Multilateralism and the Role of the International Monetary Fund in the Global Financial Crisis

• Author: Dominique Strauss-Kahn
• Position: Managing Director, International Monetary Fund

Good afternoon, it's a pleasure to be here. I would like to use this opportunity to talk to you about multilateralism, the need for global cooperation in macroeconomic and financial sector policies. We all know that decisions taken by countries in isolation may end up harming the global economy. This is the classic problem of coordination, and the problems become most glaring during time of economic distress.

One of the key lessons of the Great Depression was that a lack of cooperation and a retreat to isolationism can make things worse, dramatically worse. The unprecedented collapse in global activity in the 1930s also had dire social and political consequences, and contributed to the outbreak of a disastrous war that left millions dead and a whole continent in ruins. When world leaders met in Bretton Woods in 1944, they vowed never to repeat the errors of the past. They embraced multilateralism and a cooperative approach to economic and financial policies.

The IMF was born in Bretton Woods, forged in the furnace of this multilateral idealism, and endowed with a mandate to oversee the global financial system and to act as a lender of last resort to members with balance of payments needs. It stands right at the heart of macroeconomic and financial sector policy coordination.

Over sixty years later, although the contours of the world financial system would be unrecognizable to the Bretton Woods delegates, the IMF remains as central as ever. But it took the worst financial crisis since the Great Depression for this to be made manifest.

As the process of globalization and international financial integration accelerated over the past decade or so, it might seem obvious that the multilateral institutions usefulness would be growing alongside.

But the reality was different. Eighteen months ago, the institution was facing a progressive loss in its relevance and its legitimacy. Perhaps a victim of its own success, a global boom and the specter of economic crises fading further into memory left the institution somewhat unmoored. People were openly questioning the usefulness and relevance-and indeed the very future-of the Fund. We went through much soul searching. We went through a painful downsizing.

What can I say? Eighteen months seems like a lifetime! In that time, we have been in the midst of an economic crisis that originated in the U.S. housing market, immediately infected the advanced economies, and then spread like wildfire to every corner of the world.

As the dust settles, we are learning a few core lessons. We are learning that links between the real economy and the financial sector are deep-rooted and complex, and that the world economy is interconnected in more ways than we had imagined. We are also learning that a multilateral solution is essential, and that the IMF has a central role to play. It is an international institution ideally placed to address financing and liquidity problems at a global level, and to conduct candid, independent, and evenhanded surveillance. I will address these issues in turn.

Effectiveness as a firefighter

This crisis has shown that while firefighters might seem useless in good times, they have a major role to play when things turn sour-especially in a crisis as deep and broad as this one.

The IMF is helping emerging markets cope with the sudden stop in capital inflows. These countries had achieved impressive gains in growth and convergence. Unfortunately, for some countries, especially in Eastern Europe, these gains were associated with large current account deficits and heavy reliance on external financing. But other affected countries had sound policies and solid fundamentals, and were largely innocent bystanders of the crisis.

We have also extended our help to advanced countries. Consider Iceland, a rich western European country undone by leverage. The assets and liabilities of its banking...