Given the political paralysis in Washington and the on-going crisis over the eurozone, it is difficult to be optimistic about the global economy. Focusing solely on recent gloomy headlines, though, causes us to miss a significant transformation underway in the global economy. Since its founding, International Monetary Fund (IMF) member countries have held annual consultations with Fund staff. These consultations help ensure that each country’s economic policies contribute to growth without causing undue harm to trading partners. Since 1997, this consultation process has moved from a process conducted in private to one conducted in public, with information readily accessible by anyone with access to the internet. Simply put, the emergence of transparency concerning IMF surveillance will help the world to avoid the next economic crisis.
Four facts about this revolution in transparency merit attention. First, country transparency has increased dramatically over time. Between 2001 and 2003, 70 percent of the countries that had an Article IV consultation released the staff report – the document that the Fund staff members write for the executive board’s review. In 2010, 89 percent of the countries that had an Article IV consultation released their staff reports.
Transparency has also become more detailed over time. Countries originally allowed the Fund to issue a short press release detailing the findings of the consultation. Starting in 1999, countries were able to release the staff report, which provided even more detail for interested observers. The most recent staff report for the United States was released in July of this year. It recommended reducing the budget deficit and called for additional measures to prop up the housing market, as well as tax cuts targeted at firms hiring long-term unemployed workers. Thus, not only are more countries releasing information about their consultations, but the extent of the information has increased as well.
This historical context underscores an important point: transparency has also become robust. The global economic downturn has not caused states to release less information about their Article IV consultations. On the contrary, the number of countries releasing staff reports has increased by 4 percent since the start of the crisis. Even under the stresses of the global slump, transparency has increased. With so many countries releasing information, countries unwilling to do so stand out, whether we’re talking about press releases or staff reports.
Most importantly, transparency brings consequences. Investors can make better decisions when they have better knowledge about the present and possible future states of the economy; the Article IV process is intended to convey this information. Recent studies have sought to quantify just how much transparency matters. Countries that publish staff reports see their borrowing costs in sovereign debt markets decrease by between 25 percent and 40 percent. Thus, for developing countries, transparency serves to reduce the cost of servicing their debts.
This deepening global commitment to transparency concerning IMF surveillance brings with it important implications for the future of the international economy. In advanced economies, the proverbial day of reckoning for dealing with budget deficits has arrived. IMF surveillance can play an important role in these countries by serving as an impartial sounding-board. Leaders of developing countries have used the Fund as a ‘scapegoat’ to justify provocative political policies; it’s time for the developed countries to do the same. Critics often suggest that the IMF acronym stands for “It’s Mostly Fiscal,” and - given the Fund's expertise - it is indeed ideally positioned to offer constructive advice to politicians seeking to put their fiscal houses in order. Transparency holds the key to translating this advice into action.
In precisely the same way that transparency helps hold national politicians accountable, it also serves to hold the IMF accountable. The Fund’s Independent Evaluation Office issued a tough evaluation of surveillance in the years before the onset of the economic crisis. Since then, Managing Director Lagarde has sought to focus surveillance, to call greater attention to risks and to be more candid in speaking frankly about the nature of economic challenges faced. The Fund expressed concerns about Greece’s competitiveness as well as its budget deficit as early as January 2007. Sending clearer signals ensures that investors and analysts react sooner to adverse developments, and creates greater pressure on politicians to adopt corrective policies. Consider what would have happened had we taken note of the warnings about the Greek economy years earlier...
Finally, the emergence of this norm of transparency helps us ameliorate our concerns about the tension between democratic governance and economic integration. It is no accident that a more democratic world is a more transparent one. In many countries, information shared with the Fund’s Article IV team is also regularly released to the public. For skeptics who think the rise of global democracy will weaken a commitment to global markets, the emergence of this norm of transparency shows how these two forces can in fact coexist. Amidst the present pessimism, transparency gives us a reason to look for the silver lining.
(Photo © DR)
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