Toward a More Muscular Surveillance Process at the International Monetary Fund
In the blinding fog of the continuing European sovereign debt crisis, the International Monetary Fund (IMF) released its latest triennial surveillance review (TSR) on October 31. The IMF proposes to take important further steps forward in response to criticisms that its past surveillance practices were lax and incomplete. It is now up to the management, staff, and members of the Fund to deliver changes promised in the TSR.
The danger is that the review of this central function of the IMF will be obscured by the European crisis. The TSR and the European crisis are related because the IMF management and staff are paid to worry and to provoke IMF members through the various IMF surveillance processes. An external study for the TSR examines where and how IMF (staff, management, and members) fell short with their surveillance in advance of the euro crisis.1
The TSR was submitted to the IMF executive board at the end of August and was formally discussed by the board on October 24 after prior review by the board and by the International Monetary and Financial Committee as well as G-20 finance ministers and central bank governors. This lag between submission and action suggests that the TSR report and its recommendations have been carefully considered.
The TSR contains a wealth of information. The total package consists of 15 documents and 435 pages, including IMF managing director Christine Lagarde's proposed surveillance action plan and the executive board's conclusions from its review of the materials. Quantity does not ensure quality. In many cases quite the reverse. However, the quantity and quality of the TSR documents are impressive in large part because of the range of different views and interpretations that are reported. Appropriate disclosure: I contributed to one document as a member of the external advisory group that was established for this TSR exercise.2
Six of the many recommendations and commentaries in the TSR report and documentation deserve to be highlighted. Four are explicitly covered in managing director Lagarde's action plan and two are only implicit.
First, starting next spring, the IMF will publish, in the context of its World Economic Outlook (WEO), a multilaterally consistent assessment of external balances including multilaterally consistent assessments of exchange rates of at least 55 countries. The assessment of external balances appropriately will not focus exclusively on the contribution by exchange rates to those imbalances, but for the first time IMF staff estimates of the divergence of major exchange rates from their fundamental determinants on a globally consistent basis will be released to the public. (Heretofore those estimates have been held strictly confidential within the IMF.) Implementation of this decision will be an important step forward in IMF transparency and accountability. It will allow researchers as well as policymakers outside the Fund to have access to these analyses. The result should contribute both to improvement in the quality of the analyses in the future and to improvement in the economic policies and policy coordination by IMF members.
Second, the executive board has agreed with managing director Lagarde's proposal based on the recommendation in the TSR that the executive board establish a new framework to guide IMF surveillance that focuses not only on the bilateral aspects of a member's policies and performance but also on the multilateral aspects as well—in other words, not only on whether the member's policies are consistent with its own internal and external stability but also on whether they are consistent with global economic and financial stability. To date, IMF surveillance has focused almost exclusively on the former because, as a formal matter, a member's IMF obligations concern only those dimensions of its policies. However, in today's world, for the systemically important countries in particular, it is their contributions to global economic and financial stability, or the absence thereof, that matter. It would be better ultimately to amend the IMF Articles of Agreement to establish a formal obligation on all members with respect to global economic and financial stability.3 But the proposed approach would be a very positive step. The issues are controversial and complex; reaching a satisfactory decision will take time. It does not come naturally to national authorities to admit to, or to think about, their international responsibilities. It is important that IMF members and their representatives on the executive board deliver on this recommendation to create a framework to help them to do so.
Third, an important related recommendation from the TSR is that in the future the materials that the IMF staff produce on global risks and vulnerabilities, such as the WEO, the Global Financial Stability Report, and the early warning exercises, are integrated with the approaches used by the area departments of the IMF, which are in the front lines of surveillance. In the past, the failure to make connections between global and national concerns has been a glaring omission in IMF surveillance. The consequence has been that risks identified at a global level are not discussed with the authorities in individual countries even though they have some responsibility for contributing to those risks and they need to manage the associated vulnerabilities.
Fourth, IMF surveillance is about transparency and accountability. In this regard, the commitment in managing director Lagarde's action plan to bring forward the date of the next review of the provision of data by member countries to the IMF for use in surveillance activities, including information on the currency composition of their reserves as well as information relevant to financial sectors, is welcome. This review should encompass a fresh look at the IMF's special data dissemination standard and the associated recommended disclosures about the asset and currency composition of a country's international reserves and other official assets.
Fifth, with respect to accountability, the external advisory group was distressed to learn that IMF surveillance reviews of members' policies and performances often fail to include the systematic follow up of recommendations in previous reviews of a member's policies and performance. Such follow-ups are required under existing guidance from the management to staff on the conduct of surveillance, but too often this has not occurred. Managing director Lagarde's action plan mentions reporting on the implementation of past advice given as part of IMF surveillance, but more is needed than simple reporting on whether IMF advice has been taken. The IMF staff and management need to examine why the advice may not have been taken as well as whether the advice has proved to be wise or relevant in light of subsequent developments. Both the staff and management of the IMF and the members have to be accountable for their actions or inactions.
Sixth, although the IMF management and staff are paid to worry about threats to the stability of the international system—and have not worried as much or as effectively in the past as they should have—the IMF management and staff as well as their critics should be humble about what is possible. The IMF does not have all the answers, and some of its answers will turn out to be mistaken. One reason is that the required analytic framework and associated information base is lacking to achieve fully (or even partially) what should be accomplished through bilateral and multilateral surveillance. This shortcoming argues for more research, for example on integrating macroeconomic and financial analysis, as well as for humility about what can be accomplished over the next three years before the next triennial surveillance review in 2014.
1. Jean Pisani-Ferry, André Sapir, and Guntram B. Wolff. 2011. An Evaluation of IMF Surveillance of the Euro Area .
2. Our report [pdf] on the recommendations of the TSR and some of the related documentation.
3. I have argued that case in Edwin M. Truman. 2010. Strengthening IMF Surveillance: A Comprehensive Proposal. Peterson Institute for International Economics Policy Brief 10-29.