In today's globalized economy, one country's economic and financial policies can reverberate far beyond its borders. Be it the spread of inflation or the impact of currency devaluation half a world away, global economic forces can have a direct impact on every person's livelihood.
Under such circumstances, international cooperation is essential to ensure stability and growth and prevent disruptive crises. But for such cooperation to be effective, the international community needs the right tools.
The IMF provides one of the most important tools. For many years, the fund has engaged its member countries in a process known as "surveillance," in which it monitors, analyzes and consults on each country's economic policies -- both exchange rate policies and relevant domestic policies.
These regular checkups help to identify potential vulnerabilities and to maintain economic stability.
However, the increasingly complex policy challenges of the globalized economy demand a fresh look at this process.
A FRESH VIEW
This June, the IMF's executive board did just that, reaching a broad consensus on updating surveillance to make it more focused and effective. This is one of the most important reforms to the fund's work in the 30 years since the surveillance process was designed.
Indeed, it is part of a much broader reform effort aimed at strengthening the IMF and will have implications extending well beyond the Fund's boardroom.
The new reform brings three critical changes.
First, it affirms that surveillance should focus on what matters for stability, and gives detailed guidance in this area. IMF advice should not be spread too thin.
Second, there is now clear advice to the fund's member countries on how they should run their exchange rate policies, and on what is acceptable to the international community.
Finally, the reform sets out clearly for the first time what is expected of surveillance, and so should promote candor and evenhanded treatment of every country.
In other words, the fund must ensure that it deals with every country the same way, including delivering clear and sometimes difficult policy messages and sharing its views with the international community.
The new approach to exchange rate policies represents one of the most significant advances. Under the IMF Articles of Agreement, members are required to collaborate to promote a stable system of exchange rates and to avoid manipulation with a view to gaining an unfair trade advantage. Past guidance in this area was limited, focusing entirely on manipulation and on avoidance of short-term volatility.
This guidance remains, but what we meant by manipulation is now clearer. We have also addressed those policies that have caused the most harm to the system in recent years, including overvalued or undervalued exchange rate pegs maintained for domestic reasons.
This change comes at a crucial time for the world economy. Countries are experiencing strong growth, inflation is low and the threat of crisis has receded considerably. Few countries need to borrow from the IMF -- a highly positive trend.
But improved surveillance is essential to ensure that the global economy remains on an even keel. By clarifying what surveillance entails, the new decision should help the IMF and its members see eye to eye on the fund's role, help those involved in surveillance do their job properly and make the fund more accountable for delivering on this key responsibility.