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International Monetary Fund. Independent Evaluation Office

Abstract

1. Social protection has become a central concern in the global policy discourse. The global crisis in 2008 triggered job losses and financial turmoil, prompting the Group of Twenty (G-20) to call for actions to “mitigate the social impact,” particularly on the poorest and most vulnerable (G-20, 2009). Attention to social protection has also been raised by recurrent commodity price shocks; by concerns about rising inequality and the implications of increasing trade openness and new technologies for displaced workers and their families; by long-running demographic trends such as aging populations; and by regional social and political stresses such as the “Arab Spring” that brought attention to the need for “inclusive growth.” In 2011, G-20 member countries recognized the importance of “social protection floors”—i.e., nationally-defined guarantees ensuring that all in need have access to essential healthcare and basic income security—and urged international organizations to enhance cooperation on the social impact of economic policies (G-20, 2011). In 2015, world leaders adopted the United Nations’ Sustainable Development Goals (SDGs), pledging to achieve, by 2030, “nationally appropriate social protection systems and measures for all,” among other things (UN, 2015).

International Monetary Fund. Independent Evaluation Office

Abstract

13. Historically, the IMF’s involvement in social issues was quite limited. The Articles of Agreement call for the institution to respect members’ domestic social and political policies in its surveillance activities.7 The Board took this caveat seriously, as evidenced in its discussions on the issue and reflected in formal guidance to staff. Social issues were not part of the IMF’s core areas of responsibility, as laid out in the operational guidelines for surveillance (see IMF, 1991). Staff were not proscribed from addressing such issues but were expected to exercise their judgment as to whether the issue was relevant for macroeconomic conditions and prospects, and to rely, as far as possible, on the expertise of other institutions such as the World Bank. On occasion, particularly since the 1990s, the Managing Director directly instructed staff to pay more attention to concern for the poor and set the tone for greater involvement in social issues by the institution, but this was not built into operational guidelines.8

International Monetary Fund. Independent Evaluation Office

Abstract

32. The IMF addressed an extensive range of social protection issues in Article IV consultations with a number of countries during the evaluation period. To measure coverage, this evaluation examined Board assessments in Article IV Summings Up for advice related to social protection.42 Based on Summings Up examined for all Article IV consultations concluded in 2006, 2008, 2010, 2013, and 2015, this evaluation identified seven themes of IMF advice that were closely related to social protection;43 (i) reforming the pension/social security system; (ii) reforming unemployment benefits/minimum wage schemes; (iii) improving the targeting of social benefits/transfers; (iv) protecting vulnerable groups or limiting the social cost of reforms/policies/shocks; (v) protecting or creating fiscal space, i.e., increasing budgetary allocations, for social spending; (vi) strengthening the social safety net/social transfers/provision of social services; and (vii) pursuing active labor market policies. Examples of each theme are provided in Annex 2. Many Summings Up contained advice on more than one theme.44

International Monetary Fund. Independent Evaluation Office

Abstract

61. To incorporate social protection considerations into IMF operational work, the Board has consistently called on Fund staff to rely on the expertise of other relevant institutions (Abrams, 2017). According to economist staff surveyed by this evaluation, the World Bank was by far the IMF’s major partner on social protection issues: 80 percent of survey respondents reported interactions with Bank staff ranging from periodic or occasional meetings and information-sharing to joint missions. On the other hand, almost 75 percent and 90 percent of survey respondents respectively reported minimal to no interaction with UN agencies (including the ILO) and the OECD (Figure 12).79

International Monetary Fund. Independent Evaluation Office

Abstract

72. Traditionally, the IMF’s role in social protection was limited and its approach fiscal-centric. Social issues were understood to lie outside the IMF’s core areas of responsibility. Formal guidance gave staff some latitude to decide when such issues were sufficiently important to warrant attention in surveillance or programs, and IMF involvement generally aimed to improve expenditure efficiency and/or to ensure medium- or long-term fiscal sustainability. Within this fiscal approach, staff addressed concerns for the poor and the vulnerable by recommending that social benefits be effectively targeted to those most in need. On more specialized issues, such as the design and implementation of social protection schemes, the IMF relied on the World Bank or other institutions with the relevant expertise, per the Board’s direction.

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.