"Strengthening IMF Surveillance"

The Managing Director of the International Monetary Fund, Rodrigo de Rato, discusses attempts to and strengthen IMF surveillance over the economic policies of member nations:

Strengthening IMF surveillance, by Rodrigo de Rato, Project Syndicate: In today's globalized economy, one country's economic and financial policies can reverberate far beyond its borders. Be it the spread of inflation or the impact of currency devaluation half a world away, global economic forces can have a direct impact on every person's livelihood. Under such circumstances, international cooperation is essential to ensure stability and growth and prevent disruptive crises. ...

For many years, the IMF has engaged its member countries in a process known as "surveillance," in which it monitors, analyzes, and consults on each country's economic policies - both exchange rate policies and relevant domestic policies. These regular checkups help to identify potential vulnerabilities and maintain economic stability. However, the increasingly complex policy challenges of the globalized economy demand a fresh look at this process.

This June, the IMF's Executive Board did just that... This is one of the most important reforms to the Fund's work in the 30 years since the surveillance process was designed. ...

The new reform brings three critical changes. First, it affirms that surveillance should focus on what matters for stability, and gives detailed guidance in this area. ...

Second, there is now clear advice to the Fund's member countries on how they should run their exchange rate policies, and on what is acceptable to the international community.

Finally, the reform sets out clearly for the first time what is expected of surveillance, and so should promote candor and evenhanded treatment of every country..., including delivering clear and sometimes difficult policy messages and sharing its views with the international community.

The new approach to exchange rate policies represents ... significant advances. Under the IMF Articles of Agreement, members are required to collaborate to promote a stable system of exchange rates and to avoid manipulation with a view to gaining an unfair trade advantage. Past guidance in this area was limited, focusing entirely on manipulation and on avoidance of short-term volatility. This guidance remains, but what we meant by manipulation is now clearer. ...

This change comes at a crucial time for the world economy. ...[I]mproved surveillance is essential to ensure that the global economy remains on an even keel. By clarifying what surveillance entails, the new decision should help the IMF and its members see eye to eye on the Fund's role..., and make the Fund more accountable for delivering on this key responsibility.

This reform represents a victory for multilateralism that demonstrates ownership of how Fund surveillance will be strengthened and members' willingness to live up to their responsibilities in the process. Of course, it is critically important that it received very broad support from industrial countries, emerging economies, and developing countries.

The international community needs a setting where it can debate the most sensitive economic issues, including ... exchange rate issues. The IMF offers that venue. At the same time, it can provide the nonpartisan technical expertise that enables governments to define policies that will ensure continued economic stability. The goal is to support policies that are good for each member country - but also for other countries - through dialogue and persuasion. This is the very essence of international cooperation.

Here's Dani Rodrik on the new policy:

My candidate for IMF chief , by Dani Rodrik: ... Mali asks what my views are on

the new IMF decision on exchange rate surveillance .... Basically now for each country's report, Fund staff have to provide a view whether the exchange rate is misaligned, and by how much, according to various methods/measurements (which the results sometimes vary in great magnitude and direction).

This is a complicated one, because a country's exchange rate policy has obvious externalities for other countries. So this cannot be a free-for-all and there is indeed some role for exchange-rate surveillance. But if you take the view, as I do, that exchange-rate undervaluation is a second-best policy to overcome distortions in tradable industries, then it is also the case that you must provide developing countries with some leeway in their conduct of exchange-rate policy. The IMF gets it particularly wrong when it says it will use management of the capital account as an indication of currency manipulation--but that is yet another story. My concern is that the developmental role of currency policies is being neglected in all the focus on "external stability." I hope to return to this topic later.

I'm not sure what the right answer is on exchange rate policy. A pegged exchange rate appears to promote internal stability for developing countries, but the increased stability comes at some cost to other countries. But more generally, more and more I'm beginning to think that some types of international institutions will be necessary in an increasingly globalized world. But without the ability to enforce agreements, I'm not sure how much impact they can have. There was a time when losing access to IMF funds was a risk, and this gave IMF guidelines some authority, but with developments in international financial markets the IMF is no longer as essential as it once was, so fear of being cut off by the IMF does not provide much discipline. If financial markets do not need the IMF's seal of approval, it's authority is limited.

Dani Rodrik hopes to return to this topic, and I hope he will - this is meant to encourage him to do so - and I also hope others who are specialists in this area or have things to add to the discussion will offer their thoughts as well.