Invigorated public-private partnership is key to restoring confidence in global economy

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What can policymakers and market participants do to rebuild confidence in the global economy and in financial markets? On June 4, IMF Managing Director Horst Köhler addressed the Institute of International Finance (IIF) in Berlin, noting that much can be done in the public sector to boost trade, safeguard the international financial system, strengthen crisis prevention, and ensure more effective crisis resolution. But he also called on the private sector to shoulder more responsibility in restoring public trust and rebuilding confidence in the global financial system.

Below are edited excerpts of his remarks; the full text of the address, "A Public-Private Partnership for Confidence-Building," is available on the IMF's website (www.imf.org).

I believe we agree that it is best for capital allocation to rely mainly on the private sector, its sophistication and financing power. It is critical then to maintain a basic fabric of trust and confidence between savers, borrowers, and financial institutions. This is true in mature as well as emerging market economies. It is the responsibility of the official sector to establish a reliable and credible institutional framework. Global markets function better if there are coherent rules across geographical boundaries as well as industry sectors. If not uniform, such rules should at least be compatible along the lines of same business, same risks, same rules.

Individuals placing their retirement savings in the hands of private money managers require a leap of faith.

In this respect, the record of the recent past has not been spotless. The bursting of the equity bubble has exposed greed and sometimes outright fraudulent behavior that have undermined some of the trust so essential for wellfunctioning financial markets. The resulting loss of reputation may differ from region to region and from culture to culture. But looking for culprits only on the other side of the fence does not help to restore confidence in the system. It will only delay necessary action.

What is needed, in particular, is a visible process of reflection and correction by the private sector itself.

It is in everybody's interest that the self-correcting forces of the market are shown to work. And this should apply not only to the correction of irrational pricing of financial assets but to irresponsible behavior as well. Recent experience has shown that a surge in economic productivity has not rendered obsolete the law of...