II Conduct and Methods
- International Monetary Fund
- Published Date:
- December 1999
1. Under this heading the Executive Board asked us to address the following general question: how helpful are the procedures of surveillance, the resources and the staff skills employed, the means of interaction with member country authorities, and the dissemination methods of Executive Board surveillance conclusions? This general question was broken down into a number of more specific ones.26
(iii) Has Fund surveillance paid sufficient attention to regional surveillance, to interaction among countries, and to the external effects of policies in major countries?
(ix) Did the Fund balance openness and sensitivity appropriately from the authorities’ perspective? How helpful were the documents that emerged from bilateral surveillance?
(xi) How do you assess the role of the Executive Board in surveillance?
2. This chapter begins with discussions of how bilateral (or Article IV), regional, and multilateral surveillance is conducted. We then discuss the internal procedures by which the Fund undertakes surveillance, and conclude with a discussion of the role of the Executive Board.
3. We start with a description of the mechanics of the Article IV consultation.27 (See Box 2.1 for the chronology of an Article IV consultation.) This is followed by a discussion of the views we received on the consultation process and on other elements of bilateral surveillance.
The Internal Process
4. Within the Fund, primary responsibility for the Article IV process lies with the relevant area department. The process begins with the drafting of a “mission brief” by that department. The brief is both descriptive and prescriptive: that is, it describes the economic situation of the country and sets out the staff’s view of current policies and desirable changes. It therefore serves both as an agenda for the mission itself and as an outline of the major issues to be discussed in the staff report.
5. Before the mission brief is finalized, it is reviewed by other departments (and sometimes the World Bank). The Policy Development and Review Department (PDR) plays a particularly important role in this process; while other departments are invited to comment on the brief—comments that the area department may or may not choose to incorporate or address—PDR must “sign off,” or approve it, before it is finalized. PDR’s role is to ensure that the brief is consistent with general Fund policies, that it addresses all the topics that Article IV consultations are supposed to cover, and that it takes into account properly other departments’ comments. The brief is then sent to management (the Managing Director or one of the Deputy Managing Directors) for final approval.
Box 2.1.Chronology of an Article IV Consultation
|Day 1||Mission brief draft circulated among departments|
|Day 8||Mission brief submitted to management|
|Days 15-28||Mission visits country|
|Day 32||Back-to-office report circulated to management and departments|
|Day 51||Draft staff report circulated to departments|
|Day 65||Staff report circulated to Board|
|Day 90||Board discussion|
6. If there are significant disagreements between departments on an important issue in the brief, a covering memo will call this to the attention of management. If the issue is felt to be sufficiently important, or if management takes a particularly strong interest in a forthcoming consultation, there will be a meeting of the “Surveillance Committee”—chaired by management, with representatives of the interested departments—to review what the Fund’s approach should be.28 These internal mechanics are of interest because it is largely at this stage—the drafting of the mission brief, not the preparation of the staff report—that the Fund’s “line” on the country’s policies is thrashed out internally. It is also worth emphasizing that the mission brief is purely a staff document, not shown to the authorities of the country concerned or to the Executive Board.
7. The next stage is the mission itself. A mission usually consists of a visit of about two weeks to the country by at least four or five staff members. The mission is headed by a relatively senior staff member from the area department—generally either the chief of the relevant division or someone more senior—and consists of other staff from the area department and, if required in a particular area of interest, possibly one or two staff from functional departments. The mission consists primarily of meetings with senior and midlevel officials from the finance ministry, central bank, and other government ministries involved in the formulation of economic policy.
These meetings have two distinct purposes:
Information gathering. This varies from simply collecting and checking data and ensuring its consistency to ascertaining how government officials view the current state of the economy, and to getting more information about current and future policies.
Policy discussion and advice. Here the Fund officials discuss with government officials what they consider to be the main policy problems or decisions facing the country, and make their own suggestions for how the government should proceed.
8. There may also be meetings with the private sector and representatives of “civil society”—in rough order of frequency: bankers, financial market participants, business associations, academics, trade unions, and NGOs.
9. At the end of the mission, there is often a formal concluding meeting with senior officials (including, in many countries, the finance minister and central bank governor). At this meeting the mission leader will sometimes read out a “concluding statement,” which summarizes the staff’s view of the economy, the current policy stance, and any recommendations for changes. As noted in Chapter I, in recent years, some countries have made the concluding statement available to the media.
10. Immediately after returning to headquarters, the mission leader will prepare a “back-to-office” report to management, summarizing the most important information about the visit. The mission staff will then prepare a staff report for the Executive Board. The staff report includes a comprehensive and reasonably detailed description of the macroeconomic environment, the main economic policy issues facing the country, the staff’s forecast, and an account of the discussions between the staff and the authorities. However, the most important section is the “staff appraisal,” which sets out the staff view of the soundness of the authorities’ policies and what, if any, policy changes the staff recommend. The staff report will go through the same review process as described above, with comments from functional departments, and approval by first PDR and then management. It represents the formal, final view of Fund staff and management on the country.
The Executive Board
11. After approval by management, the staff report is submitted to the Fund’s Executive Board. The Executive Board discusses most staff reports in some detail, with the discussion of even a middle-sized country occupying most of a morning.29 Often most or all Executive Directors (or their representatives) will speak. Directors may also use the discussion of the staff report as an opportunity to bring up other issues, either specific to the country or more general, that they wish to discuss.30 At the end of the meeting, the Chair (the Managing Director or a Deputy Managing Director) will “sum up” the views of the Board. Usually, the summing up will begin with the phrase “The Board broadly agreed with the thrust of the staff appraisal,” or similar. It will then summarize the views expressed by Executive Directors, including dissenting views (using phrases like “Most Directors felt… However, some Directors felt…”).
12. Since it represents the official collective view of the Fund—not just the staff—and since it forms the basis for the PIN (which also contains a factual background section), it is worth examining in some detail how the summing up is prepared. A first draft is prepared before the Board meeting takes place. If Directors do not specifically dissent from the staff appraisal in a particular area, it is assumed that they endorse it. The draft is then modified during the meeting to take account of Directors’ views, particularly in areas where they do not agree with the staff appraisal. The new draft summing up is then read out at the end of the meeting; this is the only chance most Directors have to challenge it. The summing up is then finalized by the Secretary’s Department, in consultation with the area department, PDR, and the Director representing the country concerned.
13. The summing up is then transmitted to the country concerned. In cases where that country agrees, the summing up, together with a brief summary of the factual portion of the staff report, also forms the basis for the PIN. The draft PIN is submitted to the authorities by the Director, and only exclusion of highly market-sensitive material (and corrections of factual errors) is in principle allowed.
Views on Article IV Missions
Frequency and Intensity
14. For most countries, Article IV consultations are supposed to take place annually, although the process sometimes slips by a few months. There have been occasional attempts to reduce the frequency of consultations for smaller, “nonsystemic” countries, on a voluntary basis. However, in practice, countries have been reluctant to agree to move to biennial consultations; currently, only 23 of the Fund’s members are on a biennial consultation cycle. In financial year 1998/99, the Fund completed 124 Article IV consultations, out of its total membership of 182.
15. Member states seem generally content with an annual consultation, although there are differences in how countries approach them. Small countries often regard the annual Article IV consultation as a valuable opportunity for bringing together the economic policy establishment of the country. For some, this may be the sole such occasion. Large and medium-sized member states felt that one annual visit (though not necessarily an Article IV mission) is about the minimum for maintaining the personal contact between Fund staff and national officials, and the “feel” of the former for the country’s problems, which are essential ingredients in a constructive professional relationship.
16. However, differences of view were apparent over the desirable length and intensity of the main annual mission, its coordination with regional or multilateral efforts by the Fund, and the need for follow-up staff visits in between Article IVs.
17. A normal Article IV mission spans at least two working weeks. While recognizing the value to domestic officials of discussions with a well-prepared Fund team, most officials thought that the length of missions was excessive and could be shortened in the initial fact-exploring phases. Essentially, questions of fact (as distinct from interpretation) could and should in their view be settled in advance.
18. It is not uncommon for countries to receive follow- up visits from the staff once between the Article IV consultations. Some officials thought this was unnecessary, particularly since they also received visits from Fund staff responsible for the WEO and the International Capital Markets report (ICMR), as well as World Bank staff. Indeed, several country officials complained that they ended up answering the same questions repeatedly. The Annual Meetings (and in some cases the Interim Committee meetings) provide another opportunity for informal discussions. Quite a few thought that the Fund surveillance process was somewhat old-fashioned, with too much emphasis on large missions and not enough on more continuous surveillance based on watching the country data from Fund headquarters, as investment banks or rating agencies, for example, would tend to do.
19. In terms of resources, it is useful to separate the Fund’s membership into three categories.
Small states. Country surveillance seems particularly useful to, and appreciated by, small states; they strongly oppose any diminution in the resources devoted to them.
Industrial countries. There was general agreement among officials of all countries, staff, and outsiders that because of the systemic implications the Fund needed to monitor closely the economies of the largest industrial countries. This view was perhaps strongest among officials of those countries that relied on the Fund for information about the largest countries. However, some felt that the resources dedicated to industrialized countries, especially the medium-sized and smaller ones, were too great.
Emerging market countries. Many officials in both industrialized and emerging market countries thought that the Fund should give greater priority to emerging market countries, particularly those of systemic importance.
20. The central bank is often the main contact, providing logistical support, and sometimes providing the venue for official meetings. Relations with central banks were generally good. Indeed, a concern voiced by some national officials was that the Fund ended up being too close to the central bank; in several of the countries we visited the Fund was seen by nonmonetary officials as insufficiently critical of the central bank’s well-known views in the domestic policy debate.
21. The ministry of finance may also be the basic contact point, but in any case it is always a main stop for a mission. Although the line of the Fund is almost invariably that the budgetary position should be strengthened, hence tending to reinforce the position of the finance minister in conflicts with spending colleagues, the Fund appeared to get an approval rating in finance ministries that was not as high as that in central banks. Sometimes this attitude was based on the perception that the mission was insufficiently sensitive to domestic political problems in obtaining support for budgetary consolidation. Another contention was that the Fund was too dismissive of Keynesian views of the impact of changes in budgetary policies.
22. Missions do aim to see important economic actors in the government outside the central bank and the ministry of finance—for example, ministries of economic planning or of labor. However, coverage beyond this list varies. In countries where the legislature has a central role in economic policymaking, some officials suggested that it might be useful for an Article IV mission to have the opportunity to exchange views with selected members of the legislature. This occurs in some countries, but the practice does not appear to be widespread or systematic. In the United States, for example, the mission does not meet with legislators although Congress clearly exercises a major influence over U.S. budgetary policy. In Japan, even some officials from the central bank and the ministry of finance suggested that the shift of influence over economic policy and financial regulation from the Bank of Japan and the Ministry of Finance toward the Diet would justify a meeting with the mission. However, staff said that in some countries the Fund’s traditional interlocutors prefer to keep missions more to themselves. Similar considerations apply to meetings with representatives of opposition parties; some missions have done this, but it is not standard practice.
23. In federal countries such as Brazil and India, where state or regional governments have substantial power over tax and expenditure policies, it may be useful for missions to meet when they can with regional or local representatives. Fund practice has moved in this direction. Here, central governments have generally been supportive. We were told in a couple of instances that this was because surveillance had in such cases a strong element of technical assistance to improve budgetary practice and/or debt management in a way that was also helpful to the central government.
24. Independent research institutions, financial sector representatives, other private sector organizations, and labor unions (in rough order of frequency) are also often included in the list of visits. However, the coverage of meetings with outside organizations appeared to vary substantially from country to country; it largely seemed to be determined at the discretion of the mission chief and the main government contact. We also noted that in a number of countries the central bank or finance ministry made it a rule to accompany Fund missions to all meetings, including those with nongovernmental organizations. Some outsiders said that this inhibited them from talking frankly to the Fund.
25. We found that Fund interlocutors in the private sector and in independent research institutions—and sometimes even within the government—were in one respect somewhat disappointed in the nature of their exchange of views with members of an Article IV mission. The Fund team asks good and searching questions to which those visited seek to reply to the best of their ability, but there is reportedly little give-and- take in the discussion and the team leaves few clues as to how the information provided is to be used in the staff report. Nor are the interlocutors given an opportunity to see the final product or simply the part of it to which they have contributed. Some said that missions would be better received if there could be more in the way of reciprocity. However, the scope for such reciprocity is of course limited when the staff consultations are supposed to be confidential.
Dissemination of Surveillance Results
26. We discussed the communication of Article IV consultations—be it through the PIN, the concluding statement, or the full report—in most of our interviews. We similarly reviewed dissemination and follow- up within government with officials. Since the choices made in these areas are up to the individual country, rather than to decisions in the Fund on the conduct and methods of surveillance, we postpone the discussion of these important questions to Chapter IV, on the impact of surveillance.
Other Bilateral Surveillance
27. Country surveillance through the Fund makes use of a number of other instruments in addition to the Article IV missions and the whole structure of intensive, but somewhat discontinuous, attention to a country to which the missions give rise.
Communications from Management
28. Management occasionally communicates in writing with the central bank governor, the finance minister, or even the prime minister, of a country where an Article IV report or some follow-up to it gives cause for concern. Such messages, obviously confidential, are typically much clearer and more pointed than staff reports, let alone the Fund’s public statements. They no doubt serve to raise the attention level and the eyebrows of national authorities; as a consequence, they are regarded as a tool to be used sparingly. The Managing Director also visits countries for confidential discussions and/or public, national or regional, meetings; so does his First Deputy and, on rarer occasions, the two other Deputy Managing Directors. Furthermore, they consult with high national officials when the latter visit Washington to attend the Interim Committee or for other purposes. These are valuable occasions for focusing on one or two critical issues in relations with a country.
Informal Country Matters Sessions
29. Informal Country Matters sessions in the Executive Board have taken place for a number of years. They are designed to allow the Board to discuss the situation in countries whose economic situation gives cause for concern, in particular where a program may be in prospect. These sessions are held irregularly, on average monthly, with the list of cases mostly determined by the staff—most will be countries already in programs—but Executive Directors also have an opportunity to add to the list. The latter sometimes gets so long—15 or so countries—that there is not sufficient time for each case to be dis29. Informal Country Matters sessions in the Executive Board have taken place for a number of years. They are designed to allow the Board to discuss the situation in countries whose economic situation gives cause for concern, in particular where a program may be in prospect. These sessions are held irregularly, on average monthly, with the list of cases mostly determined by the staff—most will be countries already in programs—but Executive Directors also have an opportunity to add to the list. The latter sometimes gets so long—15 or so countries—that there is not sufficient time for each case to be discussed in depth. Executive Directors said that they found these sessions helpful, but would like to be able to examine key cases in greater detail. Several also observed that the staff made no attempt to present a regional view at these sessions, although that had originally been stated as one of the objectives. One senior staff member also made the point that, from the point of view of the staff, it would be useful if Executive Directors would use these sessions to pass on any information they had from their capitals on the countries discussed. Apparently, this does not happen.
30. Although resident representatives are not formally part of the Article IV surveillance process, a number of officials expressed the view that they made a significant and distinct contribution. Countries generally welcomed proposals to appoint a resident representative, and regretted their withdrawal.
31. Technical assistance was generally considered helpful. This was particularly the case when it was well integrated with surveillance. For example, the Brazilian authorities were very complimentary about the technical assistance they had received from the Fund, especially on the fiscal side, and the way that it had complemented bilateral surveillance more generally. However, even though opinions on technical assistance were broadly favorable, successful integration with surveillance does not appear to have been very common elsewhere.
32. Efforts at regional integration, particularly in Europe and to a lesser extent in Asia and in Latin America, have raised the issue of whether the Fund should engage itself more in surveillance of a regional nature. This question has become more topical following the experience of the past two years, when aspects of the international financial crisis have taken on a regional dimension.
The European Union and the Euro Area
33. When regional integration advances as far as has recently happened in the European Union (EU), the Fund has to make significant adjustments in its methods of surveillance. For a few years during the transition to Economic and Monetary Union (EMU), Fund missions regularly visited the precursor of the European Central Bank (ECB) and the European Commission. We therefore visited the ECB and the Commission to discuss with leading officials how they saw the future evolution of surveillance of the euro area and its individual participants. We also sought the views of some national officials from EU countries inside or outside the euro area.
34. There are now plans to have a meeting at the ECB with a Fund mission twice a year to review the common monetary policy and its exchange rate implications, and the ECB has been given observer status at the Executive Board. However, country surveillance of the 11 participants in the euro area will continue on an annual basis (except for Luxembourg, which is on a two-year cycle). Officials of EU countries pointed to both formal and substantive arguments for continuing country surveillance of nonmonetary policies. From a legal point of view, the participants continue to be members of the Fund and are hence obligated to receive the Fund’s Article IV missions. For euro area countries, only monetary policy has been centralized (trade policy, of course, has already been centralized for all members of the EU). Budgetary and structural policies continue to be a national responsibility, though the Pact for Stability and Growth subjects such policies to intensive monitoring by the Commission and by the Council of Finance Ministers (ECOFIN).
35. It is clearly in the interest of participants in the euro area, officials from those countries told us, to have the Fund apply the wide range of experience in its global membership to these policies. It may also be of interest to other Fund members to be kept informed about national policy developments in the euro area with respect to tax, expenditure, and labor market policies, not least because they are still far from uniform.
36. However, a number of interviewees (official and other) suggested that the resources devoted to such surveillance could now be considerably reduced. It was pointed out that with a centralized monetary policy there was no need to consult national central banks on this topic. Moreover, in areas other than monetary and exchange rate policy, EU states are already subject to monitoring both by the European Commission and by the OECD. In the view of these observers, it should be possible for Fund surveillance to rely largely on this work, albeit not in an uncritical way. Accordingly, it was also argued, the Fund should focus surveillance more on aggregate policies not only in the monetary but also in the fiscal area, since it is the policy mix of the euro area as a whole that is of concern to the world as a whole. Here the main input would be the Stability Programs submitted to the European institutions. They also suggested that just as Fund analysis of the United States and Japan has traditionally devoted considerable attention to the policy mix in these countries and its impact on other countries, this needs to be paralleled by a similar review for the euro area. We develop in Box 2.2 some ideas concerning the future subject material and organization of such surveillance.
37. In other areas of the world, regional integration is far less advanced than in Europe and will remain so for a long time. The focus on regional surveillance in other areas is therefore not as strong. However, member countries have taken a number of initiatives in recent years, and the Fund has been involved in several. We examined the Fund’s role in regional surveillance in Southeast Asia and Latin America.31 These revealed both the potential and limitations in such an approach.
38. In Southeast Asia, the Fund has been designated as the technical secretariat of the Manila Framework Group. The Fund is already engaged in preparing background documentation for meetings of the Finance Ministers of ASEAN, and the Managing Director has occasionally been invited to participate in and address the meeting. These contributions are recognized by country officials—and by the Fund staff—to be valuable, though the Managing Director’s comments on impending crisis symptoms in the spring of 1997 were seen to have come too late to have any major impact. Similar remarks were made about Fund input into the deliberations of the Asia- Pacific Economic Cooperation (APEC) officials, meetings that now include participants from some 20 Fund members circling the Pacific.
39. The Fund’s main contribution to such meetings is the preparation of background documentation. However, we were informed that this documentation focused not so much on regional interrelations and issues as on the individual country experiences—in other words, largely an updated replication of consultation material already available. In the view of several Asian officials, notably in Japan and Thailand, the Fund has been too ready to see difficulties in stronger regional cooperation, particularly in Asia. The Fund has traditionally been wary of mutual support facilities among central banks and/or governments at the regional level—on the legitimate grounds that such initiatives must not be allowed to erode the role and the discipline of the global system that the Fund is designed to monitor and reinforce. This concern also marked the Fund’s attitude to a regional support mechanism in the earlier stages of Europe’s monetary integration. But there might, in the view of several Asian officials, have been net benefits from encouraging a number of Asian countries to develop some degree of monetary cooperation. At a minimum, better information flows in the region might have reduced the risk of contagion, hence ultimately reducing the need for Fund resources.
Box 2.2.Surveillance of the Euro Area
European monetary unification poses special challenges for Fund surveillance, but also new opportunities. The Fund staff is recognized as objective and independent, and tougher in its analysis than European institutions. Unlike those institutions, it is not constrained to focus on precise numerical criteria. So we believe that Fund surveillance will continue to have an important role to play, provided it focuses on the area as a whole.
However, our suggestion that future surveillance of the euro area should focus on aggregate performance and policies meets with practical difficulties. Within the European Union the monitoring ECOFIN, prepared by the Commission, of polices outside the area of monetary policy remains largely country based. This reflects the reality that budgetary and structural policies remain primarily a national responsibility. Monitoring of the aggregate performance of the euro area is not yet well developed outside the European Central Bank (ECB) which has to review its monetary stance on the basis of aggregate indicators. This asymmetry in the policy frame work implies that it will initially be complex to focus Fund surveillance of the euro area on the aggregate performance and the policy mix, the core subjects for the Fund in conducting regional and multilateral surveillance. Furthermore, there is as yet no obvious authority to consult with outside the area of monetary policy.
This asymmetry in the policy framework is no accident. It reflects the view, still broadly shared in the euro area, that there is a much stronger economic case for centralizing monetary and exchange rate policies in a regional institution than for centralizing other macroeconomic or structural policies. The economic arguments are clear: (1) the introduction of the single currency implies that participants in the euro area require some fiscal flexibility, to allow their budgetary policies to absorb some of the residual divergence in national business cycles; and (2) it was hoped that problems of an inappropriate policy mix would not arise, because the combination of a monetary policy aiming at low and stable inflation and constrained national budgetary policies would prevent serious policy conflicts. There were also political arguments; the transfer of decision making on fiscal policy, where governments and parliaments have already delegated authority to national central banks; and concerns that the ECB would see its autonomy threatened by an ECOFIN with reinforced clout.
Fund surveillance may, however, gradually be facilitated by an evolution in the policy framework, which is already under way. Aggregate indicators of the performance of the euro area, notably the current account and the exchange rate of the euro, increasingly find a role in policy reviews by the Commission and in the debate in ECOFIN. Policy coordination—obviously so far on a voluntary basis, since the Treaty does not contemplate more mandatory forms—is moving onto the agenda. The purpose of coordination will be both to review the policy mix in the light of aggregate performance and to consider, in the light of that, the desirable speed of budgetary consolidation within the 3 percent limit to deficits. The recent debate over the level of the Italian deficit is a good example; in our view, illustrating that the board stance of individual countries’ fiscal policy will increasingly be influenced by what happens at the euro area level.
Fund regional surveillance should not only anticipate, but take advantage of, this evolution. As noted elsewhere, surveillance has relatively little impact on individual euro area countries. For the reason stated above, the Fund is well placed to give advice on the overall stance of euro area policies, both monetary and fiscal. To do so, visits to the ECB, the Commission, and national authorities will not suffice. Fund consultations should be extended to ECOFIN and to the Economic and Financial Committee, as has already begun to occur.1 The Managing Director might also usefully be invited to attend meetings of ECOFIN once or twice a year. In our view, given the increasing role of European institutions not only in monetary but in fiscal policy, Fund surveillance is more likely to have an impact at the euro area level than at the level of individual countries.2 Consequently, Article IV missions to participants in the euro area should become less frequent, more focused, and leaner.
We understand that such meetings took place in the June 1999 consultations with the authorities of the euro area, and the mission’s concluding statement therefore referred, appropriately, to the “economic policies of the euro area”.
This point is underlined by the fact that. in recent discussions of staff reports on individual euro area countries, euro area Executive Directors have maintained positions collectively agreed at ECOFIN.
40. In September 1998 the Fund convened a meeting in Washington of the finance ministers and central bank governors of the Americas to review the short-term prospects of the hemisphere—not least in the light of an impending crisis in Brazil. This meeting got mixed notices; the staff prepared relatively elaborate country notes for discussion, but felt that the effort might not have been justified since the process of peer pressure did not visibly help to bring about any adjustments in Brazil’s policies. Reluctance of neighboring countries to engage in frank exchange and criticism in such a forum was, we were told, characteristic of Asia also, and is apparently not unknown in European regional economic forums as well. Apparently, the Fund’s bilateral “frankness” can stand out by comparison, and becomes rather salutary. This being said, some Latin American officials who had been present in Washington were more positive, pointing to the usefulness of at least sensitizing high U.S. officials to the problems of their southern neighbors.
41. The principal vehicle for the Fund’s multilateral surveillance is the WEO, produced twice a year (and sometimes more frequently). In addition, the ICMR has gained increasing attention in recent years. Both are produced by the Fund’s Research Department. Conceptually, WEO has two main components: a description of the current state of the world economy, including forecasts of the main economic variables for the world as a whole and for large and medium-sized countries, and analytic chapters on a variety of topics. The forecast is prepared by a bottom-up rather than top-down procedure; that is, it is not produced by a single model of the world economy, but compiled from forecasts for individual countries by area departments. These individual country forecasts are scrutinized by the Research Department to ensure that they are both plausible and consistent, and if necessary changes are made after discussion between the Research Department and the area department. The ICMR is also produced by the Research Department, but with relatively little input from area departments or the Monetary and Exchange Affairs Department (MAE). Again, it has both descriptive and analytic sections.
42. As described in more detail in Chapter III, on substance, WEO and the ICMR are generally held in high regard among officials and others who monitor major international economic developments. We did not examine the process by which they are produced in as much detail as for bilateral surveillance. However, the following points did emerge in our discussions:
Some of our interviewees, government officials as well as academics, suggested that quarterly publication of an updated and leaner version of WEO would be desirable, with maybe one of them as a larger annual overview. The Fund has moved in this direction by publishing toward the end of 1997 and 1998 an update of the assessment in the October WEO (and ICMR).
A number of senior staff and some government officials raised the question of the interaction between multilateral and bilateral surveillance. It was suggested that the two processes tended to proceed on parallel, but largely separate, tracks, with area departments managing bilateral surveillance and the Research Department responsible for WEO and ICMR, and that a greater degree of integration would be desirable.
43. We heard favorable comments on the Occasional Paper series, which has been a useful vehicle for disseminating, for example, cross-country experience with different exchange rate regimes and capital account liberalization, two essential elements in the substance of Fund advice in country surveillance (see below).
44. Besides the publicly available information, multilateral surveillance also takes place inside the Fund; the chief vehicle here is the World Economic and Market Developments (WEMD) meetings, held approximately every six weeks, at which the Economic Counsellor presents his view of the world economy and of certain key countries (usually the major industrial countries and countries where the situation gives rise to particular concern). Finally, the Fund also has a role in the G-7 process. It provides a background note on the economic situation in the world and in each of the G-7 countries. At the meetings themselves, the Managing Director (and the Economic Counsellor at the G-7 Deputies meeting) gives a summary of the Fund’s views on the situation. However, they are not present for all of the subsequent discussion and play no part in drafting the communiqué.
Fund Internal Organization and Procedures
45. A number of our interviewees, particularly—but by no means exclusively—present and former staff members, raised internal and organizational issues that affect surveillance. Most of these relate primarily to bilateral surveillance, although some raise wider issues that affect the effectiveness of the Fund overall.
46. Many, perhaps most, government officials observed that there was a lack of continuity in the personnel involved in bilateral surveillance. Staff, especially junior and midlevel staff, rotate frequently. While staff believe that this has important advantages in career terms, it causes irritation among country officials, who sometimes feel they are answering the same questions on each mission. There is usually (but not always) more continuity at the head of mission level. The head typically participates in a minimum of two or three visits. It was also pointed out that sometimes the head of mission is not the division chief for the country concerned, but someone from the front office in the area department who will be more senior, but sometimes lacks familiarity with the country. However, staff pointed out that often such problems are at least in part the responsibility of the country, since some authorities consider it a slight if the mission head is not, in their view, sufficiently senior.32
The Skills Mix
47. The majority of Fund economists are recruited either more or less immediately after completing a Ph.D. (usually in macroeconomics with a specialization considered relevant by the Fund) or relatively early in their careers, with some previous experience, often in finance ministries, central banks, or research institutions. The quality of the intake is undoubtedly high, though a couple of leading academics we interviewed thought that the Fund had been less successful than a decade or two ago in attracting the very best graduates from the top universities. In any case, this recruitment policy has certainly produced a relatively homogeneous staff with high competence in the core areas of the Fund.
48. However, this situation also gave rise to some concerns among people we interviewed. These basically revolved around the question of whether country policy experience was particularly valuable in surveillance. The point was made to us by quite a few staff that because outside experience is, by definition, from the outside, and because the Fund has a strong culture regarding the way things should be done and the need to build up relevant Fund experience to do them properly, the value of significant outside policy experience (be it from a central bank, economics ministry, or a private financial institution) is undervalued. This was particularly the case for those recruited rather later in their career than the core group described above. On the other hand, in many of the countries we visited, officials were at pains to point out that they valued dealing with staff who had themselves been in a country policy position. They thought it added something to the quality of the policy dialogue.
49. Another, somewhat related, issue was the need to ensure adequate career opportunities for staff with different skills. Here it was felt that a large premium was placed on macroeconomic expertise relative to other areas, with the result that other skills were underappreciated, making it difficult to recruit and retain staff who possessed them. This gained added importance with the Fund’s increased emphasis on financial sector matters, where macroeconomics is less central.
Interdepartmental Relations and the Review Process
50. There is a tradition of strong departmental identity and autonomy in the Fund. As a consequence, there is, as there should be, vigorous debate among departments on important issues. However, a number of staff members (present and former) expressed the view that interdepartmental relations were not as constructive as they could be and that this had an adverse impact on the effectiveness of surveillance. In some cases, the relationship was adversarial; in others, distant. This situation obviously does not prevail for all departments or at all times. However, a number of comments we received, including from very senior staff, indicated that the issue was of concern.
51. In terms of its direct effect on surveillance, the most striking example was the generally poor relationship (in the period we were studying, notably the run-up to the Asian financial crisis) between the Research Department, responsible for capital markets surveillance, and the area departments responsible for country surveillance, especially the Asia and Pacific Department. All sides must share responsibility for this. Disagreements between the two departments, and the consequent breakdown in communication, were at least in part responsible for the fact that concerns about the health of Korea’s financial system were not properly reflected in surveillance nor communicated to the Executive Board (see also the discussion of Korea in Box 3.2). This situation may also have reduced the effectiveness of the Fund’s surveillance of other Asian countries, such as Japan. Internal procedures in this area appear, if anything, to have deteriorated since; the confidential “Financial Sector Notes” circulated to management and other departments by the Capital Markets group of the Research Department were discontinued in late 1997.
52. More specifically, we also encountered a number of problems in the functioning of the interdepartmental review process. While, we should emphasize, there is no suggestion on our part or on that of others that the review process should be discarded, there was a general concern that the process was becoming very time consuming and inadequately focused. Concerns were expressed from the sides of both area departments (for example, too many comments that were more form or detail than substance) and functional departments, where there was an impression that area departments did not take their comments seriously enough.33 Some further stated that the situation had worsened in recent years, as the Fund, and the coverage of staff reports, had expanded and more departments had therefore been drawn into the process. However, departments did not feel constrained to limit their comments to their areas of professional expertise—again adding to the workload all around for no particularly beneficial result.
53. While the review process does of course seek to ensure that the Fund’s views or “line” are properly reflected in the brief,34 concerns were also expressed to us that the process hinders innovation and flexibility; departments are inhibited from trying to do things differently. Some interviewees suggested that this tendency may also lead to insularity—one of the most common external criticisms of the Fund, both among our interviewees and in general—because staff are preoccupied with getting their analysis agreed and accepted internally rather than listening or learning from outside.
Other Organizational Issues
54. Here, brief mention is made of a number of other organizational challenges for the Fund. Their effect on surveillance is indirect, but they were raised frequently in our interviews within the institution.
Hierarchy and accountability. A number of concerns were raised here—notably a tendency to centralize decision making and a reluctance to delegate. This tendency, we were also told, leads to a general lack of individual accountability and responsibility. Several of our interviewees, inside and outside the Fund, felt that it was notable that no one had been held accountable for what they saw as the failures of Fund surveillance in Asia.
The number of senior staff in area department front offices. While the numbers of front office staff look large by outside standards, and quite a few staff raised doubts about the necessity of offices of this size, we were told by senior staff that the workload, given the sheer number of countries in each department and the needs of Fund-wide coordination, justified these numbers. And in any event, we were told, some nominally front office members were in effect operating as division chiefs. In any case, it was apparent that not all front offices were able to provide what one senior staff member, rightly, believed were their central functions: first, to provide an overview of the department’s work across countries; and second, to bring a perspective on what was going on in other departments and outside the Fund that would be useful to the department.
Finally, the team was struck by the burden of overwork that prevails among staff involved in the surveillance process: this has been a longstanding issue, but it seems to have worsened in recent years. Above and beyond the consequences for personnel, it surely detracts from the quality of surveillance overall.
Role of the Executive Board
55. The role of the Executive Board in the conduct of surveillance is, in principle, paramount. It is the Board’s discussion, and the summing up thereof, that completes the consultation process with a country or that authorizes the release of publishable work by the staff. We sought comments from a number of Executive Directors (EDs), from senior staff and management, and from national officials with personal experience of participation in the Board.
56. Views in general, both among current EDs and others, were negative both about the process and the results. The following points in particular were raised.
The size of the Board, although understandable from the viewpoint of membership representation, makes a free-flowing or well-focused discussion very difficult. On important countries or issues, most or all EDs will speak, often from prepared statements. (Indeed, silence is officially consent: if a Board member does not specifically dissent from the staff view, he or she is normally recorded as endorsing that view.) This can lead to sterile discussions, where one Director after another opines on each element in the staff report: monetary policy, fiscal policy, exchange rate policy, etc. As can be imagined, this is neither enjoyable for the participants nor useful for the country.35
The workload is huge. The Fund has 182 members, most of them on an annual consultations cycle. So bilateral surveillance alone generates more than 150 substantive agenda items annually, and there are also numerous multilateral surveillance items. Program countries, of course, generate even more work than surveillance- only countries, not to mention discussion of general issues, administration, and the like.
Staff members observed that EDs tended to be defensive about the countries they represent, and that other EDs deferred to this, partly because they expected the same deference in return in due course. As the internal review of the Mexican experience put it, peer pressure can become peer protection.
Some staff and EDs felt that EDs rotated too rapidly, so that they could not develop the institutional knowledge to contribute to the Board. In part, this is a consequence of the multicountry constituency system, when EDs from different countries rotate every two years or so.
The Board is chaired by management. Some EDs regarded this as anomalous, potentially putting management in a difficult position if a staff paper is strongly criticized.
The Fund staff and management attach considerable importance to presenting a unified view in Board discussions. Internal disagreements are generally not divulged to the Board. Some Directors thought it could be healthy for this to happen more frequently.
Directors noted that efforts to address the first two problems by introducing a committee structure had not made much progress. Even when committees were set up—as for some administrative matters—they were open, that is, any ED could attend (or send a representative) and speak. In the event, little real streamlining was accomplished. Some EDs thought that their colleagues would insist on making use of such an open access provision to a committee that discussed Article IV reports.
Some EDs complained that they had relatively little influence on the policy positions taken by staff. Others, however, pointed to one or two occasions when advice had been modified by the Board. (Interestingly, these were cases in which the staff had recommended devaluation to countries with pegged exchange rates.) We did examine the mechanism by which the views of the Board were transmitted back to staff at the working level. In the surveillance context, the primary formal mechanism by which this happens is the summing up; the staff report always begins by reviewing what the Board said in the previous year. So, to the extent that the Board views are still relevant, the staff will try to incorporate them into the report. Staff we spoke to said that they did try to do this; they did not want to be embarrassed by having the Board ask the same question, or repeat the same criticism, two years in a row. However, the process was less systematic for cross-country issues. Some Board members suggested that if they could see the mission briefs in advance of Article IV missions, this would enable the Board to have more input into the conduct of surveillance than it does now, when it only sees the final staff report. (Indeed, as noted earlier, the mission brief—which sets the agenda—is arguably more important than the final report.) However, some staff and national officials said that such access would, among other things, raise confidentiality concerns.
This brings us, finally, to the delicate issue of equality among the EDs. The resources they can devote to the monitoring and anticipation of papers and initiatives by staff and management clearly vary. Some EDs also have substantial resources to back them up with analytical and policy efforts in their respective capitals. It is no surprise, therefore, that the perception of many EDs is that information on important aspects of surveillance, on policy initiatives developing in the Fund, and particularly, on the preparation of programs, is not equally accessible to all shareholders. In particular, there is a firm impression among developing countries that the G-7 countries have disproportionate access, information, and influence; and a perception among many countries—including some industrialized countries—that this is doubly the case for the United States.
There is no doubt that the U.S. Executive Director’s office and to a lesser extent those of some other G-7 countries are better informed about and have provided more input into Fund policy than their colleagues. U.S. officials, indeed, seem more capable of “working the system”36 to advance their preoccupations in selected cases through contacts to staff early in a consultation process or in the preparation of a policy paper. It is less clear, according to our information, to what extent this asymmetry is due to greater resources and capacity to take initiatives or rather to differential treatment by management and staff. To some extent this is inevitable; all Fund members are not of equal weight, as the Board voting system recognizes. However, the tensions caused by this asymmetry do apparently detract from collegiality within the Board.