft landing of the economy, additional monetary policy actions may be needed. Also, fiscal policy could contribute to cooling down the economy by controlling investment expenditures and saving the likely overperformance on revenue.

In the long term, with its vast human resources, high domestic saving rate and increasing outward orientation, China has the potential for maintaining rapid growth-provided it continues to implement structural reforms. Structural reforms, particularly in the enterprise and financial sectors and labor markets, are needed to address macroeconomic vulnerabilities, create greater employment opportunities, maintain strong productivity growth, and increase the market orientation of the economy.

Question: At the moment China is actively involved in reforming its problem-ridden financial system. One of the biggest steps ever taken is to funnel $45 billion worth of foreign reserves to financially supplement two state-owned banks. Do you have any suggestions for the ongoing financial reform? What is China's biggest challenge in the financial sector and how to cope with that challenge?

Answer: Maintaining the stability of the financial system is crucial as China continues to integrate into the global economy. I am encouraged by the progress that has been made in reforming the banking sector, and by the authorities' plans for tackling the important challenges that remain. There is a pressing need to enhance corporate governance in the banks by setting up modern management structures, further improving risk management and controls, and upgrading legal and accounting standards. The commercial orientation of bank lending could also be increased by eliminating the ceilings on lending rates and strengthening the ability of banks to resolve distressed debts, including by improving the legal framework for creditor rights, foreclosure, and bankruptcy. In addition, it is important to continue to strengthen the regulatory and supervisory oversight of the banking system.

Question: In May 2004, IMF has finally decided to build a train center in Dalian City, China. The center is the first in China and one of the four of its kind around the world. What is the function of the center in China? Why does IMF choose Dalian as the city to host such a center?

Answer: An important part of the IMF's work is to provide training in macroeconomic policy and analysis to officials from the Fund's 184 member countries. The training of officials is provided at IMF headquarters in Washington, D.C., as well as at regional training centers worldwide. Those centers are in Abu Dhabi, Austria, Brazil, Singapore, Tunisia-and now Dalian. The Joint China-IMF Training Program was originally established in June 2000 as a collaborative effort between the People's Bank of China and the IMF to provide economic training to Chinese officials. The individual programs have covered a range of topics: from monetary policy to financial market analysis to macroeconomic statistics. Dalian has been chosen in consultation with the Peoples Bank of China as the primary site for the training program.

Question: The global oil prices today are quite unstable. The exchange rate policies of some big economies are quite disturbing. All these factors have contribute to the uncertainty of the global economy. Do you think if the fundamental trend of the world economic growth will be affected by these factors? How do you comment the performance of the major economies in the year of 2004? What will be the major factors affecting the trend of the world economic growth?

Answer: The Fund actually maintains a positive outlook for the world economy despite the uncertainties that you cite. In our April 2004 World Economic Outlook, we projected global growth this year of about 4.5 percent. We so far do not see any new data that would point to slower growth. Oil prices have been higher than we expected, and that may have some negative effects. But other factors will more than offset those effects. It is important to keep in mind that higher oil prices are largely a result of strong consumption worldwide.

There are many positive trends evident in the global economy. The US is experiencing a robust recovery. Japan is finally rebounding, and that can only be good news for Asia and the world. Even Europe is showing signs of recovery; the recent numbers from key EU members are heartening. And of course, emerging Asia-led by China-remains a bright spot. While there are always risks, I am confident that the authorities in the major economies are pursuing responsible economic policies. For example, even though inflationary pressures are not strong, monetary authorities in the US and Europe are maintaining vigilance; the recent interest rate increases were appropriate. All of these trends make me optimistic about the future.

Question: Over the past ten years the world has witnessed a number of frequent financial crises. The ability of IMF to deal with such financial crises has been greatly doubted by many countries, Latin American countries in particular. Some even criticized IMF as the Rich Club who doesn't quite care about the developing countries. Do you think what work should be done in order to enable IMF to play greater role in being a real guardian of the world financial system?

Answer: The financial crises of the past decade reflect the increasing complexity of the global economy and the rapid increase in cross-border capital flows. All of us-the IMF, governments, and businesses-have had to learn lessons about crisis prevention and crisis resolution. Some of the criticism of the Fund has been justified, and there is no question that the IMF has had to make adjustments. But the IMF has responded: I am greatly impressed by the quality of the Fund staff and their commitment to helping our membership achieve strong and sustainable economic growth. Moreover, there is no question that the Fund is working for all of its 184 member countries-especially the developing countries. We devote considerable resources, time, and energy to working with our poorest members to achieve progress in the battle against poverty. In this regard, our core task is helping the developing countries to achieve macroeconomic and financial stability; it is on this basis that they will be able to boost growth and reduce poverty.

Since becoming the Managing Director of the IMF, I have made clear that my No. 1 priority is ensuring that the world economy is better protected against financial crises. The Fund needs to continually enhance its ability to detect problems in individual countries-and in regions-before they develop into crises. This is an area of the IMF's work known as "surveillance." Many important strides have been made in this work since the 1990s, and we will continue to work to do a better job. At the same time, we need to constantly work to develop our ability to address crises when they occur. This will require the cooperation of all of the IMF's member countries-rich and developing.

Question: What most do you want to say to People's Daily three million readers?

Answer: I am greatly impressed by the tremendous progress that China has made over the past two decades securing a higher standard of living for its people and reducing poverty. I am also glad to see the authorities' emphasis on maintaining balanced and sustainable growth. A prosperous and stable China is a key member of the international community, and an important member of the IMF. I look forward to working closely with the representatives of your country in the coming years as the Fund's membership tries to make a more stable and more prosperous world economy.