IV Impact

International Monetary Fund
Published Date:
December 1999
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1. This chapter deals with the “bottom line,” namely, did Fund advice make a difference? The questions posed by the Board that are most directly relevant here are:55

  • (iv) Did surveillance have different impacts in different groups of countries?
  • (viii) Was the Fund’s advice implemented? If not, why?
  • (vi) How successful have been the specific efforts made since early 1995 to strengthen surveillance? What effect have these efforts had in the context of the difficulties emerging in some Asian countries in 1997?

2. Other questions also have an “impact” aspect—in particular, those that focus on communication and publicity, namely:

  • (vi) … How has the provision of information by the authorities affected surveillance?
  • (ix) … How useful were the methods to make surveillance available to the public? Should the Fund go further in publishing country reports?
  • (x) How did governments disseminate surveillance conclusions within and among government institutions? Was the circle of participants limited to economic agencies?

3. First we review the extent to which the impact does in fact vary by country groupings (question iv). We then move on to a discussion of the general considerations that stand out for the broad range of “middle” countries. This is followed by more detailed discussion of four instances in which financial and economic vulnerabilities became particularly apparent. There we focus on the advice given and the impact that the Fund had as developments unfolded. We then describe the results of the Fund’s own internal efforts to improve surveillance since 1995. Finally, since they are so closely bound up with impact questions, we discuss matters of communication and transparency. This latter discussion covers the experience with Public Information Notices (PINs) since their start in 1997, as well as the broader questions related to dissemination of Fund surveillance material in general, and in particular the Article IV consultation reports. In the final part of this chapter, we discuss practices and views related to another aspect of communication of Fund views—that within government itself.

Impact by Country Groupings

4. Our review of country impact did not turn up surprising or anomalous results in terms of differences. Most members fell “in the middle.” That is to say, for most members the impact of surveillance appeared to be sensitive not so much to the type of country but rather to more general factors.

5. However, size and sophistication always matter. And as was to be expected in the sample of countries on which we focused our interviews, Japan and the United States stood out in terms of the extent to which surveillance was seen as a low-impact exercise. Our nonsample discussions on country experiences also confirmed this. That being said, we were assured that in the largest industrial countries surveillance through Fund missions, etc., was taken seriously. Although a great deal was not expected from the consultations, U.S. officials in particular considered it especially important to “set a good example” in the way they entered into them—something also attested by the staff. However, for the large industrial countries, in no case would it be right to claim that the Fund had more than a marginal or occasional impact on national policy decision making, even in a case such as that of Japan, where economic and financial difficulties have been particularly pronounced. At the same time, some Japanese observers also made the interesting point that their bilateral consultations did “fill a gap.” The Fund approach provided a blend of theoretical and practical analysis of issues that was difficult to replicate from Japanese sources such as academics (very theoretical) and private think tanks (focusing on business-cycle analysis). That being said, the general view in the public and private sectors in both Japan and the United States was that the issues on which the Fund was capable of pronouncing would receive such wide and intense discussion within the country that it would be surprising if the staff were able to add very much to what was already on the table, beyond an international voice—however hard they tried. At the same time, our official informants were virtually unanimous that it was always interesting to hear what the staff had to say and that it was worthwhile in terms of their own thinking to have to respond to the staff’s informed probing.

6. Another aspect was that even in relation to international surveillance, let alone compared with the crucial and ever-present forces of domestic debate, the Fund was far from paramount. Some bilateral relationships were extremely important, and probably more so than the peer group influences, or even pressures, coming out of the G-7 process for example. Furthermore, the impact of the G-7 process was also greater than that of Fund surveillance. In this latter regard, however, mention was made of the usefulness of the Fund’s input into the meetings of G-7 finance ministers and governors as providing background for discussion of macroeconomic issues, and even for “clearing some issues off the table.” In Europe, the influence of the convergence process toward EMU had apparently dominated other external surveillance influences for all relevant Fund members.

7. The other countries in our sample were economically varied. However, the Fund’s impact, although on balance apparently greater than in the very large countries, did not seem to vary in any very systematic way. The general tendency was to see Fund advice as an input that could on occasion be significant, depending upon the stage of the domestic policy debate.

8. There could well be from time to time an impact from new ideas or ways of looking at an issue brought by the Fund. One example is the advice that the Czech (then Czechoslovak) authorities received from the Fund in the early 1990s in setting up monetary and exchange rate policy. Another, already referred to in Chapter III and which has applied to a number of countries, is the Fund’s work in sorting out the proper analysis of central bank operating losses—“quasi-fiscal deficits.”

9. More mundanely, it was quite common for the Fund’s views to be absorbed not as a revelation, as a new way of looking at an issue, but rather as support for a particular approach to policy that was already being advocated internally. In cases like this, the impact tended to be gradual, resulting from the continued reiteration of the same basic message over a longer period, and the building, perhaps, of a policy consensus. Furthermore, it was often the case that some policymakers were inclined to find the Fund’s recipes more attractive than other policymakers within the same country—depending on which corner of the government policy making apparatus they were located. As suggested earlier, central banks tended to find the Fund advice particularly congenial, given the emphasis on financial stability and the avoidance of fiscal excess. More broadly than this, a point made in South America was that as views on desirable policy on that continent shifted from earlier dirigiste, autarkic, approaches to more market-based, open-economy principles—an intellectual shift to which the Fund may have contributed—this helped to promote the acceptability of Fund advice. Domestic policymakers and the staff had more common ground on which to base their dialogue. At the same time, it was also noted that the level of economic policy sophistication had probably risen more rapidly over time in South American countries than it had in the Fund. This “catching up” would, naturally enough, tend to lessen the impact of Fund advice. Such a tendency, which in itself is by no means a bad thing, was also apparent elsewhere, although not as clearly identifiable as in South America.

10. Beyond the sample countries, and as already referred to in the previous chapter, we held special discussions with a group of small states. There, the surveillance impact, including a heavy dose of technical assistance (something also apparent, if to a lesser degree, in middle-ranking countries), was obviously large. Fund visits were a major event that involved virtually the entire economic policymaking apparatus. However, questions remained as to whether surveillance was being delivered as well as it could be, particularly with the turnover of staff. This was particularly apparent given the lengthier stretches between consultations and the fact that such surveillance is probably viewed as less high profile and less challenging by Fund staff.

Other Elements Shaping Impact

11. The methods and substance of advice have been dealt with specifically in Chapters II and III. Here, the focus is on what can be added to that discussion from the viewpoint of impact.

12. But before that, one general point. In quite a few instances it was volunteered, with emphasis, that Fund advice carried more weight when it was attached to a financial program. This itself is virtually a truism. However, we note that the implicit corollary is that Fund advice (as opposed to that of other institutions that do not lend) may carry some additional impact because it is an institution that might be called upon to extend financing. Furthermore, the focus in our remit on advice free of financing and conditionally56 may well become less clear-cut still when the Contingent Credit Line becomes operational. Given our terms of reference, in our exchanges we did not dwell directly on these somewhat hypothetical considerations, and neither for the most part did our interviewees. However, we do review the implications of the Contingent Credit Line in Chapter V.

13. Reverting to current Fund practice, we present below our listing of the general features that appear to enhance or detract from the impact of Fund advice, other than any matters relating to communication and publicity. These are dealt with separately below.

14. Since these main features will already have been largely dealt with in the previous chapters on conduct and method and on substance, we aim to be relatively brief.

  • In terms of general Fund approach, the most salient point was the value of conveying the ability to see the issues from the country’s viewpoint. Put another way, quite often missions were seen as coming with a preconceived framework. However, the impact of advice was clearly enhanced when missions were able, without compromising the general principles of financial prudence on which Fund advice is based, to adapt the advice to the particular situation. In this regard, members placed great stock on a mission’s ability not only to give good and/or creative policy advice but also to come up with concrete suggestions as to how it might best be implemented, recognizing the particular challenges the country faced. This was particularly true of small states. Here, the Fund’s surveillance role overlaps with its technical assistance function. The functional departments (in particular Monetary and Exchange Affairs and Fiscal Affairs) clearly have particularly relevant roles to play in this regard.
  • Obviously, the capacity to accomplish this comes in part with experience, as well as from having specialized resources. In that regard some concern was expressed that many Fund economists had limited experience outside the Fund. The feedback we received was that they were good macroeconomists, especially good at theory, but often lacked the additional credibility from experience in practical policy policymaking—at least from the country side—or in implementation.
  • Staff turnover from one mission to another, already mentioned as a clear problem for small states, was seen more generally as something of a difficulty. Correspondingly, it seemed to a number of our interviewees that the institutional memory was quite limited. This meant that more country time was spent getting members of a mission up to speed than would be desirable, and consequently that there would be less of an impact on policy.
  • In terms of attitude, certainly there were cases where difficulties had arisen because of what was seen as peremptoriness on the part of individual staff. However, these were, as noted earlier, very much the exception. On the other hand, as discussed in Chapter III, concern was also raised, both within the Fund, particularly from functional departments, and within countries on occasion, that missions were quite often more accommodating than was desirable if the real policy issues and vulnerabilities were to be adequately addressed.57
  • While the Fund had begun, especially following the Mexican experience, to look at the quality of the domestic financial sector in most of the countries we examined, it did not appear that the analysis was particularly deep or sophisticated, or that it had yet had any significant impact. This may well reflect the Fund’s traditional macroeconomic focus and the training of its economists as well as the fact that improving the financial sector is often a long and difficult task. At the same time, it is also evident that countries have tended to accept closer examination of their financial systems at best cautiously, sometimes probably out of concern over what an outside look might turn up.
  • Questions relating to the microeconomic and structural scope of the Fund’s advice have been dealt with extensively earlier. Here, however, it may be noted that the very breadth of that advice tends to dilute the impact. In part this can be because the Fund is almost invariably seen as having less competence in microeconomic and structural areas generally (where it tends to rank below the OECD and the World Bank, for example) than in macroeconomic areas. Further to this, the impact of the main macroeconomic policy messages can be directly lessened by signals emanating from other areas where advice was given. In one instance, for example, while the fact that the Fund was keen on curbing the deficit was well taken, the fact that the mission stressed “poverty reduction” as well, reportedly provided a confusing message at the political level as to whether it was really advocating fiscal restraint. Of course, the two objectives are not contradictory, but it is easy to see how the clarity of the message can be reduced.
  • Besides the potentially dilutive or contradictory effect of advice given over a broad range of matters, an important question mark arose over the extent to which country advice adequately reflects the Fund’s comparative expertise. That is to say, it was clear from our interviews that missions were not at all active in bringing to the consultations an explicit view of the international (or regional) economic and financial background into which specific country policy advice might usefully be situated, thereby improving its impact. Nor did they often bring international comparative experience directly to bear, although they would seek it out if asked. However, when such advice was provided, often by functional departments, it was generally regarded as being of high quality (for example, information provided to Sweden on other countries’ experience with inflation targets).

Impact in Four Countries

15. In one of the countries looked at in this section, a financial statesman made the comment that “If the objective of the Fund surveillance is to prevent crises, then it clearly failed in our case. The question is why?” Warding off crises is not the only element in surveillance, but given its emergence as a particularly important component, it merits special attention. In this light, we look here at the impact of surveillance in Brazil, the Czech Republic, Korea, and Thailand—which have all experienced a financial and economic crisis in their recent history.

16. Looking at the advice actually given in the period leading up to the crisis, three policy areas are of particular relevance: fiscal policy, exchange rate policy, and capital account liberalization.

  • For all these countries, the Fund was for some time counseling fiscal consolidation to a greater or lesser degree. Even if, as some contend, it is generally too quick to advocate fiscal tightening, and even if such tightening was at best only part of the right recipe (in particular in Korea and Thailand), it is hardly conceivable in these four cases that more fiscal action along the lines of Fund recommendations would have brought on a crisis. Rather, it would have lessened the probabilities.
  • On exchange rate policy, the advice was less clear-cut and more problematic. In the case of Brazil and the Czech Republic, the authorities’ strong desire to maintain a pegged exchange rate did get mild Fund support over an extended period, even as the financial pressures were accumulating. In regard to Brazil, the exchange rate (the “real plan”) was the confidence anchor, and the Fund was unwilling to argue strongly for a regime change, even though staff believed the real to be significantly overvalued.58 For the Czech Republic, an important domestic consideration in holding the exchange rate, which the Fund went along with, was convergence with the EU. Some will argue that in these instances the Fund acquiesced too readily to exchange rate pegging. Perhaps, but where it did express consistent concern was whether domestic financial policies, again in particular fiscal policy and in the Czech case wage policy as well, were adequate to support the peg. For Korea and Thailand, the advice was clearly tilted toward increasing exchange rate flexibility. In no case (except, arguably, Brazil, where in the latter part of the period the advice came together with massive conditional financing) did the Fund positively encourage a member to hold on to the peg when it became broadly apparent that some kind of exchange rate change or exchange system change could become necessary in response to the emerging crisis.
  • On the issue of capital account liberalization, however, the Fund’s advice certainly did not help prevent the crisis. In particular, in Korea, it encouraged capital account liberalization with little attention to problems of appropriate sequencing implied by liberalizing short-term foreign borrowing before foreign direct investment. While the Fund would have preferred liberalization of foreign direct investment first, the tone of its advice was that the approach taken by the Koreans was better than nothing.59 In fact, in retrospect, it was probably worse than nothing, as the Fund has now recognized.60 In Thailand, Fund advice suffered from a similar defect, albeit to a lesser extent.61 By contrast, advice to India, which did not suffer a financial crisis, was more nuanced and gave considerably more weight to the sequencing issue—as did the Indian authorities themselves.62

17. However, what is more directly relevant for the purposes of this discussion is that in all these cases the authorities’ determination of the policies actually pursued was apparently not affected very much by Fund advice.

18. Why did the Fund have little impact? No single factor stands out, but a number of considerations, relating to both the Fund and the recipient of advice, can be noted.

  • It is contended by some in Thailand that while there was forceful advice that trouble was coming, including through visits from senior management, it did not come early63 enough as regards the mounting difficulties in and via the banking system, that is, by 1995 or early 1996. By the time forceful advice did come, “it was too late” (although policy mistakes continued to be made until, and during, the onset of the crisis). In other cases, the advice, early or not, was not nearly as strong.
  • In two instances, Korea and Thailand, the Fund collectively64 was not focusing on the problems of financial structure—banks and bank debtors—that proved to be at the heart of the eventual confidence crisis. Nor was the Fund able to obtain from the authorities all the statistical information—on international reserves and foreign debt—that would have enabled it to make a more forceful case. This was especially important in the case of Korea, where the fiscal and current account deficits, the usual vulnerability signals, were both relatively modest.
  • In some of these instances (something that also can probably be generalized across Fund membership), the authorities were apparently not very sure themselves what the actual banking cum external indebtedness situation actually was. They also likely lacked the mechanisms to find out, to the extent that they in fact wanted to. And they did not accede readily to the Fund taking a look—even late in the day.
  • In no case does the Fund appear to have come close to going public with its advice, although to do so would surely have increased its impact substantially. Indeed, in three of the four cases, Brazil being the exception, communication of Fund advice, even within government, was not good. However, few of those we spoke to—either in the countries concerned or in the Fund—suggested that the Fund should have gone public (although in the case of Thailand interviewees did allow that going public could hardly have made things worse).
  • In all these cases there was an exchange rate peg, and that peg had political importance. So even if the Fund had advocated a change more forcefully, it might not have had an effect.
  • Finally and emphatically, the political situation was either difficult or delicate throughout the relevant period in all four cases. And exchange rate policy, in particular, was a highly political issue. Political difficulties are of course likely to lead to policy inertia, whatever the advice received, and however skillfully or forcefully it is presented.

19. To summarize, what was common to these situations, and what might therefore be reasonably viewed as the “explanation” of the lack of impact, was a politically important exchange rate peg; domestic political difficulties or uncertainty; and Fund advice that was not, in the event, forceful or early.

Internal Reviews

20. The preceding section puts into relief one of the specific questions posed to us, namely, “how successful have been the specific efforts since early 1995 to strengthen surveillance?” With that in mind, we examined the Fund’s main internal reviews since then, and looked at the extent to which their recommendations had been implemented.

21. The review in 1995 was dominated by the experience of the 1994-95 Mexican crisis and its spillovers. It highlighted the need for members to provide timely and accurate official data, and specific initiatives were agreed upon to improve statistical reporting. It was also agreed that the Fund should be more aggressive in pursuing surveillance—in particular with more continuity and follow-up, crosschecking official data against market information, and generally being more pointed in its analysis. The need to take a much more explicit account of capital flows was recognized, as was also, although less emphatically at that point, the need for greater attention to domestic banking soundness.

22. From early 1995 to mid-1997 the world economy experienced a relatively crisis-free period on the financial front, and the biennial review conducted in early 1997 reflected this. The main concrete result of that review was the introduction of PINs. The staff document discussing surveillance that provided background for the 1997 Board review did note, rather circumspectly but not inappropriately given what transpired later in the year, “that progress has been made; that some pitfalls remain;65 and that further efforts are needed.” However, the summing up of the Board discussion was much more positive, in that it was recorded that “Directors observed that steady progress had been made, not least in our ability to detect emerging financial tensions at an early stage.” The final report on the review process, in the spring of 1997 to the Interim Committee, noted that “current surveillance procedures have generally worked well.”

23. Clearly, the events of the past two years showed that this equanimity was not warranted.

24. On the evidence to date, the answer to the Board’s specific question has to be negative. As illustrated in earlier chapters, and particularly in the section immediately preceding this one, there has remained a significant gap between the Fund’s general efforts to strengthen its surveillance procedures, especially in regard to vulnerabilities, and satisfactory operating results.

25. This gap was underlined by the Fund’s special, post-Asian crisis, review of surveillance that was undertaken in the spring of 1998.66 From this review, less extensive but more country-intensive than earlier ones, the Board drew five lessons: (1) the importance of timely availability of accurate information; (2) more attention to banking system and capital account issues; (3) greater attention in bilateral surveillance to policy interdependence and the risks of contagion; (4) the importance of transparency in improving policy credibility and restoring market confidence; and (5) the fact that Fund surveillance will only be effective if members take the advice.

26. The first two items on this list are reiterations of, and to that extent serve to reemphasize, themes in previous reviews. The third, highlighting policy interdependence and contagion, is a new emphasis, and something we address in our conclusions. The fourth, focusing on transparency, also remains an issue, and one that we will also be taking up below and in our conclusions. The fifth, noting that members needed to be willing to take the advice, is an issue that we have confirmed, particularly in our examination of four countries that went into crisis. As we pointed out there, the reasons why the Fund had less impact than might have been hoped depend as much on the country as they do on the Fund, with political factors being prominent.

Transparency, Publicity, Communication

27. This set of issues has attracted great attention within and outside the Fund. In particular, the team was aware that the Group of 22 (G-22) Report on Transparency and Accountability, including a chapter on transparency and accountability of international financial institutions, had been released in early October, soon after it started work. That report made the case for having “international financial institutions adopt a presumption in favor of the release of information, except where release might compromise a well-defined need for confidentiality.” Against this background, the team raised transparency issues on many occasions, with particular focus on the pros and cons of publication of Article IV consultation reports and, linked to this, on experience with PINs.

28. By way of further background, the team did meet with individuals who had participated in the G- 22 exercise. We were particularly interested in learning of any progress in the transparency working group in specifying what constituted “a well-defined need for confidentiality.” We were informed that, unfortunately, no real progress had been made. This was essentially because no agreement in principle could be reached on whether to publish the Article IV consultation reports themselves. In those circumstances, discussion of what might constitute appropriate confidentiality would have been academic.

29. The team’s interviews covered both the matter of report publication and how one might go about spelling out “appropriate confidentiality.” These will be reported on below. However, before that, it is useful to discuss the experience with PINs.

Experience with PINs

30. Most countries in our sample have authorized PINs. Among officials, the consensus was that the introduction had gone quite smoothly, at least in the sense that the PIN release had not made a splash but had made news in a more sober fashion. Indeed, in a number of instances the news had apparently been so low key that a number of the people interviewed in the private sector, while quite knowledgeable about the Fund, could not recall PIN-based reports in the media. In any event, the consensus was that release had been constructive in helping to inform and demystify, and ripples were probably better than waves. As one official observer in Asia put it, it was just as well for the PIN not to be “sensational,” even if this meant that the impact was not as great as it might have been.

31. This being said, there were reservations on language and substance, although it must be emphasized that these were far from being from the same direction.

32. A worry that went to the very heart of the concept of the PIN as a vehicle for communication was over the extent to which the PIN might be abused by the media rather than merely used. This was expressed by a minority, vehemently, and seemed to relate essentially to the media’s continual search for material that could embarrass a government or at least make people sit up. PINs have indeed occasionally given rise to embarrassment. In one case the authorities suggested that they might discontinue PINs—the first had gone well, but the second had given rise to headlines emphasizing, or perhaps overemphasizing, Fund criticism. At the same time, it should be pointed out that the country’s economic and financial situation was more challenging by the time the second PIN came around, in 1998, than it was the first time.

33. In any event, PINs are evidently drafted very carefully. Indeed it is apparent that the authors take great pains to avoid loose, exploitable, words or phrases—above and beyond the question of the deletion of “highly market-sensitive” material that is a Fund Board precondition for their being authorized in the first place. However, this has led to a concern that points in the opposite direction from the criticism just mentioned, That is to say, a common complaint was that the language then became so bland, so “unplain,” that it failed to communicate well—which, after all, is the ostensible purpose of the exercise.67 No one would mistake the PIN for a press release, even if its original name was press information notice. As one experienced businessperson in Latin America put it when shown a PIN for his country, “the language is very much like that of auditors—precise, but not easy to pierce if you are not familiar with it.”

34. In terms of substance, we should underline that the revisions to the summing up of the Board discussion that are made before a PIN is issued have on occasion—and contrary to the spirit of the PIN exercise—gone beyond the exclusion of market-sensitive information. Deletions have also included material that was thought to be politically embarrassing by national authorities. We know that the staff and the Board are conscious of this weakness, including the possibility that the summing up may itself be watered down ex ante to avoid having such changes pressed when the summary is sent to the Executive Director concerned.

35. Two Board reviews of PINs have taken place since their inception, and it is apparent that after the first review there was a noticeable drop in the number of deletions. However, to what extent this drop represents greater restraint on the part of Directors or more concern on the part of the staff to avoid provoking changes is not clear to the team. Evidently, while the PIN represents progress in explaining Fund surveillance, it is still work in progress both in terms of its own definition of what it aims to be and in terms of enhancing Fund transparency.

36. Anticipating the discussion of Article IV consultation reports that follows, it is also worth recalling here that a number of countries release the staff statement that is given to the national authorities at the conclusion of an Article IV mission.

37. This is at the least curious. The concluding statement represents, first, only the staff’s view, and second, its view before it leaves the country and actually writes the consultation report that will be considered by the Board. That report is the more complete and considered view of staff. It has the imprimatur of management. And the consultation is not in principle concluded until the Board has considered that report and said whatever it has to say. Then, of course, a PIN may be issued on the basis of the summing up of the Board discussion. In fact, virtually without exception, the countries that have released the concluding statement have also authorized PINs. Any possible contrast between those statements and what is said in the corresponding PINs has not been an issue to date.

38. When queried on this situation, country representatives (including here Board members) allowed that it was at the least untidy, but in the words of one, “at this stage, more transparency, more publication, is better than less.” Others, whose authorities had not released the concluding statement but had issued a PIN, were concerned at the evident breakdown in orderly procedures and the consequential devaluation of the Board discussion.

39. As a final comment, it may be that for publication “hawks,” issuing a concluding statement has the advantage that its language does tend to be more direct than that typical of a PIN and to that extent communicates better. It also represents a single view rather than a summary of differing views, and this would also present a better package in terms of communication process, if not necessarily in substance—that is, peer as opposed to staff surveillance.

Article IV Consultation Reports

40. Our discussions of transparency issues and what the Fund might publish focused very much on these reports—the basic document of the country consultation process. The report embodies an analysis of economic and financial developments, a discussion of policies, a discussion of staff (or the authorities’) views, and the authorities’ (or the staff’s) reactions to them. In addition to the basic question of whether to publish or not, our search for views on what might constitute appropriate confidentiality included ascertaining whether there might be analogies outside the Fund surveillance framework per se. We begin with a general discussion of confidentiality in principle and practice, and then turn to the question of publication of the Article IV staff reports.

Confidentiality: Principles

41. We were told on quite a few occasions that if the Fund published the results of its consultations, then the quality of discussion would surely suffer. This would be even more the case if there was any attempt by the Fund to deepen the consultations through more analysis and exchange on hypothetical risks facing a country. Such hypothesizing is done rather little now, and the officials with whom we discussed this possibility were noncommittal about undertaking it—with or without the protection of confidentiality.

42. As noted already, there was almost total agreement—and not just among officials, we should emphasize—that some part of the consultations between the Fund and a member might well be kept confidential. One yardstick, in the terms of the PIN, is material that is “highly market-sensitive.” This evidently refers to the exchange rate, but doubts were expressed whether it really extended beyond that, to interest rates for example. More broadly, a number of officials, and some academics, thought that there were also politically sensitive issues that countries were entitled to keep confidential, including in relation to a PIN—for example, impending legislative proposals. One close and experienced observer of the Fund scene thought that in any event for many countries the truly unique and valuable part of the reports was the statistical tables, given that the Fund staff puts a lot of effort into getting country statistics into internationally comparable shape in the main financial areas—fiscal, monetary, and balance of payments. Of course, statistical tables—but not forecasts—are now published in the RED, although it was not clear how many outsiders realize this. He wondered whether there was much need for the publication of Fund opinion. A number of other commentators thought that a start at least would be to publish the statistics, although it was less clear whether this injunction covered forecasts as well. Quite possibly not.

43. Some more conceptual discussion of the confidentiality question took place with central bankers. They have had to think about the basis for confidentiality quite a lot in recent years, given the thrust toward increased transparency in monetary policy decision making. One take on this issue was that confidentiality was justified to the extent that it was necessary to do the job mandated for the institution by the legislature. Arguing for confidentiality in those terms implies being very clear on what are the objectives of the Fund’s surveillance mandate. Another view, in another country, was that transparency was particularly important in describing the considerations that lay behind specific policy decisions. However, it was not considered at all necessary to divulge—in the published minutes of monetary policy discussions, for example—analyses of hypothetical situations, or “what if” questions. An awkwardness of this analogy for our purposes is that little of the material in a regular Fund consultation report actually culminates in a specific decision by the Board.

44. Finally, one interviewee, a U.S. academic, raised the possibility that progress in spelling out confidentiality guidelines might be made by considering the distinction between microeconomic risk events and more macroeconomic ones. Thus, the Fund might be well advised to be very public as regards systemic risks—for example, where a banking system has been borrowing heavily in foreign currency and lending on in local funds—but not so in regard to how far particular institutions themselves were from the precipice. In this latter situation, which can also well represent the tricky situation sometimes faced by a banking supervisor, it could be bad luck (or, as the academic put it, “a stochastic event”) that would make the difference. To the team’s mind, however, it would also make an important difference how good the Fund was, or was allowed to be, in practicing early intervention. Clearly, if it rang the alarm bell late, this could itself bring down the banking system, as well, of course, as individual banks. Indeed, one central banker drew explicitly the analogy between Fund surveillance and that of a banking supervisor in terms of the dilemmas faced. In that regard, he noted, transparency looked better on paper than it did in practice. Of course, we can add, the analogy may not be perfect because presumably a supervisor can take direct steps to remedy a bad situation, whereas the Fund can only cajole, whether publicly, semipublicly, or confidentially.

Confidentiality: Practicalities

45. In terms of the practicalities of making surveillance analysis and conclusions more public, a number of points were made.

  • It was obvious, said some, and as already noted, that at least statistical data could be released. But, we also note, it is doubtful whether data alone would help much in providing a basis for accountability on the quality of policy advice.
  • It was suggested that lags in publication could help to reconcile the polar views on keeping things confidential, provided however that the lag was not very long. The Fund has recently decided to cut publication lags, but the lags are still years rather than, say, months.
  • Perhaps, some wondered, there could be a shorter, confidential, report alongside the consultation report itself. However, others saw this as nonviable since it would become known that there were “Report I and Report II,” and the same issues of publication and confidentiality would arise again.
  • Some interest was shown, obviously in regard to situations of particular concern, in a phased process where the Fund was, initially, a “silent whistleblower” engaging with a country in a dialogue “on behalf of the rest of the world.” Then, the advice could become gradually more open through other vehicles such as speeches and WEO. As one commentator put it, it was highly desirable to avoid the “nuclear option” in cases of imminent vulnerability, potential contagion, moral hazard, etc. So, mechanisms for a more progressive approach needed to be found.
  • A point made related to the above was that in starting publication, timing is important. As in the case of a PIN, it is desirable to establish the process in a period of relative market calm, rather than to launch it at a time that is less settled.
  • Peer pressure was considered by some to be a potential avenue of persuasion short of going public. But no one could point to examples of success. As one Asian central banker put it, “countries are just too polite to each other.” Whatever the criticisms of Fund missions to the effect that they are too accommodating to the countries they deal with, they are not seen this way in relation to other available vehicles of surveillance. In fact, Fund reports were generally seen as more rigorous than those of other international organizations—in particular those of the OECD, which are published, but only after country vetting, or those of the European Commission.
  • Finally, one seasoned observer, formerly a staff member but now outside, emphasized that it is all well and good to have rules about how and with what to go public, but there always remains the question of the will to do it. This is not an academic point, given the fact that the Fund has time and time again shown great reluctance to deploy the sanctions against a member that are already at its disposal.

Publication of Staff Reports

46. As can be readily gathered from Board discussions and the G-22 report, views were quite polar on the desirability of publication of Article IV staff reports.68 All the same, the views we collected were probably more varied and nuanced than in the above because we were not seeking the official view but rather insights on the question.

47. In regard to considerations favoring publication, most emphasis was placed on considerations relating to accountability and incentives. Much was made, above all in the private sector, of the importance of material being available on which to judge the quality of Fund advice. It was contended that this exposure would help to ensure that advice stayed good, or got better if not good. On the other hand, considerably less was made of the view that publication would help markets function better generally—on the basis of presumably more complete information—although this view was also evident in the private sector. As one businessman in Latin America put it, he thought that the additional information would provide a better perspective on the risks he and others faced, and then markets would work better. Then again, another observer, from a debt-rating agency, was concerned about “volatility feedback” resulting from publication—at least as a possibility that could not be disregarded.

48. On the other side of the ledger, concern was particularly intense over the effect of publication in causing crises rather than preventing them, and the consequential “moral hazard” issue facing the Fund. More generally, the point was made more than once that the Fund was predominantly a provider of advice to its members rather than a “whistleblower.” Furthermore, publication of that advice, in particular in regard to possible future policy moves, would adversely affect the nature of the relationship, whether the danger of causing a confidence crisis was thereby increased or not.

49. All this being said and recorded, no doubt not for the first time in the extended debate that has taken place in different forums, there was general acceptance among propublication ranks (as also recorded in the G-22 report) that some material emanating from consultation discussions would probably need to be kept confidential. We discuss this issue in Chapter V. But before concluding this section it is important, given the thrust of our recommendations, to convey our understanding as to what kind of distribution Article IV reports actually do receive after copies are produced.

50. What is very clear is that Article IV reports find their way quite readily outside the circle of authorized users. It was obvious from our interviews that outside circulation was quite common69—whether among financial institutions, debt-rating agencies, the media, etc. Furthermore, not all the distribution is completely unauthorized. In particular, national authorities evidently quite often make the reports available to debt-rating agencies, which in turn use them in coming to their assessments of sovereign risk. These agencies told us that they find them useful.

51. Another feature is that because of this reality, or perhaps as a general precautionary measure, the reports themselves are apparently unlikely to reflect the full extent or depth of the consultation discussions that actually take place. This was confirmed both by country authorities, some of whom said that they spoke to Fund staff on the understanding that nothing that was not already effectively public would appear in the written staff report, and by Fund staff, who made it clear that they practiced a substantial degree of self-censorship. According to a senior staff member, “nothing really confidential appears in a staff report.” Looked at from another angle, it is interesting to note that in a couple of cases academics had, as a condition of being interviewed, insisted to their authorities on being given access to the relevant Article IV reports. Their reaction was that there was not much material in the reports that they did not know already from other, regular, sources of economic and financial news and debate. So they wondered what the fuss was about.

52. Interpreting why, given the fact of general leaks, there may be concern about publication even in fairly “open” societies, our impression is that it may importantly reflect worry about adverse media headlines that then have to be dealt with. As was also noted in our discussions, in many places the Fund is seen as very powerful, so its advice simply has that much more popular impact. Wide release could, therefore, cause embarrassment even if all the investment houses in the world had already obtained the relevant report and made of it whatever they could.

Communication Within Government

53. The issue here, simply put (and spelled out more formally in the specific question (x) put to the team), is whether the advice got to the right people in government. At one level, it can refer to whether the advice was distributed widely enough. At another it can be whether the advice went high enough in the decision-making apparatus.

54. What is apparent from our discussions is that practices vary a great deal in both respects. What is less apparent, without a far more extended and searching discussion than the team was able to undertake, is how much difference this has made. However, communication within the government did not appear to be very widespread. In a couple of instances (that is, two out of the four cases discussed in detail earlier), there had been a clear breakdown in communication between the central bank and some other parts of the government in the period leading up to a crisis. In one case this was compounded by frequent changes in government. On a less pathological note, it is worth recording that there was a general tendency for Fund advice to remain, if not entirely at least very greatly, the property of the ministry of finance and the central bank together. This may well reflect bureaucratic prerogatives, besides any more general considerations relating to who really needed to know what. At the same time, it was also pointed out in response to this line of questioning that distribution of Fund material beyond the two institutions referred to could compromise confidentiality. Prominent officials in other ministries, even when visited by the Fund team and in cases where their area of work was the subject of recommendations in the staff report, did not necessarily get to see those recommendations—or the full Article IV report. However, it also seemed that the recent tendency in countries has been to circulate Fund surveillance conclusions (but more likely the mission’s concluding statement than the Board summing up) more widely within government rather than less. This would follow particularly from the fact that the surveillance conclusions have in recent years ranged beyond issues of fiscal, monetary, and exchange rate policy. Still, there was no indication anywhere that the circle of participants went beyond economic agencies, or that any thought that this was desirable or necessary.

55. As regards more vertical dissemination, our impression is that this would generally be quite limited and almost invariably in a summary form—sometimes reported upon orally around the cabinet table and sometimes circulated in the form of a cabinet memorandum. A minority of countries have developed the habit of putting the staff concluding statement (but not, it appears, the PIN as well) on the agenda of a cabinet meeting. At the same time, it is not unusual for the Fund’s views to be used in internal cabinet debate to bolster a policy position. A regular pattern seemed to be for the views to be used to bolster the case for fiscal restraint. As one senior finance ministry official in Asia put it to us, while he was not convinced that it was necessary to go as far as the Fund wished in cutting the deficit, ministers tended to want to do less than was needed in this direction. So perhaps, he suggested, the net result of exposing politicians to the Fund’s views was about right.

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