Review assessed effectiveness of IMF surveillance after consultations with stakeholders including market participants (photo: Spencer Platt/Newscom)
TRIENNIAL SURVEILLANCE REVIEW
The planned reforms reflect the findings of a comprehensive review of the IMF’s policy advice and analysis that was completed by the institution’s Executive Board on October 24, 2011.
The review looks back over a period of exceptional stress and contagion in the global economy. It also responds to criticisms, including by the IMF’s Independent Evaluation Office (IEO), that the IMF had not provided clear warnings about the buildup of vulnerabilities and risks ahead of the crisis.
“The failure to spot the buildup of vulnerabilities in the pre-crisis period is a humbling fact that must … continue to be addressed,” said IMF Managing Director Christine Lagarde in her statement to the Executive Board.
The IMF regularly gives economies at the country, regional, and global level a health check and provides policy advice through a process known as surveillance. The IMF reviews the effectiveness of its surveillance work every three years, but this time is particularly important because of lessons to be learned from the global economic crisis.
Important progress since the crisis
Lagarde also highlighted important progress since the crisis, but added that the IMF could do even better, with “the goal of making surveillance as interconnected as the world economy”.
The IMF has worked intensively over the past three years to address the repercussions of the global financial crisis and also tackle shortcomings in its pre-crisis surveillance framework.
The review highlights progress since 2008, with surveys of important stakeholders—country authorities, civil society, market participants and the media—indicating that IMF advice during the crisis was seen as timely and responsive (see Chart 1). Landmark reforms at the IMF since the crisis have included efforts to modernize its surveillance by sharpening the focus on risks and spillovers and better integrating existing products.
However, the review identified important gaps that still need to be addressed. According to the main report, “surveillance is still seen to be too fragmented, and its risk assessments lacking requisite depth and attention to interconnections and transmission channels” of shocks between economies.
Listening to external voices
The review was based on a wide range of research and feedback (see Chart 2), with increased participation by outside experts compared to previous reviews. It took into account past reviews, including by the IEO.
For the first time, the review was scrutinized by an independent External Advisory Group that endorsed its recommendations. It also benefited from commentaries from Nobel-prize winner Joseph E. Stiglitz and journalist Martin Wolf.
By drawing on extensive consultations with stakeholders—country authorities, civil society, market participants and the media—and in-depth studies by both staff and external consultants, this review was particularly well positioned to assess the effectiveness of IMF surveillance. In addition to focusing on the better detection of risks, the review also examined how candid and evenhanded the IMF is in its policy advice to governments and different groups of countries.
In this regard, the review found that IMF surveillance has uneven impact (or traction) among member countries—and seems to gain less attention from large economies.
Focus on interconnections, risks
Managing Director Lagarde’s action plan lays out a number of actions to strengthen IMF surveillance in priority areas that will be developed in the coming months (see Chart 3).
• Interconnections. The IMF will conduct another round of spillover reports next year for the five largest economies, building on the success of the initial pilot round and with a view to eventually making these analyses part of regular Article IV consultations. This will be a major focus of the IMF’s effort to be effective at both the country level—where shocks originate—and to better analyze spillovers between countries (identified as a particular gap in the external study of the euro area surveillance by Bruegel Director Jean Pisani-Ferry and others).
• Risk assessments. The IMF will place a greater emphasis on the analysis of risks, their transmission channels, and possible policy responses. The objective is to raise the awareness to risks, even in seemingly quieter times.
• Financial stability. A strategic plan for financial sector surveillance and increased financial sector expertise in IMF mission teams will form the backbone of IMF efforts to better integrate financial stability assessments to surveillance, and draw more attention to macro-financial risks.
• External stability. A regular multilateral assessment of external balances will be published to better inform the debate on global imbalances. External stability assessments in country reports will be broadened to better account for factors such as capital flows, balance sheet positions and reserves adequacy, in addition to assessing exchange rates levels and regimes.
• Greater traction. The IMF expects that strengthening its analysis in the areas above will help increase the impact of its advice. However, further efforts will be made to ensure that surveillance is evenhanded, tailored to country-specific needs, well communicated and candid. Stiglitz and Wolf also argued that IMF surveillance should be more open to unorthodox ideas and should also cover macro-relevant social issues. To better reach out to policymakers, the IMF plans to continue with the new Consolidated Multilateral Surveillance Report, which was first prepared for the 2011 Annual Meetings to highlight the top-line messages from all its work on surveillance and global prospects.
• Legal framework. The review also considered the legal framework for surveillance. The staff paper concludes that the current framework does not sufficiently account for economic realities nor does it adequately integrate bilateral and multilateral surveillance. To address these issues, the IMF will work on a proposal for a new integrated surveillance Decision—covering both bilateral and multilateral surveillance—that will foster a broader approach to global stability.
Next steps
Lagarde acknowledged that the reforms to improve IMF surveillance would be an inherently long-term endeavor. She said that “to see the job through, a robust mechanism of accountability will also be needed.” Accordingly, IMF staff plans to prepare a progress report a year from now rather than wait for the next triennial review in 2014.
