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Why Did the IMF Fail to
4 Give Clear Warning?

40. Various factors played a role in the IMF’s fail- lacked skills or expertise; the first type is about thought
ure to identify risks and give clear warnings. Many of processes and decision-making, the second is about the
these factors represent long-standing problems that had approaches and tools that staff used.
been highlighted for over a decade.24 In this section, 42. Several cognitive biases seem to have played
these factors are grouped into the following broad cat- an important role. Groupthink refers to the tendency
egories: analytical weaknesses, organizational impedi- among homogeneous, cohesive groups to consider
ments, internal governance problems, and political issues only within a certain paradigm and not challenge
constraints.25 There are considerable interconnections its basic premises (Janis, 1982). The prevailing view
among these categories, and their relative importance among IMF staff—a cohesive group of macroecono-
is based on subjective judgments. The IMF’s ability mists—was that market discipline and self-regulation
to correctly identify the mounting risks was hindered would be sufficient to stave off serious problems in
by a high degree of groupthink, intellectual capture, financial institutions. They also believed that crises
a general mindset that a major financial crisis in large were unlikely to happen in advanced economies, where
advanced economies was unlikely, and incomplete ana- “sophisticated” financial markets could thrive safely
lytical approaches. Weak internal governance, includ- with minimal regulation of a large and growing portion
ing unclear lines of responsibility and accountability, of the financial system.
lack of incentives to work across units and raise con- 43. IMF staff was essentially in agreement with the
trarian views, a review process that did not “connect views of the U.S., U.K., and other advanced country
the dots” or ensure follow-up, and an insular culture authorities that their financial systems were essentially
also played a big role, while political constraints may sound and resilient. Staff also concurred with the para-
have also had some impact. Interviews with country digm that the system could not only allocate resources
authorities (Annex 7) and survey evidence from staff efficiently, but also redistribute risks among those bet-
(Annex 8) echo many of the same factors. ter prepared to bear them. Moreover, IMF staff felt
uncomfortable challenging the views of authorities
in advanced economies on monetary and regulatory
A. Analytical Weaknesses issues, given the authorities’ greater access to banking
data and knowledge of their financial markets, and the
41. Analytical weaknesses were at the core of some large numbers of highly qualified economists working
of the IMF’s most evident shortcomings in surveil- in their central banks. The IMF was overly influenced
lance, particularly for the largest advanced economies. by (and sometimes in awe of) the authorities’ reputa-
These weaknesses were of two broad types: groupthink tion and expertise; this is perhaps a case of intellectual
and other cognitive biases, and analytical approaches/ capture.
knowledge gaps. Neither implies that the IMF staff 44. Confirmation bias is a well-documented cogni-
tive bias that refers to the tendency of people to only
notice information consistent with their own expecta-
Annex 6 lists conclusions and recommendations from reports tions and to ignore information that is inconsistent with
and evaluations prepared over the past 15 years that remain relevant them (Bazerman and Moore, 2009). This may explain
in analyzing IMF performance in the run-up to this crisis.
This report separates organizational impediments and inter- staff’s focus on the IMF’s primary concern—global
nal governance problems into distinct categories. It is common, imbalances and a disorderly dollar decline—as the key
however, to include structural organizational issues and incentives/ risk to global stability, largely ignoring evidence point-
corporate culture issues into a single governance category. The eval- ing to other risks.
uation team, nevertheless, considered that such an approach would
have blurred some important factors that help understand IMF per-
45. The choice of analytical approaches and
formance. In any case, many of the factors discussed could also be important knowledge gaps, some of which were shared
placed in a different category. by the whole profession, also played a role in the failure


adversely affecting the IMF staff’s ability to learn les- times this approach captures risks and vulnerabili. The dynamic stochas. roeconomic and financial developments. It preted (e. for truth. within divisions. CHAPTER 4 • WHY DID THE IMF FAIL TO GIVE CLEAR WARNING? to identify risks and vulnerabilities. the dots” and to ensure follow-up of concerns raised First. views had already crystallized. leverage. sons from each other’s experiences and knowledge. 49. Balance sheet analysis was used insufficiently ments. B. advanced country surveil- (Caprio. As one senior staff member put it.g. As a result. as a group. “balance. ence of the institution as a whole. mistook beauty. sometimes when this approach was lessons from cross-country experience. FSAPs used stress testing to help determine est systemic financial centers. multilateral with bilateral surveillance. found its way into the bilateral surveillance of the larg- 48. a number of authorities and staff admitted to seldom or never using the GFSR. In part. Discussion of used. until recently. While stress tests these risks were laid out in GFSRs. as have used additional data on individual financial insti- well as the view common among IMF economists that tutions given their prevailing conceptual framework on financial issues were not central.” its work on financial and capital market issues. thought of financial intermediation as an issue of relatively little importance for economic fluctuations.…” 27 29 This problem was widespread in the profession. Second. and to draw sis. The McDonough Report explained that “what is needed economists. IMF from praising the state of some financial systems roeconomic and financial sector analysis remained nor the risk-diversification features of securitization.” Unfortunately. while a problem. it yielded misleading results as it did not account the risks and vulnerabilities that led to the crisis never for the ongoing bubble in asset prices. Organizational Impediments tic general equilibrium (DSGE) model that was the work horse for policy discussions introduced money 50.26 macro-financial linkages. and to overcome the (Rampell. Lack of data and information.” More recently. laboration and cooperation between departments. to increase cross- stream of academic research in macroeconomics puts theoretical fertilization between the IMF’s traditional macroeconomic work and coherence and elegance first. By the time comments were received from 2009). this explains its failure to ensure coordination and cross- 26 For example. that almost half of respondents in area departments ity shocks.. Indeed. the most believe that stress tests could have led to complacency. Finally. and staff reports. and household balance sheets). and in any case it is unclear how they would linkages within the economics profession at large.” 18 . country briefs. The silo behavior made it difficult to integrate model. 2010) silo mentality that is lessening the overall effectiveness and influ- 28 See Reinhart and Rogoff (2009). Krugman This behavior has been discussed by several internal and exter- (2009) stated that “the economics profession went astray because nal reviews. credit growth. 46. they for the IEO’s research evaluation (IEO. even though some of the soundness of banking systems. A survey done are useful for a first-round examination of risks. Rogoff noted that “the main. 2011. the IMF’s Economic Counsellor stated: “In the interest of full other departments. and it occurs between departments. by the Board. and occasionally incorrectly. within depart- 47. despite the fact that some. hindered IMF performance was its operating in silos. in an April 2009 IMF Working Paper (Blanchard. even though a series of evaluations since Moreover. country-specific insights. much available data were ignored or misinter. 2011) suggests typically do not capture second-round effects or liquid. inadequate.29 ties better than would a typical open-economy macro 51. Work is now ongoing to develop models that can incor.28 or coordinate the analysis of the WEO and the GFSR. and Annex 6). and even within Management. Management. The internal review process failed to “connect was not a core reason behind the IMF’s performance. and disclosure: This is a first pass by an economist who. The silo behavior is a long-standing prob- are too complex for modeling. mentioned reason was that its analysis did not lead to because their limitations were not explicitly discussed. Perhaps more worrisome was advice outside of their units. and investigating the data second. the relative paucity of data in some emerging the Asian crisis had called for enhanced attention to markets did not prevent the IMF from raising the alarm macro-financial linkages in the IMF’s surveillance in these countries. and internal reviewers. This reflected the lack lance teams typically received the information that they of a suitable conceptual framework for analyzing such requested. clad in impressive-looking is an environment that fosters and provides incentives for close col- mathematics. the lack of data did not prevent the ments.27 lem. 52. The linking of mac. staff tend not to share information nor to seek porate financial frictions. An important organizational impediment that and asset markets in only the most rudimentary manner. IMF economists tended to hold in highest regard macro models that proved inadequate for ana- lyzing macro-financial linkages. the growth of did not connect bilateral and multilateral surveillance. to link mac- sheet analysis was the missing link in macro analy. high-risk instruments. the April 2008 GFSR estimate of financial sec. Formal interdepartmental review typically took place at tor losses was produced without any additional access a late stage in the production process of flagship docu- to data. fertilization. that is. This has been blamed for the overreliance by many economists on models as the the IMF failure to “connect the dots” in the run-up to only valid tool to analyze economic circumstances that the crisis.

certain policy initiatives. the per- 31 While this evaluation touches on governance issues only in ceived degree of explicit or implicit political pressure regards to the crisis. It also found often described as a tightly-run. Chapter 4 • Why Did the IMF Fail to Give Clear Warning? it was often too late to make significant changes. served for three months. were reportedly a major impediment exchange of ideas that is needed for good surveillance— to cooperation and collaboration. however. discussed at an earlier stage. through by senior staff and Management. attributed the failure to integrate bilateral and multilat- eral senior staff members felt that expressing strong eral surveillance and macro-financial issues in part to contrarian views could “ruin one’s career. This high turnover led to shift- ing priorities. which made little reference to research on country-specific issues. Analyti. and Economic and Financial Counsellors dur- and management processes that apply to IMF staff and ing this period. Many area department economists felt that there played in the run-up to the crisis? The answer is multi- were strong disincentives to “speak truth to power. and country authorities. High staff turnover was a frequent complaint markets. economies. there was a “culture clash” between macroeconomists 59. The IMF was Management. What role might political constraints have 57.” Thus. particularly in area working on countries with complex. closely related to the issue of silos incentives were not well aligned to foster the candid and incentives. even if proven faulty. It is too soon to judge how this process is operating. including requests to alter messages in staff tion that staff might not be supported by Management if reports. staff interviews indicate a widespread view from authorities varied significantly by country. But with the possible exception of 30 After the crisis. the IMF attempted to change this approach by self-censorship. it is likely that of country authorities and an issue that has been raised this was an example of the IMF’s insular culture. Sev. IMF macroeconomists. These were further many staff reported concerns about the consequences evidence of a lack of sufficient oversight and follow of expressing views contrary to those of supervisors. IMF reports rarely referred to work by external on well with” country authorities. systemic financial departments. hierarchical organiza- lapses in oversight and weak accountability. as there was a percep. Staff 54.30 proposals. Turf battles. On the messages from surveillance. come up with alternative views and policy options. IMF effectiveness also suffered as a consequence of changes in the First Deputy Managing 55. In some other large advanced sions had to be aligned with IMF views. and requests to pursue captured by countries” that they worked on. did not sufficiently appreciate the skills systems reported that they felt uncomfortable raising and experience of financial sector experts. demands by authorities to replace specific mis- they disagreed with these authorities.”32 Staff saw that conforming assessments were not penalized. Political Constraints A lack of accountability was frequently highlighted as a serious obstacle to getting the incentives right. each of these factors influenced IMF surveillance during the evaluation period. At times difficult issues during their first mission. One senior staff sion members. gaps in attention to the challenges facing the global economy and the IMF. Internal governance refers to the incentives Director. The evaluation found that 60. sions. analysts pointing at the mounting risks in financial 58. views such turf battles. All this was “driven by the agenda of getting 53. staff and Management effectiveness. 62. the mission’s messages. According to one 56. Rather than lack of awareness. On that governance problems were a key impediment to the IMF’s the United States. To varying extents. Hence. “the Fund operates as little fiefdoms. 61. 2011). High turnover left was also common in much of the surveillance-related mission teams in constant need of getting up to speed analytical work. staff noted that the authorities 19 . D. which made it difficult to from outside the IMF (IEO. In addition. cal work was geared to “justify” the authorities’ policy comments were only minimally addressed. In this period. bilateral surveillance missions the crisis. as this by several previous IEO evaluations. perceptions of pressure from authori- member asserted that area departments were “unduly ties leading to self-censorship.31 tion. 32 A majority of staff who responded to the survey conducted for indicated that there was no overt pressure to change the IEO research evaluation stated that their research and its conclu. Internal Governance Problems over senior staff. tended to “gravitate toward the middle” and “our advice becomes procyclical. the organization as a whole. and an Acting Managing Director who with the most experienced financial sector specialists. the IMF had three Manag- to systemic financial centers were not always staffed ing Directors.” Staff toward conforming with prevailing IMF views.” faceted because political constraints have many dimen- particularly in large countries. and weak oversight C. they were not a major factor in the IMF switching to shorter policy notes (instead of briefing papers) to be performance in the run-up to the crisis. with clearly defined boundaries. for example. Staff reported that incentives were geared senior staff. Turnover of Management and senior staff also and financial sector specialists and their analytical weakened IMF effectiveness during the run-up to approaches.

sions leading to the adoption of the 2007 Decision on tor even in the absence of overt political pressure. 65. As one staff mem. and their implementation diverted staff’s hard to give difficult messages to the authorities even if attention. In a multilateral organization like the IMF. Sometimes country governance as critical to understanding the institu- authorities would ask that a mission chief or other mis. teams seemed more comfortable in presenting was a perception that the largest shareholders were the hard-hitting analysis to smaller advanced and emerging driving force behind certain initiatives that are seen as markets. the team had the analysis … the concluding meetings it is natural for country authorities to influence the were really just negotiation sessions on language. and his Deputies. such changes should be ing Director. While at times there might be indicated that to enhance its effectiveness. exerting explicit pres. Management from more urgent concerns in the world ber who worked on a large country explained. Moreover. Pressure to adopt certain initiatives distracted sure to tone down critical messages. 64. Self-censorship appeared to be a significant fac. While there have been few such handedness and weak accountability as hindering the cases. tion’s performance in the run-up to the crisis. In a survey conducted in a chilling effect on staff willingness to disagree with 2007. CHAPTER 4 • WHY DID THE IMF FAIL TO GIVE CLEAR WARNING? took a heavy-handed approach. shareholders—that “you cannot speak truth to authori.” staff at a particularly important time. and the IMF’s 2008 downsizing. for example. “it was economy. The two main examples were the discus- 63. other stakeholders pointed at problems in overall IMF ties’ views instead of those of staff. Board members pointed to the lack of even- country authorities. there contrast.” In launching and design of policy initiatives. 2008). a mismatch needed to clarify the roles of the Board. the IMF valid reasons for such requests. 20 . Many Bilateral Surveillance. Indeed. it is clear that staff across the IMF was aware of capacity of the IMF to react effectively to emerging them and that this may have led to self-censorship. and to establish a clear explained clearly and openly to staff or they could have accountability framework. staff perceived that in case of disagreement. which directed staff attention staff members believed that there were limits as to how to exchange rate analysis and reinforced the focus on critical they could be regarding the policies of the largest global imbalances. which absorbed the attention of Management and senior ties” since “… you’re owned by these governments. Many authorities from member countries and Management would end up endorsing country authori. confirming some authorities’ belief that there having distracted the institution while the crisis was was a lack of evenhandedness in surveillance. risks (IEO. emerging. the Manag- of skills or even personalities. They sion members be replaced.