Keeping an eye on global markets in Frankfurt, Germany. The IMF recently completed a regular review of its approach to economic monitoring (photo: Horacio Villalobos/Corbis).
TRIENNIAL SURVEILLANCE REVIEW
The review of how the IMF assesses economies and provides policy advice, known as surveillance, was discussed by the IMF’s Executive Board on September 26. It explores how the institution can consolidate the major reforms adopted since the 2011 surveillance review. The 2014 review also considers how surveillance should adapt to emerging challenges and better tailor policy advice to help countries build resilience and secure durable growth.
This stocktaking comes at a time when many countries are still grappling with the painful legacies of the global financial crisis—large debts, high unemployment, and sluggish growth—and have limited policy space to secure job-rich growth. Policymakers in a highly interconnected world also face the dual challenge of harnessing the benefits of globalization, while shielding their economies from the risk of negative spillovers from greater integration.
Deepening work on risks and spillovers
In response to the global financial crisis, the IMF overhauled its surveillance in 2011 to make it more risk based and to better reflect global interconnections. The Integrated Surveillance Decision, which came into effect in early 2013, was an important step in making headway toward that goal. It makes analysis of spillovers—how policies in one country can impact other countries—an integral part of the IMF’s regular health checks of members’ economies.
The latest review seeks to build on the progress made since 2011, further solidifying the connection between the IMF’s analysis at country and global levels. It also calls for delving more deeply into how risks and spillovers are transmitted across borders and sectors.
One way of better mapping these links would be to revive and modernize the analysis of national balance sheets, an approach the IMF developed in response to the Asian crisis of the late 1990s. This would allow surveillance to better capture the full range of risks, reflecting not just the size of cross-border capital flows, but also their composition. It would also shed more light on domestic vulnerabilities, such as leverage, currency, or liquidity mismatches in the major sectors that make up the economy—the government, financial institutions, corporations, and households.
The review also suggests that the IMF capitalize on recent improvements in financial sector surveillance by integrating it more fully with its core macroeconomic analysis. It recommends a number of measures to address this gap and ensure that Article IV consultations delve more deeply into the relationship between the real economy and the financial sector—what is sometimes referred to as the links between “Main Street” and “Wall Street.”
More tailored and holistic advice
The review stresses that strengthening surveillance is an ongoing and dynamic process. The IMF’s analysis and policy priorities should also continue to adapt to emerging challenges across the membership. Managing Director Christine Lagarde emphasized that “surveillance should serve our smallest and our largest members alike.” For example, in a climate where generating job-rich growth is at the top of the policy agenda, expanding the IMF’s analysis of labor markets and associated reforms could add value to in-country policy deliberations.
The review also recommends that the IMF continue the flexible approach to policies it has exhibited in recent years. While praising the IMF’s embrace of more gradual fiscal adjustment, the review observes that fiscal policy advice could be even more sensitive to the imperative of creating jobs and growth.
To add greatest value, analysis and advice should be formulated in a cohesive and consistent way. In addition to interconnections between countries, country surveillance should focus on the links between sectors within an economy and the interactions between policies, the report said. It should also do more to capitalize on the vast reservoir of the institution’s knowledge of cross-country policy experiences.
Achieving greater impact
The review emphasizes the importance of looking beyond analytical approaches and tools to achieve greater impact. Communicating more clearly and candidly and deepening dialogue with member countries would support the goal to better tailor analysis and advice. “Listening to, and understanding, the needs and concerns of a particular member should feed into surveillance,” the main report observes.
Fair and evenhanded treatment of member countries is also essential if the institution’s analysis and advice is to have credibility and impact. This longstanding issue takes on added importance in a world where countries often have a stake in the actions of, and advice to, other countries. The review suggests ways to keep track of and deal transparently with countries’ concerns in this regard.
Finally, for surveillance to bring about global economic stability, the IMF should play a central role in fostering global cooperation. The review recommends exploring how the Fund could better encourage global policymakers to work together and be more conscious of the spillovers of their policies.
Outside perspectives
The review was based on extensive consultations with stakeholders, including policymakers in member countries, civil society, market participants, and the media. This provided a rich set of evidence to support a wide range of in-depth analytical studies by both IMF staff and external experts. This broad spectrum of perspectives was brought together in the overview paper of the review.
The review was also scrutinized by an independent External Advisory Group, which offered guidance and direction early in the process, and endorsed the findings and recommendations. It also benefited from commentaries from Nobel laureate Paul Krugman, renowned Indian economist Montek Singh Ahluwalia (former Deputy Chairman of the Indian Planning Commission), and journalist Martin Wolf.
Next steps
Drawing on the guidance offered by Executive Directors at their September 26 discussion, Managing Director Christine Lagarde will formulate an action plan that lays out concrete steps to strengthen IMF surveillance in priority areas.
Given the time it takes to fully embed surveillance reforms, the Executive Board also agreed to move from the current three-year schedule to a five-year cycle for its regular comprehensive review of surveillance. Accordingly, the next review would take place in 2019.
