The global economy has been enjoying a period of strong growth and an absence of contagious financial crises, and there is good reason to expect this performance can be sustained. But recently confidence has been shaken: by soaring oil prices, natural disasters like Hurricane Katrina, and growing global imbalances -- large surpluses in some countries offset by large deficits in others.
That these problems affect both individual countries and the world economy, shows the reality of globalization. Indeed, to balance the enormous potential benefits and dangers of an increasingly integrated world economy, governments need new tools and a deeper understanding of the forces at work. The challenges are even greater for the poorer developing countries: They need to plug into the global economy to narrow the gap with the rest of the world and bring concrete benefits to their poorest citizens.
The IMF was established after World War II to help countries avoid the errors in economic policy that helped bring on that conflagration. Over the past 60 years, the fund's responsibilities have grown as the world economy has been transformed. When I joined the fund a little over a year ago, it was clear that our member countries' demands on the fund were still intensifying. Consequently, I launched a study of the institution's role in the world economy and how it will have to change. The result is a medium-term strategy.
ILLUSTRATION: YU SHA
Our analysis shows that as globalization continues its rapid evolution, new challenges emerge. The size, speed and reach of shocks across mature and emerging-market countries have increased. Integrated capital markets have enabled some countries to run large current-account deficits, while others have been able to diversify asset holdings or insure against crises by building up reserves. And the difficulties and new realities associated with the integration of markets have been amplified, as evidenced by the current dispute surrounding trade in textiles, where global integration brings different interests into conflict.
All of this means that the IMF itself must continue to adapt. Of course, the fund has long been deeply involved in addressing the reforms required by globalization -- and it has made a difference. Much of the work since the mid-1990s has been driven by the challenges of massive cross-border capital flows. But these responsibilities have proliferated rapidly, absorbing resources and not always meeting the needs of the membership in the most efficient fashion.
What is necessary now is to refocus the IMF's priorities to help countries meet the new challenges of globalization, be it through the development of better budgetary and monetary frameworks, reforms to adapt to rising trade or the strengthening of financial systems. The refocusing must center on the way the fund analyzes economic trends on a global, regional and single-country basis, and then how it provides advice.
This work -- which the IMF calls surveillance -- needs to move from an all-encompassing approach to a more incisive analysis of specific weaknesses and distortions that create the risk of crises or hinder adjustment to globalization and the integration into the global economy. It also requires the fund to become more engaged in the policy debates that shape public opinion and policy choices.
At the global level, the fund can contribute to a better understanding of globalization by offering more in-depth analysis of crucial trends, especially in financial markets. The IMF -- as a universal institution -- offers a unique forum for seeking cooperative solutions to key issues, for example by addressing and understanding current and future global economic imbalances. In an era in which regional economic integration has become increasingly important, it is essential that the fund focus more on overall trends in individual regions, and for it to encourage steps to enhance regional cooperation.
Ultimately, it is the fund's interaction with each member country that is most crucial to the work of identifying economic vulnerabilities and ensuring long-term, stable growth. In order to provide the most useful advice and analysis to each government -- and, when needed, tailor the necessary financing -- our economists need to address the most pressing economic issues.
In advanced countries, there must be a stronger focus on the global implications of economic policies and on ways to make IMF advice more persuasive. In emerging markets, the central concern should be improving early warning systems, reviewing how best to resolve crises and considering the possible role of fund financing in crisis prevention. And in low-income countries, the poverty-reduction effort should focus on the fund's core areas of macroeconomic expertise, find ways to introduce greater flexibility in fund lending instruments, assess the achievability of the UN Millennium Development Goals, help both donor and recipient countries to increase aid and its efficiency, and streamline procedures to make interaction with the IMF more effective.
Regarding insight, the IMF as an international public institution should seek for itself the best standards of transparency and accountability.
We are already a very open organization, and all our decisions and analyses are all made public. But our own decision-making process has to be updated to reflect -- in our quotas for countries' capital shares and voting power -- the realities of the role of countries in today's world.
As we address the challenges of our rapidly globalizing world, further evolution is essential. Future crises will almost certainly be different from previous ones. The IMF needs to be ready, and flexible enough, to help the world face the unpredictable.
Rodrigo de Rato is managing director of the IMF.
Copyright: Project Syndicate
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