I. Introduction

1. The 2007–09 international financial crisis demonstrated that the unchecked build-up of risks in the global economy can culminate in substantial costs to the international community. In contrast, the policy response implemented by the G20—and supported by the International Monetary Fund (IMF or the Fund)—illustrated the substantial gains that can be achieved through global coordination. The crisis was a massive institutional failure on part of both private and public entities. However, as pertains to the IMF, it served to reveal deep flaws in the Fund’s ability to fulfill its surveillance task—that is, the monitoring of individual member countries’ economic fundamentals and policies (i.e., bilateral surveillance) and of their interactions with each other (i.e., multilateral surveillance) to identify potential risks to the system’s stability and take measures to mitigate them. The purpose of the present study is to analyze how the IMF’s multilateral surveillance can be made more effective in order to achieve better global macroeconomic outcomes and a more stable international financial system.

2. Since the financial crisis the global community and the IMF have rightly developed an ambitious agenda aimed at improving the Fund’s surveillance framework to address the pre-crisis flaws. This is, naturally, a work in progress which is strengthened through periodic reviews on the progress achieved (such as the 2014 Triennial Surveillance Review (TSR)) and frequent consultations about alternative possible enhancements (such as the present study). Here, we explore what further enhancements could be implemented in the IMF’s multilateral surveillance framework to gain efficiency and traction in the Fund’s ability to identify, analyze and mitigate risks to global stability.

3. In addressing this general issue, a number of more specific questions arise: (i) Given the current international financial architecture and the mandate of the Fund, how can the Fund more effectively call attention to the key risks to global economic and financial stability? (ii) How could the Fund work more effectively with other bodies to promote cooperation in international economic and financial policies? (iii) What further analysis should the Fund deliver to support these processes? (iv) Are the Fund’s mandate and its Institutional View on capital flows adequate to the task of undertaking surveillance of risks in international capital flows, or is a more ambitious framework needed for the Fund to play an effective role in this area?

4. We consider how the Fund can enhance its multilateral surveillance work on macroeconomic outcomes (including through advice on the stance of monetary, fiscal, and financial regulatory measures); and whether and how the Fund can assist in enhancing structural conditions (e.g., financial regulation) that impact on the efficiency and stability of the global economy and financial system. The ultimate objective of this study is to provide a set of proposals and guidelines aimed at increasing the traction and effectiveness of the IMF’s multilateral surveillance activities in order to mitigate risks in the international economy and financial system, and to put the global economy on a more sustainable and robust growth trajectory. In some instances, these proposals will seem impractical in the short term and politically unpalatable in current circumstances, but they should nevertheless be spelled out to contribute to the pressing debate concerning the global economy’s long-run growth sustainability.

5. Indeed, one of the overarching arguments we develop is that global economic governance reforms are a necessary condition for strengthening the traction of multilateral surveillance over the longer term. As the global economic landscape continues to change, the international community should seek to ensure that the IMF’s structure remains in tune with members’ economic weight and significance while maintaining representativeness and neutrality. A positive step in this direction was taken through the 2010 reform agreement, which reviewed members’ quotas and voting rights and increased the financial resources of the Fund. However, the failure of the U.S. Congress to ratify the agreed reforms represents a disappointing setback on the way to a more robust international monetary system (IMS). Thus, it seems appropriate to provide further analysis on what reforms could achieve the goal of enhanced multilateral surveillance and, ultimately, a more stable and balanced global economy.

6. The remainder of the paper is structured as follows. Section II provides a brief account of the IMF’s surveillance efforts and weaknesses in the years preceding the global financial crisis of 2007-09. Section III reviews the principal changes that have taken place, since the crisis, in the global financial architecture and the Fund’s mandate. Section IV sets out the Fund’s current multilateral surveillance framework. Section V lays out the arguments that call for a strengthened surveillance role for the IMF. Section VI proposes ways to strengthen the IMF’s multilateral surveillance activities under its current mandate. Section VII proposes ambitious long-term reforms to make the Fund’s multilateral surveillance tasks more efficient and inclusive while increasing the coherence of the global financial architecture. Section VIII concludes.

II. Multilateral Surveillance in the Run-Up to the Crisis

7. This section lays out the context for the Fund’s multilateral surveillance in the run-up to the global financial crisis. It focuses on weaknesses that were revealed in both the Fund’s surveillance and the global financial architecture, highlighting how failures of global policy coordination resulted in insufficient efforts to identify threats to global stability or mobilize action once they were detected.

Before the Crisis

8. The global economy went through major changes in the ten years prior to the crisis. Gross capital flows increased rapidly (Figure) and much faster than trade flows in the period preceding the global financial crisis.³ Net capital flows increased as well—a counterpart to growing current account imbalances and reserve accumulation—especially by emerging markets (EMs) seeking to insure themselves against crises. These developments, coupled with rapid growth in financial markets in advanced economies (AEs) and EMs’ rising share of global output, changed the way in which shocks would be transmitted.

Gross Capital Flows to Advanced and Emerging Market Economies

Citation: Policy Papers 2014, 054; 10.5089/9781498342995.007.A001

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Gross Capital Flows to Advanced and Emerging Market Economies

Citation: Policy Papers 2014, 054; 10.5089/9781498342995.007.A001

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Gross Capital Flows to Advanced and Emerging Market Economies

Citation: Policy Papers 2014, 054; 10.5089/9781498342995.007.A001

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9. Against this backdrop, the Fund’s multilateral surveillance focused on the global pattern of external current account imbalances. From 2004 to the start of the crisis in mid-2007, the Fund emphasized the risk of a disorderly unwinding of global imbalances triggering a rapid and sharp depreciation of the dollar, a surge in commodity prices and a rebound in inflation.

10. Risks building in the financial sector and the potential for macro-financial and cross-border linkages to propagate shocks received less attention. The Fund generally viewed the growth and sophistication of financial markets, and economic integration more generally, as benign developments (see paragraph 12). In line with the focus on global imbalances, the Fund examined net capital flows, but paid less attention to rising gross stocks of internationally-held financial assets and capital flows, which were becoming more relevant for financial stability and the cross-border transmission of shocks. Fund surveillance also did not focus effectively on financial regulatory issues or links between monetary policy and global imbalances, and generally did not suggest macro-prudential approaches to address emerging risks (IEO 2011). The Fund’s surveillance framework, amended in 2007, emphasized risks to the stability of the system of exchange rates and the operation of the IMS. It left uncertainty about whether staff should assess spillovers from countries that were viewed as stable, or spillovers such as financial contagion that were not transmitted through explicit balance of payment channels.

III. Evolution of the International Financial Architecture and the Mandate of the Fund Since the Onset of the Global Financial Crisis

15. The crisis provided a significant impetus to global cooperation on economic and financial policies. The incentives to cooperate, which had been absent during the boom of the 2000s, re-emerged. This section examines the emergence of the G20 as the key forum for cooperation—a reflection of EMs’ rising share of global output, the global nature of the crisis, and the fact that AEs’ policy frameworks had been discredited because the crisis was triggered in their financial systems. It also discusses international cooperation on financial sector reforms involving the Financial Stability Board (FSB).

16. Although meetings of G20 finance ministers and central bank governors had taken place regularly since 1999, the role and importance of the G20 in cooperation on international initiatives in macroeconomic policy and financial regulatory reform expanded vastly as a result of the crisis. The Heads of State and Government of the G20 held their first-ever Summit in Washington at the height of the crisis, in November 2008. The Communiqué of the Washington G20 Summit set out a remarkably comprehensive and detailed program to reform the global architecture of financial regulation. A few months later, the G20 London Summit of April 2009 supplemented these measures by agreeing on an internationally coordinated program of fiscal stimulus to mitigate the negative impact of the crisis on employment and output throughout the global economy. Thus, the newly-established G20 Summit process laid out a global reform agenda which had major implications for multilateral surveillance and the mechanisms for cooperation on economic policies and the leaders pledged to monitor its successful implementation. Key elements were as follows:

• Closer cooperation on economic policies to avoid economic collapse, restore growth, avoid negative spillovers, and support emerging market and developing economies.

• A comprehensive program of reforms to strengthen financial markets and regulatory regimes so as to avoid future crises. The Financial Stability Forum (FSF) was to be expanded to include a broader membership of EMs.

• Reforms to the international financial institutions (IFIs), including additional resources and steps to strengthen their governance and membership.

In retrospect, this was a remarkable outcome. The fiscal stimulus and the actions of central banks, although not coordinated by the G20, probably avoided a great depression.

17. The G20’s agenda has expanded significantly since 2008-09 and economic cooperation has become just one of many priorities. New areas of focus include tax evasion and avoidance, climate change, corruption and energy policy, which largely fall outside the Fund’s areas of expertise. Commentators have expressed concern at the broadening of the G20’s agenda, and that G20 communiqués have become longer and more reliant on extensive background material, with less in the way of substance.⁷ This process began shortly after G20 meetings were elevated to Heads of State level. When the agenda was transferred from central bank Governors and Ministers of Finance to Foreign Relations Ministries, it took on a more political tone and since then the G20 has almost ceased to be an effective mechanism for economic cooperation. The Australian presidency has taken steps to refocus on key priorities. Nevertheless, concerns persist about the G20’s capacity to coordinate macroeconomic policies effectively over the long term, and its ability to continue to act effectively as a forum for economic cooperation now that EMs are growing in size and importance relative to AEs in the global economy, and the strong crisis-induced incentives to cooperate have shown signs of weakening.

B. Reviving Cooperation on Global Macroeconomic Policies

23. In 2009, the G20 launched a new surveillance process with the aim of ensuring that global policies are consistent and supportive of growth. Referred to as the “Framework for Strong, Sustainable, and Balanced Growth,” it involved a mutual assessment process (MAP) of G20 countries’ goals and supporting economic policies.

24. The MAP has been led by members and supported by the Fund. This set-up was designed to secure buy-in from the members, while drawing on the Fund’s technical expertise. The Fund assesses whether members’ policies are consistent, and likely to deliver sustainable and balanced trajectories for the global economy.⁹ The Fund was also expected to make recommendations for policy adjustments to improve the global outlook. From a legal perspective, the Fund’s involvement constitutes technical advice provided under Article V, Section 2(b) which authorizes the Fund to provide technical or financial services “upon request,” and should not constrain Fund’s bilateral and multilateral surveillance work. Instead, this was expected to be an opportunity for the Fund staff to deepen its policy discussions and reinforce traction by opening up new communication channels and helping generate greater buy-in for needed reforms. To help preserve G20 ownership, staff’s assessments are provided directly to the G20, and sent at the same time to the IMF Board. Staff was to present its contributions to the Board in informal briefings ahead of each Ministerial Meeting, and to brief the Fund’s Board after the G20 meetings.

25. The MAP has required significant Fund input, particularly in early years. In its first year, Fund staff produced three main inputs, in April (Analysis and Perspectives, deriving a base case scenario), June (Alternative Scenarios) and November 2010 (Staff’s Assessment of G20 Policies), in addition to informal notes and presentations shared with the G20 at the working level (see Table).

Table.

Building Blocks for the G20 MAP Framework

Table.

Building Blocks for the G20 MAP Framework

Summit	Key steps	Description
Pittsburgh September 2009	Policy and macroeconomic frameworks	All G20 members to share information—with each other and the IMF—about their policy plans and expected performance over next 3–5 years. IMF to examine global implications.
Toronto June 2010	Assessment of members’ policies	IMF assessed the consistency of G20 members’ policies with growth objectives and simulated an “upside” scenario in which well-designed, collective action produces better outcomes for all countries and contributes to global rebalancing.
Seoul November 2010	Enhanced MAP with indicative guidelines	G20 leaders to gauge progress toward Framework goals via indicative guidelines to identify and assess imbalances. IMF was tasked to conduct in-depth assessment of members with large imbalances.
	Policy commitments	Each G20 member identified policy actions it would take to help achieve the common growth objectives.
Cannes November 2011 (Cannes Action Plan for Growth and Jobs)	Near-term actions	G20 leaders reiterated importance of expeditiously implementing measures announced by euro area leaders just before the G20 Summit. The G20 also committed to take significant strides toward a more stable and resilient international monetary system.
	Medium-term policy imperatives	G20 leaders endorsed policy actions to correct imbalances over the medium term and ensure progress toward strong, sustainable, and balanced growth. They committed to working with greater resolve on social issues, such as unemployment and social safety nets.
	Analysis of large imbalances	For seven countries identified as having large imbalances, sustainability reports by IMF staff provided in-depth analysis of the nature of countries’ imbalances, root causes, and impediments to adjustment.
Los Cabos June 2012 (Los Cabos Growth and Jobs Action Plan)	Policy actions	G20 leaders committed to adopting policy measures to strengthen demand, support global growth, and restore confidence, address short- and medium-term risks, enhance job creation, and reduce unemployment.
	Accountability framework	G20 leaders agreed on enhancing an Accountability Assessment Framework to assess progress in meeting commitments toward the shared goal of strong, sustainable, and balanced growth, and conducted the first assessment under this framework.
Saint Petersburg September 2013 (St. Petersburg Action Plan)	Policy actions	G20 leaders agreed on an Action Plan to cooperatively boost global growth, jobs, and financial stability. They acknowledged the need for fiscal consolidation to reflect economic conditions; for advancing financial oversight and regulation; and for structural reforms to support growth. Leaders also expressed support for completion of the IMF’s 2010 quota reform.

View Table

Table.

Building Blocks for the G20 MAP Framework

Summit	Key steps	Description
Pittsburgh September 2009	Policy and macroeconomic frameworks	All G20 members to share information—with each other and the IMF—about their policy plans and expected performance over next 3–5 years. IMF to examine global implications.
Toronto June 2010	Assessment of members’ policies	IMF assessed the consistency of G20 members’ policies with growth objectives and simulated an “upside” scenario in which well-designed, collective action produces better outcomes for all countries and contributes to global rebalancing.
Seoul November 2010	Enhanced MAP with indicative guidelines	G20 leaders to gauge progress toward Framework goals via indicative guidelines to identify and assess imbalances. IMF was tasked to conduct in-depth assessment of members with large imbalances.
	Policy commitments	Each G20 member identified policy actions it would take to help achieve the common growth objectives.
Cannes November 2011 (Cannes Action Plan for Growth and Jobs)	Near-term actions	G20 leaders reiterated importance of expeditiously implementing measures announced by euro area leaders just before the G20 Summit. The G20 also committed to take significant strides toward a more stable and resilient international monetary system.
	Medium-term policy imperatives	G20 leaders endorsed policy actions to correct imbalances over the medium term and ensure progress toward strong, sustainable, and balanced growth. They committed to working with greater resolve on social issues, such as unemployment and social safety nets.
	Analysis of large imbalances	For seven countries identified as having large imbalances, sustainability reports by IMF staff provided in-depth analysis of the nature of countries’ imbalances, root causes, and impediments to adjustment.
Los Cabos June 2012 (Los Cabos Growth and Jobs Action Plan)	Policy actions	G20 leaders committed to adopting policy measures to strengthen demand, support global growth, and restore confidence, address short- and medium-term risks, enhance job creation, and reduce unemployment.
	Accountability framework	G20 leaders agreed on enhancing an Accountability Assessment Framework to assess progress in meeting commitments toward the shared goal of strong, sustainable, and balanced growth, and conducted the first assessment under this framework.
Saint Petersburg September 2013 (St. Petersburg Action Plan)	Policy actions	G20 leaders agreed on an Action Plan to cooperatively boost global growth, jobs, and financial stability. They acknowledged the need for fiscal consolidation to reflect economic conditions; for advancing financial oversight and regulation; and for structural reforms to support growth. Leaders also expressed support for completion of the IMF’s 2010 quota reform.

26. The MAP has produced some benefits and has evolved over time. Member-country ‘ownership’ has remained high (Faruqee and Srinivasan 2012). The Fund’s multilateral surveillance, particularly the World Economic Outlook (WEO), has helped identify global inconsistencies resulting from country submissions to the MAP. It has also opened up new channels of communication between the Fund and top policy-makers. As the MAP exercise has evolved, the analyses provided by staff have supported the process designed by G20 members to help them elaborate their policies in the areas of correcting global imbalances, designing a more stable and resilient IMS, strengthening demand and supporting global growth, addressing short- and medium-term risks, and enhancing job creation. Efforts to raise global growth are receiving a renewed push under the Australian presidency. The most recent G20 meeting committed to developing new structural measures to lift the collective GDP of G20 countries by more than 2 percent (over US$2 trillion more in real terms) above the trajectory implied by current policies over the coming five years.

27. However, in general, cooperation has ebbed somewhat in recent years. As the deep initial concerns of the crisis have gradually faded, incentives for cooperation among G20 countries have declined. Following on the 2008 and 2009 Summits, subsequent G20 meetings set ambitious goals for global policies and members agreed to adjust their policies to achieve better global economic outcomes, but members’ response to these commitments varied. A change in the goal of the G20 MAP to include sustainability considerations as well as growth seems to have eroded the trust of some members (Faruqee and Srinivasan 2012).

IV. The IMF’s Multilateral Surveillance Framework

28. The Fund has made major changes to its multilateral surveillance framework to address the weaknesses that emerged during the crisis. This section discusses the Fund’s new approach in terms of the legal framework, processes and products the Fund has used to improve its multilateral surveillance. In particular, the Fund has taken steps to better integrate bilateral and multilateral surveillance through the adoption of an Integrated Surveillance Decision (ISD) that guides the Fund and members in terms of their responsibilities under Article IV. Finally, new procedures have been put in place for formal multilateral consultations, should the Fund want to initiate them.

V. Should the IMF Do More to Strengthen Its Multilateral Surveillance?

44. The intent of the Articles of Agreement, to which all 188 Fund member countries have pledged to adhere, is for the IMF to be the central focus of international macroeconomic policy cooperation on a consistent and permanent basis. In particular, each member accepts certain obligations with regard to the conduct of its economic and financial policies, including the obligation to “avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members.” The Fund is charged under Article IV with exercising ‘firm surveillance’ to ensure that members fulfill their obligations. In this framework the IMF is seen as the appropriate body within which all member countries undertake systematic international cooperation in implementing their economic policies. The Fund’s work on multilateral surveillance is potentially the key vehicle for achieving this ongoing cooperation. The scope for the Fund to undertake multilateral surveillance is defined by its general mandate under the Articles and by decisions of the Executive Board, particularly the 2012 ISD. The multilateral surveillance framework has been developed further since the ISD was approved in July 2012, and has included new analyses, products and processes, as described in Section IV above. Yet it is not obvious that this framework and the Fund’s current multilateral surveillance activities will be sufficient to address adequately the challenges of the rapidly evolving global economic and financial architecture. This is particularly true with respect to the risks posed by the vastly increased size and importance of capital flows in the global economy, the role of wealth effects in transmitting financial shocks, the new emphasis on the use of macro-prudential policies to address financial system vulnerabilities, and the continued recourse to unconventional monetary policies by several AEs.

45. Prior to 2007 the G7 Group of systemic ‘advanced’ countries, together with the Fund, was the main focus of international cooperation in economic policies. But, as indicated in the preceding sections, there were weaknesses in the Fund’s bilateral and multilateral surveillance work before the crisis that contributed to the widespread failure to identify the key downside risks in advance. The present section assesses the effectiveness and coherence of the Fund’s current multilateral surveillance framework in the context of this new global economic and financial architecture.

46. Given the high degree of interconnectedness of countries, markets and institutions in the international economy and financial system, as well as the gradual convergence in the economic weights of EMs relative to AEs, there is a compelling case for policy cooperation at the global level not just in terms of gains for individual countries but also from a systemic standpoint. This is especially so when coordination is undertaken proactively on a continuous basis, and has clear and attainable objectives. However, in order to achieve such cooperation the building blocks have to be in place for countries to view the operational arrangements for cooperation as beneficial in the long run. Although self-selected groups of countries such as the G10, the G7 and the G20 have shown themselves to be willing to intensify their ad hoc policy cooperation at times when they face large downside risks, it is clear that the current global structure does not provide strong incentives for these groups to engage in sustained and consistent cooperation, and that the current analytical framework is far from providing the comprehensive understanding of all the interactions in the global economy that would be needed to have an ‘independent assessor’ that could effectively direct policy coordination on an ongoing basis. Three areas where enhanced coordination may be considered desirable are examined in this section: implementation of macroeconomic policies, particularly by systemically important countries; reform of the global architecture of financial regulation; and oversight of international capital flows.

47. Cooperation in Macroeconomic Policy: It is obvious that in an interconnected world macroeconomic policy actions by individual countries, particularly systemically important ones, can exert substantial spillover effects that will be either positive or negative for individual economies and for the global economy as a whole. Nevertheless, the degree to which such systemically important countries have focused on cooperating in macroeconomic policy has been episodic.²³ Only rarely have systemic countries been prepared to alter macroeconomic policies that they have seen as appropriate to their own domestic circumstances in order to increase the possibility of achieving the uncertain prospect of a superior global macroeconomic outcome. Nor have they shown a consistent willingness to accept Fund advice in this direction—the Louvre and Plaza Accords could be cited as exceptions. This reticence is hardly surprising, given the large uncertainties that exist about the size of the potential gains from cooperation, the fact that some or most of the gains may accrue to other countries, the acknowledged weaknesses in the Fund’s past advice on the cooperative macroeconomic policy measures to be taken, and reservations about whether the Fund’s longstanding governance structure assures that its advice is neutral and unbiased. In sum, except in times of crisis the gains from engaging in macroeconomic policy coordination are seen as small and uncertain—particularly by policymakers in systemic countries—relative to the perceived costs.

48. Since the outbreak of the crisis in 2007–08, the impetus for international cooperation in macroeconomic policy has been provided mainly by the G20 Summits and Finance Ministers’ Meetings, with the Fund playing a supporting role. During the crisis, G20 policy cooperation was effective in several instances. Cases in point are the international coordination of liquidity provision by key central banks during 2007–09; the internationally-coordinated fiscal stimulus measures implemented by a number of G20 countries starting in 2009; and the G20’s comprehensive program to reform global financial regulation.²⁴ However, the G20 is an informal arrangement with no enforcing mechanisms, as well as limited representativeness. This raises the question of whether a formal institutional arrangement is needed to assure ongoing and effective economic and financial policy coordination towards the goal of “strong, balanced and sustainable growth” on a global level. Part of the intractability of this question lies in the fact that it is hard to demonstrate analytically that clear global gains will result when countries adjust their policies from what they see as best in their own interests in order to achieve a ‘better’ global economic outcome. This suggests that the impetus for systemic Fund member countries to cooperate actively in implementing macroeconomic policies typically is weak in normal times, when coordinated policy adjustments are seen only to give the uncertain prospect of modest positive effects on global economic performance.

49. To counter the perception that macroeconomic policy coordination requires that countries subordinate their domestic stability objectives to the goal of improved global macroeconomic performance, the ISD recommends that “members should consider alternative policies that, while promoting the member’s own stability, better promote effective operation of the international monetary system” and that the Fund “may not and will not require a member to change its policies in the interest of the effective operation of the international monetary system.” These strictures place clear limits on the degree to which the Fund’s multilateral surveillance can expand the scope of macroeconomic policy coordination. Thus, it appears still to be the case that a strong impetus to coordinate macroeconomic policies only comes at times of crisis—such as 2007–09—when political leaders face the imminent prospect of catastrophic risks and losses from non-cooperation.²⁵ Reflecting this asymmetry, the regular G20 Summit Meetings that began in November 2008 were initially focused on a comprehensive program to reform the global architecture of financial regulation as well as on the fiscal and monetary policy coordination that was needed to mitigate the ‘Great Recession.’ But more recent G20 Summits have reflected a less focused agenda as well as ‘mandate creep’ to issues beyond cooperation in economic and financial policies (see paragraph 17). This is a concern, since it is now relatively well accepted among policy officials that prolonged periods of stability can breed serious bouts of instability by fostering complacency and increased risk-taking. Recognizing this lacuna, the G20 countries now rely on the Fund/FSB EWEs as a basis for their assessment of the need for proactive cooperation in their macroeconomic policy settings. Thus the G20—as a self-selected group—has not established a permanent secretariat for macroeconomic policy implementation and tacitly recognizes that it is appropriate to delegate this responsibility to the IMF. At the same time, however, the IMF’s capacity to “steer” official discussions on coordination is somewhat limited by the G20 (see paragraph 33).

50. In order to encourage ‘mindfulness’ of the externalities from large countries’ economic policy actions the IMF has increasingly flagged global risks through the concept of ‘policy spillovers.’ However, there is a tension between this concept and the idea that there are aggregate long-term gains to be had from policy coordination. Several commentators have observed that the Fund might be able to achieve more traction if it could demonstrate feedback effects from policy spillovers—particularly policies implemented in large systemic countries (commonly referred to as “spillbacks.”)²⁶ In this context, some have called for a greater understanding of the determinants of global liquidity, as possibly a better-fitted framework for fostering coordination (see Box 2).

51. Coordinated Reform and Harmonization of the Global Architecture of Financial Regulation: The arguments in support of international cooperation to harmonize financial regulatory rules across jurisdictions are different from those for macroeconomic policy coordination, and in our view more compelling. Unlike macroeconomic policy, where the case for cooperation is conjunctural and depends on expectations about the size and direction of spillover effects, financial regulation provides the framework within which financial transactions are conducted both domestically and across national borders. It is a long-run structural policy, analogous to trade liberalization. Regulatory measures that strengthen the robustness of financial institutions, markets, and infrastructures should always be closely harmonized internationally. Otherwise, strengthened financial regulation in one country will be undermined by regulatory arbitrage that shifts risky activities to more tolerant jurisdictions, creating an un-level international competitive playing field and intensifying pressures to weaken discipline in risk management. Therefore, key enhancements to financial regulation through a cooperative approach are, at present, likely to result in a significant marginal reduction to systemic global risk. In sum, harmonization of key measures of financial regulation is unambiguously Pareto-improving for the global economy and financial system as a whole.

52. The importance of achieving internationally harmonized reform of financial regulation was clearly recognized by the G20 leaders in the depths of the crisis in 2008 when they transformed the FSF into the FSB and charged it with ensuring international consistency in the main elements for enhancing the regulation of financial institutions and markets to strengthen financial system stability. However, while the Fund has a central role in fostering macroeconomic policy cooperation, its Articles of Agreement contain no specific mandate to oversee the development of an internationally harmonized system of financial regulation (see paragraphs 20-22). Nevertheless, the fact that the international financial crisis that began in 2007 led to the ‘Great Recession’ demonstrated that global reform of financial regulation is highly relevant to the Fund’s capacity to perform its multilateral surveillance role. The FSAP is not a formal tool for fostering international harmonization of financial regulation. Nevertheless, the FSAP exercise in each member country includes an assessment of whether the authorities are in compliance with international financial sector standards (such as the Basel Core Principles for effective bank supervision, etc.) Since the Fund’s assessments are based on best-practice international standards and the Fund focuses on uniformity of treatment across members, the FSAP assessments can help to foster the international harmonization of key international financial regulatory standards over the longer-term. Since the onset of the financial crisis the FSAP reviews and their recommendations have gradually been integrated more deeply into the multilateral surveillance process, as well as into the bilateral Article IV surveillance missions with each member country. They provide the Fund and the international community with a useful means of reviewing whether the measures endorsed by the FSB are being implemented in a consistent manner internationally. With its virtually global membership the Fund is in a unique position to assess the degree of international harmonization of financial regulation that the G20 program will eventually achieve. FSAPs, therefore, can help to foster international harmonization of financial regulation. International coordination of financial regulatory standards, in turn, will limit both the scope and the incentives for regulatory arbitrage, thereby enhancing global financial stability.

53. Cooperation in the Oversight of International Capital Flows: Perhaps the most challenging area for achieving acceptance of the need for international cooperation is in the oversight of international capital flows. Previous sections have indicated that given the highly integrated nature of the global financial system, this is an area of fundamental interest and concern to the Fund’s work in multilateral surveillance. However, the Articles of Agreement do not give the Fund a specific mandate for oversight of international capital transactions that corresponds to its responsibility to oversee current transactions.²⁷ This asymmetry in the Fund’s mandate limits its scope to press its advice on individual governments’ policies on capital transactions. Thus the Fund’s ability to coordinate policies that directly impact international capital flows depends on the confidence that the members place in its analysis of the effects of such flows and what, if anything, should be done to influence them by policy action.

54. Prior to the onset of the financial crisis the general consensus was that gradual and sequenced capital account liberalization was desirable for all Fund member countries. It was considered that the dominant issues related to how to sequence a gradual opening up of the capital account. The general view was that these capital account liberalization measures constituted a one-way move to full convertibility that should not be subsequently reversed. During and since the financial crisis, however, many countries have found that the highly accommodative monetary policies being implemented by major systemic countries, combined with other structural elements of the international economy, have not only caused substantial volatility in exchange rates but have sometimes produced situations in which their real exchange rates (or asset prices) have moved for protracted periods to levels not considered sustainable or desirable from a macroeconomic perspective in the longer term, thus increasing the risk of abrupt adjustments with substantial welfare costs and the potential to cause major adverse macroeconomic developments. As a result, a number of countries have resorted to CFM measures to control volatile capital movements into and out of their economies. At present, despite the importance of these issues, no consensus exists on the degree of harmonization that should exist in the rules governing international capital flows, or on how much of the Fund’s multilateral surveillance work should be focused on these issues and their systemic implications (see Box 2 for further commentary). The Fund has taken a useful step in this direction by developing its ‘Institutional View’ on capital flows. Nevertheless, greater clarification on this issue—both by the Fund and systemic Fund members—will be essential to strengthening the Fund’s multilateral surveillance.

VI. Measures to Improve Multilateral Surveillance Under the IMF’S Current Mandate

55. As noted in Sections II–IV, the IMF has taken a number of steps to strengthen multilateral surveillance since the onset of the financial crisis in 2007. In our view, the measures outlined in these sections are appropriate and important steps. Nevertheless, to continue to gain credibility in this area the Fund needs to make further improvements to its analysis and advice on the international coordination of economic and financial policies. This section outlines our recommendations on the enhancements the Fund could make in the near term under its current mandate. Section VII will discuss, in a more ‘out-of-the-box’ fashion, the ways in which member countries might consider changing the Fund’s mandate over the longer term to make its multilateral surveillance the central focus of a continuous process of economic policy coordination. In extending this work Fund staff will need to have cooperation from national authorities to obtain the data it needs to make these assessments, particularly data on balance sheet and off-balance sheet positions that have not been provided to the Fund on a regular basis in the past. This will prove to be a challenge, but the gains to be achieved in the analysis of the risks in the financial sector and their linkages to adverse macroeconomic developments will be worth the effort in increasing the Fund’s ability to connect financial and real sector risks.

56. Implementation of IEO recommendations. In 2011 the Fund’s Independent Evaluation Office (IEO) published a Report on “IMF Performance in the Run-Up to the Financial and Economic Crisis: IMF Surveillance in 2004–2007.” The IEO Report (see its Chapter V) made recommendations for strengthening multilateral surveillance by changing the Fund’s internal working environment to encourage diverse/dissenting views in staff analyses, enhancing incentives for candor in the staff’s policy discussions with national authorities, better integrating financial sector issues into macroeconomic assessments, and overcoming the ‘silo mentality’ that limits the effectiveness of staff cooperation across its regional and functional departments (see paragraphs 11-14). The Fund has followed up on a number of the IEO’s recommendations through organizational changes and Board decisions. Nevertheless, it appears to us that other important IEO recommendations have not yet been fully implemented. As detailed in a recent staff study,²⁸ the main IEO recommendations that still require further effort are those to “better integrate financial sector issues into macroeconomic assessments” and to “deliver a clear, consistent message to the membership on the global outlook and risks.” Thus the immediate next steps in strengthening multilateral surveillance should be to complete implementation of these recommendations. In this section we first focus on the most pressing areas for further enhancements before turning to the additional actions we recommend to strengthen multilateral surveillance further under the Fund’s current mandate.

57. Measures to strengthen the EWE. Development of the EWE as a joint responsibility of the IMF and the FSB was one of the first major actions taken by the G20 to strengthen the capacity to identify emerging risks and vulnerabilities in the global economy and financial system (see the G20 Communiqué, November 15, 2008). Since that time the EWE has been implemented through confidential semiannual presentations by the IMF and FSB staffs to the IMFC. Thus it is the most direct means by which the Fund can succinctly communicate the most important systemic risks it identifies in its multilateral surveillance and its most important policy recommendations to a key group of systemic-country policymakers. It is therefore essential for the Fund to ensure that these messages are actionable, clearly prioritized, and unambiguous. In these exercises the Fund has a leading role in identifying macroeconomic and macro-financial vulnerabilities, while the FSB takes the lead on those vulnerabilities that need to be addressed by initiatives in financial regulation.

58. In preparing the EWEs the IMF and FSB staffs recognize that “crises result from the collision of vulnerabilities of an economic or financial nature with essentially unpredictable developments that can serve as a specific trigger.” Thus the purpose of the EWE is not to predict the outbreak of a crisis at a specific time in the future, but rather to present IMF/FSB views on key emerging downside risks and vulnerabilities that may need to be addressed to make the global economic and financial system more robust. These semi-annual assessments are also supposed to make recommendations that provide policymakers in the member countries with actionable warnings on tail risks, thereby making the outbreak of crises less likely, or their consequences less severe when they occur.²⁹

59. An essential key to continuing to enhance the EWE will be Fund Management’s commitment to strengthen the analytical capacity of the Fund staff in the three areas discussed in Section V: macroeconomic policy coordination, international harmonization of regulatory reform, and oversight of capital flows. The IEO Report recognized that in order to achieve this Fund Management must encourage a working environment where staff can be increasingly proactive and candid in identifying risks—particularly those arising in large systemic economies and financial jurisdictions—that have the potential to create vulnerabilities from large spillovers. This analysis also needs, by definition, to be forward-looking, rather than reactive.

60. Further Enhancements to the EWEs. We believe that the EWE could gain in effectiveness if staff analysis and IMFC discussions were focused not only on how macroeconomic policies should respond to counter emerging downside risks, but also how macro-prudential policies should be adjusted to mitigate major buildups of financial risks, particularly in key jurisdictions. The Global Financial Stability Reports have taken a useful step in this direction by highlighting major financial system-wide risks and the avenues for their mitigation. This element should now be hardwired into the EWE process, particularly since the newly established macro-prudential agencies in the key financial jurisdictions have until recently been more focused on regulatory rule-making than on identifying and countering rising system-wide risks in the macro-financial conjuncture. To help ensure that diverse views are aired the staff could on occasion invite external experts to EWE sessions to comment on the risks they see in the conjuncture and discuss their implications for policy coordination. Such discussions could represent an important “learning process” for cooperation among member countries.³⁰ An important case in point is the implementation of the G20’s comprehensive financial regulatory reform program, where we see international harmonization of key measures as crucial to avoiding down-side risks from regulatory arbitrage across jurisdictions that can camouflage risks and create perverse incentives. The IMF and the FSB should cooperate closely in this area to establish a shared view of the key regulatory measures that it is most important to implement in an internationally-harmonized way to strengthen the resilience of the global financial system.

61. A Fund-wide Risk Management Unit. We recommend that Management use its newly established Risk Unit—in line with the recommendations of external experts engaged to prepare a review of the Fund’s risk management framework back in 2011³¹—to proactively develop a forward-looking, institution-wide view of emerging risks. Specifically, the Unit should assist Management and the Executive Board in articulating a clear view of the Fund’s overall risk appetite/risk tolerance in both its lending activities and its policy work; overseeing Fund-wide risk management, and allocating staff resources flexibly to emerging risks as they are identified.

62. Increasing Management’s Capacity to Direct Staff Resources to address the key risks. The establishment of the Risk Unit alone will not be enough to strengthen the Fund’s ability to respond flexibly to newly identified risks. As the IEO has recognized in several of its reports, the Fund continues to have a relatively rigid internal organizational structure in which functional and area departments exercise essentially exclusive control over their assigned staff. This could mean that staff resources are not reallocated flexibly or quickly enough across departments to address unforeseen down-side risks when they arise. Such a rigidity in the Fund’s organizational structure could limit the effectiveness of its multilateral surveillance at times of heightened uncertainty—the very times when both responsiveness and analytical clarity are most needed in order for the Fund to provide credible, concrete advice on needed policy responses and their coordination. To strengthen the Fund’s capacity to respond quickly in assigning staff resources to key risks identified by the new Fund-wide risk-management framework, we recommend that Fund Management consider establishing a Committee composed of directors of the departments engaged in multilateral surveillance. This Committee could be chaired by a member of Management and would have the authority to redirect the appropriate staff resources temporarily among departments as needed to discharge the Fund’s multilateral surveillance responsibilities. The increased flexibility this could provide could also have the benefit of reducing the problems of structural inflexibility, ‘silo mentality,’ and lack of forward-looking analysis noted in IEO reports and staff surveys, thereby contributing positively to staff morale.

63. Establishing a ‘track record’ for the Fund staff’s forward-looking policy advice in the context of multilateral surveillance. In order for the Fund gradually to earn credibility as a ‘trusted advisor’ when it advocates measures of policy coordination that would not occur spontaneously, the Fund needs to establish a ‘track record’ showing that things turn out better when its recommendations on policy coordination are followed. This involves the difficult problem of the ‘counter-factual.’ In order to gain credibility as a key element of the Fund’s multilateral surveillance the EWEs need to be able to show convincingly, through an ex post analysis of outcomes, that there were occasions when significant gains would have accrued to the global economy and financial system if key systemic countries had altered their policies in response to IMF/FSB advice given in past EWE sessions. To move forward in achieving this goal, we recommend that prior to each EWE presentation to the IMFC the Fund staff should regularly provide senior officials in the finance ministries and central banks of IMFC member countries with its retrospective analysis of the advice it had given to the IMFC in the recent past, an assessment of the degree to which the staff’s advice had been followed, and—if so—whether the outcomes did indeed broadly result in a better performance than would have occurred without policy adjustments. Conversely, in cases where the staff judged that the recommended policies had not been taken, they would give their judgment as to whether the resulting weaknesses in performance had exacerbated vulnerabilities.³² Such an exercise could also be used to enhance the analytical depth of Spillover Reports. As the Fund’s analysis gained credibility the multilateral surveillance process would become more widely accepted. Clearly, when major unexpected events occur the Fund cannot be expected to have foreseen all the low-probability ‘tail risks.’ Nevertheless, it is essential for the staff to investigate these in the context of the vulnerabilities exercises. even though they often generate ‘false positives.’

64. Measures to enhance the IMF staff’s internal “Vulnerabilities Exercise” and integrate it more tightly into the EWE. As a key element of its preparations for the EWE exercise the Fund staff operates an internal “Vulnerabilities Exercise” to underpin its forward-looking effort to identify emerging risks. The Vulnerabilities Exercise has encouraged the Fund staff to undertake deeper analytical work on international macroeconomic and macro-financial linkages and on their impact on capital flows, which has informed the Spillover Report’s capacity to identify vulnerabilities that could lead to contagion. This was complemented in 2010 by the decision to require that the financial stability assessments made in the FSAP reports for the 25 (expanded to 29 in 2013) most ‘systemic’ financial jurisdictions be a mandatory component of the Article IV bilateral surveillance discussions for each of these economies. The IEO report noted that Fund Management and staff have not yet implemented a full process for the staff to: (i) monitor the measures taken by national authorities to remediate these weaknesses; (ii) evaluate their effectiveness; and (iii) consider further steps to be discussed with the authorities. We recommend that these essential follow-up actions should be a high priority for Management and senior staff. Such analysis would support key financial sector recommendations made by staff in bilateral surveillance discussions, and would also serve to strengthen the analysis of the Spillover Reports. Implementing this recommendation will require strong impetus from Fund Management to clarify the multilateral surveillance responsibilities of departments across the institution and to foster further enhancements to area departments’ cooperation with functional departments most involved in multilateral surveillance. It would also help to create the necessary incentives for staff to provide candid assessments to Fund Management and national policy makers. These processes should also be integrated into the institution-wide Risk Management Framework proposed above. In this context as well, the IEO recommendation that the Fund Management and Board should more actively seek views from independent outside analysts on a regular basis should also be acted upon.

65. Further integration of FSAPs into the Fund’s multilateral surveillance. It is commendable that the timing of FSAP assessments is now being coordinated more closely with that of the staff Article IV missions, since this element of bilateral surveillance forms an essential “bottom up” foundation upon which the aggregate view of what is needed for effective multilateral surveillance is built.³³ Therefore, we believe it is desirable that this process becomes more targeted, particularly for those countries that are judged to have significant weaknesses in their financial systems, structures, or regulations that could give rise to financial system vulnerabilities. When a country has had a recent FSAP assessment in the run-up to a regular Article IV consultation the staff participating in the Article IV can have a deeper appreciation of the strengths and weaknesses of its domestic financial system and regulation that feeds into multilateral surveillance. Consistent with this view, the Article IV missions to countries that have had recent FSAPs are now required to follow up on the FSAP recommendations, and this work is closely reviewed by the Money and Capital Markets Department (MCM). The Fund should continue to integrate financial sector surveillance into its multilateral surveillance framework by encouraging area department staff and country authorities to proactively anticipate and address emerging financial system risks in the period between FSAPs. In addition, the Fund also needs to communicate its findings on weaknesses that it sees in systemic countries or groups of countries promptly to the FSB, particularly in cases where the Fund staff identifies groups of countries that need to make more progress in resolving similar weaknesses in their financial system structures. This process could be made more systematic through the development of a business plan to strengthen coordination among the relevant area departments and MCM. It would obviously involve an increased staff resource commitment—again, efforts to improve the Fund’s capacity to allocate staff resources more flexibly in the short term are crucial.

66. The Fund needs to clearly communicate a consistent set of policy recommendations from its regular multilateral surveillance exercises that integrates its analysis of likely financial system developments with those in the broader macroeconomy, identifies the key downside risks, and outlines the policy initiatives that may need to be implemented to avoid those risks or mitigate them if they materialize. Since the financial crisis the Fund has initiated such a large number of new analytical analyses and reports that even seasoned policy analysts can be left uncertain about the ‘bottom line’ policy recommendations emanating from the Fund’s multilateral surveillance work. Since the financial crisis the Fund has initiated such a large number of new reports that there is a risk that its basic policy recommendations will be obscured. It appears to us that the Fund now needs to send a clear message to policymakers and markets of what its policy recommendations are for the case where the global economy evolves in line with the central forecast of the WEO, as well as cases where downside risks occur. Since experience suggests that problems arising in the financial sector can lead to major adverse macroeconomic developments, we recommend that Management give consideration to merging the GFSR and the WEO into a single concise document that would provide policymakers, market participants and the informed public with the Fund’s overall view of the most likely scenario for the coming twelve to eighteen months, its policy recommendations for this central scenario, the key downside risks, and the actions it would recommend if any of those risks materialized.

VII. A Case for Extending the Fund’S Mandate

67. As discussed in the preceding section, there is room for improvement both in enhancing the analytical framework of the IMF’s multilateral surveillance task and in gaining traction on cooperation through this process. This section addresses two interrelated but separate issues—the need to: (i) further strengthen multilateral surveillance; and (ii) achieve traction of multilateral surveillance especially with key stakeholders. Since the 2008 crisis, the Fund’s progress in establishing traction in its multilateral surveillance advice has been somewhat slower than the progress it has achieved in enhancing its multilateral surveillance framework. From a longer-term perspective, however, the Fund’s ability to effectively promote global economic and financial stability is limited by the architecture of the global financial system and its mandate. The asymmetry in the IMF’s mandate creates a tension: it has jurisdiction over the current account but not over the capital account. The IMS is only a part of the global economy.³⁴ Standing outside the realm of the IMF’s conventional (i.e., pre-crisis) oversight activities are several global economic and financial factors which have the potential to produce a build-up of systemic risk and are transmitted through channels not typically scrutinized by regular IMF surveillance before the crisis.

68. Since the IMF’s inception, the emphasis on open current accounts and appropriate exchange rate policies has guided much of the Fund’s surveillance work. The basis of this framework was the relatively unimportant role capital flows played in the global economy in the early years of the Fund’s activity. Their magnitude was significantly less than it is today since at the time virtually all Fund members exercised broad capital controls. International trade, which was the main economic link between countries, was understood to be strictly welfare-increasing and so the natural direction of the Fund’s work was to facilitate trade liberalization by limiting current account restrictions. The promotion of exchange rate policies that led currency prices to reflect their fundamental values helped to limit the need for macroeconomic policy coordination as exchange rate adjustments could be used to reduce the persistence of imbalances—thus limiting the potential for significant abrupt adjustments. However, as capital flows have grown in importance on a global scale (see Section II) and their economic impacts and sensitivity to macro policies and global factors have increased, their potentially destabilizing effects have become clearer, as well as more complex (see Box 2). In effect, they have become a crucial source of risk to the global economy that needs to be more closely monitored and managed.

69. The 2007–09 global financial crisis demonstrated how international imbalances (current account and liquidity-wise)³⁵ can have dire global effects and brought to the forefront of the international policy agenda the need to make the IMF’s surveillance framework more comprehensive in risk-identification and more effective in risk-mitigation through coordination (see Sections II and VI). Systemic risk is now an a par with other sources of instability and thus the multilateral approach to surveillance, including over new transmission channels such as capital flows and wealth effects, is being made more robust and comprehensive. However, it is clear that traction in this area can only go so far without a general revision of members’ obligations and the Fund’s mandate. In this regard the IMF is currently faced with the challenge of trying to achieve a stable distribution of global liquidity with only its power of persuasion to do so.³⁶

70. Although the 2012 ISD provides clear guidance in the correct direction by emphasizing that the IMF should monitor any source of risk that may lead to the ineffective operation of the IMS, including all potential sources of economic and financial instability, it does not grant additional tools with which to effectively mitigate them. To bring about a more stable global economy, significant reforms to the international financial architecture are warranted. Additionally, in order to achieve stronger global economic performance—an objective also set out by the G20—the institutions that undertake high-level policy coordination need to reflect the world’s interconnected relations in a more balanced way than is currently the case. We argue that these goals could feasibly be realized through reforms that re-allocate (or institutionalize) the mechanism of coordination under the purview of the Fund and endow it with tools to effectively induce and enforce agreements.

VIII. Conclusion

88. As the global financial system becomes more interconnected and complex, the need to constantly enhance the Fund’s multilateral surveillance and risk mitigation framework increases. Evolving patterns in international economic relations and policy frameworks—such as large and generalized macroeconomic effects from capital flows, the widespread use of unconventional monetary policies, and the growing popularity of macro-prudential and CFM measures—have created new channels of transmission for financial and economic shocks and increased the role of cross-border spillovers in policy makers’ reaction functions. Further, this trend is expected to persist for the coming decades as EM growth will likely continue to outpace that of AEs—albeit to a lesser degree than during the first decade of this century.

89. In these circumstances, the IMF must seek to improve its multilateral surveillance framework in line with its mandate to safeguard global economic and financial stability and the guidance outlined in the 2012 ISD. Recognizing that substantial progress has been achieved since the 2007–09 crisis, in the short- to medium-term there is room for further betterment. Specifically, large potential benefits are likely to be gained from inducing consistent international cooperation in (i) the implementation of macroeconomic policies—particularly by systemically important countries, (ii) the reform of the global architecture of financial regulation, and (iii) the oversight of international capital flows. Operationally, to implement these recommendations efficiently the Fund could strengthen the EWE and integrate it with the internal vulnerabilities exercises, empower the staff to be more proactive and candid in identifying risks, and enhance FSAPs to inform multilateral surveillance, in particular on progress towards harmonization of financial regulatory reforms.

90. From a longer-term perspective, the Fund’s multilateral surveillance could be improved toward fostering policy cooperation to efficiently mitigate global risks that require collective action by amending its Articles of Agreement. In particular, establishing a new governance structure, through a merger of the IMFC and the G20, could help encourage cooperation. The new IMFC would deliver strategic and policy direction and engage in policy cooperation, including macroeconomic policy, trade policy and issues relating to capital flows. This would help create a more coherent and effective forum to internalize externalities. Further, there is a compelling case for giving the Fund an explicit capital account remit. This would represent a clear commitment on the part of Fund members to shift towards a more cooperative approach to global stability; to encourage direct and formal dialogue between source and recipient countries; and to strengthen the Fund’s capacity to manage global liquidity in order to help internalize cross-border spillovers.

91. Without some degree of reform, the international financial architecture (absent a real threat of severe instability) is unlikely to generate the incentives geared toward sustained policy cooperation. Spillovers are a natural part of an interconnected economy, but they are not necessarily—in themselves—a strong basis for cooperation. Global economic and financial stability is a public good and, as such, tends to be under-produced. At present, few incentives exist for large economies to adjust their policies to align them with the interests of smaller parties, which individually do not offer high benefits from cooperation. Therefore, the internal structure of the IMF could be reformed to create the institutional mechanisms necessary for cooperation among all Fund members.

92. Ultimately, the degree to which the Fund is seen as capable of delivering global policy cooperation will depend on whether it is seen as a ‘trusted advisor’ to the international economic policymaking community. Thus, through enhancements in the quality of its analysis and policy recommendations, in the near-term the Fund must continue to improve its track record in giving advice on the modalities of enhanced policy cooperation and the resulting salutary effects along the lines outlined in Sections V and VI. Much progress has already been made in building the Fund’s analytical capacity to identify emerging risks in the global economy, but this remains a work in progress and the complete interactions of countries’ policies are yet to be understood. Without such a framework the appropriate guidelines for CFM measures will continue to be absent and the case for an extension of the Fund’s mandate will remain tenuous. Improving the Fund’s analytical framework is thus necessary to lay the groundwork for broader reforms to its mandate—especially as this pertains to its remit over capital flows following the 2012 ISD and the Fund’s ‘Institutional View’ on capital flows.