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International Monetary Fund. Independent Evaluation Office

Abstract

1. The IMF’s involvement in trade policy issues has been a source of controversy. In contrast to exchange rate, fiscal, or monetary policies, trade policy lies within the IMF’s domain through at most a soft mandate. This leaves substantial scope for disagreement on whether the IMF has overstepped its proper role on trade policy or not done enough. Also, reflecting an orientation toward removing barriers to trade, the IMF’s involvement in trade policy has stoked the debate on whether steps toward freer trade are always beneficial for a country or whether developmental objectives are better served by more gradual changes. Alongside this debate are charges that IMF advice has not been evenhanded and has pushed harder on developing countries (through lending arrangements) than on advanced countries to reduce protectionism. And with the increasing complexity of trade policy issues, questions have arisen about whether IMF staff have the expertise to address trade policies rigorously.

International Monetary Fund. Independent Evaluation Office

Abstract

5. The IMF’s mandate on trade policy issues is broad, but not precise.2 The root of the mandate lies in Article I(ii) which specifies that a purpose of the IMF is

International Monetary Fund. Independent Evaluation Office

Abstract

9. Interinstitutional cooperation is essential for the IMF to be effective on trade policy issues. Two aspects of the institutional landscape reinforce this point. First, since the IMF has few resources to devote to trade policy, it must look to organizations such as the World Bank and the Organization for Economic Cooperation and Development (OECD), even for the tools needed to address macroeconomic effects of trade policy. Second, the international community established the WTO as the locus of multilateral trade cooperation. The WTO, however, is primarily a negotiating forum, with limited capacity for taking views on how trade policies affect global, regional, or national macroeconomic vulnerabilities. Providing such views must fall to the IMF, which in turn must maintain coherence with the WTO’s framework.

International Monetary Fund. Independent Evaluation Office

Abstract

20. Executive Board guidance on trade policy since the mid-1990s pushed staff both to broaden the range of issues they covered and to be more selective.5 Discussing the 1994 Comprehensive Trade Paper (an IMF staff review of trade policy issues that was conducted every few years until 1994), Directors asked for more analysis of several issues: macroeconomic effects of trade policies; spillovers, especially from PTAs; and effects of the Uruguay Round, especially on net food importers and countries facing preference erosion. In later years, the Board also asked for staff attention to countries’ positions in the Doha Round, market access for developing country exports, and trade in services. But staff interviewed for the evaluation saw the Board’s decision to abandon the Comprehensive Trade Paper as a sign of reduced interest in trade issues. This perception was reinforced by the streamlining of structural conditionality in 2000 and of trade policy surveillance in 2002. Also, as criteria for streamlining trade advice emerged only gradually through 2005, staff were often unclear when to address issues.

International Monetary Fund. Independent Evaluation Office

Abstract

23. IMF coverage of trade policy varied widely in range and depth across countries and over time. The basic tenets of the IMF’s approach to trade policy issues are generally well supported by economic analysis (Box 3), but considerable controversy focuses on the application of its approach. This suggests three criteria against which to examine how the Fund carried out its approach: (i) How well thought out was the advice? (ii) Were macroeconomic links clear and considered? (iii) Was advice evenhanded? First for UFR and then for surveillance, we review the broad parameters of the IMF’s work. Thereafter we discuss results of background studies of single countries or issues against these three criteria.

International Monetary Fund. Independent Evaluation Office

Abstract

48. There are no straightforward metrics for assessing the effectiveness of the IMF’s involvement in trade policy issues. Three approaches are therefore taken in this evaluation. At the broadest level, and consonant with some of the academic literature, is there evidence that IMF involvement increased trade volumes? More modestly, was IMF advice, whether in surveillance or conditionality, implemented through lasting policy changes? And even more modestly, did IMF involvement get issues on the table or productively into the public debate?

International Monetary Fund. Independent Evaluation Office

Abstract

56. The substantial swing in IMF involvement in trade policy during the evaluation period went too far on each side. The interventionist approach of the late 1990s, when the IMF played an uneven but at times aggressive role in trade policies through conditionality, gave way to substantial reluctance to state strong positions even on trade policies that have macroeconomic import. Several factors undoubtedly affected this swing: the establishment of the WTO, overall streamlining of the IMF and prioritization of financial issues, and, possibly, complacency stemming from a long period of high growth in world trade.

International Monetary Fund. Independent Evaluation Office

Abstract

Trade policy occupies an unusual and at times problematic place in the work of the IMF. Though trade policies of IMF members have strong influences on macroeconomic stability, they are often seen as peripheral to the IMF’s core competency. This evaluation, which examines the IMF’s involvement in trade policy issues during 1996–2007, addresses five questions. What is the nature of the IMF’s mandate to cover trade policy? Did the IMF work effectively with other international organizations on trade policy issues? Did the Executive Board provide clear guidance to staff on the IMF’s role and approach to trade policy? How well did the IMF address trade policy issues through lending arrangements and surveillance? Was IMF advice effective? The evaluation finds that the IMF’s role in trade policy has evolved in some desirable and some less desirable ways and recommends how to use the limited resources the IMF can devote to trade policy to fill these gaps.