The IMF’s Role in Fostering Global Prosperity
Is there a “grand bargain” of promoting reforms in developing countries in exchange for financial support from rich countries?
At the IMF, ongoing oversight of members' macroeconomic and monetary policies is increasingly focused not only on promoting a coherent domestic framework of fiscal, monetary and related policies, but also on assessing the risk of damaging effects on others, and on the international monetary system itself.
These efforts are supported by the fact that countries are increasingly aware of their shared responsibility to ensure that both domestic and external economic policies work to ensure the smooth functioning of global goods and capital markets.
The IMF thus has been given a role in preventing countries from pursuing policies that harm their neighbors or the global economy as a whole. Though less developed economies are stakeholders, they face a different set of challenges.
Those countries are admittedly less focused on providing an enabling environment for global growth — and more squarely focused on raising the standard of living for their inhabitants.
In this context, the March 2002 International Conference on Financing for Development in Monterrey, Mexico is a landmark. The UN General Assembly resolution adopted at that time, referred to in the public debate as the "Monterrey Consensus", sets out an economic agenda that is both "pro-poor" and "pro-growth."
It is an agenda that, if pursued, provides an enabling environment for growth and greater equality of opportunity between rich and poor. The Monterrey Consensus is based on the premise that developing countries have primary responsibility for their own economic and social development.
They commit to taking ownership of the development process, in particular by building the institutions necessary to sustain development and implementing the policies that underlie successful growth.
If the developing countries implement the necessary reforms and make a sufficient effort to mobilize their domestic resources, rich countries are expected to respond by mobilizing additional international resources.
On the official side, this means substantial increases in ODA, debt forgiveness, technical assistance and capacity-building.
On the private side, this means measures to facilitate direct investment, provide business services — and develop innovative financing mechanisms for small enterprises.
Rich and poor countries alike also committed to enhance the coherence and consistency of the international economic architecture. But we in the rich countries have to acknowledge that we are falling short of an important commitment.
At Monterrey, the developed countries committed to promoting freer international trade as an engine for development. The current impasse in multilateral trade talks is therefore not just risking a missed opportunity. It is jeopardizing the sound and constructive international understanding that the Monterrey Consensus reflects.
The part of the question I would like to explore in more detail is the role the IMF has to play in fostering an enabling environment for stability and growth.
In my view, this is best achieved through the Fund's "surveillance" activities. Now, obscure as this phrase may sound to some, I also realize that this is a charged word in the global debate.
So what do I mean by surveillance? By surveillance, I mean the evaluation of a country's macroeconomic policy framework. In essence, there are two questions to be answered: Are monetary and fiscal policies working in tandem to achieve desirable economic outcomes? Are domestic policies consistent with a country's exchange rate regime?
Technical aspects aside, surveillance more generally is a means by which the IMF works with members to help them improve their economic governance.
First, the Fund provides advice to help its member governments better fulfill their social contracts with their own citizens. And, second, it helps all of its membership by encouraging each member to pursue policies that support a well-functioning global economy.
It does this by providing its own independent assessment of those policies that fall within its areas of expertise, and subjects both its own assessment and the policies of members themselves to a process of "peer review" by the Fund's entire membership.
Although in theory and under the Articles of Agreement the Fund should look at the international impact of each country's policies, until recently, the IMF in practice more often than not has examined a country by assuming that the world beyond its borders was unaffected by developments within its borders.
Evidently, the economic policies of some countries have important spillovers on other countries. This is patently evident from the current policy activity surrounding global imbalances. The reduction of the U.S. current account deficit, for instance, cannot be achieved without a concerted effort on the part of a number of other countries.
This realization is leading to a change in the way surveillance is performed at the IMF. Twice a year, in the World Economic Outlook, the Fund now routinely examines the impacts of the policies of certain systemically important countries on everybody else.
The aim of course, is to sensitize the respective Fund member to the impact its economic policy is having on the rest of the world, in the hope that this will lead to better economic decision-making.
And the IMF has also launched a process of "multilateral surveillance" — bringing authorities of key countries together at the same table to foster a greater appreciation of the benefits of concertation, in the first instance to address global imbalances.
An important lesson of the Asian financial crisis is that crisis prevention is just as, and perhaps even more, important than crisis resolution. It's certainly cheaper.
That is why the IMF has been working not only to improve its surveillance, but also to extend its assessments and advice to areas that it has not in the past looked at as deeply — but which experience has shown are sources of potential vulnerability in both advanced economies and emerging markets.
To provide a concrete example, an important lesson from the Asian crisis was the recognition that better regulation and supervision of the financial sector would have helped steer capital to more productive purposes — rather than more speculative activity.
In the wake of an external shock, there would have been a significantly lower likelihood of money fleeing the countries affected. This has led the IMF to broaden its expertise in the area, enabling it to advise countries on financial sector regulation and supervision.
Importantly, the IMF worked with a number of international bodies to develop a set of standards and codes whose aim is to provide policymakers in interested countries with best practices — and also to provide financial markets reliable information on which to transact.
As a result, the IMF and the World Bank examine and report on members' observance of 12 relevant standards and codes of practice in data transparency (statistical, fiscal and monetary), financial sector regulation (banking, securities, insurance, payments) and market integrity (corporate governance, accounting, auditing, bankruptcy) every few years.
Most recently, the IMF has devoted significant efforts to building capacity to help domestic financial institutions identify and reduce the incidence of money laundering and to combat the financing of terrorism.
This new focus has an even more significant benefit. Deeper, more diverse and more efficient capital markets are the best means of allocating capital to its most productive use, and thus is a key driver of growth.
To be sure, despite our best efforts at crisis prevention, crises will inevitably happen from time to time. The IMF also remains committed to helping countries that have been unable to prevent financial crises.
It has provided, and will continue to provide, significant financial resources to countries in the throes of a financial crisis.