A fundamental lesson from the Great Recession is that global instability is more than the sum of domestic instabilities of single countries (Borio 2011). Not only do country exposures to global factors matter a lot: those same global factors, while they are considered to be exogenous from each country, are in fact endogenous to their collective behaviour. As a result, in today’s highly globalised world economy, setting domestic economic policy with a view simply to keeping one’s house in order is no longer optimal, both from the global perspective and from the standpoint of individual countries (Temin and Vines 2013). The recent comment by Evenett (2013) on currency wars makes this point brilliantly clear.
Prospects for global economic and financial stability can no longer be evaluated purely as the bottom-up summation of conditions of individual countries assessed on a standalone – or country-centric – basis.
Our recent work builds from this conclusion, and calls for a broad reconsideration of the principles underpinning current global economic governance (Bossone and Marra 2013a, b). Our focus is political and institutional, not analytical. We do not concern ourselves with how economic and financial analyses should be improved by embodying country interlinkages and cross-country spillover and contagion effects1. Our key question is about how countries should modify their behaviour as members of the global community, once the principle of just ‘keeping one’s own house in order’ is recognised as inadequate and the need to factor in cross-border externalities is appreciated.
New responsibilities fall upon each member of the community of countries from the recognition that in the global economy the action of one may affect the others. These responsibilities form the core of what we have called the ‘Good Global Citizen’ remit, which our work defines and articulates.
The rules of international cooperation
The legal rules currently governing international economic and financial policy cooperation are those provided for under the Articles of Agreement of the IMF. These rules are country centred, essentially reflecting the nature of the IMF as a multilateral institution founded on membership of nation states. At the time when they were drafted, these rules were tailored for national economies whose financial dimension was relatively small and close (that is, largely domestic).
As national economies became integrated into global networks of real-time financial exchanges, the smallness and closeness of their old world were all but lost. Openness and international linkages have dramatically increased on the real side of economies as well, to be sure, due to advancements in technology and communications and the formation of global supply chains in international trade. Macroeconomic stability in the ‘small and closed’ world of the old days afforded country-specific surveillance and policy intervention, whereas macro-financial stability in today’s interconnected national economies requires integrated (that is, bilateral and multilateral) surveillance and internationally coordinated action in the case of critical cross-border events.
Over the years, the IMF has continually reviewed its surveillance framework, adapting it to reflect the changing world economy. In 2007, as the culmination of a thorough effort to analyse gaps in surveillance (Bossone 2008a, b, c), the IMF adopted a decision to distil the best practice of their surveillance, after maturing experience and accumulated knowledge. The global crisis, however, soon manifested new important gaps, including the lack of analysis of international policy spillovers and contagion effects. The extensive review of surveillance that ensued (IMF 2011a – g) led the IMF to issue the ‘Integrated Surveillance Decision’ (IMF 2012a), which became operational last January. Importantly, the new decision recognises the need to take international spillover effects from domestic policies into consideration under IMF multilateral surveillance; it also recognises that these effects might not necessarily be transmitted through the country’s balance of payments, and that they can occur even if the country finds itself in conditions of domestic stability.
Yet, the new decision carefully avoids attaching consequential policy responsibilities to members. IMF multilateral surveillance is tasked to consider the spillovers arising from policies of individual members that may significantly influence the effective operation of the international monetary system, and the IMF is allowed to discuss the impact of members’ policies on the effective operation of the international monetary system and to suggest policies that better promote its operation. However, the IMF may not require a member to change its policies in the interests of the effective operation of the international monetary system, nor is the member under any expectation to act accordingly.
That said, irrespective of surveillance adaptations the IMF’s Articles of Agreements remain anchored to a country-centric vision, precluding steps to link domestic policy responsibilities to global systemic goals.
Changing rules: the ‘Good Global Citizen’ remit
In our view, a real, effective turning point in global economic governance is only possible through a radical change in the IMF legal framework – in particular, through the definition of the principles that guide the institution’s mission and activities – in reflection of a new compact among members on international cooperation. This, we think, would be achieved if the IMF membership committed to undertaking our proposed Good Global Citizenremit for the international community.
Under the new remit, IMF members would be called on to undersign a multi-bilateral commitment to behaving ‘responsibly’ vis-à-vis each other and the global community. As good global citizens, members would be expected to take into account, within their policymaking process, the spillover and contagion effects deriving from their policy action, and to act cooperatively to achieve global systemic stability (defined under the new remit –see below). The IMF would assist members to integrate the analysis of spillover and contagion effects into their policymaking framework, and would assess the overall consistency of their domestic policy agenda with the objectives of global systemic stability.
The new commitment would complement the obligations currently governing the relationship between the IMF and its members under the Articles of Agreement. To this purpose, in Bossone and Marra (2013b) we propose specific language to amend the articles.
Under the new remit, the articles would affirm that the mission of the IMF and its membership in the new global economy is to ensure global and systemic stability. The articles would recognise that the systemic nature of the global economy demands of members to commit to cooperating toward the achievement of the common mission.
The articles would provide for a definition of ‘global systemic stability’ as:
- ‘The condition where members’ balance of payments are in sustainable equilibrium;
- ‘Their economies are characterised by high levels of employment and real income, and by reasonable price stability, including of real and financial assets’;
- ‘Where the risks of cross-border transmission of shocks are effectively managed and kept to a moderate level’.
This definition encompasses three other components:
- The notion of ‘symmetric external adjustment’;
Whereby the responsibility to adjust structural external imbalances would fall upon members running external deficits as well as those running surpluses.
- The pursuit by each member of high resource employment as well as of low price inflation in real and financial markets, seeking to ensure worldwide stability of goods and asset prices;
- The commitment by each member to keep the risks of international transmission of shocks to low levels, thus containing cross-border spillover and contagion effects;
By determining the shared policy objectives of IMF membership, the three components – together – define members’ mutual responsibilities under the new remit. Further integration of bilateral and multilateral surveillance would be necessary.
With the Good Global Citizen remit inscribed in its statutory framework, the IMF would become the repository of the members’ multi-bilateral commitments to global responsible behaviour, and would be tasked with monitoring and facilitating members’ compliance with the commitments.
The IMF would be granted the authority to call on members involved in situations where spillovers were regarded to be significant, and to activate multilateral consultations with the relevant members with a view to prompting appropriate individual and collective actions. In light of the new remit, members that were called on by the IMF for consultation would be expected to engage in a cooperative response.
All of this implies a major change in national-governance attitudes, and requires that each country recognise that in a globalised world, the national interest is better served if cross-country feedbacks are factored in and acted upon with a systemic view; all of which is under shared, collective responsibility.
While this point has been well understood by national financial authorities worldwide, leading them to tighten international cooperation over the years, the same has not happened to any comparable extent in the area of macroeconomic policy2. Yet, the increasing relevance of cross-border economic spillovers (IMF 2012b), the incentives to growing and possibly unsustainable imbalances inherent in an excessively elastic international monetary system (Borio and Disyatat 2011), and the rediscovery of the financial cycle (Borio 2103), all point to the need for countries to ‘introject’ global responsibilities within their macroeconomic policy habit.
The IMF is the place for them to do so. The Good Global Citizen remit is not intended to alter its nature as a country-centred institution. It does, however, aim to induce its members to acknowledge their responsibilities as ‘citizens’ of the global community and to behave as ‘good’ ones, within a conducive institutional setup.
Our hope – in line with the founding purpose of The Group of Lecce, which we represent – is that from the ashes of the Great Recession, the spirit of a renewed, authentic multilateralism may finally arise.
Borio, C (2011), “Central banking post-crisis: What compass for uncharted waters?”, BIS Working Papers No 353.
Borio, C (2013), “Macroeconomics and the financial cycle: Hamlet without the Prince?”, VoxEU.org, 2 February.
Borio, C and P Disyatat (2011), “Global imbalances and the financial crisis: Link or no link?”, BIS Working Papers No 346, May.
Borio, C and G Toniolo (2006), “One hundred and thirty years of central bank cooperation: a BIS perspective”, BIS Working Papers No 197, February.
Bossone, B and R Marra (2013a), “The ‘Good Global Citizen’ remit of the IMF: reforming international economic and financial cooperation”, World Economics, 14(1), March, available at www.world-economics-journal.com/.
Bossone, B and R Marra (2013b), “The ‘Good Global Citizen’ remit of the IMF: A proposal to strengthen international economic and financial cooperation in a ‘global’ world’”, The Group of Lecce, January.
Bossone, B (2008), “IMF Surveillance: A case study on IMF governance”, Background Paper BP/08/10, Independent Evaluation Office of the International Monetary Fund.
Bossone, B (2008b), “The design of the IMF's Medium-Term Strategy: A case study on IMF governance”, Background Paper BP/08/09, Independent Evaluation Office of the International Monetary Fund.
Bossone, B (2008c), “Integrating macroeconomic and financial sector analyses within IMF surveillance”, Background Paper BP/08/11, Independent Evaluation Office of the International Monetary Fund.
Evenett, S J (2013), “Root causes of currency wars”, VoxEU.org, 14 February.
IMF (2007), “The Multilateral Consultation on global imbalances”, Issues Brief, 07/03, April.
IMF (2010a), “Modernizing the surveillance mandate and modalities”, Prepared by the Strategy, Policy, and Review Department and the Legal Department, Approved by Reza Moghadam and Sean Hagan, 26 March.
IMF (2010b), “The Fund’s Mandate — The Legal Framework”, prepared by the Legal Department in consultation with the Strategy, Policy and Review Department, Approved by Sean Hagan, 22 February.
IMF (2010c), “The Fund’s Mandate — An Overview”, prepared by the Strategy, Policy, and Review Department in consultation with the Legal Department, approved by Reza Moghadam, 22 January.
IMF (2011a), “2011 Triennal Surveillance Review – Overview Paper”, prepared by the Strategy, Policy and Review Department, approved by Reza Moghadam, 29 August.
IMF (2011b), “2011 Triennial Surveillance Review — Review of the 2007 Surveillance Decision and the Broader Legal Framework for Surveillance”, Prepared by the Legal and the Strategy, Policy, and Review Departments, in Consultation with the Other Departments, approved by Sean Hagan and Reza Moghadam, 26 August.
IMF (2011c), “Triennial Surveillance Review External Commentary — An Evaluation of IMF Surveillance of the euro Area”, Prepared by Jean Pisani-Ferry, André Sapir, and Guntram B Wolff, 19 July.
IMF (2011d), “Triennial Surveillance Review External Commentary — A Short Note on Surveillance and How Reforms in Surveillance Can Help the IMF to Promote Global Financial Stability”, Prepared by Joseph E Stiglitz, 22 July.
IMF (2011e), “Triennial Surveillance Review External Commentary — IMF and Global Financial Stability”, prepared by John Palmer and Yoke Wang Tok, 25 July.
IMF (2011f), “Triennial Surveillance Review External Commentary — IMF Surveillance: Coverage, Consistency and Coherence”, prepared by Stephen Pickford, 20 July.
IMF (2011g), “Triennial Surveillance Review External Commentary — Surveillance by the International Monetary Fund”, prepared by Martin Wolf, 15 August.
IMF (2012a), “Integrated Surveillance Decision”, IMF Factsheet, 31 July.
IMF (2012b), “2012 Spillover Report—Background Papers”, 10 July.
Temin, Peter and David Vines (2013), “The leaderless global economy: Can economic history suggest lessons?”, VoxEU.org, 13 March.
The Group of Lecce (no date), website, http://www.thegroupoflecce.org/gol/.
1 For a review of the technical issues, see IMF (2011a – g).
2 See Borio and Toniolo (2006), and the comments by Marc Flandreau and Miles Kahler in the same paper.