What began as an analysis of the International Monetary Fund’s (IMF's) internal surveillance operations quickly morphed into “an exercise of making sure we’re not asleep at the wheel.”
That was the message delivered in a keynote address by Ruben Lamdany, deputy director of the IMF’s Independent Evaluation Office (IEO), as part of CIGI’s signature lecture, “Groupthink and Overconfidence: Predictive Failures in the Global Economic Crisis.”
Lamdany chronicled what amounts to the IMF’s biggest day of reckoning in its nearly seven decades of existence, before joining a panel discussion with CIGI Distinguished Fellow Paul Jenkins and Louis W. Pauly from the Munk School of Global Affairs.
“Was IMF surveillance effective in predicting the financial crisis?” Lamdany posed rhetorically at the outset of the evening. “We all know the answer to that one — no.”
He commended CIGI Executive Director Thomas A. Bernes for initiating the IMF’s period of sober self-reflection in his former role as director of the IEO.
Lamdany outlined highlights from the recent IEO report, “IMF Performance in the Run-Up to the Financial and Economic Crisis,” which focused on IMF surveillance from 2004 to 2007. He explained that the scope of the evaluation report was organized around three key pillars: the fund’s multilateral surveillance, its bilateral surveillance of the US, and its bilateral surveillance of other countries. He added that the report was intended to assess “what went wrong, what could be done better and offer a way forward” to enable better detection of future economic crises.
On the first point, Lamdany provided multiple examples of “overly sanguine” messaging from the IMF’s World Economic Outlook (WEO) in the years leading up to the financial crisis.
In the spring of 2004, the WEO proclaimed the global numbers were “among the rosiest in a decade.” By the spring of 2006, the WEO still wasn’t sounding the alarm bells. Instead, the message was that the global economy was experiencing an “extraordinarily purple patch.”
Such favourable prognostications, Lamdany noted, were in direct contrast to what the executive director of the IMF’s Global Financial Stability Report (GFSR) was saying. As early as 2005, the GFSR warned that “urgent action (was) needed to avert a crash.”
So, “who failed to connect the dots?” asked Lamdany, before offering a few key findings to help explain the IMF’s blinding overconfidence in the run-up to the crisis.
Chief among these was groupthink, Lamdany said, noting that insularity, internal cognitive biases and external political constraints meant that few people at the IMF were willing to bring arguments that ran contrary to the prevailing wisdom of the US Federal Reserve.
Going forward, Lamdany said he is buoyed by the response of the IMF board to the IEO report, particularly in accepting its recommendations that IMF researchers be “allowed and encouraged” to bring forward differing messages for due consideration.
Louis W. Pauly, director of the Centre for International Studies at the Munk School of Global Affairs, opened the panel discussion by providing some historical context on the global financial surveillance, noting that its roots date back to the League of Nations. He contrasted the perilous times and economic uncertainty following the Second World War — which led to the creation of the IMF — to the IMF’s assertions prior to the 2008 crisis that a global collapse was unlikely, adding that the IMF was “more aware now of the temptation of hubris.”
CIGI Distinguished Fellow Paul Jenkins suggested that the mutual assessment process put forth by the G20 holds the potential to strengthen IMF surveillance, including through better analysis of “spillover effects.” The assessment process can help foster coherence among different countries’ economic policies that, collectively, can benefit everyone, he said. Jenkins, co author of the recent report “Preventing Crises and Promoting Economic Growth,” stressed that an important issue is how the G20 fits into the broader international architecture, which includes the IMF.
Before fielding questions from the audience, the panellists debated what was needed for the IMF going forward.
Pauly conceded that a neutral IMF secretariat operating “outside of politics” was “probably idealistic,” but added: “we shouldn’t abandon trying for that."
Lamdany pointed to many of the current measures being adopted by the IMF — including a plan to make China its third-largest shareholder — as proof that it can implement positive reforms.
“But," Lamdany stated, "change will not happen overnight.”