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International Monetary Fund. Independent Evaluation Office

Abstract

1. This evaluation assesses the performance of IMF surveillance in the run-up to the global financial and economic crisis. It examines whether the IMF identified the mounting risks and vulnerabilities that led to the crisis and effectively warned the countries directly affected as well as the membership at large about possible spillovers and contagion. The evaluation analyzes the factors that might have hindered the IMF’s effectiveness, and offers recommendations on how to strengthen its ability to discern risks and vulnerabilities and to warn the membership in the future.

International Monetary Fund. Independent Evaluation Office

Abstract

7. The evaluation assesses the IMF’s performance during the period up to the crisis, focusing primarily on 2004 through 2007.5 It is centered around three pillars, each studying a different aspect of IMF surveillance: multilateral surveillance, bilateral surveillance in systemic financial centers seen as those where the crisis originated (e.g., the United States and United Kingdom), and bilateral surveillance in selected other advanced and emerging economies that were affected by the crisis (Annex 3 lists the countries covered). The report integrates the findings, lessons, and recommendations of case studies and background papers prepared on these pillars.6

International Monetary Fund. Independent Evaluation Office

Abstract

11. During the period 2004 through the start of the crisis in mid-2007, the IMF did not warn the countries at the center of the crisis, nor the membership at large, of the vulnerabilities and risks that eventually brought about the crisis. For much of the period the IMF was drawing the membership’s attention to the risk that a disorderly unwinding of global imbalances could trigger a rapid and sharp depreciation of the dollar, and later on the risks of inflation from rising commodity prices. The IMF gave too little consideration to deteriorating financial sector balance sheets, financial regulatory issues, to the possible links between monetary policy and the global imbalances, and to the credit boom and emerging asset bubbles. It did not discuss macro-prudential approaches that might have helped address the evolving risks. Even as late as April 2007, the IMF’s banner message was one of continued optimism within a prevailing benign global environment. Staff reports and other IMF documents pointed to a positive near-term outlook and fundamentally sound financial market conditions. Only after the eruption of financial turbulence did the IMF take a more cautionary tone in the October 2007 WEO and GFSR.

International Monetary Fund. Independent Evaluation Office

Abstract

40. Various factors played a role in the IMF’s failure to identify risks and give clear warnings. Many of these factors represent long-standing problems that had been highlighted for over a decade.24 In this section, these factors are grouped into the following broad categories: analytical weaknesses, organizational impediments, internal governance problems, and political constraints.25 There are considerable interconnections among these categories, and their relative importance is based on subjective judgments. The IMF’s ability to correctly identify the mounting risks was hindered by a high degree of groupthink, intellectual capture, a general mindset that a major financial crisis in large advanced economies was unlikely, and incomplete analytical approaches. Weak internal governance, including unclear lines of responsibility and accountability, lack of incentives to work across units and raise contrarian views, a review process that did not “connect the dots” or ensure follow-up, and an insular culture also played a big role, while political constraints may have also had some impact. Interviews with country authorities (Annex 7) and survey evidence from staff (Annex 8) echo many of the same factors.

International Monetary Fund. Independent Evaluation Office

Abstract

66. In considering recommendations, the aim is not to predict a crisis, as crises and their triggers are inherently unpredictable. It is rather to strengthen the IMF’s working environment and analytical capacity to better allow it to discern risks and vulnerabilities and alert the membership in time to prevent or mitigate the impact of a future crisis. The Fund needs to cultivate a culture that is proactive in crisis prevention, rather than primarily reactive in crisis response and management. It needs to take measures to prevent or mitigate future crises, as much as to address the weaknesses that were uncovered by past crises.33 To this end, it should continuously scan for risks and emphasize vulnerabilities, rather than playing the role of uncritical enthusiast of authorities and the economy.

International Monetary Fund. Independent Evaluation Office

Abstract

The report assesses IMF surveillance in the period leading up to the global financial and economic crisis and offers recommendations on how to strengthen the IMF's ability to discern risks and vulnerabilities in the future. Chapters discuss the unfolding of the crisis and IMF messages prior to the crisis, and analyze the complex factors that influenced the IMF's performance in the run-up to the crisis. A companion CD provides background papers not included in this report.