Journal Issue
Share
Finance & Development, March 1975
Article

Membership of the Fund: The article is based on Membership and Nonmembership in the International Monetary Fund, a new book by Joseph Gold. departments

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
March 1975
Share
  • ShareShare
Show Summary Details

Thirty of the 45 countries represented at the Bretton Woods Conference became original members of the Fund by accepting membership on or before December 31, 1945. Original members, in contrast to other countries, were entitled to become members without any power on the part of the Fund to apply terms and conditions. It is debatable whether applicant countries are entitled to be admitted, but it is clear that the Fund may lay down terms and conditions for their admission. All but one of the remaining 15 of the countries at Bretton Woods became members in due course, but not as original members.

Membership is open to applicant countries when the Fund permits and on the terms and conditions that it prescribes. At the end of 1974, 126 countries were members of the Fund. Decisions to admit countries is reserved to the plenary organ, the Board of Governors. No more than a majority of the votes cast, on the basis of the Fund’s system of weighted voting power, suffices for a decision to admit an applicant country, which can be taken to be evidence of an intention to encourage admission and a broad membership.

An applicant government that decides to enter the Fund under the resolution of the Board of Governors admitting the country to membership, is required to deposit an instrument stating that it accepts in accordance with its law the Articles and all the terms and conditions prescribed in the resolution, and that it has taken all steps necessary to enable it to carry out its obligations under the Articles and the resolution. The representations in the instrument have continuing effect, and a member may be required to make them good if at any date after admission it becomes apparent that not all the domestic steps were taken that should have been. This necessity may arise because of some oversight on the member’s part or because of an interpretation of the Articles adopted by the Fund after the member entered the organization. The Fund does not permit a country to accept membership subject to reservations.

Membership and Nonmembership in the International Monetary Fund by Joseph Gold (Washington, D.C: IMF, 1974) xiii + 683 pp., $10.

Criteria and norms: a country

The Fund’s criteria for membership are that an applicant is a “country,” that it is in formal control of its external relations, and that it is able and willing to perform the obligations of membership. The last two criteria are sometimes combined or confused. The criterion of ability to perform the obligations of membership can be deemed to be satisfied even though the applicant may have to rely on the cooperation of other members to enable it to perform them.

The Articles employ the word “country” as a criterion for membership because of considerations pertinent at the time of the Bretton Woods Conference, but it is doubtful that there is any practical difference now between the words “country” and “state.”

The Fund makes its own findings on whether an applicant is a “country,” and makes them solely for its own purposes. It is not bound by the recognition of states accorded or withheld by members or by other international organizations, but in practice the Fund may pay attention to their actions. Decisions of the Fund are taken by governors and executive directors whose attitudes are likely to be influenced by the decisions, or absence of decisions, with respect to recognition taken by the members that have appointed or elected them. Although the Fund tends to avoid action that might be regarded as premature and political, there have been occasions on which it has recognized an applicant as a country before the United Nations or most members (or members with a majority of the total voting power in the Fund) had done so. The Fund’s action to admit Bangladesh is an example. Prompt action puts the Fund in a position to give prompt financial and technical help to a new country.

The Fund’s recognition of governments, like its recognition of countries, is made for its own purposes, is not determined as a matter of law by the actions of members, and does not bind members in their own external relations, however the governors and executive directors appointed or elected by them may have acted in the Fund. Nevertheless, the state of political relations among members may have a practical effect on the Fund’s transactions, particularly those conducted through the General Account, and in the election of executive directors.

Membership is available only to countries individually. The Articles include no arrangements for joint membership, nor do the Articles make any provision for regionalism, except for the assurance given to the American Republics not entitled to appoint executive directors that they will be able to elect two directors (a number now increased to three by the exercise of a power of the Board of Governors). The Fund has sometimes taken regional considerations in establishing terms for membership, e.g., in connection with quotas or gold subscriptions. But the Fund has not refused to admit a country to membership because its partners in a close association were not members or applicants for membership.

To be in formal control of foreign relations

The applications of Italy, Austria, Germany, and Japan have had a formative effect on the Fund’s practice in connection with the criteria of the potential member’s control of foreign relations and its capacity to perform the obligations of membership. In responding favorably to these four early applications, the Fund took into account, first, the fact that although under the arrangements governing occupation, the occupying powers had broad powers, political circumstances made it unlikely that the applicants would be hindered in the performance of their obligations by the occupying powers, and, second, the fact that some of the occupying powers were members of the Fund and therefore unlikely for that reason to interfere with the performance of another member’s obligations. There was a strong disposition among members to bring the applicants into the organization of the world as reflected by membership in the Fund, which would give them not only rights but also subject them to legal constraints in lieu of a waning occupation. It was felt that there was little risk because problems were unlikely to arise, and there was a conviction that if they should arise, it would be possible to resolve them without excessive difficulty.

In practice, the criterion of the control of foreign relations has relied more on form than substance. According to this criterion, an applicant, to be eligible for membership, must not be subject to the legal right of another country to control the applicant’s external affairs. An applicant that is formally independent is not debarred from membership even though it is subject to considerable influence by another country in the conduct of foreign relations.

In applying the criterion of ability to perform the obligations of membership, the Fund has not made a detailed examination of the applicant’s ability to perform each obligation. Various pragmatic considerations have been relied on when it seemed that there might be problems of compliance. The willingness of an applicant to perform the obligations to provide information and to consult with the Fund has been given special emphasis because of the feeling that the Fund is a community of countries. Therefore, the Fund has wanted the assurance of collaboration in its relations with a prospective member, including the assurance of an opportunity to influence the member in its choice of monetary policies, for the good of the member and for the common good as well.

Currency

The norm probably contemplated by the drafters of the Articles was that a member would issue its own currency for its own exclusive use, but this norm has not become a criterion for membership. Until mid-1956 there was some feeling in the Fund that the existence of a domestic currency should be a criterion for membership, because in its absence the question arose whether an applicant would be able to perform the obligations of membership under the Articles. A great diversity in the arrangements with respect to currency can be observed among members. The Fund has taken into account in some but not all cases that the applicant used a currency that was issued by an existing member or shared a currency with other applicants. The problems that have arisen after membership have been resolved in a practical manner.

Different types of members

There can be no doubt that the architects of the Fund contemplated a place within the structure for countries with state-controlled economies. The U.S.S.R. attended the Bretton Woods Conference, and various issues its delegates raised there and in earlier discussions led to the incorporation of some provisions and affected the drafting of others in order to make it easier for the U.S.S.R. to take up membership. Among the provisions introduced into the Articles at the urging of the U.S.S.R. was Article IV, Section 5(e), on changes in par values that do not affect the international transactions of members. The provision became deeply involved in the proceedings that led to the withdrawal of Czechoslovakia. Notwithstanding the adoption of provisions of this kind, it is not clear how the drafters of the Articles reconciled membership for countries with state-controlled economies with all the obligations of membership. The U.S.S.R. has not entered the Fund, but other countries with state-controlled economies have. The most recent country of this kind entering the Fund is Romania.

Small states, however defined, have not posed the kind of problem for the Fund that they have raised, often in an acute form, for other international organizations, largely because of the Fund’s system of weighted voting power. For various reasons, the Fund has not adopted a policy of denying membership to small countries, an exclusion which would have prevented them from becoming members of the World Bank and its affiliates, and therefore would have denied them the assistance that these organizations give in promoting development.

However, the Fund has had certain problems connected with small countries. At one time, the Fund observed a policy of granting a minimum quota, but even the minimum became unrealistically large for some of the small countries that applied, and the policy had to be abandoned. Another problem has arisen from the fact that a large number of small countries may have what they regard as homogeneous interests, but insufficient voting power to give them the assurance that in practice they will be able to elect an executive director. Tensions have arisen, therefore, in connection with the composition of the executive directors. The influx of small countries has contributed to the creation of larger and more diverse constituencies in the election of some executive directors. This has increased their difficulties in determining the positions they will take on some issues. The problem is all the more serious because it is on issues of greater importance that directors are likely to canvass the opinions of their constituents.

Another effect of the increase in the number of members is on the acceptance of proposed amendments of the Articles, which cannot become effective without the acceptance of certain proportions of the total membership and of total voting power. Proposals to amend have been rare, but in the future, as in the past, amendment is likely to be resorted to in order to bring about important changes in the international monetary system or in the Fund. The increase in membership gives small countries, and certainly developing countries among which they are numbered, a de facto veto on proposals to amend. In addition, it may be more difficult for the Board of Governors to adopt certain decisions such as to compel a member to withdraw, because they cannot be adopted without a majority of the governors as well as a majority of the total voting power, but this is a less important consequence.

It is legitimate to conclude that the Fund has applied its criteria for membership with flexibility and has been guided by an unformulated policy of readiness to accept as wide a membership as possible.

Terms of membership: the quota

The Fund can prescribe terms for membership for all but original members, and it has exercised this power in the form of a resolution of the Board of Governors for each applicant. The Fund has a discretion to establish the terms appropriate for each applicant, but the practice has been to standardize the content of resolutions as much as possible. Changes have been made, however, to respond to changes in international monetary conditions, or to increase the usefulness of the Fund to new countries.

The terms that have given rise to most negotiations with applicants have related to the quota and the subscription to be paid in gold. The Fund attempts to fit the applicant’s quota into the hierarchy of members’ quotas, but there are frequent problems, sometimes because the data used in the calculation of quotas are not available for a newly independent country. The Fund prescribes and is under no legal necessity to agree the terms with an applicant, but the normal practice is to ascertain that the terms contemplated by the Fund are acceptable. As a result, applicants have sometimes held out for a smaller quota than the Fund was willing to prescribe. There have been diverse reasons for this attitude by applicants, but usually they have regretted their stand after becoming members.

A member’s total subscription is equal to its quota. In prescribing the proportion of a subscription that must be paid in gold, the Fund has been influenced, without being legally bound, by the formula in the Articles that governed the subscriptions of original members. The minimum subscription in gold payable by original members was equivalent to the smaller of two amounts: 25 per cent of quota and 10 per cent of net official holdings of gold and U.S. dollars. For other members, this formula has been modified in the course of time. The amount of the gold subscription has had special prominence in connection with applications for membership because the rest of the subscription is payable in a member’s own currency and represents no transfer of reserves. Gold is useful to the Fund because with gold the Fund can replenish its holdings of any currency that it needs for its operations. Moreover, the currency subscription does not necessarily strengthen the Fund’s resources if for an indefinite period the Fund’s policies will preclude the use of the currency in its transactions. The Fund has insisted on the subscription of some gold, although sometimes in only symbolic amounts, until 1973, when it considered an application by a country that held no gold and could not obtain it from official sources because of problems connected with the price of gold and its future role in the international monetary system.

Par value for currency

Other terms in membership resolutions prescribe the procedure for the initial determination of a par value for the member’s currency and impose an obligation on the member to obtain the agreement of the Fund for any change in exchange rates before an initial par value is established. Members are allowed to engage in exchange transactions, under such conditions and in such amounts as the Executive Directors might determine, even before the establishment of an initial par value. This term has been adopted because, for one reason or another, a number of members have been unable to establish par values for lengthy periods, and during these periods the Fund’s advice to these members might be more effective if the Fund could help them financially. The term has been particularly helpful to new countries. It illustrates the fact that the terms in membership resolutions may confer benefits as well as impose obligations.

Certain other terms are prescribed as standard practice, but there have been special terms to meet special circumstances, such as the terms for Indonesia’s readmission before it had discharged the agreement for the settlement of accounts entered into on its earlier withdrawal. A member that defaults in the performance of any term of a resolution does not forfeit its membership, but the Fund could take action against it for the failure to fulfill an undertaking.

Formal equality of all members

Except for the rights and obligations that are governed by its membership resolution, a new member has the same rights and obligations as all other members. The terms included in resolutions have been circumscribed by a policy that new members should not have permanent rights and obligations that differ from those of original members. With three special exceptions, the terms included in resolutions have not dealt with events after agreement on an initial par value.

This practice is consistent with the spirit of the Articles, which make no permanent distinctions among categories of members. The principle of the formal equality of all members has been modified de facto by special policies designed for the benefit of developing members, but it has been necessary to formulate these policies to make them applicable in principle to all members. There are, however, boundaries beyond which it is not possible to go in moderating the effects of the doctrine of formal equality. It is questionable, for this and other reasons, whether the principle of formal equality is realistic or beneficial for developing members, and there is evidence that formal distinctions among members may be made in the international monetary system of the future. In recent years, however, the principle of formal equality was useful in establishing the right of all members to participate in the Special Drawing Account, through which special drawing rights are allocated, and in the Committee of the Board of Governors on Reform of the International Monetary System and Related Issues (the Committee of Twenty).

The Special Drawing Account is not a separate international organization even though some of its features resemble, and indeed were based on, those of an affiliate with an international personality of its own, and even though each member of the Fund may decide whether or not to become a participant in the Account. A member of the Fund that has chosen not to participate in the Special Drawing Account may be permitted to become a holder of special drawing rights but cannot receive allocations of them.

Dependencies

A country accepts membership on its own behalf and in respect of its dependencies (“all their colonies, overseas territories, all territories under their protection, suzerainty, or authority and all territories in respect of which they exercise a mandate”). Dependencies cannot be admitted to membership, and the Fund, unlike some other international organizations, has no category of limited or associate membership. The principle has meant that dependencies with important currencies in world trade and payments could not become members, whereas small new countries with no currencies of their own have become members.

The Fund has not found it necessary to develop precise definitions of the various classes of dependencies. The words “all territories under their … authority” create a residual category that can accommodate all territories that cannot be classified readily into some other category of dependency. For example, the words apply to trust territories even though they are not mentioned in the Articles, and to occupied territories even though legally they are part of the territory of a member other than the occupying member.

A member is responsible to the Fund for observance of the Articles in its dependencies, whatever may be the degree of autonomy they exercise and however difficult it may be for the member to ensure observance.

The legal character of the exchange regime of a dependency under the Articles may differ from the legal character of, and be more or less liberal than, the exchange regime of the member that has accepted the Articles in respect of the dependency.

A member ceases to be responsible under the Articles for a former dependency if the territory becomes independent or is incorporated into the territory of another member. When a member ceases to be responsible for a former dependency, no problems of settlement or of the assumption of indebtedness between the Fund and the territory can arise because a dependency cannot engage in transactions with the Fund and a member cannot engage in transactions on behalf of a dependency.

A former dependency of a member has no claim to membership, and it must apply in the ordinary way if it wishes to become a member. If it becomes a member, its relationship with the Fund is unaffected by decisions of the Fund taken in relation to it as a dependency on the initiative of the member formerly responsible for it. A former dependency thus begins its relationship with the Fund with a clean slate. The principles as explained above have been important in practice because much of the great growth in the membership of the Fund results from the independence of former dependencies.

Territorial or constitutional changes

Territorial and constitutional changes can create problems connected with membership, and neither the express provisions of the Articles nor international law may give much help in solving these problems. The separation of India and Pakistan was treated as a situation in which India retained its international personality and membership in the Fund, and Pakistan was considered a new country that had to apply for membership. The quota of a member cannot be reduced without its consent, and the quota of India remained unchanged. There have been other occasions on which the emergence of new countries has reduced the territory, resources, and population of a member, but on no occasion has this event led to a reduction in quota. In these circumstances, it may be difficult to defend the consequences of the rule requiring a member’s consent for the reduction of its quota.

The amalgamation of Egypt and Syria to form the United Arab Republic was held by the Fund to have produced a single member without the necessity for a new application, but notwithstanding this conclusion, the Fund treated the two countries as separate regions and continued to hold both of their currencies. When the amalgamation was dissolved, the two countries resumed their membership, once again without the necessity for new applications, on the theory that their identities had been fused without extinction. The Fund regarded its treatment of the United Arab Republic as transitional on the hypothesis that ultimate union was intended, and therefore the solution is no precedent for constitutional arrangements intended to be permanent. It is not possible to predict the Fund’s reaction to any future arrangements of a novel kind that members may enter into, but it should be noted again that the Fund has been willing to find practical solutions when faced with abnormal problems or with new conditions.

Ex-membership

A member may be deemed to have withdrawn from the Fund, whether it wishes to or not, for failure to agree with the Fund on a suitable par value; or it may withdraw voluntarily and with immediate effect by delivering a written notice to the Fund; or it may be required to withdraw. The Fund can compel a member to withdraw, in accordance with specified procedures and safeguards, under certain provisions that deal with special situations or under a more general provision that refers to a member’s failure to perform any of its obligations under the Articles.

No member has been deemed to have withdrawn; three members (Poland, Cuba, and Indonesia) have withdrawn voluntarily, but one of them (Indonesia) has become a member again; and one (Czechoslovakia) has been compelled to withdraw, although it insisted that it had done so voluntarily. The withdrawal of Czechoslovakia, motivated in part by cold war politics, was a rare event in the history of international organization and raised a number of important legal and political issues. In the debates on the withdrawal of Czechoslovakia, some protagonists expressed the view that an international organization is like a private club, and that there is a minimum set of expectations, or rules of the club, from which it is not practicable to exempt members. Others thought that an international organization resembled an international society, and that the exile of members weakens the structure of society. The latter view probably prevails in the Fund today. There is evidence for this conclusion in the absence of any provision in the amendment of the Articles of July 28, 1969, under which a participant in the Special Drawing Account can be compelled to terminate its participation or withdraw from the Fund because of any failure to fufill obligations with respect to special drawing rights.

The compulsory withdrawal of a member must be preceded by its ineligibility to use the Fund’s resources, although withdrawal is not a necessary consequence of ineligibility. The Fund has been reluctant to declare members ineligible because this action may suggest that it will be followed by expulsion. The Fund has made only one declaration of ineligibility (Czechoslovakia); it initiated the procedure of ineligibility against Cuba but did not complete it because of Cuba’s voluntary withdrawal; and one member (France) became ineligible automatically, that is, without a declaration by the Fund. (The Fund terminated the ineligibility of France on October 15, 1954.)

When a member withdraws, whether voluntarily or compulsorily, normal transactions in its currency cease and the member must settle all accounts with reasonable despatch by agreement with the Fund. If agreement is not reached promptly, the provisions of the Articles on settlement apply. These provisions are an ingenious comprehensive code that give scope for flexible arrangements between the parties but fill any gap in the terms if they cannot agree. Settlement under these provisions is completed five years after withdrawal. In all four withdrawals, the Fund and the ex-member reached agreement after negotiations that were sometimes complex. The agreements were influenced by the code for settlement in the Articles but departed from them in many respects. All four agreements involved net payments to the Fund. It was not necessary to use the procedure prescribed by the Articles for the arbitration of disagreements between the Fund and an ex-member.

The withdrawal of a member produces legal consequences in domestic law, in the Fund, and in other international organizations. Under the Articles of the World Bank, a country withdrawing from the Fund ceases after a time to be a member of the Bank unless the Bank decides by a special majority that the country shall remain a member. Withdrawal from the Fund may have other consequences for the country in the World Bank Group.

Nonmembership

The Fund’s practice puts a considerable gloss on the principle of international law that a treaty does not create obligations or rights for “third states.” Article XI imposes obligations on members in their relations with nonmembers, but there are many obscurities in this provision, and it has not been influential in practice. There have been a number of more specialized techniques by which it was sought to affect the conduct of nonmembers by acting through members.

The most interesting of the specialized techniques is the obligation under the General Agreement on Tariffs and Trade (GATT) of a contracting party to enter into a “special exchange agreement” if it is not a member of the Fund. The complementary character of “trade” and “exchange” was recognized at the Bretton Woods Conference, and the purpose of the special exchange agreement is to bind a contracting party that is not a member of the Fund to refrain from measures in one field that would frustrate the intent of provisions applying in the other. An elaborate standard form of special exchange agreement with provisions closely related to the Articles of the Fund has been prepared. The obligations under it, however, are owed to the Contracting Parties and not to the Fund.

In the reverse situation, a country may be a member of the Fund but not a contracting party to the GATT. The question has arisen whether the Fund could do anything to fill the gap in the economic obligations of the country. The Fund has considered it inadmissible to give a more extensive interpretation for this purpose to certain provisions of its Articles when applied to members that are not contracting parties.

The Fund has extended certain benefits to contracting parties to the GATT that have signed special exchange agreements. The Fund’s prescription of a nonmember as an “other holder” of special drawing rights is another example of benefits that a country may be permitted to enjoy pursuant to a treaty to which it is a stranger. The major benefit to nonmembers is not among those that can be formally extended to them: it is the orderly international monetary environment that can be achieved if the Fund succeeds in its purposes.

The Fund has an objective international personality that goes beyond the express provisions of its charter. It is able, therefore, to enter into relations with nonmembers even though there is no explicit authority for this purpose in the Articles. The leading, but not the only, example of this activity is the agreement of June 11, 1964 with Switzerland by which that non-member became associated with the Fund’s General Arrangements to Borrow. Agreements with nonmembers or arrangements in which they participate must be consistent with the purposes of the Fund, and those entered into have been for the obvious benefit of members.

Other Resources Citing This Publication