First, despite the increasing integration of the world economy, which might appear to reduce the effect of national policies, the nation state has in fact flourished since 1945. The collapse of ideology and empire, and the triumph of the ideas of a liberal market economy, have been accompanied by an extraordinary expansion in the number of countries in the world. In 1946 there were fewer than 80 countries. Now there are 192 members of the UN. Much of that increase represents the division of empires, such as the former Soviet Union, into new states, as well as growing ethnic separation. Most of these new countries were not “present at the creation” and see no reason why they should acquiesce in governance arrangements made in their absence. And the economic weight of countries has changed greatly since the post-war international institutions were set up. In 1950, Asian countries accounted for a sixth of world GDP measured at purchasing power parity. Now they account for more than a third. Second, the world economy is very different today than when the IMF, the World Bank, and the other international economic institutions were set up. At the end of the Second World War, the international monetary system was built around fixed exchange rates and controls on capital flows. The rules of the game were simple. Countries were supposed to balance their current account. When “imbalances” arose, they were under an obligation to correct them. In practice, however, the obligations on creditor and debtor countries did not prove to be symmetric.
The main tool to monitor those commitments is surveillance. The surveillance activities of the IMF have been criticised because they pay insufficient attention to spillover effects and instead examine in unnecessary detail microeconomic issues. For example, the sharp rise in oil prices over the past two years has posed a risk to economic stability in many countries. But there is no reference in the IMF’s Article IV report on China to the role that Chinese demand may have played in pushing up world oil prices. And the report on the United States this year singled out the electricity sector and competition among auto manufacturers and airlines as areas warranting special examination by IMF staff. It would be better if those microeconomic issues were examined within the OECD, and, in turn, issues of macroeconomic spillovers and global “imbalances” were left to the IMF. But even when IMF surveillance has been well-focussed, as in the analysis of Thailand’s exchange rate policies in 1996, it has not always carried sufficient weight to influence countries’ policies. 4  BIS Review 126/2006  These short-comings must be remedied in two ways. First, the focus of IMF surveillance should be on spillover effects and the consistency of macroeconomic policy frameworks. By the Spring Meetings of the IMF in Washington in April, we shall know whether this is likely when we see the results of the current review of the 1977 decision on exchange rate surveillance. Second, IMF surveillance should be more independent of member countries.