The “Good Global Citizen” remit of the IMF: reforming international economic and financial cooperation
Speed Read
- The IMF rules governing international cooperation are country-specific and are inadequate to setting globe-centric policies more appropriate to an integrated global economy.
- Rule changes made in 2007 were based on the traditional assumption that achieving external stability required only internal financial stability and economic
growth.
- The IMF needs a new ‘global citizen’ remit with a mission to define and ensure global and systemic economic and financial stability requiring international cooperation.
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.
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.
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. 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.
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.
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. 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.
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).
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.
Borio, C. (2011), Central
banking post-crisis: What compass for uncharted waters? - BIS Working
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For a comprehensive review of
the technical issues, see IMF (2011a – g).