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Entrusted with task of analysing why the International Monetary Fund (IMF) failed to predict the global economic crisis, its Independent Evaluation Office (IEO) has recommended changes in attitude and in systems within the organisation.
In a report titled ‘ IMF Performance in the Run-Up to the Financial and Economic Crisis: IMF Surveillance in 2004–07 ', the IEO has said that the global financial watchdog would need to “overcome the silo mentality”, while encouraging more contrary views among its ranks. This would help strengthen the organisation for the future and make it more relevant in a recovering world economy.
Power blocks
The independent review agency has also suggested certain incentives that would reward members who speak up against the more powerful power blocks.
It has also urged the IMF to work towards better integration of macroeconomic and financial sector issues, while delivering a consistent message on the global outlook and risks.
According to the IEO, the IMF had provided few clear warnings about the risks and vulnerabilities associated with the impending crisis before its outbreak. There was also a belief that financial markets were fundamentally sound and that large financial institutions could weather any problem, hence reducing the sense of urgency to address risks.
“The banner message was one of continued optimism after more than a decade of benign economic conditions and low macroeconomic volatility. The IMF, in its bilateral surveillance of the United States and the United Kingdom, largely endorsed policies and financial practices that were seen as fostering rapid innovation and growth,” said the IEO review. Also, the advanced economies had not been included in IMF's ‘Vulnerability Exercise' launched after the Asian crisis, despite internal discussions and warnings from several quarters.
Systemic risks ignored
Moreover, some risks that were identified at different points in the ‘ Global Financial Stability Report ', were ignored. They were not reflected in the World Economic Outlook or in the IMF's public declarations. “The IMF did appropriately stress the urgency of addressing large global current account imbalances that, in the IMF's view, risked triggering a rapid and sharp decline in the dollar that could set off a global recession. But it did not link these imbalances to the systemic risks building up in financial systems,” it said.
While attempting to identify bottlenecks that prevented the IMF from identifying the systemic faults, the report said that the international lender was “hindered by a high degree of groupthink, intellectual capture, a general mindset that a major financial crisis in large advanced economies was unlikely”.
To enhance the effectiveness of surveillance it is critical to clarify the roles and responsibilities of the board, management, and senior staff at IMF, and to establish a clear accountability framework, said the IEO.
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