MANY OF THE ideas and suggestions that have come to the fore in discussions about institutional development and renewal fifty years after the Bretton Woods conference involve concepts such as “multilateral surveillance” and “early warning systems,” which have long been a part of debates about the international financial system. Surveillance does not appear by this name in the Bretton Woods agreement, but it is implied by Article I, Section (i) of the IMF’s Articles of Agreement, which established a “mechanism for consultation and collaboration on international monetary problems.” In general, the IMF has under the Articles of Agreement a responsibility for the overall functioning of the international monetary system.

The practice of surveillance has developed out of two parallel considerations. First, the general overview of the international system called for the investigation of national economic policies. Initially, the major requirement for the establishment of an international monetary order was the adoption of current account convertibility. The Articles of Agreement provided for consultations by the IMF with countries that had not lifted exchange restrictions five years after the IMF had begun operations (Article XIV, Section 4). Article VIII also committed the Fund to act as a central place for the exchange and transmission of information (Article VIII, Section 5(c)), while member countries had the corresponding obligation to provide data on national income, prices, and a variety of international financial transactions. Later, as a response to the liberalization of current account transactions and then the emergence of international capital flows on a scale not anticipated at Bretton Woods, the assessment of the global economy and of interactions with individual national economies became an increasingly urgent task.

The second principle for surveillance emerged out of the conditionality of the use of Fund resources (on which there is of course a substantial literature¹), and a consequent need for supervision. From the beginning this was a central issue in debates about the role of the IMF. The details of conditionality were almost inevitably contentious, and at some times it became conventional for outsiders to speak of “harsh conditionality,” but the general principle, except in the very early period, commanded a considerable consensus. As a result, one commentator suggested that most people would probably favor IMF-like conditionality in the case of any country but their own.²

There has always been a trade-off between surveillance for the benefit of the functioning of the international order, and the preservation of the prerogatives of national governments (sovereignty). This paper focuses largely on multilateral surveillance as a central element in the management of the international monetary system, and as a means of reducing disturbance originating from policy shocks (since inappropriate policies in one country may have a major impact on the rest of the system). It does not deal in detail with the mechanisms and policy implications of bilateral surveillance.

I. Conditionality and Surveillance

The substance of surveillance was already adumbrated in the early wartime discussions between John Maynard Keynes and Harry Dexter White about the shape of the postwar currency order. In particular, the notion of discretionary management of the international monetary system by a supervisory body was introduced by the United States in order to avoid the potentially very high liabilities implied in Keynes’s original vision of an almost completely automatically operating clearing union.

The United States intended to endow the stabilization fund suggested in its own proposal with powers sufficient to tackle those obstacles that had in the past stood in the way of world economic cooperation. The stabilization fund would have to be given extensive powers to control matters that had previously been regarded as the purview of national sovereignties. “It is vital to the success of any international stabilization fund designed to play a really useful role that there be a suspension of certain economic elements of national sovereignty in favor of international collaboration.... If no government is prepared to sacrifice for the sake of a larger though possibly a less obvious good what it regards as an advantage when that advantage is obtained at the expense of some friendly power, then the world will revert to the barbaric international economic relationships of the ‘twenties and ‘thirties.”³

Most of the proposed limitations on governments were set out as rules to be imposed by the new institution, including:

(1) the abandonment, not later than one year after joining the stabilization fund, of any restrictions and controls on foreign exchange transactions that had not been approved by the fund;

(2) a prohibition on altering exchange rates without the approval of the fund; and

(3) a prohibition on accepting investments and deposits from another country except with that country’s consent (the participants in the debates on reform all had vivid memories of the large sums involved in capital flight in the 1930s).

However, the proposal also included commitments and limitations that could not be formulated so precisely. For example, members would commit themselves to reduce trade barriers. And countries would not impose any monetary or banking or price measure that might “bring about sooner or later a serious disequilibrium in the balance of payments, if four-fifths of the member votes of the Fund submitted to the country in question their disapproval of the adoption of the measure.”⁴

This would mean an activist IMF, debating, consulting, warning, and advising—in short, behaving very differently from the inherently automatic Credit Union of Keynes’s plans. In order to work effectively, the proposed stabilization fund would need a trained and expert technical staff that would constantly supervise all international transactions in order to be able to advise the voters on the IMF’s governing body. “The condition and movements of the international accounts of the member countries would be to the Fund’s research staff, what the thermometer, stethoscope, x-ray, and microscope, etc., are to the diagnostician.”⁵

After Bretton Woods, the next step toward surveillance was the formulation and systematization of a principle of conditional lending in the form of the stand-by arrangement. In 1948, an extended debate began in which it became increasingly evident that policy conditions to be placed on a country would depend on the amount it was drawing from the Fund. In part this move was a consequence of the IMF’s April 1948 decision to deny access to IMF resources to countries participating in the European Recovery Program (ERP, or Marshall Plan). In 1948, shortly after the ERP decision, an internal IMF memorandum suggested that the payments positions and prospects of members should be evaluated twice yearly and used to determine countries’ eligibility to use Fund resources. The decisive breakthrough came when the IMF’s second Managing Director, Ivar Rooth, proposed linking increasingly stringent conditions to increasingly higher levels of borrowing. A member’s drawing of the first 25 percent of its quota would be automatic, but for larger sums, conditionality and surveillance would be applied. This method of operation was approved by the Board on February 13, 1952. In October 1952, in association with a provision for approving necessary drawings in advance, “stand-by” facilities—or, in other words, a way to approve in advance any necessary drawings—were approved and the basis had been laid for increased activity by the Fund as a financial institution. The stand-by arrangement, which made balance of payments support available on condition that certain policy measures be taken and subjected these measures to a performance test, became the most characteristic form of Fund financial activity. The first of these arrangements was a six-month $50 million program for Belgium, which was used by the Belgian Government to support the operation of the European payments system. After this breakthrough, the granting of waivers under Article V, Section 4 to members allowing them to draw more than 25 percent of quota in the course of one year became commonplace. At the same time a set of rules governing the availability of funds emerged. While the IMF was providing aid to Finland in 1952 it was established that in order to secure the principle of revolving access to Fund resources, drawings by a particular country should not be for more than three years. The technical basis of the Bretton Woods system was thus established. It depended on a limited automaticity in regular transactions, and increasing amounts of discretion by the IMF corresponding to the member country’s increasing macroeconomic imbalance as revealed by the balance of payments. The newly created financial incentive structure could—and was—used to motivate countries to adopt further degrees of liberalization, and to create in practice the global economy that at Bretton Woods had been glimpsed only as a vision.

II. Surveillance and the International Financial System

Between 1946 and 1958 the major form of IMF surveillance was the consultation process with countries with nonconvertible currencies, held in accordance with Article XIV of the Articles of Agreement. Surveillance took on a new meaning with the transition between 1958 and 1961 of major industrial countries to the current account convertibility provided for in Article VIII of the IMF Articles of Agreement. By the early 1960s, private capital markets (the “Euro-markets”) began a dramatic expansion; the movement of capital imposed a new sort of constraint on national economic policymaking and potentially challenged the positions of the two major reserve centers—the United States and the United Kingdom.

It only then became possible to speak of a genuine “international monetary system”: indeed, the phrase only entered the general vocabulary in the context of discussions in the early 1960s about the creation of the General Arrangements to Borrow (GAB) by ten members of the IMF—Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, the United Kingdom, and the United States, as well as Switzerland (which joined the group, but not the IMF, slightly later).⁶ The 1960s saw a shift from a world of nation-states with an institution supervising rules of conduct, to a system in which nation-states, whose behavior was affected by those rules, interacted with markets, and in particular with the growing currency and capital markets. (Thus, the international financial system was conceptually entirely different from the international political system: in the latter, states alone interact with each other, while in the former there is a large body of other agents, private as well as official, continually judging and second-guessing the decisions made by the states.)

The creation of additional resources through the GAB produced a new sort of conditionality, intended to calm continental European fears about the possible use of the GAB by the major reserve centers of the time, the United States and the United Kingdom. After discussions with French Finance Minister Wilfrid Baumgartner, the IMF’s Managing Director, Per Jacobsson, pledged that before making a call under the GAB, the IMF would obtain the consent of the participating countries. The agreement was recorded in a letter of Baumgartner’s to the other participants in the GAB.⁷ GAB participants would consult with each other and inform the IMF of the amount they were prepared to lend. The French provisions were accepted by the IMF’s Executive Board on December 18, 1961. A request for support under the GAB required the consent of the GAB members as well as that of the Executive Board. This “double lock” represented a major dent in the Fund’s claim to universality and its capacity to judge by itself the conditions for assistance in dealing with balance of payments problems.

The GAB and its members rapidly aroused the suspicion that a new ideology of cooperation between industrial countries had replaced the universalist aspirations of Bretton Woods. Cooperation between the G-10 members became institutionalized through study meetings of Deputies (senior or permanent civil servants at the heads of Finance Ministries or Central Banks), which from October 1963 were chaired by Robert Roosa, the U.S. Treasury Under Secretary for Monetary Affairs, and after 1965 by Otmar Emminger, Vice President of the German Bundesbank. The group committed itself to “undertake a thorough examination of the outlook for the functioning of the international monetary system and of its probable future needs for liquidity.” It defined its task as “multilateral surveillance” (the first use of the term in discussions about the international economy), which it interpreted as an appraisal of “the various means of financing surpluses and deficits” in order to develop “a common approach to international monetary matters.”⁸

Debate about reform of the system shifted for a time to this new forum. In April 1961 the OEEC (later the OECD) Economic Policy Committee created a study group called Working Party Three with the intention that it should analyze the effect on international payments of monetary, fiscal, and other policy measures, and would consult together on policy measures, both national and international, as they related to international payments equilibrium. Working Party Three was to be composed of senior officials from Belgium, Canada, France, Germany, Italy, the Netherlands, the United Kingdom, the United States, Switzerland, and a Scandinavian country (in practice Sweden), with the later addition of Japan, thus intentionally replicating the composition of the G-10. In this way, the industrial countries, with a heavy over-representation of Europeans, appeared to be on their way to establishing their own international financial system. Their actions challenged the vision many had of a more global, inclusive international economy.

Working Party Three’s essential function was multilateral surveillance of balance of payments issues. In order to accomplish this, it needed to analyze broader macroeconomic developments. Meetings characteristically began with a tour d’horizon of crucial economic indicators in a number of the large industrial countries. But in the increasingly serious currency crises of the later 1960s, the Working Party played an ever more peripheral role. This was not for lack of foresight. There was an urgent awareness of the gravity of the problem by the mid-1960s, but also, already then, an increasing sense of impotence and ineffectiveness.

In August 1966 Working Party Three produced a report entitled “The Balance of Payments Adjustment Process.” The report’s recommendation was the creation of an “early warning system” to try to ensure that as soon as evidence of an actual or potential imbalance began to accumulate, it was the subject of a collective evaluation of the situation of the country or countries concerned, with a view to facilitating the adoption of appropriate policies. The key objective, spelled out in Paragraph 70, was to entice countries to begin the process of domestic adjustment earlier—before the outbreak of a major crisis. The report largely ignored exchange rate adjustment, giving the subject only two brief references.

Within the Working Party, Emminger (who at the time was also the chairman of the G-10 Deputies) devoted himself to the development of a mechanism for such an early warning system. Instead of looking indiscriminately at a large collection of data, policymakers should pay attention to a number of key indicators (money supply, bank lending, bank liquidity, short-term interest rates, and use of central bank credit). The function of the surveillance exercise was to focus attention on macroeconomic data that should initiate a policy change or policy response. Emminger concluded that due emphasis should be placed on the relationship between the developments in the field of money, credit, and public finance on the one hand, and the balance of payments on the other.

The problem that made surveillance less than effective lay largely in the political task of prompting countries to make earlier, and less dramatic, responses to potential balance of payments difficulties. In particular, the failure of the United Kingdom to address the overvaluation of sterling in the five-year period before the belated sterling devaluation in November 1967 demonstrated how surveillance was made ineffective by political constraints: in this case, the commitment of the U.K. Government to full employment strategy, and its refusal to contemplate devaluation (which in fact had become known as “the unmentionable”). The practical unwillingness to consider parity changes as a mechanism of adjustment severely limited the room for maneuver under surveillance, especially since fiscal policy remained oriented toward the domestic political priority of maintaining full employment.

In addition, there was also the almost insuperable intellectual challenge of convincing some monetary authorities that there existed such a link between money and the balance of payments. Effective multilateral surveillance becomes practically impossible in the absence of a basic consensus about the interactions involved in the global economy.

The parallel institution that occupied itself with multilateral surveillance fared little better. The G-10 had an intrinsically strong position because of their economic, financial, and political strength (including voting power on the Executive Board). Nor did the purse power established through its connection with the GAB harm that position. But a combination of political and intellectual resistance blocked the evolution of the G-10 as an effective provider of surveillance. In the mid-1960s, U.S. officials were referring to the G-10 as “more mouse than elephant.”⁹ They resented the leverage that its composition inevitably gave to the Europeans, who regularly caucused before meetings, and as a consequence the United States tried to make that body as much of a mouse as it could by restricting the policies that could be considered by the G-10. The influence of the United States, and the U.S. wish not to have the dollar discussed, led to a general refusal to consider parity alterations as a solution to balance of payments issues. In 1964, the G-10 Deputies’ Statement included the following list of “appropriate instruments of economic policy”: budgetary and fiscal policies, incomes policies, monetary policies, measures relating to international capital transactions, commercial policies, and selective measures on housing or hire purchases. The document added that “such instruments must be employed with proper regard for obligations in the field of international trade and for the IMF obligation to maintain stable exchange parities which are subject to change only in cases of fundamental disequilibrium.”¹⁰ In other words, exchange rate changes were not to be considered a usable policy instrument.

Even the IMF was willing to present the option of altering exchange rates only in the most cautious of terms. When discussing balance of payments adjustment, the IMF’s 1964 Annual Report stated: “Adjustments in exchange rates are of course not precluded by the par value system, and are indeed foreseen by the Articles in the event that a country has fallen into fundamental disequilibrium; but such situations should arise less frequently to the extent that the policies described above are followed.”¹¹ Subsequent Annual Reports, however, were silent on the issue of parity changes.

After the major sterling crisis of 1967, as a response to the French franc and deutsche mark turmoil of 1968, and in preparation for the meeting of the G-10 Finance Ministers in Bonn in November 1968, the IMF Research Department began to calculate appropriate parity changes to deal with the mounting current account imbalances. These calculations, based on the Multilateral Exchange Rate Model (MERM) might be said to mark the beginning of the IMF’s engagement in a more concrete multilateral surveillance. In practice, however, it was politically impossible to raise these issues until after a general crisis had broken out in the Bretton Woods system following President Nixon’s closing of the gold window on August 15, 1971. Even then, any leak about the MERM calculation was politically explosive. The figures provided by the Research Department nevertheless eventually provided a major input in the resetting of exchange rates at the Smithsonian meeting in December 1971. But within two years, the new exchange rates had collapsed, and a general skepticism about pegged or fixed rates developed.

III. The Jamaica Agreement and the Second Amendment

The outcome of the currency chaos of the early 1970s, often interpreted as reflecting too much discretion in the system, was a wish to return to increased monetary management. This was most easily effected in national political settings, where monetary control offered precisely a depoliticized, rules-based approach that would take some of the excessive burden off the political system. Central banks tried after the mid-1970s to impose new rules in the form of monetary targets, but international flows of money and international policy considerations frequently threatened the attainability of these targets. In the European Monetary System, a major group of states attempted to move back in a collective cross-national effort to a more rules-based system, and to limit the range within which currencies could float.

In the global international arena, on the other hand, debates about monetary reform resulted in the IMF Interim Committee’s Jamaica meeting (January 1976) and the formulation of the Second Amendment of the Fund Articles of Agreement. These were less a basis for a move toward rules than a legal foundation for coordination based on discussion, persuasion, and the exchange of information. The logical outcome of this approach was less coordinated formulation of policy than the reaching of a common understanding about a stable policy framework, in which markets were exposed to as few surprises and shocks as possible. The new principle of surveillance was universal and all embracing. It included not only countries with IMF programs, but also those without. It recommended structural adjustment in all countries with chronic balance of payments difficulties, whether developed or developing,¹² reflecting the theoretical revolution of the 1970s. In order to secure structural adjustment, advice often had to be combined with the provision of resources during the adjustment period.

The new system accepted the principle of nonfixed exchange rates and encouraged an active role by the international monetary order’s central institution—the International Monetary Fund—in prompting national authorities to accept realistic exchange rates. Such a regime would avoid both the disruptions caused by the “excessive” fluctuations of exchange rates and an undue rigidity of rates, which would hinder the international adjustment process. In this way, the reform might produce a return to “more orderly conditions.”¹³

The agreement at Jamaica had been negotiated between the United States and France, in particular by senior finance ministry officials Edwin Yeo III, Under Secretary for Monetary Affairs of the U.S. Treasury, and Jacques de Larosière, the French Director of the Treasury. France had begun these negotiations with a robust statement of its traditional commitment to the principle of par values: Article IV, Section 1 of the new IMF Article of Agreement should refer to “the aim of establishing stable but adjustable exchange rates.” The United States would then be drawn into the philosophy that lay behind the post-Bretton Woods pegged rate system that had been established as the “European snake.” The IMF would “notify members, as soon as international economic conditions exist, that par values will be reestablished.” But this would be backed up by a very intensive mechanism for regular consultation and surveillance: de Larosière proposed a “collective agreement” between central banks to prevent erratic fluctuations, accompanied by a “secret agreement” to determine “when conditions would be disorderly and erratic, and how central banks should intervene.”¹⁴ There should be a pattern of regular meetings between central bankers, and between finance ministry officials.

The U.S. response to this initiative was somewhat skeptical. Yeo responded to de Larosière by pointing out that currency intervention was not always a source of stability, and drafted a much more permissive version of Article IV. The experience of the European snake was cited by the United States as an example of the destabilizing effects of fixed exchange rates. In the U.S. draft, the purpose of the Agreement would be “to establish a framework for the promotion of exchange stability, the maintenance of orderly exchange arrangements, and the pursuit of exchange policies that contribute to adjustment. Each member undertakes to collaborate with the Fund and with other members toward these ends.”¹⁵

In lieu of a system of rules, the new Article IV set out a new philosophy of management of the international economy. Section 1 referred to the obligation of IMF members “to assure orderly exchange arrangements and to promote a stable system of international rates” (i.e., not “a system of stable international rates”). Section 4 in practice indefinitely postponed (at least as long as the United States was opposed) the readoption of par values. “The Fund may determine, by an eighty-five percent majority of the total voting power, that international economic conditions permit the introduction of a widespread system of exchange arrangements based on stable but adjustable par values. The Fund shall make the determination on the basis of the underlying stability of the world economy, and for this purpose shall take into account price movements and rates of expansion in the economies of members.” If there ever was to be a return to a fixed standard, it could not be gold or any national currency (the anchors of the so-called Bretton Woods system), but had to be the SDR or another common unit agreed by the IMF. In practice, it seemed unlikely that a new stable system would be put in place soon. As a result, the system would be a managed one, rather than one created simply by an automatic rule.

While this did not include any specific provision for the surveillance of purely domestic economic policies (which naturally should be set in accordance with national political choices), the Articles of Agreement did provide a basis for IMF surveillance of domestic policies affecting growth and inflation.¹⁶ The interrelationship of domestic policies with surveillance activities was also acknowledged in an Executive Board decision (EBD 5392, April 29, 1977, as amended). In particular, it is noted in that decision that the Fund’s appraisal of a member’s exchange rate policies “shall be made within the framework of a comprehensive analysis of the general economic situation and economic policy strategy of the member, and shall recognize that domestic as well as external policies can contribute to timely adjustment of the balance of payments.”

At the same time, the exchange rate and its problems inevitably provided an indicator reflecting the outcome of a large number of choices made about national economic policy: about financial and monetary management, the openness to capital movements, and the degree of openness to trade and the extent of flexibility in labor and product markets. In this way, exchange rates provided a guide to assessing all links of the national to the international economy. The weakness of the Bretton Woods system had been the continued absence of any adequate mechanism for encouraging members of the system to adjust exchange rates promptly to altered circumstances. The new Article IV stated: “The Fund shall exercise firm surveillance over the exchange rate policies of members, and shall adopt specific principles for the guidance of all members with respect to these policies.” This was intended to avoid the problems that had dogged the par value regime. The 1978 Annual Report set out the new mission in the following way: “One of the tasks of Fund surveillance will be to identify exchange rate policies leading to inappropriate rates at an early stage, and thus to reduce the economic costs and international frictions associated with such rates.”¹⁷ Surveillance would in addition address (under the provisions of Article VIII, Section 7) the issue of international liquidity, and would have as an objective making the SDR the “principal reserve asset in the international monetary system.” The principle of surveillance was not new to the IMF. Surveillance had been practiced through the regular consultations held under Article XIV for countries with nonconvertible currencies, and later also through consultations with those member states that had accepted convertibility. The intention of the Jamaica Agreement was simply to strengthen an already existing practice.

The specifics of surveillance were set out in an IMF decision of April 1977. The objective was that “a member shall avoid manipulating change 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 would initiate discussions with members outside the framework of the regular Article IV consultations in the case of deliberate manipulations carried out “for balance of payments purposes”: if a country practiced protracted large-scale intervention in foreign exchange markets; if it maintained an unsustainable level of borrowing or excessive lending; if it introduced or intensified or maintained restrictions on current account or capital account transactions; if it pursued monetary or other domestic financial policies providing abnormal encouragement or discouragement of capital flows; or if the exchange rate seemed to be “unrelated to underlying economic and financial conditions.” (The last condition was added, at the insistence of countries committed to the principle of fixed rates, so as to avoid the impression that countries that through a floating rate left their exchange rate policy to the market could automatically avoid the surveillance of the IMF.) This was a very long list of circumstances requiring IMF action and a restraint on members’ action, but in practice these IMF-initiated discussions were very rarely applied.¹⁸

Although it turned out that the 1980s were replete with circumstances in which exchange rates moved wildly and without relation to “underlying economic conditions,” and with balance of payments oriented actions, the IMF intervened only on two occasions to initiate special consultations. However, Article IV consultations often included formal or informal discussions of exchange rate arrangements. The two “special” consultations took place in response to complaints about exchange rate policies by other IMF members. Scandinavian countries complained about the extent of the Swedish 15.9 percent devaluation of October 1982; and the United States criticized the large current account surplus and what it believed to be an undervaluation of the Korean won in 1987 (the time a formal IMF proceeding was launched with regard to a surplus country). In this sense the provisions of Article IV with regard to exchange rate policy represented more of a pious code filled with a hope of liberalization than a serious attempt to change countries’ policies by specific intervention by the IMF.

Initially, the principles for surveillance set out in the 1977 decision were regarded as temporary, and there was a provision for regular review. Although many observers both inside and outside the IMF were concerned about the practical effectiveness of surveillance, and wanted a “strengthening,” in fact there were few operational changes made during the periodic reviews of the surveillance policy. The discussions provided for under surveillance, it appeared, could never be as “strong” as rules, but then the limitations of rules had been illustrated in 1971-3. There remained a constant danger that large and destabilizing capital flows and exchange rate movements might result from the adoption of mutually inconsistent national policies.

Some surveillance was of course taking place in other forums. Central bankers continued to meet in Basle at the Bank for International Settlements (BIS), with the G-10 central bank governors continuing to be a crucial group. However, since there was no longer any provision for the regular meetings of central bankers, finance ministry officials, and ministers—as originally suggested by de Larosière in the discussions with Yeo—surveillance in practice depended in part on the regular IMF consultations (known as Article IV consultations after the Second Amendment, when the original purpose of the consultation process as a discussion of the removal of exchange restrictions was obliterated). In practice, Article IV consultations for the major industrial countries involved an assessment of their macroeconomic stance, and frequently a detailed examination, with recommendations, on fiscal policy, as well as a discussion of monetary policy. But exchange rate policy was in general such a highly politicized topic, and so sensitive to leakages, that it was more or less tacitly excluded at least from the formal part of the consultations procedure (even though it was the rationale for them). However, there were sometimes informal discussions.

In 1983, it was agreed that for some members of the Fund these consultations need not be held annually, but should occur at least every two years, and in 1987 a mechanism for “bicyclic” consultations was introduced, though in 1993 the Fund moved back to the principle of the annual cycle.¹⁹ Over time, a demand for increased publicity about the surveillance process developed. From 1990, brief summaries of the individual consultations, reports, and related discussion by the Executive Board were included in the Annual Report.

Surveillance was not a separate part of the Fund’s activities, but rather constituted a prerequisite for effective support operations. The consultation exercise made the IMF aware of problems that might potentially require financial assistance. As a result, the IMF’s financial programs, and the conditionality attached to them, could be regarded as nothing more than an extension of the surveillance procedure. The IMF rapidly reached the conclusion that “the effectiveness of the Fund’s role depends not so much on formal or rigid procedures as on the quality and candor of the dialogue between the Fund and each of its member countries. In implementing surveillance, the Fund should therefore rely as much as possible on persuasion, rather than on prescription.”²⁰

The surveillance process involved a continual exchange of information as a means of persuasion. Since it was a global exercise, it also served as a channel through which members could influence the policies and conduct of other states, either through the Fund’s bilateral Article IV negotiations, or through discussions and the provision of information about the state of the world economy. The Article IV consultations provided the basis for statements about world economic developments (and the role of national policies in these developments). This was the foundation for the forecasting and diagnostic exercise associated with the World Economic Outlook. This exercise was especially critical since discussion of economic problems focused increasingly on the global scenario; on the large current account imbalances that had emerged in the later 1960s, and their implications for exchange rates; on the impact of commodity price shifts (and particularly of the oil price increase); and, in the later 1970s, on the contribution made by growth in one or two of the large industrial economies toward world economic developments.

The first World Economic Outlook, with projections of macroeconomic indicators for the seven largest industrial economies, was prepared in 1969. Initially, many skeptics treated it as little more than “academic discussion,”²¹ but it became quite crucial in the wake of the major shocks of the 1970s, when it began to serve as a useful compass for an uncertain economic voyage. In 1973 the exercise was extended in order to make the forecasting of country performance compatible and consistent, so that each country’s projections were adjusted in account of those for other countries. At the crucial meeting of the Committee of Twenty after the 1973 oil price increase, the IMF’s Managing Director used World Economic Outlook estimates as a basis for discussion of the appropriate response by the global economy to the price increase.²² The figures showed such large imbalances that it was clear that any attempt at sudden adjustment would produce a dramatic collapse of economic activity throughout the world. Full adjustment thus had to be delayed.

Supplying information and ideas—as well as funds—now became the major means by which the IMF would seek to guide the evolution of economic policymaking. Managing Director H. Johannes Witteveen was particularly impressed with the possibilities for the new instrument. From 1974, the timing of the preparation and discussion of World Economic Outlook reports in the Executive Board was adjusted to fit the pattern of Interim Committee and Annual Meetings, and to provide a basis for discussion of trends in world economic development and the effects on the development of payments positions. At the end of 1973, in addition, in line with the increased emphasis placed on discussion of global economic developments as a way of guiding decisions in individual countries, the Fund undertook so-called special consultations on international currency relations, initially with the large industrial countries. The World Economic Outlook mechanism allowed a continual interplay between the ideas of the IMF, which were partly formed through the staffs regular contact with member country officials, and, at the political level, the views of countries expressed through their constituency representatives on the IMF’s Executive Board. In this way, the World Economic Outlook provided an institutional channel to mediate between “technocrats” on the one hand and “politicians” on the other. These different pressures became particularly evident later in the 1970s, as international demands that Germany and Japan should pursue more expansive policies increased. The question of how Fund forecasts could be made more useful in policy discussions raised the difficult issue of whether governments should be publicly confronted with alternative forecasts for statistics as politically sensitive as growth rates and inflation levels.

The general and advisory aspect of surveillance in fact soon took on a semipublic aspect as, first, the Managing Director’s 1978 Note on the World Economic Outlook was given to the press, and then, from May 1980, the World Economic Outlooks themselves were published— although initially much of the forecasting involved in the preparation of the “scenarios” was omitted. One of the purposes of making data and projections available is to inform and guide the shape of national debate about economic policymaking in the world’s major economies (which of course influences the environment for other countries), and the openness of information and its availability for public debate are clearly a major facilitating factor. The discussion of surveillance had become more urgent during 1978. At this time, the rapid depreciation of the dollar, especially against the yen, but also against European currencies, increased fears about the consequences of currency floating for international trade. The imperative for greater surveillance that also pushed the Europeans into the European Monetary System in 1978-79 made other countries demand a more effective application of surveillance.

The centrality of the World Economic Outlook in the surveillance process was expressed not simply in a technique (collecting data) or a mechanism (discussion of the World Economic Outlook report), but also in an intellectual revolution that marked a major divide in the approach of many governments to the international economy. That revolution stands at the watershed between the inflationary 1960s and the orientation toward stability in the 1980s. Debate within the IMF about the appropriate character of monetary policy was conducted largely in terms of a discussion of World Economic Outlook recommendations. The shift in thinking, replacing a short-term by a medium-term strategy, was quite abrupt. In immediate terms, it was a response to the mixture of stagnation and inflation in 1975. In 1975, the primary concern of the IMF Research Department in compiling the World Economic Outlook had been the possibility of a dramatic world wide collapse in demand as a response to the transfer of income to higher-saving and lower-spending oil producers; the recommendation thus reflected the belief in a general need for reflation. “Present policies might not provide sufficient stimulus to assure a strong and well sustained recovery. On this issue, the possibility should be recognized that consumer spending (counted on to lead the recovery in its earlier phase) and business fixed investment (expected to resume expansion after its customary cyclical lag) may be more subdued than in earlier postwar recoveries.... Policies that were overly cautious could prolong the underutilization of resources, lead to widespread pressures for a rapid shift to expansionary measures, and forgo the beneficial effects of gains in productivity stemming from the resumption of solid economic growth and the absorption of slack.” Only just over a year later, the tone of the World Economic Outlook had changed dramatically. “The recent experience indicates that, unless the currently high level of price inflation is brought down and inflationary expectations are eradicated, the effects of policies aimed at stimulating growth and employment are likely to be short-lived.... It would seem to be in the interest of the entire international community and of the international adjustment process for the industrial countries to pursue policies directed toward the abatement of price inflation and of inflationary expectations.”

In practical terms, the new advice meant an increasing skepticism about the use of incomes policies as the primary weapon against inflation, and greater use of monetary and fiscal discipline. In intellectual terms, the reports reflected an analysis of shifts in current account position as a consequence of the behavior of investment and savings levels, a type of analysis that subsequently became the academic orthodoxy of the 1980s.²³ These new points emerge very clearly in the later 1970s: there was a “deep-seated” problem of lower productivity and potential GNP in industrial countries, attributable to “the relative weakness of capital formation in the 1970s compared with the previous decade.” Short-term fiscal measures could not resolve this problem. As an IMF document at the time stated, “It is a lesson of experience that decisions to change the stance of fiscal and monetary policies should not be based on the movement of economic indicators over a very short period.”

The change of thinking within the IMF was an outcome of internal policy debates. In the mid-1970s, Managing Director Witteveen became increasingly frustrated with the shape of policy in major industrial countries, and believed that there had been too much financing and too little adjustment. He worked very closely in elaborating the new approach with the Research Department, which had been hostile to the new low conditionality financing initiatives (the Oil Facilities) established by the IMF. Some of the institution’s area departments also pressed in the same direction: in 1978, for instance, demanding a firmer line against inflation and an insistence that making forecasts about likely inflation levels should not run the risk of being interpreted as an endorsement of inflation. Finally, discussion of the World Economic Outlook in the Executive Board and the interventions of Executive Directors from countries with a greater sympathy for stability helped to strengthen the new stance.

The full development of this approach still lay in the future. In the second half of the 1970s it appeared to many that the most important forum for the exercise of international surveillance lay not with the multilateral International Monetary Fund, but rather with the device of the “summit,” excluding multilateral institutions, excluding developing countries, excluding oil producers, excluding the European Community, and including only “our small group”—as the summit had become known to its participants.

IV. G-5/G-7 Surveillance

For much of the first half of the 1980s, the absence of any consensus about economic policy made the practice of global surveillance problematic. The U.S. administration’s insistence that its budget deficit did not represent a major international problem, coupled with the belief of European politicians that it was a major source of disturbance, meant a complete impasse. The dissension divided G-7 summits, G-5 Finance Ministers meetings, and the IMF’s Interim Committee.

The apparently complete absence of agreement, however, prompted a new search for a mechanism that could make multilateral surveillance more effective. At the beginning of 1982, some U.S. officials began to reflect on the cost of the high dollar for America’s foreign political relations and to ask, “is there something missing from U.S. foreign economic policy?” What was required internationally was a “conceptual glue,” a “common analysis of international economic problems... to move domestic economic policies in less diverging directions.” The mistake of the past had lain in attempting to use international negotiations immediately to affect policy outcomes (as in 1978 at the highly controversial Bonn G-7 summit), rather than to work on discussions that would create an understanding and a consensus about the way policies affected performance.²⁴ This was an approach that in the end proved highly fruitful, but it reached fruition only after the transition in the U.S. Treasury from Donald Regan to James Baker in 1985.

At Rambouillet on April 24-25, 1982, in the course of a preparatory meeting before the Versailles G-7 economic summit, the French Director of the Treasury, Michel Camdessus, and the U.S. Treasury Under Secretary for Monetary Affairs, Beryl Sprinkel, spoke about the need for greater policy coordination.²⁵ The French spokesman reasserted the traditional preference of his country for fixed exchange rates. In addition, he argued that greater official intervention in foreign exchange markets, and less of a reliance on pure “market forces,” would produce greater stability.²⁶ France was worried that she would suffer from the “erratic fluctuations” on currency markets, and the apparent resurgence of “benign neglect” on the U.S. side. Sharp currency movements would place a strain on the European Monetary System. In addition, they would endanger the domestic reforms and the macroeconomic expansion program of the new government, under the Presidency of the socialist party leader Frangois Mitterrand. A flight from a depreciating franc was the most likely threat to the new course. There were memories of the 1920s and 1930s when financial chaos had also undermined the ambitions of left-center governments. As a result, Mitterrand wanted to turn to the international system to safeguard his objectives. International coordination might lead to some measure of currency stabilization, and create a more favorable framework for domestic policymaking. The French President had pointed out that it was not just in France that high levels of unemployment would produce the risk of social explosions that presented “a greater danger than inflation.” At the 1982 Versailles G-7 summit, Mitterrand went even further and explained that “My country is one of those that has had least success in the struggle against inflation, but we have the fastest growth. There is a lot we can learn from each others’ experience.”²⁷

The United States, on the other hand, saw the most important task as securing a new disinflationary convergence of monetary policy and price stability. It had little sympathy for intervention in exchange rates, or for Mitterrand’s reflationary ideas. The United States had an alternative approach to international monetary discussion, and to the building of a new consensus. The U.S. negotiators envisaged a sort of economic report card on country performance, including inflation and monetary performance; they also hoped that it would be subtle enough not to judge fiscal stance solely by the size of the deficit—other measures such as the rate of increase of government spending or the full employment budget would be preferable. The outcome of this sometimes acerbic Franco-American discussion was productive in that it led to a more institutionalized mechanism for the discussion of economic policy in the major industrial countries, but the creation of a forum for debate corresponded much more closely to the U.S. view than to the more rules-oriented French vision.

The proposal first set out by the economic officials at Rambouillet and then elaborated at the political level at Versailles (June 4-6, 1982) involved a regular meeting of G-5 Finance Ministers, in practice twice yearly, with the Managing Director of the IMF attending in a personal capacity rather than as the representative of his institution. This represented a personalized (and perhaps slightly peculiar) way of implementing the principles on surveillance set out in the Second Amendment of the Fund Articles of Agreement. The IMF’s surveillance exercise could now be used directly as a basis for policy discussions by the major industrial countries. President Mitterrand thought that this agreement would initiate a more general reform of the international monetary system. The summit communique stated: “In order to achieve this essential reduction of real interest rates, we will as a matter of urgency pursue prudent monetary policies and achieve greater control of budgetary deficits.” A supplementary note stated: “We attach major importance to the role of the IMF as a monetary authority and we will give it our full support in its efforts to foster stability.... We are ready to strengthen our cooperation with the IMF in its work on surveillance; and to develop this on a multilateral basis taking into account particularly the currencies constituting the SDR [i.e., the G-5].... We rule out the use of exchange rates to gain unfair competitive advantages.”

The G-5 surveillance process in the new format was centered around a relatively short presentation (at first of only ten minutes) prepared by the Managing Director for G-5 Ministers meetings, and accompanied by a series of charts with explanations of major developments. An analysis of macroeconomic fundamentals would be the best way of producing a policy convergence around the objectives of low inflation and growth. The first G-5 meeting of the new type was held on September 3, 1982, in Toronto, shortly before the Fund/Bank Annual Meetings.

The most dramatic action of the G-5, however, left both the IMF and the surveillance principle on the sidelines. The G-5 Plaza meeting in September 1985 was intended to correct the overvaluation of the U.S. dollar, with a mixture of high publicity and coordinated intervention (in fact, such intervention had begun already in January in a successful but more gradual attempt to lower the dollar). But interest rates and monetary policy in general were not part of the Plaza discussion. Over the course of the next two years, they increasingly became the focus of controversy, as the United States saw greater expansion elsewhere as the best solution to its payments problem. In consequence, many felt that it would be desirable to include a more wide-ranging set of economic data in the discussions of the G-5.

At the Tokyo economic summit (May 1986), the accompanying G-7 Finance Ministers meeting reached an agreement on the use of indicators in multilateral surveillance in order to encourage discussion of “appropriate remedial measures.” Initially, there were to have been ten: GNP growth, inflation, interest rates, unemployment, central and general government balances, current account balance, trade balance, monetary growth, reserves, and exchange rates. The number was later reduced to seven at the insistence of Nigel Lawson, the British Chancellor of the Exchequer, with the vaguer “monetary conditions” replacing the trio of interest rates, monetary growth, and reserves.²⁸ In practice, most discussions of monetary conditions concentrated on interest rates. As a result of the wish to strengthen cooperation by providing a more specific data set, the IMF became much more deeply involved than it had been at the time of the Plaza meeting (where public relations had mattered more than macroeconomic data).

Underlying the indicators proposal was the belief that debates about international coordination had in the past focused too exclusively on exchange rate issues and that more fundamental corrections, affecting the current account positions of the major industrial countries, would be needed for the balanced development of the world economy. Indicators were a major policy departure, a significant addition to the arsenal available for international economic cooperation, although logically they were simply an extension of the concept of surveillance expounded in the Second Amendment of the IMF Articles of Agreement. In telling the story of any innovation, it is important to remember that the motives of the agents involved do not necessarily determine the nature or quality of the outcome. Potentially desirable outcomes can be launched for all manner of reasons, some good, some bad.

The United States, which took the major part in launching this initiative, wanted to use it primarily to alter policy in other countries. But it also represented a major change in the U.S. stance. The number of occasions in the postwar world on which the United States had offered to subject itself to external discipline had been few, and the willingness of the United States to entertain the concept had been completely absent in the early 1980s. In this light, other countries with an interest in a cooperative system should have seized the opportunity now provided by a move in part dictated by U.S. self-interest. In particular, the United States wished to address the large current account imbalances that seemed endemic by the mid-1980s. The United States was re-enacting a drama familiar on the international stage since John Maynard Keynes’s wartime missions to Washington: the desire of a deficit country to find institutionalized ways of putting pressure on surplus countries. But the U.S. approach contained an obvious danger. Treasury Secretary Baker saw indicators primarily as a lever to obtain rapid political action: tax reductions in Germany or Japan, import liberalization in Japan, and (later) a lowering of German or Japanese interest rates. The process inspired excessive expectations about a quick response. The danger was that if something happened, the surplus countries would feel that they were being unfairly pressured, and if nothing happened the surveillance and coordination mechanism itself would get the blame.

Baker had begun a discussion of the possible use of “objective indicators” in April 1986, and had included originally also an eleventh indicator, a commodity price index, which was later removed at the insistence of Secretary of State George Shultz. The notion was presented to the United Kingdom at the time of the spring Interim Committee meeting, and afterwards to France and Japan. The Interim Committee communique referred to discussion of external imbalances, policy interactions, and exchange rates. “An approach worth exploring further was the formulation of a set of objective indicators related to policy actions and economic performance, having regard to a medium-term framework.” The Interim Committee communique also specified a mechanism for applying the indicators approach. The IMF’s World Economic Outlook would be expanded in function “to improve the scope for discussing external imbalances, exchange rate developments, and policy interactions among members.”²⁹

At the Tokyo summit, the word “objective” was dropped from the summit declaration at the insistence of Germany and Japan. Both the Germans and the Japanese were generally skeptical about the approach, and hostile to its policy implications. Lawson recognized that the indicators were “essentially a device to put pressure on the Japanese and Europeans to take ‘expansionary measures’ and in this way to take the heat off the falling dollar.”³⁰ The Japanese Vice-Minister in the Finance Ministry, Tomomitsu Oba, commented that “the thrust of the whole argument revolved around this one consideration. We’re not going to allow indicators to meddle into the domestic politics and sovereignty.”³¹ On the other hand, the Japanese Government desperately wanted to keep the yen rate stable, since it believed that it would lose the general election due to be held in July if the yen rose above a level of 160 to the dollar. The other surplus country, Germany, was no more enthusiastic about indicators than was Japan. Of the Germans, Bundesbank President Karl Otto Pöhl in particular was contemptuous of the multiplicity of indicators involved, and what he felt to be the intellectual fuzziness of the U.S. approach. He wrote soon after that “those who wish to replace persons and ad hoc decisions by regulatory mechanisms and indicators apparently have no perfectly clear idea about the nature of monetary policy decisions and the difficulties of reaching them... there are, I think, very few situations in the area of international monetary policy in which a depersonalized, predetermined decisionmaking process could have covered up, much less resolved, such differences of aim.”³² As a result, although the Germans felt that some indicators (fiscal deficits and monetary measures) mattered more than others, they did not attempt to set up a list of priorities. If there had been one, the United States would have preferred to put current account imbalances at the top.

In June 1987, the G-7 summit produced the Venice Economic Declaration, which proposed a specific method for the greater use of indicators in surveillance. First, each country would accept a commitment to develop medium-term objectives and perspectives for its economy, and use these to accept mutually consistent objectives and projections. Second, the countries would use performance indicators to review and assess economic trends.

Indicators attained a more prominent position in national economic policymaking because they were not simply intended as illustrations or demonstrations at high-level political meetings. Parallel to the sessions of G-5 ministers, the deputies would hold discussions on the indicators with the IMF’s Economic Counsellor. These civil servants also discussed exchange rate and intervention issues, but without the advice or presence of IMF representatives (although this was clearly a policy area for which the IMF, under the Articles of Agreement, had a responsibility). The main task of the IMF in these meetings was to present indicators or projections from national sources, along with equivalent figures differently derived, through econometric models of the world economy. In the course of 1987-88, along with the indicators (GNP/GDP growth rates, inflation, fiscal balances, current account and trade positions, monetary conditions and exchange rates), the IMF also provided “composite indicators” (real GDP/GNP, industrial production, consumer and commodity prices, monetary growth, long- and short-term interest rates, employment growth rates, and unemployment levels).³³ As the meetings developed over time, some shifts in emphasis occurred. The financial liberalization of the later 1980s made the relationship between national monetary behavior and output problematic, and the IMF began to pay attention to the “output gap,” the difference between actual and potential production, as a guide to an appropriate monetary stance. In the early 1990s, in addition, it presented data on the constant employment fiscal balance (i.e., a fiscal stance adjusted for the state of the business cycle) in order to point out underlying fiscal shifts: deteriorations masked by the improvement in business conditions in the late 1980s, or improvements concealed by the world recession of the early 1990s.

The IMF “indicators” of course did not always correspond with national estimates, nor with the actual performance of the indicators. (In terms of growth, they missed some of the strength of performance in the late 1980s, and failed to anticipate quite how severe would be the recession at the beginning of the 1990s).³⁴ But they aimed at and succeeded in giving guidelines on what medium-term set of policies would achieve greater fiscal stabilization and a consistent monetary policy.

In principle the indicators approach constituted a bold undertaking. It implied the acceptance by the G-7 of some sort of externally imposed constraints that would help to free the making of economic policy from the apparently irrational impulses of domestic politics. Some saw it as an “international Gramm-Rudman-Hollings.”³⁵ Its most ambitious variant envisaged the creation of “monitoring zones.”³⁶ If indicators moved outside these zones, they would trigger special meetings of the G-5/G-7, and perhaps even the adoption of remedial measures. The bolder concept was never realized, however, as the United States believed that figures for a medium-term projection of the current account position should be treated as “objectives” while the critics in Germany and Japan did not want to accept anything more binding than “forecasts.”

Even a modest version of indicators made possible a more rigorous and structured discussion of international economic problems, and strengthened the role of the IMF in the surveillance process. One of the architects of the IMF implementation of the indicators approach, Andrew Crockett, later wrote that “it did help to crystallize a consensus about the operation of economic policy... The watchwords of this consensus are stability and sustainability.”³⁷ Taken in this sense the spirit of the exercise mattered more than the following of precise guidelines about the development of indicators—about which countries almost inevitably hesitated, as economic fundamentals changed. Even this spirit, however, required an acceptance by nation-states of some derogation of national sovereignty.

V. Global Surveillance

The next major impetus for an international reconsideration of the IMF’s surveillance role came in the aftermath of two crises that demonstrated the volatility of capital flows in a period of greatly increased mobility. First, the crises of the European Monetary System (EMS) exchange rate mechanism in 1992—93 had left the IMF apparently impotent. There had been some informal warnings about the strain on exchange rates following the shock of German monetary unification in 1990, but in the actual development and unfolding of the crisis the IMF played no role.

Second, the Mexican devaluation crisis of December 1994 and the subsequent U.S. Treasury and IMF rescue package raised an analogous issue, but one that clearly involved the IMF directly. It was widely felt that the Mexican crisis did not reflect the longer-term policies of stabilization, fiscal adjustment, liberalization, and deregulation pursued from the mid-1980s. On the other hand, it did result from a deterioration of economic policy in 1994, a sharp increase in government dollar-denominated indebtedness, and the cessation and then reversal of capital flows. Such a sharp and sudden deterioration would be too abrupt to be handled in the conventional manner of annual IMF Article IV reports.

These crises differed from the older problems of pegged rate systems, such as the Bretton Woods regime, in that the period prior to the outbreak of the crisis involved very large capital flows and judgments about the sustainability of those flows. The victims of the September 1992 EMS crisis—Italy, Spain, and the United Kingdom—had experienced major inflows attracted by higher interest rates and the promise of an exchange rate guarantee. If doubts arose about the commitment to the exchange rate mechanism, the flows would be very quickly reversed. Mexico also attracted major inflows (some $75 billion between 1991 and 1993, mostly of portfolio investment), which financed large current account deficits. The timing of the crisis depended on guesses as to when the inflows would end, and what the consequences would be for Mexico’s crawling peg exchange rate regime.

In other ways, the crises of 1992-95 were not so new. The discussion of both the EMS and Mexican crises raised the classical problems of external advice in the context of fixed or pegged exchange rate systems. Since changes and news of impending alterations offer the controllers of private funds the possibility of making dramatic gains, many market-sensitive policy issues became very hard to discuss and analyze. The more substantial the capital flows, the greater the sensitivity and vulnerability. This was especially true of exchange rates, and of central bank intervention on exchange markets—both in the fixed and in the flexible systems, but it is also true of interest rate policy. In addition, strong political pressures and incentives led to an attempt to orchestrate policies in a narrower setting, to create “our small group” (see end of Section III).

The most remarkable postwar example of the increased difficulty of practical surveillance is perhaps to be found in the contrast between the alacrity with which parity alterations were discussed by the IMF as a policy tool and a facilitator of adjustment in the late 1940s, and the reluctance of the G-10, the OECD, and the IMF to consider parity alterations for the major currencies in the 1960s. The extreme receptivity of markets to rumor, combined with the political delicacy inevitably associated with issues affecting national prestige, produced what amounted to a taboo on discussion. There was a fear, which grew with the threats to the credibility of the system, that any dent would make impossible the attaining of any new stability. In particular, the U.S. unwillingness after the late 1950s to consider a change in the dollar parity of gold, despite balance of payments deficits, produced near paralysis. It led to an institutional incapacity to deal with the needs of the global economic situation. In these circumstances, the only hope for change lay not in additional discussion but in deliberate and forceful behavior to break the impasse. In the circumstances of 1971, U.S. Treasury Secretary John Connally played that part with considerable verve. One of the major tasks of a reformed system, the IMF’s Executive Board concluded, would be to establish “criteria and procedures for orderly change which will accord to the United States, as well as to other members, a due measure of initiative in the effective exercise of exchange rate flexibility.”³⁸ This story, from the classical Bretton Woods era, of increasing inability to discuss market-sensitive problems despite the creation of new institutions for multilateral surveillance was repeated (with different institutional actors) in the tale of the EMS.³⁹ In the early years after the creation of the system in 1979, there were few problems in both discussing and undertaking parity alterations. Later, from the mid-1980s, consideration of parities within the EMS became so politically sensitive, within the European Community, but also consequentially within the OECD and IMF contexts, that it was in practice ruled out.

This dilemma provides an example of a more general problem, that an institution responsible to member governments finds the discussion of market-sensitive material very hard, as governments may resent the implications of second-guessing the market, and can only be persuaded by arguments about what the market is likely to do after the market has actually done it. For instance, in a different context, it is possible to imagine the outrage if any international institution had given a clear and statistic-laden warning about the extent of bank exposure to middle-income debtors in the summer of 1982 and thereby touched off a panic flight of funds: it needed to wait for the crisis to be triggered by market sentiment. The same considerations applied in the development of the 1994 Mexican crisis.

Similar problems have appeared elsewhere, outside the context of multilateral surveillance. In general, it might be concluded that the major problems for modern policymaking involve information and its availability. For instance, in dealing with centrally planned economies in the 1980s, the worst cases of mismanagement, and the failure of surveillance, occurred in the cases (Romania, Yugoslavia) where deliberately deceptive information was submitted to the IMF, and the IMF lacked both the technical capacity to correct it and the political ability to protest against the insufficiency of information. In the case of Romania, for some time there was no country page in International Financial Statistics.

There is a widespread recognition of the centrality of information to economic management. The April 1995 Interim Committee recommended that “timely publication by members of comprehensive data would give greater transparency to their economic policies,” and “requested the Executive Directors to work toward the establishment of standards to guide members in the provision of data to the public.”⁴⁰ At Halifax in June 1995, the G-7 summit endorsed this view in its conclusions on reform of international institutions. Paragraph 16 of the summit communique called for “fuller disclosure of this information to market participants,” and urged the IMF to:

—establish benchmarks for the timely publication of key economic and financial date;

—establish a procedure for the regular public identification of countries which comply with these benchmarks; and

—insist on full and timely reporting by member countries of standard sets of data, provide sharper policy advice to all governments, and deliver franker messages to countries that appear to be avoiding necessary actions.

The 1994-95 Mexican case in particular has highlighted a difficult problem about the supply of information. The regular release of information is a way of depoliticizing its supply and leaving thousands of market participants rather than any one political body to make judgments about the appropriateness of policy. But this should be supplemented by confidential advice on how markets are likely to respond to particular policies or developments. In the era of globalization, the IMF has a function in providing advice backed by resources, or the potential or eventual supply of resources (the traditional effect of IMF conditionality). In terms of size, however, these operations will inevitably be outweighed by market flows. Here the provision of information is a way of involving the world’s capital markets in practice in the operation of surveillance.

This development involves a logical extension of the Bretton Woods vision. For a long time the practice and effectiveness of surveillance had been stymied by concerns about confidentiality of data provided and of policy recommendations. But greater publicity opens the way for the institution of a much more effective surveillance mechanism. The provision of better and more extensive information, more regularly, and in a more standardized form, allows the international financial system to make judgments on policy and supply funds—in other words, participate in the exercise of surveillance, which in the Bretton Woods framework was much more exclusively the preserve of the IMF.