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IMF Surveillance - Making Truth Telling More Meaningful

Every year, the International Monetary Fund issues its review of a country’s economy. Fresh off its recent review of the United Kingdom, IMF staffers recently met with Treasury Department officials to conclude their review of the United States. Public statements from Fund staff include a recommendation to slow the pace of spending cuts in order to strengthen the economic recovery. The Fund argues that spending cuts will reduce growth in the US this year by a percentage point and a half, reducing growth by about a third. In light of our debates about spending versus austerity, one might think that the Fund’s ‘report card’ would attract a great deal of attention, but one would be hard pressed to find any evidence in prior years that this actually took place. For IMF surveillance to become more influential, it needs to be a more public process. The Fund cannot shape debates about fiscal policy without making its findings more accessible to the public. Prioritizing public diplomacy will make IMF surveillance more meaningful.

The surveillance process is designed to help the IMF meet its mandate of ensuring that the economic policies that countries adopt are compatible with global economic growth. The advice that the IMF gives is not backed by enforcement power. This was part of its design: policymakers wanted the freedom to adopt policies to pursue growth, even if these policies might ruffle feathers abroad. While other countries might have concerns about quantitative easing by the US or Japan, the Fund can only advise on appropriate policies and not sanction countries. The influence of surveillance, especially for developed countries, is limited by design. In developing countries, financial markets respond to the content of IMF surveillance, and this gives them additional leverage. By contrast, the developed world is not as sensitive to the whims of financial markets, and the existence of numerous sources of information gives it a degree of insulation from the IMF’s preferences.

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Making surveillance more meaningful has been a challenge for the IMF since its inception. In the wake of the Asian Financial Crisis, IMF surveillance became a public process. Countries would be more likely to adopt the Fund’s advice if it was no longer made confidentially. The IMF began issuing press releases detailing the findings of the consultation, and starting in 1999, countries had the option to release the staff report discussed by the IMF executive board. For many countries, the findings of the consultation are also discussed in a public press conference. For the past two years, this press conference was run by Managing Director Christine Lagarde.

The US experience tells us that merely making information public is not enough to generate policy change. In the Summer of 2011, the IMF consultation took place during the debate about raising the debt ceiling. The Fund called for both tax increases and expenditure cuts to deal with the growth of public debt. While one might think that some of the Fund’s specific proposals for closing tax loopholes, raising the retirement age, and creating a national sales tax would have been talking points in the White House’s pursuit of a ‘grand bargain’ there’s little evidence that these ideas found their way into public speeches by either Congressional or Administration officials. This gives us little confidence for the upcoming consultation. Managing Director Lagarde has already suggested that growth in the US has slowed because of the “self-inflicted fiscal wounds” caused by the sequester. Just as in the United Kingdom, excessive fiscal consolidation is causing problems, and a relaxation of the sequester would improve growth and help address the unemployment problem.

While these findings will be a rhetorical victory for the White House, they are unlikely to be translated into actual policies. Without more attention, Congress would not agree to undo some of these cuts. The IMF needs to use the tools of public diplomacy more effectively to make surveillance more influential. The surveillance consultation in the United Kingdom generated extensive media coverage. Lacking this media attention in the US, it will be easy for Congress to ignore the Fund’s findings. Public outreach through newspaper op-eds can also help to explain the IMF’s position and underscore that more spending, if done the right way, can bolster growth.

Devoting more attention to what the Fund calls “traction” will benefit the IMF in the long run. There are plenty of countries whose policies the IMF would like to change, and becoming more media savvy can both educate politicians and increase pressure on them to adopt reforms. A greater focus on public diplomacy will also require the Fund to do its job better. Rather than trot out platitudes, more public engagement means that the quality of its advice will need to become more fine-grained and country-specific. Fulfilling the promise of surveillance requires that the IMF create a genuine conversation with policymakers and publics.