♠ Posted by Emmanuel in Bretton Woods Twins at 2/27/2010 04:02:00 PMNo, no, I am not referring again to past indiscretions of IMF Managing-Director Dominique Strauss-Kahn. That stuff is old. Instead, what we have here is yet another proposal to make the international financial institution more in tune with the times. After a slow period in the wake of the Asian financial crisis, it seems the IMF has sprung up all over the place and is still gathering momentum. As I see it, the essential point here is that modern financial crises have contagion-like characteristics that affect groups of usually neighbouring countries facing similar difficulties: think of Southeast Asian countries that couldn't roll over foreign currency-denominated debts in 1997/98 or Eastern European countries suffering from parlous finances exacerbated by the credit crunch of 2008.
Hence, a new WSJ article outlines plans to change traditional IMF patterns of lending and surveillance to meet today's challenges by shifting focus away from single countries to groups of countries:
The International Monetary Fund is considering a new multibillion dollar lending arrangement it would deploy during crises, which would offer money to countries even if they don't ask for it. Under the "multicountry credit line," the IMF would, for the first time, make money available to groups of countries that it believes are in danger during financial crises, rather than individual nations, said a senior IMF official.The article further notes that the usual stigma associated with approaching the IMF should be lessened with this multicountry approach. That is, a particular country doesn't need to call Washington with mayday appeals. Rather, the IMF monitors the situation in a particular area of the world and decides if the extension of emergency funding is called for largely of its own initiative. In a speech just this Friday, Strauss-Kahn alluded to the tabling of such a mechanism in line with the challenges now faced by the lender:
The countries wouldn't need to request the assistance; rather the IMF would make lines of credit available to those nations whose policies it deems are sound. The nations wouldn't be required to use the money. "The fund would declare there's a systemic problem and here's line of credit for the following countries," said the official. He emphasized that a formal proposal isn't expected to be ready before September and would need to be approved by the IMF's governing board.
Board members have said they are interested in "exploring the merits" of the proposal, according to an IMF summary of board discussions.
In principle, the Fund’s surveillance covers both economic policies in individual member countries, and developments relating to the global economy as a whole. But in practice, the bulk of our efforts have been at the country level. One result of this has been that we have not paid enough attention to the linkages and spillovers between economies—including those that transmit through the arteries of the global financial system.It's an interesting new product proposal.
For this reason, there may be a need for a clearer mandate to pursue risks to global economic and—I stress—financial stability. In particular, we are floating the idea of a new multilateral surveillance procedure. This would allow—indeed require—the Fund to assess the broader and systemic effects of country-level policies, and the associated risks, in a fundamentally different way. We need to take up these issues of systemic importance frankly, regularly, and even-handedly.
I believe the world is ready for a shift to this more “systemic” vision of IMF surveillance. A clear indication is the G-20’s launch of the Mutual Assessment Process. The so-called MAP aims to reduce risks to the system by making the world’s largest economies accountable—to each other—for ensuring the global consistency of their economic policies.
Of course, there is a much broader range of international policy challenges than those currently being considered by the MAP. And an enhanced multilateral approach, with increased accountability between countries, is essential for finding lasting solutions. I see a role for the IMF to help address these kinds of multilateral problems.
At the same time, we should enrich the systemic content of our bilateral or country-level surveillance. One way to do this would be to introduce thematic country reports, with staff undertaking joint policy discussions with several countries facing common issues. This type of analysis would improve our comparison across countries, our analysis of regional spillovers, and indeed the interest and traction of our surveillance in member countries.