Clerk changes foreign exchange rates: IMF's Article IV consultations started after fixed exchange rate system broke down (photo: Francis Dean/Dean Pictures)
MODERNIZING SURVEILLANCE
The goal of surveillance is to promote healthy national economies and a stable international financial system. In his medium-term strategy for reforming the IMF, Managing Director Rodrigo de Rato emphasized the critical role surveillance plays in helping the IMF adapt to the new challenges posed by globalization. To serve this purpose effectively, surveillance must meet several criteria: it should be focused, candid, transparent, evenhanded, accountable, and take into account cross-country spillovers—the latter being an area where the IMF is uniquely placed to give advice because of its near-universal membership.
Consistent with this strategy, the IMF has launched a number of initiatives to improve the implementation of surveillance. Some of these initiatives seek to improve the institution's analytical tools, while others relate to procedures (see box). A third set of more abstract—but very important—reforms aims at reviewing and, if necessary, modernizing the framework for surveillance. These reforms are the focus of this article.
Box 1
Improving surveillance implementation: a snapshot
Innovations to improve the implementation of surveillance are underway, complementing the work on updating the legal framework. Some of this work is still at the experimental stage. Multilateral consultations are a new vehicle that allows the IMF to take up issues of shared concern with several member countries at the same time, with a view to promoting collaborative solutions. The first consultation of this type focuses on how to resolve global payments imbalances while maintaining global growth.
Another initiative involves sharpening the focus of the IMF's dialogue with member countries in order to concentrate on the most important issues, including through streamlined consultations with selected countries. The IMF is also strengthening the global and regional perspective of surveillance and is enhancing its exchange rate analysis, as well as its financial and capital markets analysis. As part of this process, it recently refined its methodology for medium-term real exchange rate assessments and extended coverage to include additional economies. Finally, new tools are being developed to better integrate financial sector and capital markets analysis into macroeconomic assessments
Surveillance serves several important functions. Through the surveillance process, the IMF offers the international community an impartial expert assessment of the economic and financial policies of each member country, including an analysis of possible spillover effects of one country's policies on other countries. Surveillance relies on candid dialogue, with the IMF acting as a trusted advisor to member countries. It also provides the machinery for international economic cooperation by providing a forum for its membership to engage in discussions of macroeconomic developments at both the country and global levels, including on how one country's actions may affect other countries. Such cooperation is especially crucial in today's globalized economy where the economic and financial policies of one country may affect the economic wellbeing of many other countries. Surveillance contributes to well-informed policy debates and well-functioning markets via the release of information to the public and the markets.
A bit of history
Surveillance as it is practiced today came into being in the late 1970s. In 1977 the Executive Board crafted a policy statement to provide guidance to both members and the IMF itself on how to implement the new Article IV of the IMF's Articles of Agreement, introduced after the breakdown of the Bretton Woods system of fixed exchange rates. This policy statement is known as the "1977 Decision on Surveillance Over Exchange Rate Policies." To this day, it is the IMF's main policy statement on surveillance.
Since 1977, the practice of IMF surveillance has evolved in response to a changing economic and financial landscape. The perhaps most striking adjustment to the surveillance framework was necessitated by the enormous expansion of international financial and capital markets and the subsequent increase in crossborder flows of private capital. This expansion led the IMF to zero in on financial sector surveillance and to pay much greater attention to global spillover effects, notably through exchange rates.
The IMF also started to pay more attention to structural policies as a means to relaunch growth in the wake of the oil price shocks in the 1970s, the developing country debt crisis in the 1980s, and the emergence of transition economies in the 1990s. Institutional issues—such as central bank independence and financial sector oversight—were also included in the surveillance portfolio as new research showed that weak institutions, along with poor macroeconomic policies, could slow down growth. Finally, after the emerging market crises of the late 1990s, the IMF now also seeks to assess the extent to which countries may be vulnerable to crises.
Box 2
Article IV consultations: what they are and what they do
On a regular basis—usually every year—IMF economists visit of its 185 member countries to gather information and hold discussions on economic developments, prospects, and policies with government and central bank officials. As part of this process, the IMF team usually also meets with business executives, labor representatives, members of parliament, and civil society organizations. When the IMF mission has wrapped up its visit, which includes leaving a preliminary statement with the country's authorities, it returns to headquarters and prepares a staff report, which is then submitted to the IMF's Executive Board for discussion. This report contains background information, a summary of the discussion with the authorities (including their views), and an overall appraisal by the staff. As part of this process, the Executive Director representing the country is given the opportunity to convey the authorities' views to the rest of the IMF's Executive Board.
All 185 IMF members are represented at the board meeting by the 24 Executive Directors, who may submit written statements in advance of the meeting as well as participate in the discussion during the meeting itself. The board's views are summarized at the end of the meeting in what is known as a "summing up." This statement formally concludes the Article IV consultation and is transmitted to the country's authorities. With the authorities' consent, both the staff report and a so-called "public information notice," which includes the summary of the Executive Board's assessment, are then published on the IMF's website.
In sum, the IMF has continuously refined its analytical tools in response to changes in the global economy. Best practice today is very different from what was considered best practice even five years ago. And now the IMF is weighing whether it also needs to modernize the legal framework for surveillance.
Modernizing the surveillance framework
Reviewing the guiding principles of surveillance—adopted 30 years ago— is important because it will help improve governance by making the IMF and its work on surveillance both more transparent and accountable. It is also an opportunity for IMF members to make sure that they agree on the role and mandate of surveillance in the 21st century and to set out clear expectations, which will help improve the quality and evenhandedness of surveillance. The IMF's 24-member Executive Board launched a review of the 1977 decision in 2006. It has already found important areas of broad agreement and is building common ground in other areas where agreement has yet to be reached.
While the review process is still unfolding, certain things are already clear. First, if the decision is to be revised, there will be no new obligations for member countries, and dialogue and persuasion will remain key pillars of surveillance. Second, strong emphasis will remain on the need for due regard to countries' specific circumstances and on evenhandedness in the treatment of members. And third, the framework will remain flexible, to allow surveillance to continue evolving in response to changes in the global economy.
The IMF has also examined its methods for assessing the effectiveness of its monitoring and advice and for setting priorities. The goal is to make sure that the institution uses robust methodologies when it assesses whether surveillance is achieving its objectives and helping member countries improve their economic performance. Clear objectives are critical so that benchmarks can be set against which to assess effectiveness. In this context, one specific tool under consideration is a high-profile statement of timebound surveillance priorities—a so-called surveillance remit. Such a statement would help guide the implementation of surveillance and would make it easier to assess the effectiveness of the IMF's advice.
