The “Good Global Citizen” remit of the IMF: reforming international economic and financial cooperation

Biagio Bossone, Roberta Marra - March 2013

I        Introduction

A fundamental lesson from the Great Recession is that global instability is more than the sum of domestic instabilities of single countries (Borio 2011). Not only do country exposures to common – global – factors matter a lot. Those same global factors, while taken to be exogenous from each country, are in fact endogenous to their collective behavior. As a result, in a highly globalized world where markets are tightly integrated, purely country-centric approaches are inadequate to understand the workings of the economy and to formulate effective policy. Setting domestic economic policy with a view simply to keeping one’s house in order is no longer optimal in such a world, both from the global perspective and from the standpoint of the single countries. Prospects for global economic and financial stability can no longer be evaluated purely as the bottom-up summation of conditions of individual countries assessed on a stand-alone basis: a globe-centric approach becomes necessary. As Borio (cit.) most aptly puts it

 

Actions that may appear reasonable from an individual country’s perspective need not result in desirable aggregate outcomes. (…) Individual countries cannot be “safe” unless the global economy is safe and their safety can only be assessed in a global context.” (pp. 7,8)

 

 

Our work builds from this conclusion, and calls for a broad reconsideration of the principles underpinning the current governance of the global economy. Our focus is political and institutional, not analytical. We will not concern ourselves with how economic and financial analysis should be improved by embodying country inter-linkages and cross-country spillover and contagion effects.[1] We will rather focus on how country policy frameworks need to be revisited in a globalized world, as country mutual externalities are appreciated. Our key question is about how countries should modify their behavior as members of the global community, once the principle of just looking at their own house is recognized to be inadequate to ensure world prosperity.

 

To address this issue, it is only natural to start from the IMF’s Articles of Agreement – the legal architecture that frames and sets the obligations of countries vis-à-vis international monetary and financial cooperation, including those subjecting country policies to IMF surveillance – and to determine whether the existing IMF obligations are consistent with the globe-centric approach mentioned above.

 

The rules currently governing international cooperation under the IMF Articles of Agreement are country centered, essentially reflecting the nature of the IMF as a multilateral institution founded on a community of nation states. Such rules were originally tailored for national economies whose financial dimension was relatively small and close (largely domestic), and which were themselves slow moving, since their activities were pre-eminently “physical”, that is, characterized by flows of material goods and services that required time to be produced, distributed, and used.

 

As the economies became integrated into global networks of real-time financial exchanges, the smallness, closeness, and slowness of their old world were lost. Speed, openness, and international linkages have dramatically increased on the real side of the economies as well, with advancements in technology and communications and the formation of global supply chains in international trade. Whereas macroeconomic stability in the “slow, small and closed” world of the old days afforded discrete-time monitoring and essentially country-specific surveillance and policy intervention, macro-financial stability in the contemporary global system of open and interconnected national economies requires continuous oversight, integrated (bilateral and multilateral) surveillance and internationally coordinated action in the case of critical cross-border events.

 

Yet, changing from the old approach to the new one is not just a technical issue. It is primarily one of country attitude: countries must learn how to live in a globalized world, in particular by internalizing their mutual externalities, by taking responsibility for what their action produce on others and on the whole community, and by behaving in ways that manage externalities coherently with domestic and global stability.

 

Our work is about changing country attitude in the direction just noted. The work is organized as follows. Section II explains why the existing legal architecture of the IMF is inadequate to foster the international policy cooperation that is necessary in today’s globalized world economy. Section III illustrates how to address this problem by introducing the “Good Global Citizen” remit, and submits specific proposals to amend the IMF Articles of Agreement formally to integrate the new remit within the IMF’s legal framework. Section IV concludes the work with closing remarks.  

 

 

II       International Cooperation under the IMF Articles of Agreement

International monetary and financial cooperation revolves crucially around Article IV of the IMF’s Article of Agreement, which sets the rules for IMF surveillance over member policies and the related obligations for each member to cooperate with the IMF. The article reflects the possibilities and the limitations of such cooperation, and it is naturally the object of any reform proposal aimed to influence members’ attitude toward economic policy making.

 

As the culmination of a long and thorough effort to analyze gaps in surveillance (Bossone 2008a, b,  c), the IMF adopted in 2007 a Decision to distill the best practice of surveillance, and to crystallize a common vision of modern surveillance in a comprehensive statement. The new Decision revised the 1977 Decision, which had been crafted shortly after the collapse of the Bretton Woods system, in the midst of considerable uncertainty as to how the new system would work, and which focused exclusively on surveillance over exchange rate policies. The 2007 Decision did not create new obligations for members. It was intended to update the 1977 Decision in a number of important respects. In particular, in order to help focus surveillance on issues crucial to international monetary and financial stability, the 2007 Decision introduced the concept of “external stability” as an organizing principle for bilateral surveillance.[2] The 2007 Decision also specified the essential modalities of effective modern surveillance, emphasizing among other things its collaborative nature. It also underscored the need for a multilateral and medium-term perspective.

 

Yet, the vision underpinning the 2007 Decision was the traditional one whereby member countries achieve the goal of external stability if only they succeed to promote internal stability (that is, economic growth and price stability) and orderly financial and monetary conditions. Systemic stability was still seen as the sum of the internal stabilities of each country. Under this vision, there is no expectation or presumption that members should change course of action when policies that are justifiable from the country-centric point of view turn out not to be so from a globe-centric perspective (as would be the case, for instance, when they are deemed to add to global imbalances).

 

The 2007 Decision was silent on multilateral surveillance and on the importance of integrating it with bilateral surveillance. In light of its provisions, the IMF may not require a country that was compliant with its obligations under the Article IV Section (i) and (ii) to correct its policies in the pursuit of systemic stability. As a consequence, it was the case that each member was taken to be compliant with its obligations under the Articles of Agreement if its policies were not found to be in conflict with the general macro-objectives indicated in the Articles.

 

Following the 2007-09 crisis, the IMF staff did recognize the limits of the 2007 Decision in the context where it developed and had rapidly become global (IMF 2010a – c). First, the staff noted that the legal framework for bilateral surveillance required the IMF to examine transnational events (say, financial sector shocks originating in one member country and spilling over to others) only to the extent that they were transmitted through the country’s balance of payments. Second, with respect to members’ domestic policies, each member was required to promote global systemic stability only by promoting its own domestic stability. Both requirements rendered bilateral surveillance a poor vehicle for discussing the implications of country policies or shocks that can be transmitted internationally without balance of payments effects or without adverse consequences for domestic stability.

 

Moreover, as the staff underscored, the country-centered nature of bilateral surveillance with its individual country teams would be unfit to assess outward spillovers, since it is hard for them to assess how their focus country affects the rest of the world. Also, while the analysis and policy advice underpinning bilateral surveillance necessarily takes external (global and/or regional) developments as being exogenously determined, these are in fact the outcome of dynamic feedback loops that require a “bird’s-eye view” to analyze. Because of this, and because consultations under Article IV involve exclusively the authorities of the country concerned and rule out the dialogue with relevant policy makers of other countries, bilateral surveillance focuses less on transnational problems and international policy consistency and cooperation, and more on how global trends and outlooks affect the country under consultation.

 

These critical observations and the latest, extensive review of surveillance (IMF 2011a – g) led the IMF to issue the Integrated Surveillance Decision (IMF 2012), which has become operational in January 2013. Importantly, the new Decision recognizes the need to take international spillover effects from domestic policies into consideration under IMF multilateral surveillance; it also recognizes that these effects might not necessarily be transmitted through the country’s balance of payments, and that they can occur even if the country finds itself in conditions of domestic stability.

 

Yet, the new Decision carefully avoids attaching consequential policy responsibilities to members. Firstly, it reaffirms that, in its bilateral surveillance, the IMF will focus on those policies of members that can significantly influence present or prospective balance of payments and domestic stability, under the explicit recognition that “systemic stability” (defined as to encompass orderly exchange arrangements and a stable system of exchange rates) is most effectively achieved by each member adopting policies that promote its own balance of payments stability and domestic stability.[3]

 

Secondly, the new Decision states that, while the IMF will always examine whether a member’s domestic policies are directed toward keeping the member’s economy operating broadly at capacity, it will not require a member that is complying with Article IV, Sections 1(i) and (ii) to change its domestic policies in the interests of balance of payments stability. In other words, a country that is found to be running a structural balance of payment surplus, therefore detracting persistently from global demand and output, would not be solicited – let alone placed under any obligation – to correct its position by stimulating domestic absorption.

Thirdly, under the new Decision, IMF multilateral surveillance will consider the spillovers arising from policies of individual members that may significantly influence the effective operation of the international monetary system, and the IMF will be allowed to discuss the impact of members’ policies on the effective operation of the international monetary system and to suggest alternative policies that, while promoting the member’s own stability, better promote the effective operation of the international monetary system. However, the Decision also provides that the IMF may not and will not require a member to change its policies in the interests of the effective operation of the international monetary system, nor will the member be under any expectation or presumption to so act.  

 

In conclusion, the new Decision does not alter members’ obligations vis-à-vis the IMF. Even if the IMF acknowledges that a member’s policies may have a significant impact on other members and on global economic and financial stability, it may not require the member to change policies. The IMF may discuss with members the implications of their policies and, to the extent possible, suggest potential alternatives to better promote the effective operation of the international monetary system. to implement external and domestic economic and financial policies that, in themselves or in combination with the policies of other members, are conducive to systemic stability. Moreover, the new Decision fails to recognize that countries need to take on new mutual responsibilities as members of a community of nations in a context that makes them all growingly interconnected.

 

All considered, it appears that, irrespective of the recent adaptations and interpretations, the IMF’s Articles of Agreements remain strongly anchored to a country-centric vision, which precludes any steps to link domestic policy responsibilities to global systemic goals within a framework of strong international cooperation.

 

 

III     Introducing the IMF’s “Good Global Citizen” remit 

A political will from the international community should be expressed toward a renewed multilateral cooperative spirit that should lead to a reform of the IMF legal framework, which would:

 

-     eliminate the distinction between “domestic policies” and “external policies,” the assumption underpinning this dichotomy being that domestic policy decisions are not to be assessed on the basis of their impact on other members and global systemic;

 

-     redefine the notion of “systemic stability”: the pursuit of domestic stability by members may not be sufficient to ensure systemic stability globally. Every member should be called on responsibly to evaluate whether its domestic policy choices do, or could, clash with global systemic stability and consider appropriate corrections as necessary. This rule would be acceptable only if members recognized that, if followed by all, the rule would better serve their own interest: the objective of global systemic stability would then be internalized within domestic policy decisions and become a domestic policymaking concern;

 

-    suppress the hierarchy – currently inscribed in Article IV – between exchange rate policy and other domestic policies, by challenging the primacy of the former and by emphasizing the relevance of domestic policies for global systemic stability; and

 

-      focus on the soundness of the “international monetary and financial system”, rather than on the stability the exchange rates system, as the overall mission of IMF surveillance: such a mission should not be just the objective of multilateral surveillance but of surveillance tout court. Multilateral and bilateral surveillance should be parts of one single framework, with a view to bringing their scope and modalities within a unitary context, allowing the IMF to assess country compliance against the overall objective of a stable international monetary and financial system.

 

These changes can be coherently introduced under what we call the IMF’s “Good Global Citizen” remit. Under the new remit, the IMF members would undersign to a multi-bilateral commitment to behaving “responsibly” vis-à-vis each other and the global community. As “good global citizens”, they would be expected to take into account, within their policy-making process, the spillover and contagion effects deriving from their action, and to act cooperatively to achieve global systemic stability (to be technically defined under the new remit).

 

Under the Good Global Citizen remit, the IMF would become the repository of the members’ multi-bilateral commitments recalled above, and would be tasked with monitoring and facilitating members’ compliance with the commitments. With the new remit, and by integrating bilateral and multilateral surveillance, the IMF would ascertain whether economic policies or events originating in one member might impact on the domestic economy of other members (outward spillovers) and vice versa (inward spillovers), and advise members accordingly. In light of the new remit, the IMF would be granted the authority to call on members involved in situations where (potential) spillovers were regarded to be significant, and to activate multilateral consultations with all the relevant policy makers with a view to prompting appropriate individual and collective actions. In light of the new remit, members that were called on by the IMF for consultation would be expected to engage in a cooperative response.

 

In our view, such a formidable turning point in global economic governance is only possible through a radical change in the IMF legislative framework, in particular through the definition of the principles that guide the institution’s mission and activities, in reflection of a new compact among members on how to cooperate in a globalized world economy. This requires clarity about the goals to be pursued by national policy makers in the global economy through individual and collective action at the country level.

 

Under the new remit, the Articles would affirm that, in the new world economy, the mission of the IMF is to ensure global and systemic stability, and should recognize that the systemic nature of the global economy connects in principles all members’ economies and economic policies, and requires of them to commit to cooperate toward the achievement of the common mission.

 

In this spirit, the Articles would provide a technical definition of “global systemic stability”. This could be defined and set out explicitly in Article 1 as the condition where members’ balance of payments are in sustainable equilibrium; their economies are characterized by high levels of employment and real income, and by reasonable price stability, including of real and financial assets; and where the risks of cross-border transmission of shocks are effectively managed and kept to a moderate level.

 

This definition encompasses three components.

 

Integral to the first component is the notion of “symmetric external adjustment”, whereby all countries would be responsible to pursue external balance, meaning that the responsibility to adjust structural external imbalances would fall upon countries running external deficits as well as those running surpluses.[4] As a result, under the Good Global Citizen remit, at the same time that deficit-countries would be asked by the IMF to implement adjustment programs, countries running persistent surpluses would equally be required to take measures to invigorate domestic demand, use their surpluses to finance investments abroad, and/or encourage domestic structural reforms to increase economic efficiency and facilitate domestic consumption, thus re-injecting stimuli into the global economy and reducing the adjustment cost for deficit-countries.

 

The second component of the definition of global systemic stability (i.e., high employment and low real and financial inflation), on the other hand, are more in line with the traditional principle of “keeping one’s house in order”, since they refer to the pursuance of domestic objectives. Importantly, however, compliance with both objectives combines stability with high resource absorption and production, and ensures that each member provides the global economy with a sustained and sustainable injection of demand and output, and with a low risk of international price shocks.

 

The third component (i.e., low risks of cross-border shocks) recognizes explicitly that, giving the existence of cross-country systemic interconnections, global stability demands that each member cooperates with all the others to keep the risks of international transmission of shocks to low levels.   

 

On the basis of the new definition, IMF surveillance would be fundamentally reoriented. Article IV would indicate that, in making economic policy decisions, each member takes into consideration the potential impact of those decisions on other members and the global economy, and have due care for minimizing their negative impact on other members and the global economy and, where possible, for cooperating with other members with a view to achieving global systemic stability.

 

Article IV would then provide that, through surveillance, the IMF will advise members on the potential impact of their policy decisions on other members and the global economy, will assist them in making policy decisions that are consistent with the goal to achieve global systemic stability, and will assess the member’s endeavor to fulfill such responsibility.

 

With the new Article IV, surveillance and the corresponding members’ obligations would be redesigned under a notion that would embody both bilateral and multilateral surveillance within an integrated whole. Surveillance would be redefined so that:

 

-    periodic consultations with individual countries should no longer be seen as ends in themselves, and should become a tool for surveillance on a global level. Bilateral consultations would be the instrument through which the IMF obtains detailed information and makes adequate recommendations on domestic policies, and would be preparatory to – and followed by – multilateral meetings with the countries that are more directly affected by mutual policy decisions, spillover and contagion effects, or common shocks. Multilateral consultations, in themselves, are not an innovation.[5] In our proposal, however, they would provide the main instrument to address systemic issues originating from individual countries and affecting others;

 

-     consequently, members obligations would not relate only to the “one-to-one” relationships binding each member to the IMF, but would define an entirely new status of international relations: as a member of a multilateral organization aimed at international cooperation, each country would take part to the cooperative effort not just as an individual entity but as a responsible member of the global community of countries.

 

Finally, from the standpoint of the global responsibility of each country, Article VIII should be amended to provide that members shall furnish detailed information even on affairs of individuals or corporations in all cases where the information is deemed necessary to analyze issues of systemic relevance, and that members and the IMF will agree on the confidential treatment of sensitive information.

 

We have translated the above changes into specific amendments to the relevant IMF’s Article of Agreement, which we have reported in the broader version of this article available on the website of “The Group of Lecce” on global governance and financial reform (www.thegroupoflecce.org).

 

 

IV    Conclusion

We have learned from the ongoing crisis that global instability is more than just the sum of domestic instabilities of single countries and that, in today’s globalized world economy, setting domestic policy with a view simply to keeping one’s house in order is no longer optimal, both from the global perspective and from the standpoint of the single countries. Prospects for global economic and financial stability can no longer be evaluated purely as the bottom-up summation of conditions of individual countries assessed on a stand-alone basis. A globe-centric approach becomes necessary for adequate analysis and policy-making decisions.

 

Designing such an approach requires a deep change in the attitude of countries vis-à-vis their contribution to international policy cooperation. A globe-centric approach implies that each country act responsibly toward the community of countries, by incorporating within its policy decision making the (inward and outward) externalities that derive from the integration and systemic interconnections inherent in globalization. This would be a major change in attitude, which would in turn require that each country accept the notion that in a globalized world even the national interest is better served if cross-country feedbacks are factored in and acted on with a systemic view and under a shared, collective responsibility.

 

New responsibilities follow for each member of the international community of countries from the recognition that, in today’s globalized world, the action by one may affect the others. A new commitment is required from each member – especially those having systemic relevance – which should reflect such responsibilities. These responsibilities form the core of what we have called the “Good Global Citizen” remit of the IMF. We have proposed that the legal architecture of the IMF be reformed to incorporate the new remit, through the deliberate decision of its members to surrender part of their national sovereignty (by subjecting themselves to new obligations) in exchange for greater levels of global welfare.   

 

Our hope is that from the ashes left by the crisis the spirit of a renewed, authentic multilateralism may finally arise.

 

 

References

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