As a mea culpa, it could not have got better. Or should that read 'worse'? But as an exercise in soul-searching, the report of the Independent Evaluation Office (IEO) of the International Monetary Fund (IMF) on the IMF's performance in the run-up to the financial crisis, released mid-February, could not have been more thorough.
Or more deserving of attention! But February is a month when most of India is fixated on the Union Budget looming ahead. So the IEO report was almost completely ignored by business dailies here despite the fact that it is a remarkable piece of work. And, as a freshly-minted member of the G20 club charged with overseeing safe-landing the global economy, we have a vital role in ensuring the report gets more traction, and more important, is acted upon. But first, what is the IEO?
It was established in 2001 after the Asian crisis with a mandate to conduct independent and objective evaluations of the IMF's policies and activities. The idea was that a frank and informed postmortem would improve the Fund's ability to draw lessons and integrate improvements into its future work. The Office is fully independent of the IMF's management and operates at arm's length from the board of executive directors.
The director is an official of the Fund, but not a staff member, and the majority of full-time IEO personnel are from outside the Fund. This is not a matter of detail. No internal body would have been as scathing of the IMF's performance. Consider. In a Box titled, What was the IMF saying about Iceland in 2007-08, the report says the IMF's discussions with that country's government under Article IV found Iceland's medium-term prospects 'enviable', adding 'the banking sector appears wellplaced to withstand significant credit and market shocks.'
All this, just months before Iceland's banks collapsed like a house of cards! That is not all. The IMF, we in India have tacitly accepted , has one set of rules for the developing world and another for its patrons in the developed world. But you don't expect to see that in a report fathered by the IMF, even if by an Independent Evaluation Office! And here lies the strength of the report: its honesty. 'The quality of bilateral surveillance,' it admits, 'varied greatly among other member countries.
In contrast to upbeat messages to the largest systemic financial centers, some smaller advanced and emerging market countries with similar vulnerabilities received repeated warnings about the buildup of risks in their domestic economies.' A case of double standards? You bet! The IMF's ability to correctly identify mounting risks was hindered by a high degree of groupthink, intellectual capture, a general mindset that a major financial crisis in large advanced economies was unlikely, and incomplete analytical approaches.
Groupthink or the tendency among homogeneous, cohesive groups to consider issues only within a certain paradigm and not challenge its basic premises is not unique to the IMF. It happens everywhere. All the more reason to guard against it! But that is easier said than done, as anyone familiar with the parable of The Emperor's New Clothes would agree .The prevailing view among IMF staff, a cohesive group of macroeconomists, mostly educated in US universities was that market discipline and self-regulation would be sufficient to stave off serious problems in financial institutions. They also believed that crises were unlikely to happen in advanced economies, where 'sophisticated' financial markets could thrive safely with minimal regulation of a large and growing portion of the financial system.
The IMF staff was uncomfortable challenging the views of authorities in advanced economies, being overly influenced (over-awed?) by their reputation and expertise; a case of intellectual capture, the report concedes. So, while they had no problem lecturing developing countries, they were was wary of doling out tough talk to developed countries. Many believed there were limits to how critical they could be regarding the policies of the largest shareholder since '... you're owned by these governments (read: the US)'.
More dangerously, staff perceived that in case of disagreement, the IMF management would end up endorsing country authorities' views. None of this is a particularly encouraging read at the time when the G20 seems to have lost its way and the IMF, to all intents and purposes, has regained its position as numero uno.
True, there has been some tinkering at the margin with voting rights in the IMF Board and advanced economies have been included in the Fund's 'Vulnerability Exercise' and 'Early Warning Exercise'. There is also increased research on macro-financial linkages and financial stability assessments have been made a mandatory part of surveillance for 25 most systemic financial sectors. However, as the report points out, similar views were articulated after previous crises;but were either not implemented or implemented indifferently. Why? Because of a phrase we in India are hearing more and more these days: 'governance deficit'.
The report accepts this but finally settles for more of the same. So, it suggests creating a risk assessment unit reporting directly to the management, changing the insular culture of the IMF by inducting outside analysts, encouraging staff to be more candid, etc. And shies away from more crucial reform that alone can deliver better governance: root-and-branch overhaul of the Fund's voting rights to reflect the new realities of the 21st century world.
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