Chapter 2: Background
- Ruben Lamdany
- Published Date:
- April 2013
5. Prior to the global crisis, the Fund was often portrayed as losing relevance to the global economy, in view of its diminishing financing role and the widespread belief in the “Great Moderation.”2 During the immediate pre-crisis period, except for low-volume lending to low-income countries, the IMF was almost exclusively focused on surveillance. Many of the large advanced and emerging economies had lost interest in engaging with the Fund. Key stakeholders argued for downsizing the Fund, as they saw little likelihood that the global economy would again need an “emergency firefighter” for emerging market economies.3 Consequently, the institution was seen as struggling to redefine its strategic role.
6. With the onset of the global crisis in 2007–08—and its origin in advanced economies—the Fund’s engagement with its member countries changed dramatically, as it was called upon to respond on an urgent and unprecedented basis. In many countries, it provided significant countercyclical financing and support for their budgets. In light of lessons learned from the crisis, the Fund also adopted new initiatives aimed at strengthening its surveillance and its ability to provide member countries with more complete assessments of global risks, linkages, and spillovers.
7. Did these changes influence the way the Fund is perceived? If so, did this mostly reflect the Fund’s increased financing role or did it truly reflect a changed view of the IMF as a trusted advisor? And does more effective surveillance imply tipping the balance in favor of the Fund’s role as global watchdog at the expense of being a trusted advisor to its individual members? The Fund must inevitably grapple with achieving the right balance between these potentially conflicting roles, but is it also possible for the Fund to strengthen the latter without compromising the former? These are critical questions, as the answers are important determinants for how the Fund could maintain its relevance in a postcrisis world.
Why a “Trusted Advisor”?
8. As noted above, the Fund’s ability to gain traction with its policy advice depends on the confidence and trust its advice inspires. But does the IMF have a formal mandate to serve as a trusted advisor to its membership? Serving as a trusted advisor is not codified in the Articles of Agreement as an official role of the IMF, but it is widely acknowledged and referenced as fundamental to the IMF’s effectiveness, for instance, in the 2012 Integrated Surveillance Decision (ISD) (IMF, 2012b), Board papers, and numerous statements by Management, the Executive Board, and the International Monetary and Financial Committee (IMFC) (Box 1).4
9. Much of the policy dialogue with member countries is initiated by the Fund in performing its surveillance or financing roles, but country authorities might also seek advice on their own accord. As illustrated in Figure 1 above, the Fund provides advice and engages in policy dialogue (i) through its formal interactions (e.g., multilateral/bilateral surveillance; during discussions of programs supported by IMF financing (use of Fund resources (UFR)); and (ii) at the initiative of country authorities (i.e., demand-driven advice). In formal interactions, the interest of the authorities to engage the Fund and the ensuing depth of the policy dialogue are important indicators of whether countries consider the Fund a trusted advisor. In cases where advice is demand-driven,5 the authorities’ decision to seek the Fund’s advice might also signal their trust in the Fund and could provide the opportunity for the Fund to influence policy formulation at an earlier stage.
Figure 1.Gaining Traction Box 1.Is the IMF Expected to Be a Trusted Advisor?
The Fund is required to oversee member countries’ compliance with their obligations under its Articles of Agreement. It does this in part through policy advice provided to members. In formulating policies (through the 2011 Triennial Surveillance Review, 2012 Integrated Surveillance Decision (ISD), transparency policy reviews, etc.) that guide this policy advice, Executive Directors have made it clear that the Fund should be viewed by its membership as a trusted advisor to enhance acceptance of the Fund’s advice. This is validated in practice, with multiple references being made in IMF policy documents (see, for example, this report’s opening quotation from the ISD) and Management statements, to the IMF’s role as a trusted advisor to member countries.