V Conclusions and Recommendations

International Monetary Fund
Published Date:
December 1999
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1. As can be seen in the preceding chapters, the team reviewed a wide range of surveillance issues with a wide variety of parties—as called for under its terms of reference. Correspondingly, our findings and recommendations also cover many different aspects of surveillance—both in regard to the Fund’s dealings with its members and in regard to its internal procedures.

2. However, before going through the individual recommendations together with the reasoning behind them, we want to present a broader picture of what we found.

3. Not surprisingly, and paralleling the experience of member countries, Fund surveillance has been playing catch-up to the globalization of financial markets and the vastly increased importance of private capital flows. This has shown up very clearly in internal post mortems on the Mexican, and then the Asian, crises. One challenge for the Fund, along with everyone else, has been to reach an adequate understanding of the forces at work on the global capital scene—including their role in the phenomenon of contagion. In that regard, we think that in its ex post internal reviews the Fund has identified quite well the areas where action needed to be taken in regard to broad surveillance approaches, both by countries and by the Fund itself. However, it appears to have had some difficulty translating its broad intentions into corresponding action in the field. Notwithstanding the lessons of Mexico, the implications, particularly in terms of capital account risks and vulnerabilities in the domestic financial sector, did not register uniformly, and with the appropriate intensity, throughout the. institution. We say this even allowing for the fact that translating broad intentions into solid actions inevitably takes time. Indeed, one of the weaknesses of the Fund’s internal workings that drew our attention was the difficulty it has in transferring relevant knowledge and experience across the organization.

4. It is also noteworthy that this process of catch-up to globalization is continuing at a rapid pace—as evidenced by the emphasis in recent months on the development and monitoring of international standards of conduct over a range of economic and financial activities and on the development of the Contingent Credit Line as an additional source of liquidity. Accordingly, the team found itself to a degree focusing on a moving target. We discuss later in this chapter the various implications for surveillance of these new international initiatives. However, we were pleased to see that many of those implications only served to reinforce points we had emphasized in looking at the surveillance framework that was already in place.

5. Another challenge in evaluating the effectiveness of surveillance was the evident gap—one that is, it should be emphasized, more apparent outside the Fund than inside—between the general impression, or expectations even, of the impact of surveillance and the Fund’s actual degree of “clout.” It is therefore worth reiterating the staff’s observation in the 1997 biennial review that “Fund surveillance is only one influence, and generally not the predominant one, on members’ policy and performance.” We can confirm this in regard to the range of countries that we surveyed—in particular through the study of the four countries that went into crisis in the recent period; see Chapter IV. So while Fund influence will no doubt vary by country and within a country over time, depending on particular circumstances, it surely has to be accepted that surveillance is hardly ever going to be a primary influence on a country’s policy actions.

6. The best the Fund can realistically hope to do is contribute over time to building or maintaining a consensus across the membership on the broad policy framework; and to tip the balance in situations where policies are in fact genuinely in the balance. However, the latter requires the existence of a reasonably clear domestic political will or consensus to change policies if necessary—something that was, for example, certainly not apparent in the four “vulnerabilities” cases that we focused on. Indeed, we were left with the impression that a financial crisis may be, unhappily, a crucial ingredient in concentrating the necessary political will—or, alternatively, that domestic political considerations will almost always dominate over Fund warnings, even in the face of a looming crisis. Part of the task regarding surveillance may therefore be seen as seeking mechanisms to concentrate that will before a crisis strikes. Here, more transparency, in the sense of publicity, in surveillance conclusions is obviously an important issue, and some of our recommendations aim to encourage further movement in that direction.

7. Turning to a review of the broad thrust of our conclusions, one of the key elements is the need to focus surveillance more directly on the international aspects of a country’s situation, the linkages across countries, and the lessons countries can learn from other experiences. Member countries have expressed a lot of interest in such material, and here the Fund has substantial talent and advantages that are not yet used to best effect. Furthermore, to maximize the effective use of those resources in the international interest, more flexibility in monitoring country situations is called for. In particular, more resources should be devoted to multilateral and cross-country issues and less to individual Article IV assessments of industrial countries—other than the very largest, where the implications of their policies for the international financial system should be the focus.

8. As regards the general substance or quality of advice, we found it was generally good in the Fund’s core areas of macroeconomic and financial analysis. It was less surefooted when it ventured into more structural areas. But, in any event, Article IV consultations themselves should, while becoming more international and less “bilateral” in approach, also be more focused on a relatively tight range of core issues. Ensuring this focus needs not only strong guidance from management, but also Board support in light of the ever-present pressures and inducements to expand the scope of the Fund’s activities in country surveillance. Our judgment is that this expansion, which continually adds to the surveillance load, detracts from its effectiveness.

9. We believe that the time has come to publish all Article IV consultation reports. Those reports already get significant informal, but privileged, distribution outside. However, broad, regular, distribution should yield important gains in both accountability and understanding. Besides improving the accountability of the Fund generally, publication should help also in maintaining or improving the quality of advice by exposing its views more to outside assessments. This will also help to limit “clientism”—the inevitable pressures on staff to avoid raising clearly with a given country difficult but important issues that should be addressed in the interests of international financial stability.

10. We also tackle a range of internal issues where we believe that shifts of policies or procedures could benefit the surveillance effort. In a number of these, in particular the problem of inadequate knowledge transfer, increased publicity for consultation reports will help. However, in questions of staffing and internal organization, more direct steps appear to be called for.

11. Mention should be made here of a quite distinct internal issue, that of the role of the Board. It is beyond our scope to deal with the underlying governance issues that exist. However, as regards surveillance, we are strongly of the view that the Board’s contribution would be greatly improved by the effective use of a committee structure.

12. In the next five sections we present our detailed findings and recommendations. The first deals with objectives and priorities, with particular emphasis on where surveillance might usefully be expanded and where cut back. We then look at the quality of advice—appraising Fund counsel in some particular areas, but also examining broader questions relating to the Fund’s general approach in developing its advice. This is followed by a section that tackles a number of organizational issues: internal organization and resources; the style and intensity of contacts with member countries, and the extent to which such contacts might usefully vary across members, i.e., “selectivity”; and finally here, the role of the Board in surveillance. The fourth section deals with communication, above all with the much-debated issues of transparency and confidentiality in surveillance. Finally, as already indicated, we comment on two newer developments that have substantial implications for all aspects of surveillance—the growing emphasis on monitoring rules of conduct over a range of financial and economic activities and, finally, the Contingent Credit Line.

Objectives and Priorities

International Added Value

Multilateral Surveillance

13. Fund multilateral surveillance is of generally high quality, and its work in this area, particularly as expressed through WEO and the ICMR, received much favorable comment. Some particular issues are dealt with later in this chapter, but the basic point that these publications are well regarded should be recorded here.

14. If there is a broad shortcoming, it is the lack of integration of multilateral and bilateral surveillance. The staff’s comparative advantage is in analyzing international systemic issues and economic interdependence, not least when the latter gives rise to vulnerabilities. A number of our recommendations below focus on how the multilateral and international expertise of the Fund staff can be harnessed to still greater advantage.

Bilateral Surveillance

15. This is the main focus of our attention in the area of international value added. Simply put, we, and many of those we spoke to, found the Article IV consultation process to be insufficiently international in focus—too “bilateral,” in fact. This is also the implication of the Fund’s own “third lesson” in relation to surveillance and the Asian crisis.70

16. Given the shift in the international environment on account of the vastly increased importance of private capital flows, the increasing openness of economies through trade, and the increased sophistication in many countries in the field of domestic macroeconomic policies,71 the Fund’s comparative advantage now lies at least as much in bringing international considerations and experience to bear as it might in giving broad advice about domestic policies per se. However, this is not the way Fund consultation discussions are shaped at present.

There are three different aspects of Fund value-added to consider here:

  • the desirability of a Fund mission explicitly bringing to the consultation table its view of the international economic and financial situation and prospects, with particular emphasis on those features that are most relevant for the country in question;
  • a more systematic attempt by staff to explore beforehand and then volunteer pertinent experiences from other countries, whether in terms of issues or policies; and
  • more direct focus on how a member might incur and absorb shocks coming from the outside, whether they come through direct economic interrelationships and spillovers or through more general contagion from market disturbances. Even if, as may well be the case, the member is not inclined to respond directly, or at all, to these hypothetical issues, it would still be worthwhile to raise them consistently, thus leaving an imprint.

17. For the very largest countries or policy areas (i.e., the euro area), the focus in this third aspect would be as much on the implications of their own policies for the rest of the world as on the likely impact from developments elsewhere.

18. Besides the direct advantages of explicitly including such considerations in the consultation process, this more international focus would have the important collateral gain of forging greater linkage within the Fund between the multilateral and bilateral aspects of its surveillance work. These links, as discussed in more detail in the section on organization, below, are quite weak.

We recommend that consultation guidance be restructured to give explicit attention to international aspects along the lines indicated above.

Regional Surveillance

19. In the Fund canon, “regional” surveillance is not generally seen as a separate category, but here it merits separate discussion. Internal reviews of surveillance have given some attention to regional aspects. However, this attention has been more on the mechanics of the institutional side, focusing on evolving regional economic and financial associations such as the European Union, and monetary unions such as the CFA franc zone and the Eastern Caribbean Currency Union. At the same time, another set of regional-type issues—regional economic and financial spillovers and contagion, and the potential for constructive application of regional peer pressure—has been driven increasingly to the fore by recent events in Asia and Latin America.

20. The first, institutional, set of questions has to deal with how the surveillance process copes with evolving regional arrangements. For the euro area, as noted in Box 2.2, the challenge of finding the appropriate set of surveillance arrangements is particularly complex, involving as it does political as well as technical considerations. However, despite this complexity, the replacement of 11 monetary and exchange rate policies with one, formulated exclusively at the euro area level, should lead to significant resource savings. Clearly surveillance over monetary and exchange rate policies—the raison d’être of Fund surveillance under Article IV—will have to take place via the European institutions. However, even in the case of fiscal policy, given the intensive, and intensifying, degree of monitoring at the euro area level, we believe that the Fund is much more likely to have an impact if it concentrates its efforts at this level.72

We recommend that surveillance of the euro area center around the ECB and other EU bodies. Surveillance of individual participants in the euro area should largely take place at the euro area level, and through EU institutions.

21. As regards the second set of regional issues, the Fund has taken some initiatives to address them through its participation in regional meetings, including at the highest level of management, and, indeed, in taking the initiative to arrange a meeting of ministers of finance and central bank governors of the Americas in September 1998. On the evidence to date, what surveillance results should be expected from such gatherings? In our view, probably not more than broad familiarization and consciousness raising. This is because even where country policies cause concern among their neighbors, peer pressure is unlikely to be applied very actively—and in any case convincing evidence of any significant impact has yet to be produced. Furthermore, the Fund is not, and practically speaking cannot be, more than a facilitator of such meetings,73 with any associated exhortations from senior management that might give increased focus to the event. At the same time, the Fund documentary contributions have not been as much to the point as they could, and should, be. They have been focused more on supplying material that exposits individual country situations than in highlighting the regional interactions and issues agenda that could usefully be explored if participants really had a mind to do so in such a forum. The same is often true of internal Fund material; for example, that presented at the Board’s Informal Country Matters sessions, which were originally intended to have a regional focus.

22. That being said, we suspect that even if the Fund did prepare more compelling documentation along the lines just indicated (which it should of course aim to do in any case, since it is the right thing to do even if it ruffles a few country feathers), the diplomatic niceties of large gatherings would continue to constrain direct discussion, and hence any results from peer pressure.74 Accordingly, we do not see that regional surveillance in this form can in the end realistically be a substitute for country surveillance. However, country surveillance should in any event emphasize regional and spillover issues.

We recommend that (consistent with an increased focus on international aspects) the Fund bring spillover issues, whether regional or multilateral, directly to the table in its various country consultations and in Board discussions.

23. Conceivably, this kind of focus could also lead, over time, to more fruitful regional exchanges—at the margins of such meetings if not at formal sessions.

Cutting Back

More Concentration on the Core of Surveillance

24. The recommendations just made fit squarely into the Fund’s statutory mandate to exercise “firm surveillance over the exchange rate policies of members.” However, the same cannot be said of other elements that have come to be included in bilateral surveillance.

25. In recent years, the surveillance agenda has expanded rapidly. This expansion into nonfinancial, structural areas was described earlier, in Chapter I, and will not be repeated here. What should be noted, however, is that the pressures for expansion come from more than one source and may also reflect different priorities.

  • Governments and/or their legislatures. Here, the outstanding example has been the recent U.S. law authorizing the latest increase in the U.S. quota in the Fund. This legislation requires the U.S. government to press for a whole series of initiatives to be undertaken by the Fund. These include promoting, besides “market-oriented reform, trade liberalization, and economic growth,” also “democratic governance and social stability” in member countries. Doing this will involve, among other things, “establishing or strengthening elements of a social safety net” and “the maintenance and improvement of core labor standards” as well as pursuing “macroeconomic stability while promoting environmental protection.” Another very recent example is the June 1999 G-8 communiqué, which calls upon the Fund to give “more attention” to “the development of sound social policy and infrastructure in developing countries” and “to give particular priority to core budgets such as basic health, education, and training to the extent possible, even during periods of fiscal consolidation.”
  • Nongovernmental organizations. In some areas NGOs are also pressing for similar expansions of the Fund’s role to those just described (see also our report on discussions with NGOs in Chapter III).
  • The Fund’s own view of its evolving role. It has increasingly concentrated on medium- to long-term issues such as stabilization sustainability and growth, which it now considers key to surveillance. In this regard, it perceives a need to examine a wider range of issues, micro or structural in nature. In addition, the Fund has of course been attempting to deal with the demands for any additional activity in surveillance along the lines just noted in the previous bullets.

26. Our basic concern is that raising a broad set of issues in a consultation will not enhance, but rather dilute, the quality and impact of surveillance advice. For one thing it can, as we were told, lead to confusion on the part of national authorities as to what in fact is the basic thrust of that advice. For another, while the staff are well equipped to deal with macroeconomic management and international financial questions and perhaps in time even structural questions relating to the financial sector, they cannot credibly lay claim to nearly the same level of expertise in nonfinancial structural and/or microeconomic questions, social policy questions, environmental questions, and the host of other issues that are being put on the agenda. And this apparently shows in consultation discussions. To be sure, we were told of cases where a team had indeed been effective in providing advice in noncore areas. But the basic issue is rather whether Fund resources as a whole would be better applied, and surveillance thereby become more effective, if the focus were more targeted to the core topics. We believe that there would be an improvement. This is especially so given the evident need to focus, in addition to domestic macroeconomic policies and exchange rate matters directly, more on financial system and capital account issues in light of their propensity to generate exchange rate disturbances. This conclusion is strengthened further should the Fund find merit in the increased international perspective that we believe it should also bring to the bilateral consultation process.

27. Evidently, the pressure for expanding the scope of surveillance comes in important measure from evolving views as to what needs to be addressed in Fund programs rather than from the evolution of surveillance itself. The design of programs is outside our mandate, and we shall not deal with the controversial questions as to what needs to be included in them. However, while we can certainly see the logic of the argument that because the Fund might be obliged to involve itself in a wide range of economic (and perhaps even noneconomic) issues in programs, these should also be put on the agenda for surveillance, we are not persuaded by it. The reason it is not persuasive is because we believe that surveillance, even in the relatively narrow, relatively “traditional,” sense in which we see it, is difficult enough to do successfully without adding to the menu a range of other kinds of interventions whose relevance depends on hypothetical future needs.

28. Accordingly, given the Fund’s competencies, and given the evident need for further improvement in the Fund’s work on exchange rate policies, and the associated macroeconomic and financial framework, particularly in regard to the international dimensions, it is our view that the quality (if not the quantity) of surveillance would be better served if the Fund were to concentrate more centrally on the above areas. The alternative, if one takes literally the demands now placed on surveillance, is a vast expansion, without any foreseeable limit, of varied and specialized resources devoted to Fund monitoring of economies.

29. It is important to emphasize that a more central focus on what might be considered the traditional core of surveillance does not mean that important linkages between macroeconomic management and other policies should not be recognized and addressed as part of surveillance. However, the criterion for addressing other issues should be the extent to which they actively and directly impinge upon the effective conduct of macroeconomic policy. To give a specific example, labor market policy clearly can have implications for macroeconomic management. But the Fund should normally confine its advice and analysis to those implications—and not attempt to resolve the more general question of what “good” labor market policy might be.75 Moreover, the burden of proof should rest upon advocates for including additional items to show how they would improve the effectiveness of surveillance. This too would help focus the overall surveillance agenda.

We recommend that surveillance focus, above all, on the core issues of exchange rate policy and directly associated macroeconomic policies, in particular the international implications of such policies. Other analysis should only be undertaken if directly relevant.

30. We recognize that the views just expressed regarding a tighter focus for surveillance may not fit too well with the kind of role foreseen for the Fund in the application of international standards or codes of conduct. In particular, this role, as currently envisaged, may involve monitoring standards in fields that are less clearly financial and more microeconomic (e.g., accounting standards and governance). It seems to us that here the Fund has been viewed as not so much the chosen instrument as, practically speaking, the only available instrument, given its current surveillance infrastructure and global membership. We discuss this issue in the section below on recent developments.

31. Our view implies that the Board should act as a skeptical, restraining, influence on any widening of the surveillance agenda beyond its core. In other words, the presumption the Board should adopt is that of a limited approach, focused on well-specified core topics in which the Fund has a clear comparative advantage.

32. Turning to individual bilateral consultations, we see a similar need to set priorities. At the moment, staff feel obliged to produce reports that cover the entire surveillance agenda of the Fund. Even with our proposed refocusing and reduction of that agenda, the pressure will remain to produce a comprehensive report that touches relatively lightly on a large number of issues, rather than one that focuses in more depth on a limited number of key issues. We believe that what is required is a systematic structure that ensures that bilateral surveillance takes the latter approach.

We recommend that a systematic process be developed whereby the Board would discuss and sign off on the main issues to be raised at forthcoming individual Article IV consultation discussions.

33. Proposals in this regard would be submitted by the staff, and the Board could then augment or subtract from them, and at least discuss or take note of them. Such proposals would not be the detailed briefing for the mission—best in our view left with management. Rather, they would come before the briefing and would allow the Board to reflect on the two or three main issues that the consultation should principally address.76

34. Such a process would also afford the Board greater ownership of the consultation process that culminates in a Board discussion (something that appears lacking at present), while providing greater assurance that the process would be focused on what is truly important.77 This recommendation has to be seen also in the context of our recommendations regarding the role of Board committees in surveillance that are developed later, in the section below on organization. However, anticipating that discussion, it is worth emphasizing here that this process is aimed not at generating more work or a slower pace of work in getting the Fund’s surveillance business done, but at helping to streamline work by setting an earlier, better focus on what are the real priorities in each country’s surveillance.

Less Attempt to Find Optimal Policies in All Areas

35. Not surprisingly, every staff report suggests some modifications to current policies—for example, a small tightening in fiscal policy, or an acceleration of financial market reform. No country is perfect. However, this may lead to two problems. First, it leads to staff making suggestions for relatively marginal improvements. But while countries may sometimes find this helpful, it is unlikely to be the best use of resources. Second, it tends to reduce the impact of Fund criticism when matters are seriously awry. Since every report contains some criticism, and since all criticisms are to some extent muted by the subtle and specialized phrasing in which they tend to be couched, it is easier for countries to disregard warnings that really do require immediate policy action.

We recommend that staff focus policy advice on issues of serious or immediate concern and distinguish such advice clearly from analysis of whether relatively small or judgmental policy shifts would be helpful


36. One point that struck us in comparing our review and conclusions with earlier internal reviews is the extent to which the problems—and to some extent the solutions—that we identify have already been discussed. There is, it seems, something of a disconnect (or at least a very long lag) between the broad policy directions outlined by the Board in review and policy discussions, and actual practice in day-today surveillance work, particularly bilateral consultations. Accordingly, we are inclined to think that if the periodic reviews of surveillance are in future to lead to more effective surveillance in practice, substantially more attention should be given to the extent to which decisions by the Board affecting surveillance have been implemented.

We recommend that in the next internal review of surveillance, more attention be given to measuring in some detail (by topic and country) the extent to which the specific operational guidance that has been put forward on behalf of the Board is actually followed in Fund consultation reports, and, equally important, if not why not.

37. This will require a less general, more fully documented, approach by the staff. We also wish to emphasize that a fully adequate discussion of these matters involves reviewing not only what the Fund did or did not do, but also what kind of response was forthcoming from the country in question. The Asian crisis review went some distance in this direction, but was of course limited in country scope.



38. The problem of insufficient frankness is one of both substance and language. Fund staff are sometimes unwilling to probe deeply into areas where the authorities are sensitive, although these are also likely to be the areas where deeper examination is most warranted. Alternatively, the staff may diagnose a problem but present their analysis in rather indirect language. This allows the staff to claim that they have covered the issue. However, they will not have alerted the international community, and possibly not the authorities either, to the significance of the problem. The consequences of a lack of directness can be particularly serious in the area of vulnerabilities. For example, the Fund staff have been more prepared by and large to tell a member that its fiscal position, while basically sound, should ideally be tightened further than they have been to focus clearly on problems in a banking system.

39. This problem has long been recognized, yet it has persisted. It was raised in successive reviews of the Mexican and Asian crises. Most staff, including those directly responsible for country work, are well aware of the problem and do try to minimize it. However, in light of the extremely strong incentives for the staff to maintain a close relationship with country authorities, and the fact that countries tend to react badly to criticism, especially when they have difficulties, it seems unlikely that further exhortation alone will improve matters much. Nonetheless, it should be possible to improve the incentives to the staff for more candid advice.

40. Proposals elsewhere in this chapter to focus surveillance more closely on identifying and addressing the major priorities, and in specifically tackling potential vulnerabilities, will help. Furthermore, the publication of staff reports should provide important support over time for greater frankness. With publication of views, the evidence will be more out in the open and can be judged accordingly.

41. Such steps should also help to change perceptions within the Fund. However, a view that exists in the institution is that a report that is incisive but offends the authorities is damaging to a mission chief’s career while one that is bland and later turns out to be lacking in some important respect will be overlooked.

We recommend that the Board, management, and senior staff attempt to alter the incentive structure by making it clear that they will, if necessary, back up staff who give frank advice.

42. We recognize that the line between a lack of diplomacy in presenting advice and frankness may sometimes be difficult to draw, and that the latter should not be seen as an excuse for the former. However, given on the one hand the Fund’s express, and well-founded, wish to offer more candid advice, and on the other hand the built-in incentives to avoid offering it, such an affirmation is very unlikely to redress clientism bias too far.


43. We do not believe that, in general, the criticism that the Fund applies an overly rigid “template” or “model” to every country is justified. There is nothing wrong with the fact that the Fund has a framework within which staff analyze macroeconomic issues; indeed, it would be worrying if this were not the case. In bilateral surveillance,78 the staff use mainstream open-economy macroeconomic models, and their particular approach makes a point of enforcing consistency in the analysis of macroeconomic and financial flows. This can only be to the good. However, there has been a more limited emphasis on stock variables. This results in weaknesses in the analysis of capital flows; some specific points relating to capital account issues are described below.

44. It is appropriate to raise here a related problem. Staff appear in general to be reluctant to give advice that is country-specific—that is, advice that takes into account the political and institutional constraints within which policymakers have to operate. In other words, Fund advice often focuses on identifying the first-best general policy. There is nothing wrong with that, and politicians need to hear it in as direct a form as possible. But when policymakers, quite reasonably, respond that they live in a second-best world, staff are apparently not as good at suggesting how the first-best might actually be implemented in practice, or at developing and analyzing alternative, specific, policies.79

We recommend that surveillance devote more attention to policy implementation and to the identification and analysis of alternative policy options.

45. This is consistent with our general recommendation that surveillance give much greater emphasis to cross-country experiences.80 The ability to give such advice depends to some extent on having staff with sufficient policymaking expertise and experience, which may be difficult to obtain within the Fund; some recommendations in this area are set out below. Another consideration here is the need for the Fund to take account of the differences in economic and institutional structures between different countries.

Capital Account Issues


46. The Fund has been severely criticized for being too enthusiastic about capital account liberalization. Without entering into this debate at length, we note that it does appear that the Fund has in the past been keen to liberalize as fast as possible, and as a consequence has given insufficient attention to the proper sequencing of capital account liberalization—in particular, the need for domestic financial sector reform as a precondition for external liberalization. However, policy appears to have shifted significantly since 1997; while the potential benefits are still recognized,81 much greater attention is now being paid to the risks of liberalization if the financial sector is weak. We believe this more nuanced attitude is broadly appropriate. However, for it to be properly implemented in the context of bilateral surveillance there will need to be more detailed and sophisticated analysis of the financial sector than the Fund has developed so far, a topic we discuss below.


47. Distinct from its policy recommendations, the analysis of capital account issues in surveillance has suffered from a number of weaknesses. There are a number of related problems here.

  • A traditional Fund method of analysis—financial programming—tends to treat a substantial part of capital flows as a residual. This leads to a lack of attention to the capital account and the forces driving its various main components. However, in recent crises, reversals in capital flows have been the force behind current account reversals.
  • Concentrating on the current account and its sustainability,82 as much Fund analysis does, can lead to a lack of attention to autonomous forces driving the capital account—and therefore driving the current account as well.
  • A lack of attention to the capital account is also likely to lead to an inadequate appreciation of the domestic macroeconomic effects across countries of shifts in capital flows.

48. These problems arise even though there are staff who have a detailed knowledge of capital account issues and problems; indeed, some Fund economists are in the forefront of research on these topics. However, they are mainly in the functional departments (especially Research) while area departments take the lead in bilateral surveillance. Without adequate interdepartmental cooperation or coordination, these internal arrangements have led to inadequate knowledge transfer within the Fund. But with the increased importance of international capital flows, and in particular the role played by sudden reversals of capital flows in recent crises, it is clearly essential that bilateral surveillance—not just research and multilateral work—devote as much attention to analysis of capital account issues as it currently does to current account issues.

We recommend that Article IV staff reports give greater attention to the forces driving the capital account, and to capital account issues in general

A number of our other recommendations are also particularly relevant in this area:

  • The increased attention to vulnerabilities that we recommend should focus more attention on the analysis of the possibility and consequences of large capital outflows.
  • Improving interdepartmental relations (partly a job for senior management), and ensuring that knowledge is transferred between different parts of the Fund, should help to ensure that the expertise that does exist on these issues is deployed in bilateral surveillance.

Financial Sector

49. In response to the Mexican and Asian crises, and to the clear desire of the international community, the Fund has greatly increased the emphasis given to surveillance of the financial sector. We believe that this is appropriate; the close linkage—in both directions—between domestic financial sector crises and exchange rate/balance of payments crises justifies the Fund’s involvement. However, we note that improving financial sector surveillance was identified as an important task as long ago as 1995, and the pace of improvement has been slow. So far, area departments have tended to treat this remit as another add-on, which they do not have the time and expertise to fulfil in more than a pro forma way, especially if countries drag their heels in providing information. In short, the infrastructure and the push have been lacking.

50. The proposed Financial Sector Stability Assessments (FSSAs) to be undertaken by MAE should help to remedy this. However, to be successful, the Fund will need to be able to draw on the appropriate specialized staff; we discuss this in more detail below. Moreover, it will be important to ensure that the work done by MAE is properly integrated into the Article IV process.


51. At the moment, Fund documents tend to add some general remarks about “downside risks” to an elaborate central scenario for a country’s economic prospects over the next year or two. However, notwithstanding the analytical and procedural complications that are evidently involved in going further, it is important for the Fund to strive to bring the analysis of vulnerabilities more to center stage.

We recommend that surveillance devote substantially more attention to vulnerabilities.

52. In the following, we sketch how this added focus on vulnerabilities might be brought about. Some further implications for the Fund’s work are discussed in the sections of this chapter.

We envisage that this process would proceed in three stages:

  • identification of vulnerabilities prior to Article IV missions, in part with the aid of early warning systems (EWS);
  • information gathering from the private sector; and
  • presentation of vulnerabilities analysis to national authorities.

Identification of Vulnerabilities

53. The starting point for a Fund team going on an Article IV mission would be to examine, together with functional departments (notably RES and MAE), potential vulnerabilities of the country in question. As part of this process, the team would explore the latest position of the country in relation to the set of indicators used in the Fund’s EWS.83 Such a discussion would become an integral part of the review of the mission brief, but the subject would lend itself better to a meeting of the team with staff from RES and other functional departments than to written exchanges.

54. Although it remains very difficult to predict the timing of a crisis, it is not a random event. Given the high stakes—and the poor record of both the Fund and outside observers to date—even a modest ability to predict crises would be very valuable.84 In any event, one important advantage of the EWS approach for bilateral surveillance is its quasi-objective nature; a poor score will force area departments and, we hope, country authorities to focus their attention on problem areas even if they would prefer to avoid the topic. So, even if the indications from EWS are no better than the staff’s informed judgment (and we would not normally expect that they would be), they may have a role in combating pressures for “clientism.” Of course, this additional tool should not rule out staff using their own judgment and analysis to identify what they consider to be the country’s principal vulnerabilities. Furthermore, the application of country-specific analysis can, in turn, help to improve the construction of EWS.

Meetings with the Private Sector

55. To follow up this part of its preparation, participants in the mission would make a point of searching out information from the private financial sector—through analysis of market commentary or interviews along the lines already conducted by a mission from the capital market divisions in RES when it visits a global or regional financial center before preparing the ICMR. Such information may, for example, relate to the buildup of large open positions in the currency concerned, or to the interpretation of recent movements in short-term indicators additional to those used in EWS, notably bond spreads.

Presentations to Country Authorities

56. The mission would take up the issue of vulnerabilities against its central scenario for the country’s prospects. It would not only assess the risks but also comment upon the feasible policy responses.

57. We are aware that not much reaction can be anticipated from many national representatives. The team’s interviews indicated that officials, while recognizing the merits of the exercise, were wary of engaging in a dialogue about such matters. The knowledge that the consultation report was going to be published would presumably reinforce such wariness. However, we nonetheless believe that even just presenting this material on a regular basis is valuable and important for the surveillance process.

58. With time, actual discussion of vulnerabilities (as opposed to the consultation presentation itself) should become a standard part of Article IV consultations. Such an outcome will be helped along by two parallel developments. One is the greater familiarity with the analysis of vulnerabilities and EWS that will develop as past crises are dissected in the multilateral publications. The other development is the introduction of the Contingent Credit Line. This would require the analysis of vulnerabilities and the risks of contagion to take center stage in some bilateral consultations—and to have the discussions reported to the Board in cases where a country wanted to qualify for a contingent facility. We return to the implications of this in the section on recent developments below.

Multilateral Surveillance

59. While there are competitors, the comprehensiveness of the Fund analysis tends to make WEO and ICMR indispensable to anyone interested in an objective and detailed perspective on the global economy and the increasing interdependence among its components. We reported in Chapter II that some officials and academics saw value in more regular publication of the analysis, particularly the forecasts, contained in WEO. We also note that in December of both 1997 and 1998, a combined “interim” WEO/ICMR was produced. We suggest that the Fund take a further step in this direction.

We recommend quarterly publication of the WEO forecast.

60. This is not intended to imply that the Fund should produce much more material than it does at present; simply that rather more should be published. In terms of forecasts, descriptive material, and short-term policy analysis, it is clear that most of the necessary material already exists internally, and indeed is presented to the Board at the regular WEMD sessions (and the quarterly private sector financing notes). We see no reason not to publish this material with greater frequency.85

61. As regards the longer and more systemic background studies that currently form part of WEO and the ICMR, these could be reserved for a larger publication—either WEO and ICMR separately or with the two documents combined, such as the one that appears at the time of the Annual Meetings—or they could be incorporated quarterly as and when available. Again, we are not suggesting any increase in the amount of material produced by the Fund.

62. We also believe that this change in publication should be accompanied by two changes in the accountability for the publications that would strengthen their objectivity.

63. There are presently two problems for the objectivity, and hence the authority, of the multilateral publications. On the one hand, the forecasts are not clearly the responsibility of the main authors in RES. On the other, members of the Executive Board at times appear to lean more heavily on the staff to modify judgments of policies in their respective countries than is healthy for the long-run reputation of WEO and the ICMR.

64. As regards the former point, we have noted in Chapter III that forecasting in the Fund is to a large extent a “bottom-up” rather than a “top-down” exercise, that is, global forecasts are built up from the country analysis of area departments. Although a consistency check is obviously provided by RES, we suspect that this process is likely to result in a general bias toward optimism (although, clearly, there are no doubt occasions when area department forecasts are more accurate than RES ones).

65. Furthermore, this leads to the serious problem that no one is willing to accept ownership of the WEO forecast. This was evident from our interviews with staff; RES staff disclaimed responsibility for forecasting errors in the published WEO—although the rest of the world is given to understand that it is their product—saying that the forecasts were really the responsibility of area departments. Area departments, by contrast, regard the forecasts as the collective responsibility of the staff. We do not regard this situation as appropriate.

We recommend that ultimate responsibility for the WEO forecast be vested clearly in RES.

66. Of course, RES will continue to rely to a very great extent on the work done, and the material provided, by area departments; we are not suggesting a shift in resources here. And where there are disagreements, it will doubtless wish to take their views into account. However, in the end, if RES is to be accountable for the quality of the forecast exercise, it should be clearly responsible for making the final decision on contentious issues.86 Time will tell if it is correct.

67. The second issue in regard to accountability—and candor—is the nature of the Board’s involvement before publication. While the Board has the intention of letting WEO and the ICMR be issued on the staff’s responsibility, it is evident that Board review can become Board pressure for change to protect individual country interests. This obviously reduces the overall value of what is published.

We recommend that the Board make it clear that the presumption is that the staff draft should be published as it stands.87

68. Indeed, simply as a matter of practicality, the review and Board clearance process would need to be streamlined considerably if the WEO forecast were to be produced quarterly.88


69. This section deals with the organization of surveillance under three main heads: first, the organization of surveillance relations with countries, including the organization of missions; second, internal aspects; and third, the role of the Executive Board.

Country Surveillance

Greater Flexibility in Monitoring

70. Members vary a great deal in their characteristics, and more selectivity in how surveillance is applied is therefore appropriate. It may be contended that there are risks involved(it would have been easy to argue, for example, that Korea in 1995, a successful country with what the Fund and many others believed were largely sound policies, required relatively little attention.89 However, our broad judgment is that significantly fewer staff resources could be devoted to industrialized countries overall without any loss in effectiveness or impact. This reflects these countries’ risk characteristics, and the greater public availability both of data and economic analysis. In large part, Fund efforts here are duplicative of other work performed in both the public and private sectors.

  • We recommend the following:
  • For all industrial countries but the very largest, full Article IV consultations should be less frequent than annually.90
  • For the very largest industrial economies,91 in light of their systemic impact, annual consultations are still called for. However, to improve the payoff, surveillance should focus more on the international implications of these countries’ domestic policies and correspondingly less on advice regarding the policies themselves.
  • The particular issues in surveillance of the euro area are discussed in more detail in Box 2.1. But regardless of exactly how surveillance is organized, there is a strong case for cutting back the resources allocated to the euro area, which are now more than four times those devoted to the United States.

71. The changes recommended for industrial countries overall should yield significant savings in resources. Some could be applied to lessening the problems of overloaded surveillance agendas that are noted below. However, it should be possible also to transfer resources to the other areas that we identify as priorities: the international dimension and harnessing cross-country experience.92 In saying this, we are not arguing for any particular allocation of resources between area departments on the one hand and functional departments on the other (although, clearly, there will need to be some reallocation across area departments). But we do see it as important that the resources within area departments—again, taken as a group—should in important measure be refocused to deal with these priorities.

Small States

72. Small states93 clearly have concerns that their economic policy problems are qualitatively different, and that the Fund fails to take sufficient account of this. Moreover, the impact of surveillance is probably greatest for small states (see also our discussion of technical assistance, below). It seems appropriate to try to respond to these concerns.

73. While we did analyze the possibility of setting up a special coordinating division to take the lead in dealing with such members, we abandoned this idea as being too complicated to implement unless one also shifted small states out of their respective area departments. However, what we do propose is that the Fund establish a project to analyze the economic effects of small country size from the macroeconomic management point of view—to see whether their situations are indeed substantively different in ways that are relevant to the Fund’s surveillance competencies. Then, surveillance might be reviewed in this light.

74. Of course, the basic challenge still remains: how should the level of surveillance resources devoted to small states be decided in the light of two conflicting considerations—that these states are numerous and attach great importance to surveillance, but their share of the total world economy is very small. Clearly, a substantial reduction in these resources would not pose any systemic threat to the world economy, while freeing up resources for use elsewhere. To the extent that surveillance should focus on issues of concern to the international financial system, such a reduction appears to be justified. However, the negative impact on individual countries might be significant, amounting as it would to an effective reduction in development aid or technical assistance. This trade-off is essentially a political question; but it should be recognized as one that essentially is not about the deployment of resources within surveillance, but rather concerns choices between surveillance and aid. As such, it is largely outside our remit.

More Continuous Surveillance

75. More continuous surveillance has for some time been a Fund objective, and a range of measures such as midyear visits and Board informal country and WEMD sessions have now become a regular feature, along with the long-standing practice of ad hoc bilateral meetings at the time of the Interim Committee and Annual Meetings. These features are further augmented by the work of functional departments—in particular the visits of the capital markets groups from RES, whether to countries or to capital market centers.

76. Can the process be improved further? We think it can. While missions themselves apply modern technology to communicate with headquarters, the surveillance cycle and process as a whole has not fully adapted to it. The process appears very much as when it was designed in the 1960s, despite the increase in the quality and availability of telecommunications and the ease of transmission of data and research on the Internet. That is to say, in the normal course of events the episodic nature of relatively large-scale physical visits still dominates—with a gear-up and wind-down, and a relative lessening of focus as staff turn to other endeavors. But while missions are no doubt an essential way of taking stock from time to time, they should not be allowed to overshadow these other means of communication and information gathering. The staff need to develop such channels with their country contacts. This might mean taking a leaf out of the book of the way these things are done in the private sector, which consciously maximizes electronic contact and minimizes the length of physical visits. We should emphasize that we are not trying to devalue actual visits as part of continuous surveillance. Rather, we are suggesting shorter, more targeted, and perhaps (but not necessarily) more frequent visits.

77. Our discussions with country representatives certainly indicated some receptiveness to updating the process in this way, with consequential savings in the time spent by missions and by their hosts. Accordingly, we think that the Fund should actively experiment with receptive members in enhancing the role of telecommunications in data gathering and in other areas to see what improvements and efficiencies in surveillance can be gained—as a complement to or substitute for actual visits. In the same way, experimentation should also be undertaken in making consultation missions shorter by trying to increase the amount of work that can be done in advance.

We recommend a more conscious focus on the use of electronic means of communication, initially on an experimental basis, with a view to maintaining close contact with policy officials and to reducing the length of consultation missions.

Technical Assistance

78. While Fund technical assistance as such is outside our remit, surveillance is often to a greater or lesser degree technical assistance. This is particularly the case for small states. However, as we observed and as noted in the 1999 internal review of technical assistance, surveillance and technical assistance are not always as well coordinated as they might be.

We endorse the recommendations of the internal review in this regard—in particular, that area departments should, through the consultation process, seek to integrate the support provided to members through technical assistance and surveillance activities.

External Contacts

79. Fund missions have been expanding their range of contacts outside the traditional circle centered on the central bank and the ministry of finance. But this expansion does not appear to have been systematic. And while it is understandable that staff would tend to meet people who they feel speak the same language—academics and financial market participants rather than trade unionists, nongovernmental organizations, or others who are often critical of the Fund—this tendency should not be allowed to dominate completely.

80. Although decisions will still need to be taken on a case-by-case basis, we believe there is a role for central guidance to encourage breadth of contact.

We recommend that the External Relations Department monitor and assess Fund practices and experiences to date with a view to giving guidance with the Fund’s explicit backing regarding external contacts.

81. The purpose of such contacts is twofold; both to explain to such bodies what the Fund is and what it does, and to allow those representatives to give their views in areas relevant to the Fund. Meetings should be focused on the surveillance agenda, with the staff making very clear what in that context the Fund does and does not do, and why.94 We have already made proposals earlier in this chapter for tightening this focus in the Fund’s own work in the interests of more effective surveillance. Furthermore, given the interest in shorter missions where feasible, such contacts also would have to be well focused. However, we think that an allocation of a small part of a mission’s time for such endeavors is worthwhile.

82. In the same vein, the Board may wish to consider inviting from time to time informed outside observers of the Fund to meet with the Board.

83. On a related topic, in some countries we were informed that representatives of the government, usually the central bank or the department of finance, made a point of accompanying a mission to all meetings, whether with government or private sector representatives. This may be for administrative convenience. Nevertheless, it can in some cases be inappropriate for effective surveillance. However, missions are understandably reluctant to tell governments so.

We recommend that the Fund make clear where necessary that meetings with nongovernmental representatives should take place without the presence of government officials.

Relations with World Bank and Others

84. We found that coordination between the Fund and the World Bank remained uncertain, particularly in the financial sector area, where the greatest overlaps exist. We are aware that this topic has been studied numerous times, and we do not have any further suggestions to make. However, as is discussed further below, we believe that the Fund should make more effort to make use of work done by others, particularly in areas where it does not have expertise.


85. In earlier chapters, particularly that on conduct and methods, we described a range of surveillance challenges internal to the institution that emerged from our interviews. These are addressed further here.

Skills Mix

86. In light of the evolving demands of surveillance, in particular the emphasis on more specialized and more sophisticated policy skills, more diversity would seem desirable in three principal areas.

  • More financial sector expertise. If the Fund is to fulfill the new demands placed on it in this area, it clearly needs more staff with authoritative experience in the financial sector. This means both people with regulatory and supervisory experience and people with private financial sector experience.
  • More policy expertise. Policymaking experience appears to be particularly helpful in surveillance, and this suggests that a sustained effort should be made to encourage it through recruitment—as well as through secondment or interchange programs—with relevant policymaking institutions in member countries. This may also mean giving greater weight to policymaking expertise in deciding the level at which individual staff are recruited to the Fund.
  • More outside experience in general. The dangers, given the large proportion of staff who spend virtually all or most of their careers in the Fund, are insularity, conformity, and lack of hands-on experience. This suggests greater use of external consultants, interchange with member governments, academia, and private sector institutions, and so on.

87. The Fund is aware of its needs in the first area—financial sector expertise. However, more of a conscious program may be needed in regard to the other two.

  • We recommend consideration of the following specific policy actions:
  • More emphasis on policy experience, and therefore less on academic credentials, at all recruitment levels, including the Economist Program; and
  • Fund staff should be positively encouraged to spend one or more assignments outside the Fund before reaching management grades. Current programs in this area should be expanded, if that proves necessary to ensure adequate opportunities.95


88. The Fund has a strong sense of hierarchy, and one downside of this is a lack of individual accountability for the quality of the output. Surveillance material that is submitted to the Board is regarded as the collective output of the Fund, with the full endorsement of management. As a result, responsibility is pushed upward, to management or to the Fund collectively.96 While it is clearly helpful to the cohesion of the institution for there to be a sense of collective responsibility, it is damaging to internal accountability and incentives if junior or midlevel staff do not feel individual “ownership” of Fund policies or outputs to which they contribute directly. We think that there could be more individual accountability, with the associated good incentives, without damaging cohesion.

  • We make the following specific recommendations:
  • There should be as much accountability as possible for papers, staff reports, and the associated policy recommendations. In particular, the staff member most directly responsible for authorship of a paper or staff report, or with greatest knowledge of the country being discussed, should be the main presenter at any Board discussion.
  • In the surveillance context, it should generally be the case that one staff member—normally the Division Chief in the area department—has overall responsibility for operational dealings, including leading missions, with an individual member state, and should be held accountable for them.

89. The Fund is not alone in facing the problem of ensuring that staff are rewarded according to the quality of their output. We do not underestimate the difficulty of this task, which is particularly marked in public sector organizations like the Fund, where pay differentials are smaller and separations rarer than in the private sector. However, at the moment the perception—both inside and outside the Fund—is that success and failure, certainly in the surveillance context, do not translate into career prospects as directly as they might. We are aware that the Fund administration is conscious of these difficulties and has taken some steps to mitigate them. We are also aware that the concentration of elevated ratings under the performance evaluation system is not a totally fair reflection of the extent of differentiation in performance recognition that does go on. Nevertheless, there still remains a problem in sharpening incentives.

Interdepartmental Relations and the Review Process

90. We view communication among departments as being relatively poor. A lack of collegiality between departments inhibits learning from others’ experiences and, more generally, the transfer of knowledge within the institution that is so important for its effective functioning. As a result, the Fund sometimes appears to be less than the sum of its—often very impressive—parts.

91. This is particularly apparent in regard to the interdepartmental review process through which all surveillance documents must pass. We certainly do not dispute the necessity for a review process; it is clearly essential both for quality control and for knowledge transfer. But, as currently constituted, it is extremely cumbersome, being time-consuming and generating a considerable amount of paper, and perhaps excessively adversarial on occasion. And as a result, as was very clear from our discussions with staff, it is often frustrating for the participants, in both area departments and functional departments, and less constructive than it might be. We think that the process could be streamlined, and the number of participants considerably reduced, while maintaining and indeed increasing the value of the exercise. We think that this could also help knowledge transfer, with less focus on checking and more on adding ideas.

92. While we refrain from making formal recommendations on a detailed organizational matter of this nature, we do have a number of specific suggestions that the Fund might wish to take into account in any examination of its internal processes.

  • At present all drafts and comments pass through front offices. As well as reducing accountability and adding an extra level of review, this also takes time away from the other responsibilities of front office staff, discussed below. It is not clear why drafts could not be circulated by their principal authors directly to other departments, with the internal departmental review taking place simultaneously.
  • There could be greater use of informal communication rather than written memoranda. The issue behind many written comments could be resolved more efficiently and less adversarily by phone or e-mail. It would be worth experimenting with meetings and the more flexible exchange, even debate, that will then occur—short, focused, and only with the necessary participants—instead of paper messages.
  • As noted above, the individuals primarily responsible for reports should be accountable for their quality. It should therefore be their responsibility to solicit comments from other departments and to decide how to take account of them. Other departments should normally restrict their comments to their areas of responsibility, and avoid drafting comments.

93. In this context, it is worth mentioning the role of PDR, which provides an important central monitoring and quality control function, and whose signing-off role should therefore be retained; although this does not imply that PDR, like other departments, could not reduce the resources devoted to the process. It is in large part PDR’s responsibility to ensure that general policies are implemented, and that staff reports do indeed address the key issues, focus on international aspects, and are frank and direct. Correspondingly, our proposals to limit the scope of consultations should help to reduce the burden of checking off that all consultation bases are touched.

Front Office

94. The Fund departmental management structure appears to be rather top-heavy; in particular, the current number of staff in departmental front offices appears large compared to other organizations, public and private sector. And, as noted above, front office staff seem to spend a disproportionate amount of time on the interdepartmental review process—both in approving the drafts of their own departments, and preparing and collating comments on other departments’ drafts—an activity which could be streamlined considerably.

95. If, as we see it, many in the front offices of area departments act in effect as senior division chiefs, it is appropriate to see whether they should be moved into divisions, with a corresponding reduction in the size of the front office. This would help internal accountability. Another concern that we were left with is that while an important role of the front office in general should be to take an overall view—particularly as regards knowledge transfer—we are not at all convinced that this key role is being filled under present arrangements, where keeping up with the area’s own country surveillance agenda dominates everyone’s time and thinking.

We recommend that front offices in area departments be made clearly accountable for ensuring that bilateral surveillance incorporate cross-country and multilateral perspectives.

96. This will involve keeping up with relevant analysis and research both in other Fund departments and outside.


97. There is no doubt that many Fund staff are chronically overworked. While the willingness of staff to work long hours is commendable, and contributes to the Fund’s impressive capacity to respond quickly to crises, this inevitably reduces the general effectiveness of surveillance, as well as that of other activities. In particular, it is conducive to “tunnel vision”—the inability to look outside, take the long view, or examine alternatives—simply because the pressure of deadlines in getting through the regular surveillance calendar is in many instances so great.

98. On a related topic, there is a need for more and higher-quality research assistant level staff to relieve junior professional staff of low-quality work. This is being pursued, but we note that at the present pace it will be some time before the professional/research assistant ratio is comparable to that of other similar institutions.

99. The greater focus and prioritization in surveillance that we recommend, together with a number of the other recommendations, could help to relieve the pressure on staff. However, for this relief to be realized, the organization as a whole needs also to practice constant vigilance and restraint so as to avoid getting drawn into interesting but lower value-added areas.

We recommend that the overall volume of surveillance work be reduced relative to the number of personnel engaged in it.

General Organizational Issues

100. The Fund faces a rapidly changing external environment. This constantly generates new demands and challenges, both for surveillance and for the Fund’s other functions. With the current debate over reform of the international financial architecture, this is the case now more than ever. In this context, we think it is worth examining whether the internal workings of the Fund—its organizational structure, how it is managed, the recruitment, composition, and skills of its staff, and its internal functioning and procedures—are well adapted to these new challenges.

101. The challenge of rapid change is not unique to the Fund. A number of the issues discussed above, in particular those related to accountability, incentives, hierarchy, and management structures, are ones that are faced by most large public sector institutions, and that have been sharpened by recent changes in the role of the public sector. These issues are particularly difficult in “policymaking” institutions like the Fund, and we do not wish to minimize the complexities here, or suggest that management and senior staff are not seized of the issues. However, we do note that many policymaking institutions—as well as large organizations in the private sector—in the Fund’s member countries have undertaken fundamental management and organizational changes in the past 10 years; the example of New Zealand springs immediately to mind, but many others have gone at least part way down similar roads.

102. The Fund has not in recent decades undertaken a fundamental review of its organizational and management structure in the light of its objectives. However, we are not aware that the Fund is so different from other policymaking institutions that have benefited from such reviews. Given the changes taking place in the international financial architecture—and the Fund’s evident integral role—current circumstances might provide an opportunity for such an examination.

External Relations and Relationships and Review

103. This is a broad area, and we limit ourselves to some observations directly related to surveillance.

104. The Fund has moved a considerable distance in the amount it publishes on surveillance (as well as on other subjects). However, the basic point we want to underline here is that it is desirable for the Fund not only to communicate the results of its work and thinking to others, but also to take pains to show that it listens to and learns from others.

105. In this regard, we were struck by the fact that staff reports typically do not contain references either to academic literature or, perhaps more tellingly, to the output of other organizations, or to the financial press.97

  • We recommend that the staff:
  • systematize and organize their use of outside information with a view to applying it in surveillance; and
  • refer to and/or summarize work produced by other organizations where relevant.

106. Finally, we note that while the Fund should of course continue with its internal reviews of surveillance, and while publication of consultation reports should help in terms of accountability and maintaining or improving quality, we also believe that a systematic external review process (as distinct from external evaluation) would also help to provide continuous upward pressure on quality.98 For example, external review of some proportion of individual staff reports by invited outside reviewers (normally academics with country-specific knowledge or possibly former officials) would be relatively inexpensive, but could provide a salutary check on the internal process and conventions.

We recommend that the Fund experiment with external review of a sample of staff reports.

Executive Board

107. In the earlier chapter on conduct and methods, we summarized our discussions regarding the role of the Board—pointing to a number of problems that had been registered. Some of those problems are congenital, reflecting the way that the international community has designed the basic arrangements for Fund governance. Nevertheless, everything we know about institutional governance indicates to us that a group of 24 is, to put it mildly, extremely large for useful exchanges of views, discussion, and group decision making. Accordingly, the Board starts with a major impediment. This impediment is particularly striking in the area of surveillance, given the huge workload and given the crucial role that the Board is supposed to play in the Article IV consultation process.

108. If a regular, functioning, Board committee structure were easy to set up, it surely would have been by now. The glaring absence of meaningful committee work speaks volumes for the constraints under which Directors apparently operate, de facto if not legally, as country and constituency representatives. That may well mean that in tackling the question of the Board’s role in surveillance we are looking at symptoms rather than causes. However, on the assumption that there is a general desire to have the Board operate more effectively in the process, and that a look from the outside is worth something in this regard, we strongly urge that serious consideration be given to instituting a committee structure that specifically aims to make the Board’s contribution more effective.99

We recommend that all Article IV staff reports be discussed in the first instance in a committee rather than by the full Board.

109. We should emphasize that this does not mean that the full Board would not get a chance to discuss individual countries; nor do we mean that each staff report should be discussed in depth twice, thus increasing rather than reducing the workload. Rather, those discussions would take place on the basis of a committee report that provided focus and, where possible, grouped countries in the same region or facing similar issues. Indeed, by allowing a committee to set the agenda for a focused discussion of the full Board, our proposal should strengthen the Board’s involvement, and perception of ownership, in the surveillance process. Consistent with our general recommendations, the full Board should aim to focus its discussions on the international environment and cross-country issues, as well as on the main domestic issues.

110. We believe that, if implemented effectively, such a system could both improve the Board’s contribution to the surveillance process—and consequently the process as a whole—and reduce the time spent by individual Directors discussing surveillance material. While there may be some additional work for staff as a result, we think this would be a worthwhile tradeoff. It will, however, require the Board—collectively and individually—to adopt the working practices necessary to make a committee structure function efficiently. Without this determination, a committee system would not improve matters.

111. An illustrative committee structure is described in Box 5.1. Clearly, other structures would be possible. However, if significant benefits are to be realized, a radical change in the Board’s working procedures is necessary.


Publication of Article IV Reports

112. Transparency, whether to enhance accountability, to help markets function better, or to increase the effectiveness of surveillance, now appears well established as an internal principle in the Fund. The difficult issues in regard to surveillance have come not in relation to this principle, but rather in agreeing on how far or in which direction transparency can be extended without in some respect compromising the effectiveness of surveillance.

113. On this latter score, the chief reservations against extending transparency through publication of the Article IV consultation reports have been twofold.

  • The Fund’s role as policy adviser would be weakened severely by publicity. Governments will be unwilling to engage in frank discussions about policy options if the results of those discussions are to be made public.
  • Publication of policy analysis and views could precipitate exactly the sort of crisis that it was meant to avert. Indeed, this might occur even if the analysis is actually incorrect or merely overly pessimistic.

114. However, in weighing the benefits and costs of publication from the viewpoint of surveillance, the team found these costs to be distinctly less onerous than they might appear in general.

Box 5.1.Possible Board Committee Structure for Surveillance

We propose that most surveillance work be conducted through committees. In particular, the first consideration of all Article IV staff reports should be at the committee level. We suggest that these committees be organized on a regional basis. This would have the additional advantage that the committees could have an input into regional surveillance as well as into the bilateral Article IV process.

The main points of such a structure might be as follows:

  • There would be one Executive Board committee for each area department, so a total of six committees.
  • Each committee would have eight members. Ideally, four of these would be from within the relevant geographic region, and four from outside.1 Each Executive Director would thus be on two committees; his or her own regional committee, and one other:2
  • The committees would consider Article IV staff reports. In addition, they could commission and consider additional analysis from the area department on regional issues.
  • The committees would, on the basis of proposals from staff, agree on the two or three key issues on which upcoming Article IV consultations would focus (see the section of this chapter on objectives and priorities).3
  • Nonmembers of the committee could attend as observers, but normally would not speak. They could submit written views if they wished, but this would not be encouraged.4
  • The committees would propose to the full Board draft Article IV conclusions, normally on a lapse-of-time basis. These conclusions would only be discussed by the full Board if there were a significant difference of view within the committee or if there were significant objections from nonmembers of the committee. Any Board discussion would focus on these areas of disagreement.
  • Every quarter, the full Board would discuss each region, on the basis of a report from the regional committee. This report would discuss developments in the region and would highlight major regional issues and potential problem countries. Reports, which would be the responsibility of the committee, would be drafted by staff from Directors’ offices, with input from area department staff as required.

The advantages of this procedure would be the following:

  • A substantial reduction in the amount of time spent by Executive Directors on Article IV staff reports. Each Executive Director would be on two committees out of six, and would thus consider approximately one-third of all staff reports in the first instance.
  • More constructive discussion on reports, since they would be discussed in a committee of 8 rather than a Board of 24.
  • More focused discussion in the full Board, which would only discuss important issues, problem countries, and issues where there was a significant disagreement among Directors.
  • Greater attention to regional surveillance and cross-country issues.
  • An opportunity for the Board, through the committee process, to have a more systematic input into the issues considered by staff in bilateral and regional surveillance and into the agenda of the full Board.
1Since area departments do not each contain four Board constituencies, this will have to be adjusted in some cases.
2Chairs would rotate and be from outside the region. Alternatively, it would be worth considering having Deputy Managing Directors in the chair, if this were thought to improve the process.
3In practice, staff could prepare a brief report to the committee each quarter, stating that Article IV consultations were scheduled and what the main focus of discussions would be for each.
4This is a small but important point. If all Directors feel they must participate in all committees, little increase in focus will result. While the demands on the time of Directors and staff will increase.

115. Our main reason for discounting the damage that might result from publication is the fact that Article IV reports are not, in the event, kept very confidential. When one considers the worldwide distribution that such reports have to receive, it would be surprising indeed if they were not fairly readily to a determined, informed, interested party. Debt rating agencies may obtain them directly from a country being rated. Others may get hold of them through third parties. Our discussions with a wide range of interviewees fully confirmed this view.

116. To be more precise, it is a sound assumption that the major international market participants already have, in various ways, fairly ready access to these reports. Furthermore, to the extent that they find them useful to act upon, they will do so. It then follows that any adverse market impact from publication would be quite modest. Note, however, that the modest nature of the impact applies both ways—not only in mitigating the adverse effect of actually precipitating a crisis through publication, but also in lessening any favorable effects through improved market information and, presumably, market discipline.

117. There is a second consideration as to why the costs of publication would be low. The fact that Article IV reports are very likely to have a significant circle of unauthorized readers also appears to affect what is put in them. Again, our wide-ranging discussions led us to the view that either governments do not engage in as frank and as confidential discussions as many suppose, or, alternatively, that missions (quite possibly with the tacit agreement of officials) filter those discussions to minimize potential embarrassment in the written report.100

118. Clearly, this should affect one’s view as to the importance of the first concern with publication that was mentioned—namely, that the frankness of the consultations would suffer. Equally clearly, anyone who still feels that they are likely to find bombshells if they get their hands on a Fund report is likely to be disappointed.

119. One conceivable conclusion from this is that it is not particularly worthwhile to publish the reports—their contents already having been absorbed by market participants, in addition to having been leaked occasionally to the media. However, this would in our view not be the correct conclusion. Admittedly, there is little to be gained in terms of market functioning or even Fund impact through markets. However, there are still definite gains to be had. One, of a subsidiary nature, is that consistent publication would establish a more level playing field as regards the information available—a generally good thing. More broadly, publication would increase the Fund’s accountability.

120. One aspect is the increased accountability to the public in general—the taxpayer, the voter. This also enhances the Fund’s broad political legitimacy. Another, of particular interest to the team, is the systematic availability of more comprehensive information on the kind of advice given. This in turn should allow more informed criticism, favorable or otherwise, of that advice. And this should, correspondingly, act to enhance the quality of that advice, or at least keep it up to the mark. In particular, referring back to earlier discussion in this chapter, there would be a wider range of judgment as to whether the advice was sufficiently frank in the circumstances (“clientism”) or whether the Fund diagnosis or model was adequate or too rigidly applied (“template”). To the extent such criticisms held water, the incentive to improve would be greater.

121. One possible objection to publication is that this would provide material that could be used to criticize, even unfairly, the member government, and that some are better able to deal with such criticism than others. We appreciate this point but do not regard it as conclusive. Dealing with criticism is not necessarily a bad thing. Furthermore, it is now generally accepted that the Fund is not infallible, and publication of its advice is as likely to draw criticism of that advice—again, fair or unfair—as it is to be used to criticize the recipient.

We recommend that the Fund should publish on a regular basis the complete text of all Article IV reports.101

122. It should be added here that we believe that these reports should not be vetted before publication, either by the member in question or by the Fund, to remove “highly market-sensitive” material. This is consistent with our position that the reports already receive substantial self-censorship, given the chances that they would be leaked. Also, of course, such vetting would muddy the waters as regards accountability. While we appreciate the reasons for the “highly market-sensitive” reservation, in the circumstances that we have analyzed in this section, we are not persuaded by them. However, if the reservation is kept, we think that the process would become more internally transparent, and hopefully more rigorously consistent, if proposals for exclusion were brought back to the Board for active consideration rather than being left to the Director in question and the staff to resolve, as is now the case with the PIN.

123. We are aware that there is now a pilot project that involves the voluntary publication of about twenty Article IV staff reports over a year. It is not clear to us what this process will demonstrate, given the self-selection bias that is involved in what is published, although we are aware that efforts are being made to gather a “robust sample” of countries. It would, however, set a precedent along the lines that we recommend pursuing on a comprehensive basis, except that the project envisages, as in the case of the PIN, the exclusion from publication of material that is deemed highly market sensitive.

Where Confidential Exchange Fits In

124. Given the importance that some members have placed on their ability to have a confidential exchange with the Fund, we return here to that question.102

125. The basic point made in this section is not that confidential exchange should be ruled out. Rather, it is that the consultation process—involving as it does an inevitably broad international peer review of a member’s policies in the light of that member’s statutory obligations to the Fund, in other words, “firm surveillance”—is not realistically to be thought of as a confidential exchange. Furthermore, as we have suggested, given the on-the-ground reality of consultations, little in terms of the quality of the consultation should be lost by making the reports public. And, on balance, with the increased openness the impact of surveillance would be enhanced.

126. We also believe that any need for confidential exchange, as there might well be, for example, over hypothetical policies, should be dealt with outside the framework of the Article IV consultations. Any such discussions could only be reported to the Board in a quite general way if their substance was expected to remain confidential. Such confidential discussions (as one of our interlocutors put it, “to bounce off ideas”) could be held at mutual convenience and in any form or venue that seems appropriate. They could even take place in the margins of the formal Article IV discussions (as, we suspect, they already do).

The Role of the PIN

127. Where would our recommendation leave the PIN? While its general significance would clearly be diminished, it would in one crucial respect not be superseded—namely, in regard to the expression of Board views that concludes the consultation process. Of course, it might well be that views expressed in the Board will sometimes be at variance with those in the staff report. Then, outsiders would see this more clearly. This should not be a particular cause for concern. Of course, if differences were to persist, this would be a cause for concern that the Fund would need to address—as it would even if the reports were not published.

128. The issuance of a PIN should also, of course, be standard, not voluntary.

129. In particular, the PIN should set out clearly the consensus or majority view of the Board on the main policy issues (rather than, as now, emphasizing the diversity of views). Furthermore, perhaps now that some two years of experience have elapsed, there will be more confidence in moving the PIN to a more straightforward level of communication.

We recommend that the Fund intensify its efforts to make the PIN more reader-friendly.

Recent Developments

130. As we have worked on this report, a number of new proposals related to surveillance have emerged from policymakers inside and outside the Fund. We were not able to discuss these new initiatives in depth with country officials and other interviewees, since they were—and are—still in the process of development. However, in this section we discuss two—the application of international standards in country surveillance, and Contingent Credit Lines—that are likely to have particularly important implications for the topics that we cover.

International Standards

131. The Fund has made significant progress in implementing better statistical standards for an important segment of its members. Similarly, in two of its areas of core competency—fiscal and monetary policy—the Fund has developed a “Code of Good Conduct on Fiscal Transparency” and is well on its way to formulating a similar code for monetary policy in cooperation with major central banks and the BIS. These efforts are intended to help in making important aspects of surveillance more standardized and objective through the detailed checklists provided by the codes.

132. However, it is worth noting that even in the Fund’s core area of expertise, this will present challenges. Monitoring standards of fiscal transparency is not the same thing, and does not necessarily require the same skills, as monitoring the stance of fiscal policy. Monitoring standards is likely to require substantially more institutional knowledge, cross-country experience, and perhaps background in policy formulation and implementation (and correspondingly rather less in the way of basic macroeconomic modeling skills). This reinforces a number of our earlier recommendations:

  • the need for a more diverse skills mix among Fund staff;
  • the increased focus in surveillance on knowledge transfer and cross-country experience; and
  • the need to integrate better the work of functional and area departments, with missions making greater use of functional department staff.

133. These points are perhaps most important in the financial sector area, which has proved once more during the Asian financial crisis to be closely related to the Fund’s macroeconomic concerns, and which, as discussed above, is clearly important to more effective surveillance. For a limited number of countries—perhaps a dozen a year—specialized missions that would prepare Financial Sector Stability Assessments (FSSAs) are now envisaged. This will require additional staffing, largely in the form of temporary support from central banks and other financial supervisors, in addition to intensified cooperation with the World Bank, particularly in nonindustrial countries. The Fund’s plans in this area seem realistic and appropriate, provided the Fund can succeed in attracting temporary contractual expertise to assist its permanent staff, since it would take a long time to build up in-house expertise in the areas required for the FSSAs.

134. However, this task seems demanding enough. We are concerned that if, as the G-7 finance ministers propose,103 Article IV consultations are expected to cover, in addition to the financial sector issues addressed by FSSAs, monitoring of country compliance with numerous other international standards, then overstretch is inevitable. In our view, in areas such as securities market regulation, accounting and auditing, bankruptcy legislation, and corporate governance, the Fund staff lack the professional capacity to participate in developing the relevant international standards, and arguably even to monitor them. In most of these cases, other international institutions such as the World Bank, the OECD, the Basle Committee for Banking Supervision, and private or international organizations—the International Organization of Securities Commission (IOSCO) and professional associations of lawyers, accountants, or auditors—have developed international standards on which international monitoring might be built. But in several cases the standards remain incomplete, either because there are outstanding disagreements or because the geographical coverage of the preparatory work has been far less than global.

135. More important, monitoring these standards is in most cases not a simple matter of “ticking boxes,” as it is sometimes presented; it requires a considerable degree of professional expertise, and the ability to ask probing questions in a variety of areas. Without in any way detracting from the capacities of Fund staff, we think it is unreasonable to ask them to acquire the requisite expertise across such a wide range of topics, especially given the overstretch that exists already. In other words, we do not believe it to be realistic to incorporate the monitoring of international standards outside the Fund’s core areas of responsibility104 into Article IV consultations.

136. Instead, we are attracted by the idea developed, for example, by Eichengreen (1999), that not only the formulation of the international standards, but also their monitoring, should to the largest extent possible be the responsibility of the above-mentioned organizations and associations. The Fund would simply report their views on country compliance in an annual publication and on its web site (as the Annual Report on Exchange Arrangements and Exchange Restrictions already does). Not only would this reduce the problem of overstretch, it would also soften a potentially serious conflict of in terest for the Fund, since compliance with standards will be one of the criteria that the Fund will have to consider in connection with elegibility for the Contingent Credit Line (see below).

We recommend that outside the Fund’s core areas, monitoring international standards to the maximum extent possible be delegated to the responsible international bodies, with the Fund’s role largely confined to that of a clearinghouse for information.

Contingent Credit Line

137. The Contingent Credit Line (CCL) is a direct response to the contagion observed in and around the Asian crisis. In particular, some argued that while financial crises in certain countries were clearly related to macroeconomic imbalances or weaknesses in the banking system, the crisis quickly spread to other countries where weaknesses were less obvious or immediate. In other words, some international investors were simply pulling out of all emerging markets, without looking closely at individual countries’ fundamentals. For example, immediately after the Russian devaluation and default of August 1998, there was a dramatic widening of interest rate differentials between almost all emerging markets and the large industrial countries—even though economic fundamentals in many emerging market countries were clearly wholly different from those in Russia.

138. The CCL proposes to provide a form of insurance to Fund members with sound fundamentals, by allowing them to “prequalify” for the use of Fund resources, if they are affected by a crisis of confidence not obviously linked to their own policies and performance. Ideally, if the CCL succeeds in its objectives, the resources themselves need never be used, since their availability should in itself give the markets confidence that the country will not suffer a financial crisis.

139. A decision to set up the CCL, initially for one year, was adopted by the Executive Board in April 1999. For a country to qualify, the Board will have to satisfy itself that four sets of conditions have been met:

  • that the member is unlikely, on the basis of current policies, to need Fund resources;
  • that its policies have received a “positive assessment during the latest Article IV consultation” and beyond; and that the member adheres to “relevant internationally accepted standards”;
  • that the member has appropriately involved private sector creditors in limiting external vulnerability; and
  • that a satisfactory economic and financial program has been submitted.

140. The CCL will blur the previously clear distinction between Fund surveillance and application of conditionality. We have in our interviews and analysis accepted the time-honored distinction in these two types of relationships between the Fund and a member; surveillance is the peacetime activity, while the conditionality attached to the use of Fund resources involves much tighter monitoring, typically based on quantitative performance criteria.105 However, this neat distinction between surveillance and conditionality would not be applicable following the introduction of a CCL. This would clearly have major implications for surveillance procedures in all the dimensions that we have tried to evaluate: conduct and method, substance of advice, and impact. We believe that these implications tend to reinforce our principal conclusions:

  • Surveillance would have to become more continuous, since if policies went off track between annual consultations, the Fund would have to withdraw access to the CCL.
  • Staff appraisals and Board conclusions would have to become clearer and more unambiguous, since the Fund would have to determine whether a member is or is not eligible for the CCL.
  • Surveillance would have to become more focused on the macroeconomic and external issues that are the core competency of the Fund, since it is these that will be most relevant to a country’s ability to qualify for the CCL. Moreover, more attention will need to be paid to external vulnerabilities.
  • Since it will presumably be made public which countries have qualified for the CCL, the case for publishing the Article IV staff reports, which will form the principal basis on which the Fund decides whether a country should qualify, will be strengthened.

141. The new facility also has attractions in terms of increasing the impact of surveillance. We have noted that in general, impact has been low; and that in large part this is simply a consequence of the fact that as long as members do not expect to have to draw on Fund resources, external advice is unlikely to have as much impact as internal forces. But since a positive assessment of economic policies and performance is a prerequisite for qualifying for use of the CCL, the clout of surveillance is likely to increase significantly. From this perspective, a well-designed CCL would add to the potential effectiveness of surveillance.

142. However, we do have some concerns. Our earlier discussion suggests some grounds for skepticism as to the ability of the surveillance process, as currently constituted, to discharge the demanding tasks highlighted by the adoption of the CCL. In particular, we see three possible problems:

  • the difficulties of applying internationally accepted standards in an increasing number of complex areas, discussed above;
  • the additional tension between the Fund’s traditional role as a policy adviser and the need to become in effect a rating agency; and
  • the likelihood that the Board will come under pressure to become lax in its judgment as to whether a member has met the criteria for qualifying for the CCL, and the even greater difficulty of withdrawing the CCL if a member’s policies or situation deteriorate materially.

143. As regards transparency, we have tried above to define what we understand as the remaining scope for confidentiality prior to the adoption of the CCL. Since the whole idea of the CCL—a public demonstration of the Fund’s faith in a country’s policies and prospects, designed to engender market confidence—requires publication of the decision to commit resources to a member under the new facility, the CCL can only enhance the need for transparency. On the other hand, some national authorities may be unhappy at the prospect of discussing their reaction to possible unfavorable disturbances in the knowledge that such exchanges would be included in a published document. Even when such discussions become essential in prequalifying for the CCL, some role may need to be preserved for confidential exchanges, though the Board will need to be more fully informed than through subsequently published Article IV reports. This would enhance the role of the informal country matters and WEMD sessions in the Board.

144. Finally, there is a clear risk that the Board, given the tradition for individual Executive Directors to defend the interests of their respective constituencies and to show considerable deference to each other, will be reluctant to deny CCL status to a country that seeks it. Even more so, it will be very difficult, given the possibility of adverse market reaction, to “downgrade” a country whose performance has deteriorated since the initial commitment (of course, this problem exists already with respect to Fund-supported programs). In our view, this emphasizes the need for greater frankness in staff reports, greater transparency, and more pointed discussions in the Board. Moreover, formulations such as “some Directors felt … ; however, other Directors stressed …” will not be useful in a published PIN, no matter how accurate the rendering of the discussions. The Board will have to assume a greater degree of collective responsibility in cases where a CCL decision is proposed than has been customary in discussions of Article IV reports.

145. On balance, the addition of the CCL facility should add to the effectiveness of surveillance by raising the demand for high-quality assessments by Fund staff and the Board and by adding financial clout to surveillance, hence strengthening its impact. But the CCL and the associated reliance on complex, largely judgmental, considerations and on a number of international standards will also further expose some of the weaknesses in past surveillance to which we have drawn attention in this report.

Appendix I Terms of Reference

I. Purpose of the Evaluation

The Executive Board of the International Monetary Fund has decided to request independent external experts to conduct an evaluation of Fund surveillance over members’ policies under Article IV of the Articles of Agreement. The purpose of the evaluation is to assess the effectiveness of Fund surveillance and to make recommendations for improvements consistent with the purposes of the IMF as defined in Article I.

2. Focus of the Evaluation

The evaluation will focus on the effectiveness of all aspects of Fund surveillance over members’ policies and will be carried out by three independent external experts, as indicated in Section 3 below. The experts are requested to include in their evaluation all channels and instruments of Fund surveillance, including bilateral surveillance, regional surveillance, multilateral surveillance and the content and format of the World Economic Outlook, and surveillance of international capital markets and financial systems and of the provision by member countries of economic and financial data to the IMF and the public. The experts are requested to consider four broad topics in their evaluation of Fund surveillance, including on the basis of case studies as indicated in Section 4 below:

  • A. The effectiveness of surveillance in identifying those macroeconomic, structural, and financial weaknesses and imbalances in member countries and the world economy that are an obstacle to achieving sustainable noninflationary economic growth and external viability.
  • B. The substance of Executive Board and Fund staff surveillance recommendations: are these policy recommendations of the appropriate relevance, realism, and timeliness?
  • C. The impact on members’ policies of the Fund’s surveillance recommendations: has an appropriate impact been achieved, and what does impact depend upon?
  • D. The conduct and methods of surveillance: how helpful are the procedures of surveillance, the resources and staff skills employed, the means of interaction with member country authorities, and the dissemination methods of Executive Board surveillance conclusions?

In focusing on the above topics, the experts may wish to be aware of the following more specific questions that are of interest to Executive Directors:

  • (i) How did the Fund’s advice correspond to the short-term objectives and medium-term strategies of existing policies?
  • (ii) How did this advice correspond to the analysis and advice of other domestic and international institutions? Did the Fund’s advice add value?
  • (iii) Has Fund surveillance paid sufficient attention to regional surveillance, to interaction among countries, and to the external effects of policies in major countries?
  • (iv) Did surveillance have different impacts in different groups of countries?
  • (v) Have the frequency and general focus of the Fund’s surveillance been appropriate with hindsight? Has advice been consistent? Has advice helped foster noninflationary economic growth?
  • (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? How has the provision of information by the authorities affected surveillance?
  • (vii) Did the advice take into appropriate account the institutional, political, and social framework? Did it pay adequate attention to the uncertainties and political constraints that lead to “small” deviations from first-best policies?
  • (viii) Was the Fund’s advice implemented? If not, why?
  • (ix) Did the Fund balance openness and sensitivity appropriately from the authorities’ perspective? How helpful were the documents that emerged from bilateral surveillance? How useful were the methods to make surveillance conclusions 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?
  • (xi) How do you assess the role of the Executive Board in surveillance?

3. Evaluators and Their Independence

Mr. Ricardo Arriazu, Mr. John Crow, and Prof. Niels Thygesen, working as a team, have agreed to conduct the evaluation; Mr. Crow will serve as chair. They shall conduct their work freely and objectively and shall render impartial judgment and make recommendations to the best of their professional abilities. At their full discretion, the evaluators may wish to take into account the views of member country authorities, parliamentarians, academic experts, representatives of other international organizations, representatives of the business and financial market communities, representatives of civil society and the media, and Fund Executive Directors and staff.

4. Selection of Countries for the Case Studies

The evaluators are requested to base their conclusions, in part, on the study of a limited number of country cases. The selection of country cases will be the responsibility of the evaluators. Countries chosen for study should be representative of the Fund’s membership in terms of size, geographic location, and the variety of the macroeconomic, structural, and financial issues encountered. The effectiveness of Fund surveillance in these countries should be evaluated over a time period that is long enough to allow such insight as is possible into acceptance and outcome of surveillance recommendations and during which the countries received no, or at most sporadic, disbursement of Fund resources.

Appendix II Articles of Agreement

For the purposes of the surveillance evaluation exercise, the following are the relevant parts of the Fund’s Articles of Agreement.

Article I

The purposes of the International Monetary Fund are:

  • (i) To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems.
  • (ii) To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy.
  • (iii) To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation.
  • (iv) To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade.
  • (v) To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.
  • (vi) In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members.

The Fund shall be guided in all its policies and decisions by the purposes set forth in this Article.

Article IV

Section I. General Obligations of Members

Recognizing that the essential purpose of the international monetary system is to provide a framework that facilitates the exchange of goods, services, and capital among countries, and that sustains sound economic growth, and that a principal objective is the continuing development of the orderly underlying conditions that are necessary for financial and economic stability, each member undertakes to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates. In particular, each member shall:

  • (i) endeavor to direct its economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability, with due regard to its circumstances;
  • (ii) seek to promote stability by fostering orderly underlying economic and financial conditions and a monetary system that does not tend to produce erratic disruptions;
  • (iii) avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members; and
  • (iv) follow exchange policies compatible with the undertakings under this Section.

Section 3. Surveillance Over Exchange Arrangements

(a) The Fund shall oversee the international monetary system in order to ensure its effective operation, and shall oversee the compliance of each member with its obligations under Section 1 of this Article.

(b) In order to fulfill its functions under (a) above, the Fund shall exercise firm surveillance over the exchange rate policies of members, and shall adopt specific principles for the guidance of all members with respect to those policies. Each member shall provide the Fund with the information necessary for such surveillance, and, when requested by the Fund, shall consult with it on the member’s exchange rate policies. The principles adopted by the Fund shall be consistent with cooperative arrangements by which members maintain the value of their currencies in relation to the value of the currency or currencies of other members, as well as with other exchange arrangements of a member’s choice consistent with the purposes of the Fund and Section 1 of this Article. These principles shall respect the domestic social and political policies of members, and in applying these principles the Fund shall pay due regard to the circumstances of members.

Appendix III List of Interviewees

The list below is set out as follows. We do not separately identify Fund staff or Executive Directors by name. We list the people we met on our country visits by country, identifying their position at the time of the interview, or relevant former affiliation. Separately, we list officials of other governments and international institutions, academics we saw outside specific country visits, private sector, and NGO representatives. A number of those we met were former members of the Fund staff or management, or Fund Executive Directors; these are identified by an asterisk. We apologize for any errors or omissions.


We met with a large number of Fund staff (more than 50). Among senior management, these included the Managing Director, Deputy Managing Directors, and senior management from the relevant area and functional departments. We also met with the staff directly responsible for surveillance for the countries in our sample, and, formally and informally, with numerous other staff in a variety of departments and at a variety of levels.

Executive Directors

We met with a number of Executive Directors (representing the majority of Executive Board constituencies), their Alternates, and Advisors.


Ana Teresa H. De Albuquerque, Secretaria do Tesouro Nacional

Edmar Bacha, Creditanstalt, formerly Secretaria do Tesouro Nacional

Fabio O. Barbosa, Secretaria do Tesouro Nacional Gustavo Bussinger, Banco Central do Brasil

*Daniel L. Gleizer, Credit Suisse, First Boston

Eduardo Refinetti Guardia, Secretaria do Tesouro Nacional

Francisco L. Lopez, Governor, Banco Central do Brasil

Gustavo Loyola, Tendencias Consultoria Integrada, formerly Governor, Banco Central do Brasil

Demosthenes Madureira de Pinho Neto, Banco Central do Brasil

* Alvaro Manuel, Ministry of Planning

Alkimar R. Moura, Escola de Administracao de Empresas de Sao Paulo, formerly Banco Central do Brasil

Claudio Ness Mauch, Banco Central do Brasil

Mailson F. Da Nobrega, Tendencias Consultoria Integrada, formerly Minister of Finance

Marcelo Piancastelli de Siqueira, Secretaria do Tesouro Nacional

Roberto Egydio Setubal, President, Brazilian Bankers Association

Jose Tavares, Ministry of Planning


Vittorio Corbo, Universidad Católica de Chile

Alejandro Foxley, Senator, formerly Minister of Finance

Guillermo LeFort, Banco Central de Chile

Carlos Massad, Governor, Banco Central de Chile

Joaquin Vial Ruiz-Tagle, Ministerio de Hacienda

Juan Villarzu, Empresa de Obras Sanitarias de Valparaiso, formerly Secretary General to the Presidency

Roberto Zahler, Zahler & Co., formerly Governor, Banco Central de Chile


Weiping Di, State Development Bank

You Guo, China Everbright Bank

Hongbo Huang, State Administration of Foreign Exchange

Weiping Huang, Renmin University of China

Hongmei Han, State Administration of Foreign Exchange

Xuejun Kang, Ministry of Finance

Mingzhi Liu, People’s Bank of China

Zhengming Liu, People’s Bank of China

Yiping Peng, China Everbright Bank

Jie Shao, State Administration of Foreign Exchange

Hong Sheng, Beijing UNIRULE Economy Research Institute

Gouqing Song, Beijing University

Sining Tang, State Administration of Foreign Exchange

Benhua Wei, People’s Bank of

China Fulin Wu, China Everbright Bank

Ping Xie, People’s Bank of China

Junmei Yang, Ministry of Finance

Xian Zhu, Ministry of Finance

Czech Republic

Richard Falbr, Confederation of Trade Unions

Ota Kaftan, Czech National Bank

Miroslav Hrncir, Czech National Bank

Vaclav Klaus, Member of Parliament, formerly Prime Minister and Minister of Finance

Ivan Kocarnik, Ceska Pojistovna, formerly Minister of Finance

Pavel Kysilka, Czech National Bank

Vera Masindova, Czech National Bank

Ludek Niedermayer, Czech National Bank

Pavel Stepanek, Ceska Spositelma

Josef Tosovsky, Governor, Czech National Bank, formerly Prime Minister

Hong Kong SAR

Gary Coull, Global Emerging Markets, Credit Lyonnais

James Lau, Hong Kong Monetary Authority

George Pickering, Bank for International Settlements

Andrew Sheng, Hong Kong Security and Futures Commission


Shankar N. Acharya, Ministry of Finance

Montek Singh Ahluwalia, Planning Commission

Shri Chidambaran, formerly Minister of Finance

Tarun Das, Ministry of Finance

Sandip Ghose, Reserve Bank of India

Omkar Goswami, Confederation of Indian Industry

V. Govindarajan, Ministry of Finance

*Bimal Jalan, Governor, Reserve Bank of India

Vijay Kelkar, Ministry of Finance

Rohit Modi, Ministry of Finance

H. Prasad, Ministry of Commerce

T.R. Prasad, Ministry of Industry

Yashwant Sinha, Minister of Finance

M.R. Srinivasan, Reserve Bank of India

Satya Pal Talwar, Reserve Bank of India

*Sawak S. Tarapore, formerly Reserve Bank of India

*Asuri Vasudevan, Reserve Bank of India


Yoichi Funabashi, The Asahi Shimbun

Toyoo Gyohten, Special Adviser to Prime Minister, formerly Deputy Minister of Finance

Kyoto Ido, Ministry of Finance

*Takatoshi Ito, Hitotsubashi University

Masaaki Kanuo, Japan Economic Research Center

*Michio Kitahara, Bank of Japan

Richard Koo, Nomura Research Institute

Yutaka Kosai, Japan Economic Research Center

*Haruhiko Kuroda, Ministry of Finance

*Takashi Murakami, Bank of Japan

*Takehiko Nakao, Ministry of Finance

*Yoshio Okubo, Ministry of Finance

*Eisuke Sakakibara, Ministry of Finance Seiji Shimpo, Economic Planning Agency

*Masahiko Takeda, Bank of Japan

Kazuo Ueda, Bank of Japan

Mikio Wakatsuki, Japan Research Institute, formerly Bank of Japan

Koji Watanabe, Keidanren

Masaru Yoshitomi, Long Term Credit Bank of Japan

Saudi Arabia

Mohamed Aba Al-Khail, Gulf International Bank, formerly Minister of Finance

Abdulwahab Attar, Minister of Planning

Ibrahim Al-Assaf, Minister of Finance

Tameel Al-Hojailan, Secretary General, Gulf Cooperation Council

*Muhammad Al-Jasser, Saudi Arabian Monetary Agency

Abdullah Al-Kuwaiz, Gulf International Bank, formerly Deputy Minister of Finance

Hamad Al-Sayari, Governor, Saudi Arabian Monetary Agency

Jobarah Al-Soraisry, Ministry of Finance

Kevin Taecker, Saudi American Bank

South Africa

Jim Buys, Anglo American Corporation of SA Ltd.

Estran Calitz, Professor of Economics, University of South Africa, formerly Ministry of Finance

Dennis Dykes, NEDCOR

Alec Erwin, Minister of Trade and Industry

Evan P.J. Franklin, SA Reserve Bank

Bernie L. de Jager, SA Reserve Bank

Christo Liebenburg, NEDCOR, formerly Minister of Finance

Mxolisi Lindie, Department of Finance

Trevor Manuel, Minister of Finance

Tito Mbowene, SA Reserve Bank

Guy Mhone, Department of Labor

Jay Naidoo, NEDLAC

Raymond Parsons, SACOB

Francois le Roux, Department of Finance

Chris Stals, Governor, SA Reserve Bank

Matthys Strauss, SACOB

Timothy T. Thahane, SA Reserve Bank

Ben van Rensburg, SACOB

Lambertus (Bertus) van Zyl, SA Reserve Bank


*Krister Andersson, Skandinaviska Enskilda Banken, formerly Sveriges Riksbank

Claes Berg, Sveriges Riksbank

Sune Davidsson, Liberal Party of Sweden

Bengt Dennis, Skandinaviska Enskilda Banken, formerly Governor, Sveriges Riksbank

Thomas Franzén, National Debt Office

Ingemar Hansson, Ministry of Finance

Urban Hansson, Ministry of Finance

Lars Heikensten, Sveriges Riksbank

Stefan Ingves, Sveriges Riksbank

Tomas Nordstrom, Ministry of Finance

Svante Öberg, National Institute for Economic Research

*Eva Srejber, Foreningssparbanken

Ann Wibble, Industriforbundet, formerly Minister of Finance


*Pisit Leeahtam, Ministry of Finance

Kleo-Thong Hetrakul, Bank of Thailand

Tarrin Nimmanahaeminda, Minister of Finance

Nukul Prachuabmoh, formerly Governor, Bank of Thailand

David Proctor, Bank of America

Ammar Siamwalla, Thailand Development Research Institute

Amaret Sila-On, Financial Regulation Authority, formerly Minister of Industry

Chatu Mongol Sonakul, Governor, Bank of Thailand

*Vijit Supinit, Parliament of Thailand, formerly Governor, Bank of Thailand

Jon Vanasin, Financial Regulation Authority

Vicharat Vichit-Vadakan, Financial Regulation Authority

Amnuay Viravan, Saha Union Co., Ltd., formerly Minister of Finance

Worawut Wesaratchakit, Financial Regulation Authority

Chaiyawat Wibulswasdi, formerly Governor, Bank of Thailand

United States

Steven N. Braun, Council of Economic Advisors

Tom Connors, Federal Reserve Board

Jeffrey Frankel, Council of Economic Advisors

Alan Greenspan, Chairman, Federal Reserve Board

Karen Johnson, Federal Reserve Board

Donald Kohn, Federal Reserve Board

Larry McDonald, U.S. Treasury

Nuriel Roubini, Council of Economic Advisors

David Stockton, Federal Reserve Board

Edwin Truman, U.S. Treasury

Small States

Representatives of Antigua, the Bahamas, Barbados, Botswana, Dominica, the Eastern Caribbean Central Bank, Jamaica, St. Vincent and the Grenadines, Samoa, the Seychelles, and Trinidad.

Officials of International Institutions and Governments Other Than Those of Sample Countries

Johan Barras, DG2, European Commission

Willem Buiter, Bank of England

Hervé Carre, DG2, European Commission

* Andrew Crockett, General Manager, Bank for International Settlements

Jon Cunliffe, HM Treasury, United Kingdom

E. A. Evans, Secretary, The Treasury, Australia

*Günther Grossche, Secretary, Monetary Committee, European Union

André Icard, Bank for International Settlements

Otmar Issing, European Central Bank

Donald Johnston, Secretary General, OECD

Mervyn King, Bank of England

Jürgen Krueger DG2, European Commission

John P. Martin, OECD

Thorvald Moe, OECD

John Murray, Bank of Canada

*Gus O’Donnell, HM Treasury, United Kingdom

Tommaso Padoa-Schioppa, European Central Bank

Rinaldo Pecchioli, OECD

Jean Pisani-Ferry, Tresor, France

Stephen Potter, OECD

Arnaud Schneiweiss, Tresor, France

Kumiharu Shigehara, OECD

Philip Turner, Bank for International Settlements

Ignazio Visco, OECD

John West, OECD

William White, Bank for International Settlements

*Nigel Wicks, Chairman, Monetary Committee, European Union

*John Williamson, World Ban


Ralph Bryant, Brookings Institution

Richard Cooper, Harvard University

Wendy Dobson, University of Toronto

*Barry Eichengreen, University of California, Berkeley

Martin Feldstein, National Bureau of Economic Research/Harvard University

Benjamin Friedman, Harvard University

Peter Kenen, Princeton University

Frederic Mishkin, Columbia University

Richard Portes, London Business School/Center for Economic Policy Research

Jeffrey Sachs, Harvard University

Jan Art Scholte, Warwick University


Gemma Adaba, International Confederation of Free Trade Unions

Jo Marie Griesgraber, Center of Concern

Stephen Pursey, International Confederation of Free Trade Unions

Christine Real de Azua, Accounting for the Environment

Carol A. Webb, Friends of the Earth

Private Individuals

Jeffrey Anderson, Institute for International Finance

Kevin Barnes, Institute for International Finance

Eric Barthalon, Paribas

Fred Bergsten, Director, Institute for International Economics

*Sterie T. Beza

John Chambers, Standard & Poor’s

Robert Chote, Financial Times

William Cline, Institute for International Finance

*Charles Dallara, Managing Director, Institute for International Finance

*Richard Erb

Gregory Fager, Institute for International Finance

*Joaquin Ferrán

*David Folkerts-Landau, Deutsche Morgan Grenfell

Lacey Gallagher, Standard & Poor’s

*Morris Goldstein, Institute for International Economics

John Hartzell, Dresdner Bank

Randall Henning, Institute for International Economics

Helena Hessel, Standard & Poor’s

Christopher Huhne, Fitch-IBCA

*Desmond Lachman, Salomon Brothers

*John Lipsky, Chase Manhattan Bank

Anders Ljungh, Morgan Stanley

David Malpass, Bear Stearns

Catherine Mann, Institute for International Economics

Ken Pinkes, Moody’s

*Jacques Polak

Adam Posen, Institute for International Economics

Lex Rieffel, Institute for International Finance

*Douglas Smee, Citibank

Britt Swofford, BancOne

*Leo Van Houtven Kal Wajid, Institute for International Finance

*Former Fund staff, management, or Executive Director.
Appendix IV Recommendations

Note: This list is attached for reference purposes only. Recommendations should be read in the context of the analysis and discussion in Chapter V.

1. We recommend that consultation guidance be restructured to give explicit attention to international aspects.

2. We recommend that surveillance of the euro area center around the ECB and other EU bodies. Surveillance of individual participants in the euro area should largely take place at the euro area level, and through EU institutions.

3. We recommend that (consistent with an increased focus on international aspects) the Fund bring spillover issues, whether regional or multilateral, directly to the table in its various country consultations and in Board discussions.

4. We recommend that surveillance focus, above all, on the core issues of exchange rate policy and directly associated macroeconomic policies, in particular the international implications of such policies. Other analysis should only be undertaken if directly relevant.

5. We recommend that a systematic process be developed whereby the Board would discuss and sign off on the main issues to be raised at forthcoming individual Article IV consultation discussions.

6. We recommend that staff focus policy advice on issues of serious or immediate concern and distinguish such advice clearly from analysis of whether relatively small or judgmental policy shifts would be helpful.

7. We recommend that in the next internal review of surveillance, more attention be given to measuring in some detail (by topic and country) the extent to which the specific operational guidance that has been put forward on behalf of the Board is actually followed in Fund consultation reports, and, equally important, if not why not.

8. We recommend that the Board, management, and senior staff attempt to alter the incentive structure by making it clear that they will, if necessary, back up staff who give frank advice.

9. We recommend that surveillance devote more attention to policy implementation, and to the identification and analysis of alternative policy options.

10. We recommend that Article IV staff reports give greater attention to the forces driving the capital account, and to capital account issues in general.

11. We recommend that surveillance devote substantially more attention to vulnerabilities.

12. We recommend quarterly publication of the WEO forecast.

13. We recommend that ultimate responsibility for WEO forecasting be vested clearly in the Research Department.

14. We recommend that the Board make it clear that the presumption is that the staff draft of the WEO/ICMR should be published as it stands.

15. We recommend that:

  • For all industrial countries but the very largest, full Article IV consultations should be less frequent than annually.
  • For the very largest industrial economies, in light of their systemic impact, annual consultations are still called for. However, to improve the payoff, surveillance should focus more on the international implications of these countries’ domestic policies and correspondingly less on advice regarding the policies themselves.
  • There is a strong case for cutting back the resources allocated to the euro area, which are now more than four times those devoted to the United States.

16. We recommend a more conscious focus on the use of electronic means of communication, initially on an experimental basis, with a view to maintaining close contact with policy officials and to reducing the length of consultation missions.

17. We endorse the recommendations of the internal review that area departments should, through the consultation process, seek to integrate the support provided to members through technical assistance and surveillance activities.

  • . We recommend that the External Relations Department should monitor and assess Fund practices and experiences to date with a view to giving guidance with the Fund’s explicit backing regarding external contacts.
  • . We recommend that the Fund make clear where necessary that meetings with nongovernmental representatives should take place without the presence of government officials.

20. We recommend:

  • More emphasis on policy experience, and therefore less on academic credentials, at all recruitment levels, including the Economist Program;
  • Fund staff should be positively encouraged to spend one or more assignments outside the Fund before reaching management grades. Current programs in this area should be expanded, if that proves necessary to ensure adequate opportunities.

21. We recommend that:

  • There be as much accountability as possible for papers, staff reports, and the associated policy recommendations. In particular, the staff member most directly responsible for authorship of a paper or staff report, or with greatest knowledge of the country being discussed, should be the main presenter at any Board discussion.
  • In the surveillance context, it generally be the case that one staff member—normally the Division Chief in the area department—has overall responsibility for operational dealings, including leading missions, with an individual member state, and should be held accountable for them.

22. We recommend that front offices in area departments be made clearly accountable for ensuring that bilateral surveillance incorporate crosscountry and multilateral perspectives.

23. We recommend that the overall volume of surveillance work be reduced relative to the number of personnel engaged in it.

24. We recommend that the staff:

  • systematize and organize their use of outside information with a view to applying it in surveillance; and
  • refer to and/or summarize work produced by other organizations where relevant.

25. We recommend that the Fund experiment with external review of a sample of staff reports.

26. We recommend that all Article IV staff reports be discussed in the first instance in a committee rather than by the full Board.

27. We recommend that the Fund publish on a regular basis the complete text of all Article IV reports.

28. We recommend that the Fund intensify its efforts to make the PIN more reader-friendly.

29. We recommend that outside the Fund’s core areas, monitoring international standards to the maximum extent possible be delegated to the responsible international bodies, with the Fund’s role largely confined to that of a clearinghouse for information.

Appendix V Confidential Exchange: An Elaboration

Note by Chairman John Crow

Questions were raised at the Board’s informal meeting of August 3 regarding what, in the surveillance evaluation team’s eyes, could represent confidential exchange between the Fund and the member, given the team’s emphasis on having the staff assess “vulnerabilities” in the consultation discussions. This note reiterates and elaborates on our thinking.

As regards the vulnerabilities exercise, the important point to our mind is that the staff should present its assessment for the member’s consideration as an integral part of the consultations. That assessment would, in large measure, be conducted with reference to the kinds of indicators entering into early warning systems, and would occur for all consultations. We also recognize that in the consultation exercise, the member may wish to respond to the assessment fully, partially, or not at all.

As regards confidential exchange, this could appropriately, as our report suggests, deal in general with hypothetical matters. And one part of any such exchange could of course, if the member chooses, be a discussion of issues arising from the vulnerabilities presentation, if the authorities did not judge it desirable to respond to such matters in the consultation itself. Other hypothetical matters (e.g., possible or pending government or legislative action) could also of course be discussed in such an exchange.

We are also of the view, on practical grounds, that the product of such confidential exchange would not be conveyed directly to the Board. By definition, it is not part of the formal consultation procedure—the results of which would be made public. Rather, it would be retained within the staff and transmitted to the Board in a general way, and at management’s discretion.

1In what follows, we do not make the distinction sometimes made in the academic literature between “coordination” and “cooperation.”
2It is notable that the informational function of the Fund has only recently come to the fore; many authorities do not mention it at all. For example, see Manuel Guitián, The Unique Nature of the Responsibilities of the International Monetary Fund IMF Pamphlet Series No. 46 (Washington: International Monetary Fund, 1992), which does not mention the provision of information as one of the Fund’s “key institutional functions” (p. 8)
3See, for example, Ralph C. Bryant, International Coordination of National Stabilization Policies (Washington: Brookings Institution, 1995), for a helpful exposition of the two dimensions of international policy coordination (minimalist to maximalist, and rules versus discretion).
4This section draws heavily on James M. Boughton, Silent Revolution: The International Monetary Fund, 1979-1989 (Washington: International Monetary Fund, forthcoming). See also Louis W. Pauly, Who Elected the Bankers? (Ithaca, New York: Cornell University Press, 1997), for a description of the origins of economic surveillance.
5See Pauly (1997), chapters 3-5. Pauly views the surveillance function as inherent in the design of the Fund, which in turn was a product of the experience of the interwar years. “The surveillance function of the Fund has existed in embryonic form ever since the organization was established…. In a very basic sense, the acceptance of these obligations, implicitly in 1945 and explicitly three decades later, was a response to the depression studies of the League of Nations.” However, Jacques Polak suggests Pauly “paints a picture of more continuity—and that means less progress—than the facts warrant.” (Jacques Polak, “Comments on Louis Pauly,” unpublished mimeo, 1998, p. 1.)
6Guitián (1992).
7In the early postwar period, surveillance of Western European economies took place primarily through other institutions, notably the Organization for European Economic Cooperation and the European Payments Union.
9As illustrated by, for example, the U.K. experience in the 1960s.
10See OECD, The Balance of Payments Adjustments Process (Paris: OECD, 1966), and subsequent OECD studies of fiscal and monetary policy.
11The text of the relevant sections of Article IV and of Article I (which describes the general purposes of the Fund) is reproduced in Appendix II.
12Boughton (forthcoming) describes the phrase as a compromise between advocates of flexible and stable exchange rates: “Those who sought a flexible system in which exchange rates could adjust freely to market forces saw surveillance as a means of discouraging countries from manipulating exchange rates in opposition to market pressure. Those who sought greater stability in exchange rates saw it as a means of encouraging countries to adopt economic policies that would ensure such stability.”
13See Harold James, “The Historical Development of the Principle of Surveillance,” Staff Papers, International Monetary Fund, Vol. 42 (December 1995), pp. 771-72.
14The Contingent Credit Line, whereby the Fund agrees in advance to make funds available to a country if it were to require them, clearly blurs the line between surveillance and conditionality even further.
15See, for example, James (1995), p. 775: “The consultation exercise made the IMF aware of problems that might potentially require financial assistance. As a result, the IMF’s financial programs, and the conditionality attached to them, could be regarded as nothing more than an extension of the surveillance procedure.” This point was also made to us in conversation by the Managing Director and Jacques Polak.
16Executive Board Decision No. 5392, April 29, 1977.
17Executive Board Decision No. 5392, April 29, 1977.
18Guitián (1992), p. 12. It is notable, reading Guitián’s description (pp. 12-14) of the proper coverage of surveillance, how much the scope of Fund surveillance has expanded in the last decade.
19One of the academics we spoke to described this as the difference between simply advising a country how to avoid a crisis, on the one hand, and trying to optimize the use of all policy instruments on the other.
20An interesting illustration of this expansion can be found in the terms of reference for this evaluation, which ask us to assess “the effectiveness of surveillance in identifying those macroeconomic, structural, and financial weaknesses and imbalances in member countries and the world economy that are an obstacle to achieving sustainable noninflationary economic growth and external viability.” This clearly goes well beyond exchange rates.
21As the Managing Director put it: “Countries need new laws, new institutions, and strong professionals to adopt and apply the new standards. And the international community needs mechanisms to make the standards operational and to monitor progress. The IMF, which has been given a universal mandate for surveillance, will have here a critical role—a daunting task indeed—for which it will need to avail itself of the support of the variety of other bodies with more practical experience in each of these specific areas.” Michel Camdessus, Speech to the Foreign Policy Association, February 24, 1999.
22In particular, management has sought to define the ultimate goal of the Fund as “high-quality growth,” meaning growth that is sustainable, equitable, and environmentally friendly. See, for example, Michel Camdessus, “Addressing Concerns for the Poor and Social Justice in Debt Relief and Adjustment Programs,” speech by the Managing Director, October 22, 1998.
23Supplemental consultations were held with Sweden in 1982 and Korea in 1987. Neither appears to have had much effect on policy in the countries concerned, but the Swedish exercise may have helped to reduce the political and economic tensions arising between Sweden and its trading partners as a result of a devaluation viewed by many as excessive. See Boughton (forthcoming).
24As in the case of Thailand. See the discussion in Chapter IV.
25Peter B. Kenen, “What Role for IMF Surveillance?” World Development, Vol. 15 (December 1987), pp. 1445-56.
26Numbers in parentheses indicate the number assigned to the question in the original Executive Board request. See the Terms of Reference in Appendix I.
27See Richard Harper, Inside the IMF: An Ethnography of Documents, Technology, and Organizational Action (San Diego: Academic Press, 1998), for an interesting discussion, from a rather different perspective, of the “career” of an Article IV staff report and of an Article IV mission (to “Arcadia”).
28This committee is ad hoc (that is, it meets as required) and does not keep minutes.
29The discussion of a very small country, however, can be relatively brief.
30See Harper (1998), p. 254.
31The Fund also has regular discussions with some other regional groupings, including regional monetary unions in Africa and the Caribbean. We did not examine these in detail.
32We learned from the staff that the mission head’s seniority had been an issue for one of our sample countries (Korea) in the period leading up to a crisis. This had delayed the consultation and had, in the staff’s opinion, reduced the effectiveness of surveillance in this instance.
33This latter point does not apply to PDR, which has to sign off on every brief.
34At the same time, it was also suggested to us that in terms of the PDR involvement in the review process, there was now less of a “line” to be adhered to than earlier.
35While no one suggested that the problem did not still exist, some thought that it had lessened somewhat recently, especially with the increased use of preliminary statements (“greys”) distributed in advance of the meeting.
36The expression was used by the Deputy Secretary of the U.S. Treasury. Lawrence Summers, Remarks to the Senate Foreign Relations Subcommittee on International Economic Policy and Export/Trade Promotion, January 27, 1999.
37Numbers in parentheses indicate the number assigned to the question in the original Executive Board request. See the Terms of Reference in Appendix 1.
38See also the discussion of capital controls in Chile later in this chapter.
39This comment was actually made to one of the external evaluators of Fund research activities. Coincidentally, the official was from one of our sample countries.
40By contrast, in one country the Fund, while critical of a particular political commitment made by the government policy, provided detailed advice on its implementation that also softened the rougher edges of the measure. This was regarded as constructive and helpful.
41One notable exception was the run-up to EMU, and in particular in the aftermath of the ERM crises of 1992-93, when Fund staff and management appeared to take a rather skeptical view both of EMU’s feasibility and its desirability, suggesting instead that more exchange rate flexibility would be beneficial. Whatever the analytical merits of this view, it clearly tended to reduce the impact of Fund surveillance. However, with the introduction of the euro, this is water under the bridge.
42Note, however, that these commentators were not making the distinction between program and nonprogram countries that the evaluation team was asked to adhere to.
43Barry Eichengreen and Paul Mas son, Exit Strategies: Policy Options for Countries Seeking Greater Exchange Rate Flexibility, IMF Occasional Paper No. 168 (Washington: IMF, 1998).
44See, for example, Stanley Fischer, First Deputy Managing Director, “The Financial Crisis in Emerging Markets: Some Lessons,” speech to the Economic Strategy Institute, April 28, 1999. “We are thus likely in coming years to see more countries adopting flexible exchange rate systems or, if they choose to fix, to do so in a definitive way, for example by adopting a currency board arrangement.”
45See, for example, Stanley Fischer, First Deputy Managing Director, “Reforming the International Monetary System,” David Finch Lecture, Melbourne, November 9, 1998: “We see no case for controlling long-term inflows, particularly of foreign direct investment, but can see the disadvantages of surges of short-term capital, both inflows and outflows, and therefore can support market- based controls, along Chilean lines, that are intended to discourage short-term inflows.”
46However, we should also draw attention to the Fund’s analysis of the framework for financial supervision in the euro area (see International Capital Markets report, 1997 and 1998), which warned of the potential risks of a lack of coordination of national authorities and of the absence of a clearly defined lender of last resort. While ECB officials believed this concern to be overstated, many in academic and financial circles shared the Fund’s concern. At a minimum, the Fund’s timely probing prompted the ECB to clarify its position.
47At the same time, it should be recognized that the reasons for Fund commentary in these areas can be quite subtle on occasion. We heard, for example, that commentary on military spending in one country was more or less invited as a way of strengthening the hand of government in its desire to curb military outlays.
48The relevant part of Article I is the following: “to facilitate … the development of the productive resources of all members as primary objectives of economic policy.” See Appendix II.
49Michael T. Artis, “How Accurate Are the IMF’s Short-Term Forecasts? Another Examination of the World Economic Outlook,” IMF Working Paper 96/89 (Washington: IMF, 1996).
50It may be worth bearing in mind also that WEO and the ICMR are not, formally, documents of the Board, but rather of the staff. The Board reviews them but does not release them in its name; the May 1999 WEO includes for the first time a summing up of the two Board discussions of a draft.
51Although, equally, it was also pointed out to us that on a number of occasions the judgment of area departments had been more accurate than that of the Research Department.
52Article IV, section 3, reproduced in Appendix II.
53Peter Isard and Hamid Faruqee, eds., Exchange Rate Assessment, IMF Occasional Paper No. 167 (IMF: Washington, 1998).
54A different method for the modeling of real exchange rates has also recently been developed by Fund economists, with promising results for some developing countries. Ronald MacDonald, “What Determines Real Exchange Rates? The Long and the Short of It,” IMF Working Paper 97/21 (IMF: Washington, 1997).
55Numbers in parentheses indicate the number assigned to the question in the original Executive Board request. See the Terms of Reference in Appendix I.
56“Countries [that] received no, or at most sporadic, disbursement of Fund resources.”
57This would of course be one argument, but a second-best one, in favor of rotating Fund staff.
58Indeed, these concerns were expressed—albeit in very guarded terms—in the published Recent Economic Developments sections of the 1998 staff report (published as IMF Staff Country Report 98/24, April 1998). See in particular Chapter VII, “The Post-Real-Plan Developments of Tradables and Nontradable Prices and the External Current Account.”
59For example, the 1996 Article IV staff report states: “The recent acceleration in the schedule for capital account liberalization and the somewhat greater precision on prospective measures are welcome.”
60See, for example, Stanley Fischer, First Deputy Managing Director, “Economic Crises and the Financial Sector,” speech to the Conference on Deposit Insurance, Washington, September 10, 1998: “Although country circumstances differ, the general advice on international financial sector liberalization is first to open to longer-term investment, particularly foreign direct investment, and only to open at the short end when the necessary preconditions, in the form of macroeconomic stability and a strong banking and financial system, are in place. This was not the path chosen in Korea and Thailand.”
61The 1996 staff report argued that “particular progress [in structural reform] has been made in the financial sector; the mission believes that consideration could now be given to relaxing restrictions on foreign equity participation in the domestic capital market.” While this might indeed have been helpful, the report failed to caution on the dangers associated with the then prevailing system, which tended to encourage short-term foreign borrowing.
62It is interesting to note in this regard that while the important “Report of the Committee on Capital Account Convertibility” issued by the Reserve Bank of India in May 1997 put major emphasis on the importance of the proper preconditions and sequencing for capital account liberalization, its message has not, according to one of the authors of the report, been properly interpreted. Rather than, as the report proposed, getting on with establishing the necessary preconditions and lining up the appropriate sequencing so as to be able to progress with capital account liberalization, the policy lesson many have drawn has been rather that liberalization itself is a poor idea.
63Of course, whether advice given earlier would have been taken is quite another question. Quite possibly it would not have been, but that does not contradict the basic point that early warning is better than late.
64By “collectively” we mean in terms of advice actually given by the staff to the member. Within the Fund there were different levels of awareness of the precariousness of the domestic financial situation—especially in regard to Korea. Another consideration is that while the Mexican crisis of 1994-95 had been in part a consequence of a weak banking system, this aspect of financial vulnerability had not been fully absorbed across Fund area departments.
65In this regard, particular note should be taken, especially given the eruption of the Asian crisis a few months later, of the cautionary observation in paragraph 71 of that document: “While substantial attention has been paid to financial sector issues in surveillance, the coverage of these issues in Article IV consultations appeared in most cases to have been backward looking. Moreover, it is difficult to infer from the language the extent of the risks seen by the staff. In part, this hesitation may reflect the fact that the extent of banking problems often emerges only with a delay together with practical limitations on the ability of the Fund to attempt to identify banking problems in advance.” More generally, the staff review also cautioned in the same piece that “the absence of major crises with systemic effects does not provide evidence that Fund surveillance has become more effective. Such welcome developments may reflect good management by countries unrelated to Fund activities, good luck, or other factors.”
66The conclusions of the review are summarized in the 1998 IMF Annual Report, pp. 34-38.
67By way of example, fairly randomly chosen, the reader is invited to peruse the following PIN sentence for the main message: “[Directors] stressed, however, that fiscal consolidation at both provincial and federal levels had been reflected in substantial efforts to contain the growth in outlays for medical services and to improve the efficiency of the health care system, but they were doubtful that that approach could be relied upon to contain the increases in health care costs that were likely in the future.”
68We should note that in April 1999, the Board did agree on a compromise pilot project of publishing Article IV consultation reports for about 20 countries on a voluntary basis—to be reviewed after 18 months. Our own views on publication come in Chapter V.
69Bear in mind that they are sent, among other things, to 182 countries. In this regard, we were told of one instance where the public had access in a country’s central bank library to all Article IV reports.
70IMF, Annual Report, 1998, p. 37.
71Our conclusion is that in a preponderance of cases it is not an understanding of economic policy principles that inhibits a country from doing “the right thing,” but rather, as we have already indicated, the challenge of summoning up the critical mass of political will to do so in a timely fashion.
72The same is true for structural policies. But, in any case, as set out below, we recommend that the Fund aim to reduce the resources devoted to the surveillance of structural policies across the board.
73As it also is at G-7 meetings.
74It is interesting to note that in the most thorough published analysis of surveillance, Guitián (1992), who was then a senior staff member, saw the key challenge as how—in the absence of any coercive power—surveillance is to be made effective through peer pressure. See Manuel Guitián, The Unique Nature of the Responsibilities of the International Monetary Fund, IMF Pamphlet Series No. 46 (Washington: International Monetary Fund, 1992).
75Of course, we recognize that what is directly relevant to macroeconomic management will differ from country to country. Labor market policy may be directly relevant in one country but not in others.
76This recommendation would also address a related problem; perfectly naturally, individual Directors are inclined to raise particular issues during a Board discussion that they feel staff might pursue in future consultations. There is certainly nothing wrong in this. But if all such requests are pursued—and certainly the incentives are for staff to do so—then the net effect is a continual expansion of the agenda. The proposed system would help Directors to consider whether such suggestions were consistent with a focused approach to surveillance, and with the resources available.
77Note that this issue also comes up in relation to matters of transparency, in particular “self-censorship,” discussed in the section of this chapter on communication.
78In modeling for multilateral surveillance purposes, the Fund uses its own multiregion macroeconomic model (MULTIMOD). See Douglas Laxton, Peter Isard, Hamid Faruqee, Eswar Prasad, and Bart turtelboom, MULTIMOD Mark III: The Core Dynamic and Steady-State Models, IMF Occasional Paper No. 164 (Washington: IMF, 1998). MULTIMOD is generally recognized as being on the cutting edge in this field.
79As noted in Chapter II, this is in part a problem of success. Once, it may have been sufficient to focus with many country policymakers on what the first-best was, since they didn’t know. Now, in many countries policymakers know full well what the first-best policy is, but would like advice and assistance in identifying the best available alternative policy option or modification, even if the Fund will also underline (as it certainly should) that it is indeed only a second-best.
80To give a concrete example, it would probably be more useful to a country experiencing large capital inflows to have a Fund analysis of other countries’ policies and experiences, and what the lessons might be for the country in question, than to be told that capital account liberalization was a good thing.
81Here it is worth recalling the point made in Chapter IV—that stressing the importance of proper preconditions and sequencing should not at all be taken to imply that capital account liberalization is a bad thing.
82We are not suggesting here that the current account and its sustainability is not an important subject of analysis.
83We explain the main elements in EWS and comment on its use, primarily in multilateral surveillance in Box III.l, while focusing here on its application to the Article IV process.
84One observer has likened the difficulties of forecasting balance of payments crises to those of predicting earthquakes. See Barry Eichengreen, Toward a New International Financial Architecture (Washington: Institute for International Economics, 1999). We find this analogy excessively unfavorable to EWS for two reasons: first, earthquakes are even more difficult to predict than financial crises; and second, their occurrence cannot be influenced by human action—only their consequences can be mitigated—while balance of payments crises can, in principle, be forestalled by timely warnings.
85The current WEO forecast schedule might not fit too well with a move to quarterly publication, since at present WEO appears in late April and late September, leaving a gap of only five months. Either this timetable could be adjusted slightly, or the new summer WEO could be particularly lean—perhaps simply containing forecasts and descriptive material.
86One potential objection to this recommendation is that it would simply reverse the problem; area departments would feel a loss of ownership of the Fund’s forecasts for the countries for which they are responsible. While this might occasionally cause difficulties on the rare occasions where there were sharp disagreements (although we do not see any great problem in general in being quite transparent about divergences of view and the reasons for them), we do not see that it would undermine the conduct of bilateral surveillance to the extent to which the present situation undermines the credibility of the WEO forecast.
87Of course, the Board would still discuss the draft in advance of publication (and WEO could record the views in an Appendix, as was done with the May 1999 issue). But the staff should decide how to deal with the points raised at the discussion.
88WEO is currently discussed by the Board four to five weeks before publication, and Board members require three weeks to review it before the Board discussion. As a consequence, while it only takes about two months for the staff to produce a draft WEO document—even with the current elaborate internal review procedures—it takes another two months before publication can proceed, with relatively little value added.
89It is also worth bearing in mind that the deterioration in Korea’s circumstances in 1996/97 was in any event not signaled by current, nonselective surveillance procedures.
90This would not imply that staff would only visit countries every two years; we would expect short, smaller missions to visit more frequently than this. See also our recommendations on more continuous surveillance below.
91The United States, the euro area (i.e., consultations focusing on the area as a whole), and Japan.
92We note that the Fund is already increasing the resources devoted to financial sector surveillance.
93Without aiming at any precise definition of “small states,” we can note that there are some 40 Fund members with populations of less than one million.
94We believe that this can also help to correct a general and significant lack of understanding of what the Fund is and what it can do.
95It has been suggested to us that the role of resident representative offers this kind of experience. We agree that it is different from being in Washington, but we are not convinced that the experience overall is sufficiently different.
96The same process takes place within departments; material—even of a relatively mundane nature—is not generally circulated to other departments until it has been collated, reviewed, and approved by departmental front offices. This issue is also addressed below.
97One staff member pointed out that the 1996 staff report on Korea was produced just after an Economist survey, which had a detailed description of the financial problems of Korea’s corporate sector. However, the staff report did not cover this topic, and made no reference to the Economist survey.
98The external evaluation process, of which this evaluation is a part, can only look at issues in a one-off fashion. It is not the same thing as an ongoing process of external review and evaluation of the day-to-day surveillance output of the Fund.
99Agreement on two or three lead speakers to focus each discussion at Board surveillance meetings, as they are presently constituted, would be an improvement over current arrangements. However, we believe that the gains in terms of a more active Board contribution to Fund surveillance activities would be much greater through a committee structure.
100An interesting recent example—since it relates to a large industrial country whose economy is generally performing well and which might therefore be expected to be less sensitive—is the United Kingdom. A number of Executive Directors complained that the most recent staff report made only passing reference to EMU—clearly the most pressing medium-term macroeconomic issue—and expressed their belief that this reflected the staff’s view that the U.K. authorities would not welcome such a discussion.
101We recognize that there are some legal issues here. The Fund could publish a staff report—provided that it did not contain the views of the Executive Board or any confidential material provided by the country—without the country’s permission. However, if the report contained the Board’s views, significantly more restrictive criteria would apply. We take the view that if the Board decides in principle in favor of this approach then these issues can be resolved.
102See also the note by Chairman John Crow, “Confidential Exchange—An Elaboration,” included as Appendix V of this report.
103Communique of April 25, 1999.
104To reiterate, we consider that the core areas of responsibility are exchange rate policy, macroeconomic policy, financial systems, and capital account issues. While the Fund’s current view of the core seems more expansive than that—see, for example, the discussion in Chapter I of this report—it does seem that on this question of international standards, the Fund’s view and ours do coincide.
105Some of the countries we have looked at more closely have passed from one state to the other as they entered into Fund programs: Thailand in July 1997, Korea in December 1997, and Brazil in November 1998. In accordance with our terms of reference, and since the Fund involvement in—and influence over—a member’s policies changes qualitatively around such dates, we have confined our study to surveillance in the classical sense. Of course, as mentioned in Chapter I, the advice given in the surveillance context is to some extent likely to foreshadow program conditionality. But if, as in these countries, the program follows a crisis, circumstances will have changed significantly, and so necessarily will the Fund’s policy prescriptions.

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