- Norman Humphreys
- Published Date:
- June 2000
In its more than fifty years of existence, the International Monetary Fund has evolved from a small, obscure international agency, with new and uncertain responsibilities, into a powerful institution that today has assumed center stage in the international monetary system. This evolution has occurred even though twenty-five years ago, when the Bretton Woods system had collapsed, the Fund would seem to have lost the central purpose of its existence. It is a remarkable story of how an institution has developed and adapted itself to an evolving world and a changing membership in a way that perhaps no other international agency has been forced or able to do. And, moreover, this transformation has taken place despite bouts of criticism from industrial and developing countries alike, frequent exploitation by national politicians as a convenient way of deflecting criticism from their own disastrous national policies, serious controversy and criticism in the academic community, general suspicion in the trade union movement, antagonism from nongovernmental organizations (i.e., charity, church, and relief organizations), and a widespread lack of interest on the part of the general public in an institution that has such a remote and technical role.
Along the way, the Fund has developed new financing facilities; extended and enlarged the financial assistance available to its members; taken on new and wide-ranging responsibilities in the area of international surveillance of member countries’ economic and financial policies; developed programs of reform in the areas of fiscal, monetary, structural (i.e., aspects of banking, corporations, and contract law), governance, and social policy; and broadened and intensified its technical assistance and training programs. At the same time, from an inward-looking and rather secretive bureaucracy, the Fund has become an institution anxious to explain itself to the public, although still mindful of its confidential relations with its members. It now has a very large publications program, covering country economic reports, comprehensive and authoritative reports on the world economy, international capital markets, economic and financial statistics, and, with the agreement of the member involved, a web site (www.imf.org) that reproduces the results of the Fund’s Article IV consultations with member countries, as well as letters of intent and memoranda on the programs that it is supporting in those countries. In urging greater transparency on its members, the Fund in its own operations has now gone a long way in putting into practice what it preaches.
Growing through crises
Several developments and international crises have given the Fund the opportunity to be an important international player. Its first significant appearance on the international stage was in 1956, when all four combatants in the Suez Canal military adventure sought the Fund’s financial assistance, for an amount that far exceeded the total amount of funds disbursed in the preceding nine years. In 1974 and 1975, when the par value system had crumbled, the Fund created the oil facilities, which played an important role in acting as a conduit for recycling petrodollars from the suddenly rich oil-producing countries, caused by the action of the Organization of Petroleum Exporting Countries (OPEC) in tripling international oil prices, to the poorer, hard-hit oil-consuming countries. In 1982, when Mexico abruptly announced that it could no longer service its loans and was on the brink of default, the Fund took a major role in persuading the international banking community not to run for cover but to reschedule old loans and provide new money in support of Mexico, predicating the Fund’s own financial assistance on the condition that the banks come up with a sufficient financial package to give Mexico time to implement corrective policies. Concerted lending, as it was called, was the pattern of the financial packages that was used for the rest of the decade in providing assistance to heavily indebted countries. During the 1980s, when many countries were strapped with high indebtedness, the Fund also introduced the structural adjustment facility (SAF) and the enhanced structural adjustment facility (ESAF) to provide expanded and concessional assistance to poorer countries, as well as the enlarged access policy (EAP) for other countries.
The Fund’s role as crisis manager emerged fully in 1994, when Mexico was struck by a resurgence of investors’ fears and the country again turned to the Fund for assistance. When the U.S. Congress refused the Administration’s request for $40 billion in loan guarantees, the Fund stepped in (with the support of the U.S. Administration) and increased its financing package from an initial $7.8 billion to $17.8 billion. In addition, the U.S. Administration provided $20 billion from the Exchange Stabilization Fund (a resource that did not require congressional approval). Investors’ confidence was thereby very shortly restored, Mexico was able to repay its credits ahead of schedule, and a wider conflagration was avoided. All told, as many as 20 countries were involved in a crisis, which up to that point was considered one of the most serious in the postwar world.
It was in the 1990s, also, that the Fund received an influx of over 30 new members, including all the countries of the former Soviet Union, as well as those from the Soviet bloc in Eastern Europe. For this new group of members a special temporary facility, the systemic transformation facility, was established to help the economies of these countries make a transition from a command to a free-market economy. In this endeavor, in addition to substantial financial assistance, the Fund provided intensive and widespread technical assistance and training in spearheading the effort to establish the basic infrastructure, legal environment, and social policies necessary to bring about market economies. In this period, Switzerland also became a member and by the mid-1990s, the Fund had finally become a universal organization, with only North Korea, Cuba, and a few ministates outside its orbit.
In 1997-1998, the Fund’s role as crisis manager, as demonstrated in 1982 and 1994, was put to a severe test as the Asian economic and financial crisis broke. Using the emergency financing facility that it had introduced after the 1992 Mexican crisis, the Fund put together massive financing packages, including multilateral and bilateral financing, in support of macroeconomic and structural reform programs in the countries involved—mainly Korea, Indonesia, the Philippines, and Thailand—and counseled other countries to which the contagion had spread, such as the Hong Kong Special Administrative Region (SAR), Malaysia and Singapore. Outside the Asian area, other countries, principally Russia but also several countries in Latin America, also suffered from the resurgence of investors’ fears, requiring many billions of dollars in emergency financing. The result was the emergence of a severe pressure on the Fund’s resources, both in terms of manpower and finances.
Although a general increase of 45 percent in quotas had been approved by the Board of Governors early in 1998, the reluctance of the U.S. Congress to authorize payment of its subscription brought about a general slowdown in the payment of all subscriptions, thereby delaying through the following 12 months a much needed reinforcement of the Fund’s financial resources. Similarly, the New Arrangements to Borrow (NAB), which were approved by the Executive Board in January 1997, became linked to the quota increase and suffered a corresponding delay in becoming effective. Neither the quota increase nor the NAB could become effective without payment of the subscription by the United States, since it alone holds 18 percent of the total voting power and for the quota increase and the NAB to become effective both measures require members totaling 85 percent of the Fund’s total voting strength to enact all necessary legislation and make the relevant payments to the Fund. In August 1998, therefore, with the Fund’s liquidity at a historically low level, it became necessary to activate the General Arrangements to Borrow (GAB) to replenish the Fund’s resources—the first time that the GAB had been activated since 1978. Subsequently, the NAB became effective in November 1998 and the quota increase shortly thereafter.
It is visionary to see the International Monetary Fund progressing to become the world’s central bank, but the movement to a “one world” is not to be denied. The establishment toward the end of 1998 of a powerful regional central bank, the European Central Bank (ECB), serving 11 advanced industrial countries, is an interesting precursor of wider international developments. The Fund has already clearly become the world’s lender of last resort—an important attribute of a central bank. It has also demonstrated that it has the experience, expertise, and staff to take the lead in a crisis. Its attempt to create the Special Drawing Right (SDR) in the late 1960s, in order to be able to regulate the level of international liquidity in accordance with the world’s need (i.e., a role parallel to a national central bank’s role in controlling the domestic money supply), has been swamped by the integration of the international capital markets and the unhindered flow of capital across borders. The attempt, therefore, to make the SDR the principal international reserve asset—as set out in the Fund’s current Articles of Agreement—has failed, and the role of the SDR has been reduced to that of mainly facilitating transactions within the Fund itself.
On the broader question of coordinating national economic and financial policies, the Fund has worked diligently and with increasing sophistication in carrying out and expanding its responsibilities of surveillance over members’ economic and financial policies, and its analysis carries great weight in international financial organizations, summit meetings of the industrial countries, regional gatherings, and other fora, but so far it has had less impact in national capitals. It has, therefore, yet to realize its goal of being able to coordinate the policies of its member countries and thus to place the world economy on a secure and stable basis. This is the test that it now faces, and it is the test that its members also face in becoming fully cooperative participants in the international monetary system, and thereby furthering the goals of the Fund’s founders.
The gold and gold exchange standards
The International Monetary Fund was born out of the experience of the interwar years. During the last half of the nineteenth century and up to the outbreak of World War I, the world’s monetary and exchange rate system was based on gold, as was the domestic money supply in most countries. The gold standard system was, in theory, self-regulating; a deficit in a country’s balance of payments would result in an outflow of gold, followed by a reduction of money in circulation, deflation, and thus a correction in the external balance. The gold standard was accepted as the natural order of things, and although it may not have been ordained by God, it was a religion that central bankers could believe in. While industrial countries competed on an equal footing and the rules of the game were adhered to, the system worked well. The center of the monetary universe was London, and the Bank of England was the fulcrum on which the system was balanced. The London bank rate was the signal for monetary retrenchment or expansion, as the case might be, and the rest of the trading world watched and acted accordingly. Adjustments tended to be made in unison, with each economy in lockstep with the others. The exchange rate, that is, the value of a currency in terms of gold, was “a given,” and was immutable. There were signs, however, even before World War I that cracks were appearing in the edifice. Reserve currencies were becoming a growing part of countries’ reserves, and the impact of gold movements was being neutralized. World War I brought the system temporarily to an end.
The outbreak of World War I led to currency inconvertibility, blocked balances, and the imposition of exchange controls. After the war ended, repair of the system was neither easy nor immediately possible. Exchange controls persisted, currencies remained inconvertible, and central banks intervened in exchange markets to manipulate the rates. The war and its aftermath had been accompanied by a vastly uneven increase in the general price levels among countries and a profound redistribution of gold, away from London. Nevertheless, sentiment for a return to the gold standard remained strong, and the pound sterling returned to gold in 1925 at its prewar parity. At that rate, the pound was substantially overvalued, and the cost at home was severe unemployment. The move to gold, moreover, did not restore stability to the world’s exchange rate system; the pound began to lose its primacy to the U.S. dollar, and reserve currencies were increasingly being held as major components of international reserves alongside gold. The world, in fact, had moved to a gold exchange standard, a system in which gold bullion was the only ultimate means of settlement among nations, and one in which gold specie rarely circulated. The link between the balance of payments and domestic money supply had been broken, and national economic policies began to be set mainly to achieve domestic objectives rather than to uphold the gold content of currencies. Confidence in the system was severely weakened, and it became subject to increasing speculative attacks.
The pound sterling was forced off gold in 1931, followed two years later by the U.S. dollar and the currencies of most other industrial countries. The collapse of the gold exchange standard ushered in a period of near chaos in international financial relations. Discriminatory currency blocs, bilateral trade and exchange agreements, multiple currency practices, trade quotas, and any other stratagem to gain national advantage were pursued at the expense of the common good. It was the “beggar-thy-neighbor” decade. The Great Depression, the breakdown of the international financial system, and the growth of economic nationalism all fed on each other, resulting in a startling contraction in international trade. The Tripartite Agreement of 1936, between France, the United Kingdom, and the United States, was an early and notable attempt to bring some measure of stability among exchange rates. Of more importance, perhaps, it indicated to future policymakers a way to go forward.
Establishment of the Fund
World War II saw a repeat of the economic disruption that had accompanied World War I—exchange controls, blocked balances, and bilateral arrangements in external dealings, and physical controls and suppressed inflation at home. The lessons of the interwar years, however, were there for all to see. Men on both sides of the Atlantic, with vision and expertise—notably John Maynard Keynes in Great Britain and Harry Dexter White in the United States—almost simultaneously, and independently of each other, began to assemble a blueprint for the international monetary system of the postwar world. Each produced a plan for a new international organization, the one called an International Currency (or Clearing) Union and the other a Stabilization Fund, and though each came to the task from a different perspective and with somewhat different national interests in mind, there was a remarkable overlap in their proposals. These two plans, drawn up late in 1942 in the midst of war, were joined over the following two years by other plans and proposals from several other countries, officials (including those of governments in exile), economists, and other individuals. The final texts of two international agreements—the Articles of Agreement of the International Monetary Fund and the Articles of Agreement of the International Bank for Reconstruction and Development (IBRD)—were hammered out at the International Monetary and Financial Conference held at Bretton Woods, New Hampshire, during July 1-22, 1944. Delegates from 44 countries, plus a representative from Denmark, were present, as well as observers from several international organizations.
The aim in setting up the International Monetary Fund was clear and simple. It was to establish a new world order based on an open exchange and trading system that would operate under international scrutiny and control. In particular, exchange rates were recognized as being matters of international concern. Currencies would have internationally approved par values in an exchange rate system that aimed at stability without rigidity; discriminatory and unfair practices would be outlawed; and a new spirit of enlightened self-interest would be fostered. The establishment and maintenance of such a system would be the responsibility of the International Monetary Fund, an organization whose membership, open to all countries, would entail both obligations and privileges. The Fund would enunciate a code of conduct to be observed by all its members. Members would subscribe to and have available to them a pool of currencies that they could draw upon in times of external payments difficulties. Within this unique framework, which included regulatory functions, financial operations, multilateral consultations, and technical assistance, the Fund would bring into existence a new comity of nations. The Fund was to be firefighter, policeman, and counselor simultaneously.
Par values and exchange restrictions
The inaugural meeting of the Board of Governors was held in Savannah, Georgia, in May 1946, and the Fund opened its doors for business in Washington, D.C., in March 1947. Its first order of business was to invite its members to propose par values for their currencies, to be established in terms of gold as a common denominator or in terms of the U.S. dollar of the weight and fineness in effect on July 1, 1944. Apart from a cumulative initial change of 10 percent, par values could be changed only on a proposal by the member and subject to a finding by the Fund that the member’s balance of payments was in fundamental disequilibrium. Among a number of general obligations included in the Articles of Agreement, each member was to avoid restrictions on current payments, abstain from discriminatory currency practices, and establish convertibility for foreign-held currency balances (Article VIII). Recognizing the uncertain conditions brought about by the war, however, the Articles also provided (Article XIV) for a transitional period, in which members could maintain and adapt to changing circumstances the restrictions on payments and transfers for current transactions.
In the event, all but a handful of members availed themselves of the transitional arrangements under Article XIV, and it was not until 1961 that most industrial countries had formally established convertibility for their currencies and had undertaken to perform the obligations of Article VIII. Informal convertibility had, in fact, been established two or three years earlier, and by 1960 the preponderance of international trade and payments was being conducted on an open, nondiscriminatory basis. One of the major goals of the Bretton Woods system had thus largely been attained. Despite the disruption of the Bretton Woods exchange rate system in the early 1970s, the drive to an open trading system has been maintained, and the number of members accepting the obligations of Article VIII has increased steadily over the years. By the end of April 1998, 144 members, including all the major trading countries, had accepted the obligations of Article VIII; with 38 other countries, all developing countries or new members (such as the successor states of the former Soviet Union), still availing themselves of the transitional arrangements.
The rise and fall of the Bretton Woods systems
The 1960s proved to be an expansive decade. The value of world trade increased by about 135 percent, world economic growth averaged nearly 6 percent a year, and inflation, though increasing, remained moderate until the end of the decade, especially compared with developments that were to occur in the 1970s. The revolution in communications and transportation, together with open exchange and trade arrangements over much of the world, unleashed capital movements, encouraged the formation of multinational and transnational corporations, and began the transformation of the world economy into what was later to be called “the global village.”
But disquieting trends began to surface. Economic growth was uneven among countries, as were rates of inflation, and the system began to lose its center as Europe started competing with the United States, both economically and politically. The system came under stress. The United States, increasingly involved in the Vietnam war, found it politically difficult to adopt corrective domestic economic policies and continued to run balance of payments deficits. Externally, the U.S. authorities felt that their hands were tied. On the one hand, they believed that the United States was unable to change the value of the dollar against other currencies by raising the price of gold, because they were convinced that devaluation would have prompted offsetting moves by other countries. On the other hand, they were unwilling to raise the price of gold, partly because of the political implications of benefiting South Africa and the U.S.S.R., the world’s main gold producers. Other countries, too, were unable or unwilling to devalue or appreciate their currencies against the dollar, resulting in a general stickiness in the exchange rate system. The continued growth of foreign-held dollar balances intensified the pressure on the dollar, and the almost riskless cost of speculating against a fixed-rate currency invited periodic bouts of speculation against the weaker currencies. The Bretton Woods par value system came to an end on August 15, 1971, when the United States suspended the convertibility of official holdings of dollar balances into gold.
A brief attempt to restore the fixed-rate system was made in December 1971, when finance ministers of the Group of Ten countries held a meeting, the first of its kind, at the Smithsonian Institution in Washington, D.C., to negotiate a new pattern of rates for their currencies, including a devalued rate for the dollar and the creation of central rates, with wider margins and a less formal procedure for exchange rate changes. One by one, however, the major industrial countries abandoned fixed rates for their currencies and let them float. By March 1973, all the major currencies were floating against each other, marking the end of the exchange rate system established at Bretton Woods.
After the breakdown of the Bretton Woods system, several difficult years for the Fund followed. The main currencies floated against each other, either as a managed float or floating freely according to demand and supply (referred to at the time as “dirty” or “clean” floating), depending on the degree or absence of official intervention. Other members adopted a variety of exchange arrangements. Some preferred to let their currencies float, some opted to peg the value of their currencies to one of the major currencies, some to a trade-weighted composite of currencies, and a few to the Special Drawing Right (SDR), the new reserve asset created in the Fund in 1968. In 1974, the SDR itself was revalued by the Fund in terms of a basket of 16 currencies, reduced to a basket of five currencies seven years later. The link between gold and currency values having been broken, national monetary authorities were no longer able to maintain an official price for gold. Nonmonetary gold transactions (i.e., private sales and purchases) took place at three or four times the nominal official price. All these developments were, of course, contrary to the legal obligations that members had assumed under the Articles of Agreement.
Despite its loss of control over the value of its members’ exchange rates, the Fund continued to exercise what authority remained to it. It requested members to provide the Fund with full details of their exchange arrangements, continued to hold members bound by their undertakings on exchange restrictions, lent heavily on the obligation that each member had undertaken to “collaborate with the Fund to promote exchange stability, to maintain orderly exchange arrangements with other members, and to avoid competitive exchange alterations,” and promulgated a set of guidelines to be observed by members engaged in managed floating. Further, following a recommendation by the Committee of Twenty, the Fund circulated a declaration on trade to all members, asking them to voluntarily pledge that they would not introduce or intensify trade or other current account measures without a finding by the Fund that there was a balance of payments justification for such measures.
Reform of the international monetary system
While these attempts were being made by the Fund to continue exercising some control over international monetary relations, it was also focusing intensively on a reform of the system. Early in 1972, the Executive Directors had submitted a report to the Board of Governors, entitled Reform of the International Monetary System, which, among other things, suggested further study on a number of issues on which the Executive Directors had not been able to agree. Publication of the report was followed by the establishment of the Committee of Twenty and its Deputies, charged with the task of putting together a draft of a reformed system. The Committee worked for two years, produced many interesting and useful technical studies, but, citing the highly uncertain economic conditions then prevailing in the world economy, admitted that it had been unable to reach agreement on a comprehensive reform. It settled instead on an Outline of Reform, indicating the general direction in which the Committee believed the international monetary system could evolve, and proposing a list of immediate measures that could assist in the evolution of the system. Among these immediate measures was a recommendation to establish an Interim Committee to advise the Board of Governors on the supervision, management, and adaptation of the monetary system.
The task of negotiating a reformed system had thus reverted to the Fund. After two years of intensive work within the Fund, along with several referrals to the Interim Committee and bilateral negotiations on a number of key points, agreement was reached on a full-scale reform of the international monetary system in 1976. The new system came into effect in April 1978. Its main themes, spelled out in the second amendment to the Articles of Agreement, were: (1) each member could adopt the exchange arrangement of its choice; a system of par values could be introduced if 85 percent of the total voting power of the membership agreed; exchange arrangements would be subject at all times to firm surveillance by the Fund; (2) the role of gold would be reduced, including the disposition of the Fund’s own gold holdings, to be effected by the elimination of gold as a common denominator of the par value system, the abolition of its official price, the abrogation of obligatory gold payments to the Fund, and a requirement that the Fund complete the disposition of 50 million ounces of its gold holdings, as well as authorization to dispose of the remainder of its holdings; (3) the introduction of changes in the characteristics of the SDR, so as to assist it to become the principal reserve asset of the international monetary system; (4) simplification and expansion of the types of the Fund’s financial operations and transactions; (5) provisions to establish a Council as a new organ of the Fund, its establishment to be subject to an 85 percent majority of the total voting power; (6) certain improvements in the organizational aspects of the Fund, principally involving the composition of the Executive Board and the election of Executive Directors; and (7) a reduction in the categories of special majorities to 70 percent and 85 percent, but with a considerable expansion in the number of decisions of the Executive Board or the Board of Governors subject to these special majorities; all other decisions would be taken by a majority of the votes cast.
Surveillance over exchange rate policies
Although the second amendment to the Articles was comprehensive, with ramifications throughout the operations of the Fund, the fundamental change that overshadowed all others related to the exchange rate system, under which a member could adopt the exchange arrangement of its choice and no longer had to declare the value of its currency to the Fund or gain approval for a change in its value. Instead of having the responsibility of approving currency values and their changes, the Fund was charged with a less specific but broader, and more important, responsibility of exercising firm surveillance over members’ exchange rate policies. Firm surveillance was a new, crucial provision of the reformed system, and in order for it to become effective the Fund needed the continuous cooperation of its members, particularly the major industrial countries, in areas of national policy that had not hitherto been under compelling continuous scrutiny. To be effective, surveillance would have to apply not only to exchange rate policies, as such, but also to the broader national monetary and financial policies that were being pursued by national monetary authorities, whether they used the Fund’s resources or not. The major industrial countries had always sought to maintain their independence of the Fund under the Bretton Woods system, and even when they had altered the par values of their currencies they had notified the Fund of the change at the last minute, rather than following the impractical procedure of seeking its approval, thereby complying with the obligations of the Articles in form rather than in substance. It was unlikely, therefore, that an important advance in policy coordination could be developed suddenly, particularly in the light of the difficult economic circumstances of the 1980s.
Surveillance did, indeed, become gradually more sophisticated and effective over the ensuing decades, but, nonetheless, it proved to be a difficult area for the Fund and for the major industrial countries, which were loath to cede any of their sovereignty over economic policy to an international forum. The analysis conducted in the Fund, the probing of national economic policies, and the regular examination by the Fund of exchange rate movements and their underlying causes gradually gained weight and influence, particularly in the more restricted fora outside the Fund, such as in the economic summit meetings of the leaders of the Group of Seven industrial countries and other multinational fora. These meetings proved to be a more intimate forum in which the major powers could be open with each other. Since the Plaza Hotel meeting in New York in September 1985, the major industrial countries have sought, still with only partial success, to bring some measure of harmony to their national economic policies and to cooperate—sometimes with success—in exchange rate management.
In 1977, the Executive Board established three broad principles for the guidance of members’ exchange rate policies. These were: (1) a member should avoid manipulating exchange rates or the international monetary system in order to prevent balance of payments adjustment or to gain an unfair competitive advantage; (2) a member should intervene in the exchange markets to counter disorderly conditions; and (3) members should take into account in their intervention policies the interests of other members. The Board also established a number of other criteria that would be taken into account in judging the application of these principles, such as protracted large-scale intervention in one direction, an unsustainable level of borrowing for balance of payments purposes, the pursuit for balance of payments purposes of monetary and financial policies that provide abnormal encouragement or discouragement to capital flows, and the behavior of the exchange rate in a manner that would appear to be unrelated to the underlying economic and financial conditions.
The Fund’s surveillance procedures include analyzing the economic and financial conditions in member countries and focusing on the international issues that are of concern to all members. Regular consultations are held, normally each year, with each member country to assess the appropriateness of its domestic macroeconomic and structural policies and the impact of these policies on exchange rates. The Fund also conducts a multilateral surveillance procedure twice a year through the Executive Board, aimed at assessing the world economic outlook, the interaction of members’ economic policies, and the presentation of alternative policy options, together with related projections of various international scenarios. These reviews by the Executive Board are supplemented by periodic discussions on exchange rate developments and on the conditions of the financial markets in the major industrial countries. The Managing Director’s attendance at the meetings of the Group of Seven industrial countries brings to those meetings a broad and knowledgeable international perspective, based on the Fund’s surveillance procedures.
In the 1960s, a new and major problem began to emerge, that of international liquidity, a subject that had been discussed but not actively engaged at the Bretton Woods Conference of 1944. The dilemma was that as world trade and other international transactions expanded, and the potential magnitude of external imbalances increased, the need for international liquidity would rise. Unconditional liquidity (i.e., owned reserves) consisted of gold, reserve currencies (mainly U.S. dollars), and reserve positions in the Fund (the reserve tranche). Of these three components, only U.S. dollar reserves were capable of expansion, since both the world’s stock of monetary gold and reserve positions in the Fund were fixed, at least in the short and medium term. The continued growth of the U.S. dollar in international reserves itself involved a paradox. On the one hand, dollar holdings by foreign national monetary authorities could expand only if the United States continued to run a balance of payments deficit, thereby expanding claims by foreigners on the United States, and on its stock of gold. On the other hand, the viability of the U.S. dollar required that foreign national authorities (and private foreigners) continue to have confidence in it as a stable unit of value and in its convertibility into gold. These were two contradictory lines of development that, at some point in time, were bound to bring the system into crisis.
The discussions involved issues of whether the need was for better adjustment policies or increased international liquidity; whether the potential need should be met through increased conditional liquidity (such as drawings on the Fund) or through increased unconditional liquidity (i.e., owned reserves); whether a scheme for reserve creation should be confined to a group of industrial countries or be a universal one; and whether such a scheme should be linked to the needs of developing countries by establishing a mechanism for promoting the growth of development finance, the so-called link. An overriding issue was to what extent any new provisions should be mandated or be left to voluntary compliance. Many proposals were put forward, including special reserve balances in the Fund, multicurrency reserve schemes, various forms of a substitution account, and several schemes for the creation of reserve units. The debate ended in a compromise, with the establishment of the SDR facility in the Fund, brought into effect by the first amendment of the Articles of Agreement (1969).
The SDR facility and gold
The chief characteristics of the SDR facility were: (1) it was a universal scheme open to all members of the Fund, although participation in it was voluntary; (2) allocations and cancellations of SDRs would seek to meet long-term global needs as a supplement to existing reserve assets; (3) allocations and cancellations would be made to all participants in the facility as a percentage of each member’s quota; (4) SDRs would be created on the books of the fund, backed by an international agreement (the Fund’s Articles of Agreement); (5) use of the SDR would rest on two legal foundations: the obligation of the Fund to designate a transferee of SDRs if requested by a participant, and the obligation of the designated transferee to provide freely usable currency in exchange for SDRs; (6) SDRs would be for use through the Fund by national monetary authorities and a limited number of other official holders, and would not be available for use in private markets; (7) decisions on allocations and cancellations of SDRs would be made for basic periods of five years (although the Fund was authorized to vary the length of the period) and be subject to a cautionary procedure that subjected the final decision to an 85 percent majority vole of the Fund’s Board of Governors; and (8) the value of the SDR, originally defined in terms of gold, was to be determined by a basket of currencies.
The international community, eager to test its fledgling reserve-creating mechanism, authorized allocations of SDRs during the first basic period of three years (1970-72) amounting to SDR 9.3 billion. Thereafter, however, the new system of floating exchange rates and the availability of petrodollars for recycling purposes fundamentally changed the world’s liquidity position. No further allocations of SDRs were made until the third basic period (1978-81), when SDR 12.1 billion was allocated, partly, one can surmise, to be in accord with the second amendment to the Articles (1978), which called for the SDR to be the principal reserve asset of the international monetary system. The assumption then was presumably that a virtually nonexistent reserve asset could hardly be a principal asset, but even so, no further allocations have been made since 1981, and the total of SDRs in circulation has remained at SDR 21.4 billion.
In mid-1998, however, the Executive Board drew up a proposed amendment to the Articles of Agreement that would provide for a onetime allocation of SDRs. The amendment was aimed at correcting a perceived inequity, insofar as members that had joined the Fund since 1981 had not received any allocations of SDRs, and many that had joined before that year had received only partial allocations.
Despite the fact that measures have been taken to make the SDR more attractive (e.g., its valuation in terms of a basket of five currencies, its market related interest rate, and a broadening of its uses), the SDR has remained very far from being a principal reserve asset. Indeed, measured by the extent of its use, the SDR is declining sharply in relative importance. Whereas world transfers in currencies amount to many billions a day, total transfers of SDRs reached a record level of only SDR 27.4 billion in the year ended April 30, 1996, and have declined since then. Similarly, since the last allocation in 1981, SDRs have been a declining and insignificant proportion of international reserves, accounting in 1998 for about 1.2 percent of nongold reserves and, with gold valued at London market prices, about 1.5 percent of total reserves (seeChart 1).
Chart 1.International Reserves-All Countries
Nevertheless, from the early 1970s, international liquidity ceased to be a current widespread problem, although the increasing diversification and uncontrolled growth of reserve currency holdings, and the potential for switching from one reserve currency to another, remain potential concerns for the future. A more immediate concern in the 1990s, however, was that the integration of the world’s capital markets, although bringing undoubted long-term benefits, posed short-term problems in view of the volatile character of capital movements that moved in and out of immature and vulnerable private banking sectors in developing, and even some advanced, economies.
The second amendment to the Articles of Agreement eliminated gold from the operations of the Fund and required the Fund to sell 50 million ounces of its gold holdings. Accordingly, in the period from 1976 to 1980, the Fund sold (restituted) half of this amount (25 million ounces) to its members at the official price of SDR 35 an ounce and sold by auction a further 25 million ounces at prices several times higher than the official price of gold, placing the profits on these sales in a Trust Fund for the benefit of low-income countries.
One of the purposes of the Fund is to “give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards,” as stated in Article I of its charter. Before a member can use the Fund’s financial resources it must represent that it has a need to make the purchase “because of its balance of payments or its reserve position or developments in its reserves.” It is these conditions—the requirement of a balance of payments need, temporary use, and adequate safeguards—that have distinguished the Fund’s financial operations from its sister institution, the World Bank, facing it across the street in Washington, D.C. Whereas the World Bank primarily deals in long-term finance for development purposes, such as agricultural, irrigation, and transport projects or for sectoral development, and is concerned, among other matters, with the viability of the particular project being financed and the credit status of its loan recipients, the Fund provides short- to medium-term finance for general balance of payments support and is concerned primarily with a member’s macroeconomic policies (i.e., monetary and fiscal policies, and related structural improvements) and the ability of the member to repay the Fund within a specified time period. It should be noted, however, that the character of the Bank’s lending is also changing, with project financing accounting for a declining proportion of the total, while sectoral lending is increasing.
In the very early days of its operations, the Fund settled on a pragmatic and flexible set of policies and procedures, known as “conditionality,” which established the terms that would govern the use of the Fund’s financing.
First, members’ drawing (purchasing) privileges were divided into tranches, each amounting to 25 percent of a member’s quota. The first 25 percent of quota, known as the reserve tranche (formerly the gold tranche), could be drawn (purchased) without challenge. Requests for drawings in the second 25 percent of quota, known as the first credit tranche, could be made subject only to moderate conditionality. Use of a member’s second, third, and fourth credit tranches, known as the upper credit tranches, required substantial justification and agreement by the Fund on a sound corrective program. Second, it was determined that “temporary” use of resources should mean that repayments (repurchases) should be made in three to five years. Third, use of the Fund’s resources in the upper credit tranches would be made available under what was then a new instrument of international finance, the stand-by arrangement. With the introduction of the stand-by arrangement, which was normally for a period of one year (although members often entered into successive one-year arrangements), came two other precautionary measures—the quarterly phasing of members’ drawings under the arrangement and the setting of performance criteria to assess the progress of programs.
Conditionality in Fund-supported programs is based on the basic and incontrovertible proposition that a deficit in a country’s external payments, as long as it is not transitory or reversible, will have to be corrected eventually, whether or not there is policy action. The issues are whether the adjustments will be effected in good time, be carried out efficiently, and be successful in balancing a country’s external accounts without unnecessary disruption of national or international economic activity. The financing obtained from the Fund, along with the conditionality attached to it, enables the period of adjustment to be extended, allows the corrective measures to be less severe than they would otherwise be, and eases the pain of adjustment.
A balance of payments deficit normally springs from excessive aggregate demand and expenditure. The objective of an adjustment program is to keep the level and growth of aggregate demand in line with the level and the rate of growth of a country’s productive capacity. For this purpose, adjustment needs to concentrate on the fiscal balance—government revenues and expenditures—and on monetary policies that will subdue the expansion of bank credit and control monetary flows. In addition, adjustment programs may contain provisions for the implementation of appropriate price incentives, including the exchange rate, interest rates, and other prices, as well as policies on external debt management.
The character, range, severity, and efficacy of the conditionality required by the Fund have been much discussed for many years, both inside and outside the organization. The Fund’s guidelines on conditionality have evolved over four decades and are reviewed periodically by the Executive Board. They were last codified in 1979 and have been reviewed several times since then, but have undergone little change. One guideline to which developing countries attach importance is the directive that the Fund will pay “due regard to the domestic social and political objectives, the economic priorities, and the circumstances of members.” Another states that “performance criteria will normally be confined to (i) macroeconomic variables, and (ii) those necessary to implement specific provisions of the Articles or policies adopted under them,” In the past few years, the Fund has given greater attention to the impact that adjustment programs may have on the poor and on the environment.
From time to time, Fund conditionality has been criticized as being too harsh, too insensitive to social conditions, and heedless of programs of economic growth. In fact, Fund-supported adjustment programs have had mixed success, with failures coming mainly as the result of internal political will and exogenous and unforeseen factors. More rarely, the fault has lain with an ill-designed program. Certainly, the Fund must be assured that in accordance with its Articles, a Fund-supported program will consist of policies that will result in a sustained balance in a country’s external payments and provide the basis for further economic growth, but in the last analysis the elements of the program and the timing of their implementation must rest with the national authorities of the country in question.
Resources of the Fund
The resources of the Fund consist of its ordinary resources and its borrowed resources. Ordinary resources consist of gold, SDRs, and currencies of members’ paid to the Fund in accordance with their quota subscriptions, and the undistributed net income from the use of those resources. The value of these resources is maintained in terms of SDRs, the Fund’s unit of account.
A member’s quota establishes its basic relationship with the Fund. First, it determines a member’s voting power. Second, it determines a member’s maximum potential access to the Fund’s financial resources. Third, it determines a participant’s share in the allocation of SDRs. After the second amendment of the Articles (1978), gold was eliminated from the Fund’s operations, and that part of the quota subscription that used to be paid in gold (up to a maximum of 25 percent of quota) is now paid in SDRs or a usable currency, and this amount establishes the reserve tranche.
A quota is established in accordance with a member’s relative economic strength in the international community of nations. For this purpose, the original formula used at Bretton Woods (1944) included a range of basic economic variables, such as the value of annual average imports and exports, gold holdings and dollar balances, and national income. Since then, beginning in the early 1960s, that formula has been supplemented by four other formulas containing the same basic variables but with different weights. These five formulas were run with alternative sets of data, roughly measuring the same economic characteristics but using somewhat different concepts. The resulting 10 formulas were used, in the period up to 1980, to determine the initial quotas of new members and to adjust existing members’ quotas under the periodic general quota reviews. Subsequently, the number of formulas was reduced to five, but further changes were made to the weights and in the data. The proliferation of formulas and the conceptual changes made in the data suggest correctly that a member’s calculated quota is not a definitive determination of its final quota. In the last analysis, a member’s quota is determined by the Executive Board’s recommendation to the Board of Governors, guided by the use of formulas.
The Fund is required by its Articles of Agreement to conduct a general review of quotas at intervals of not more than five years, and the last such general review was completed in 1997, raising total quotas to SDR 212 billion ($288 billion). In view of the length of time that it can take for the Fund to increase its ordinary resources through a quota increase, whereas payments imbalances may appear suddenly and may be the result of temporary factors, such as occurred in the 1970s through the oil shocks, the Fund has resorted to borrowing to tide it over periods in which members have an enlarged need for its financing. From 1962, the Fund entered into the GAB with members of the Group of Ten for the purpose of having available access to borrowed funds in the event of a major disruption to the world balance of payments. These arrangements were enlarged in the 1980s and have been renewed through 2003.
In January 1997, the Executive Board further strengthened the Fund’s financial resources by approving new borrowing arrangements (NAB). Under these arrangements, 25 participating countries and institutions stand ready to lend the Fund additional resources when needed, on terms similar to the GAB, in a total amount of SDR 34 billion (about $47 billion). The NAB, which were still awaiting ratification by member countries at the end of 1998, do not replace the GAB, but they will be the facility of first recourse.
Other borrowing arrangements have been entered into over the years, such as those in 1974 and 1975 with the OPEC to finance the oil facilities (a total of SDR 5.7 billion); in 1979 for the supplementary financing facility (SDR 7.8 billion); and in 1981-84 for the EAP (SDR 18.3 billion).
The Fund also receives income from investments and from charges levied on its financing operations. From such income, the Fund covers its administrative budget and pays remuneration to members with creditor positions in the Fund. Net income is placed to the general and special reserve accounts.
Most of the Fund’s financing is provided on condition that corrective policy actions will be taken to bring about an appropriate adjustment to a member’s domestic economy, thus ensuring that the Fund will be repaid. However, the Fund also provides financing for members’ balance of payments difficulties that are transitory or reversible, where no corrective policies may be required. The first of such facilities established the compensatory financing facility, under which members could draw on the Fund to offset export shortfalls caused by factors largely beyond their control. Use of this facility is based on the assumption that the shortfall is temporary (such as a crop failure) and that export earnings will recover over the short- to medium-term. Drawings on the facility are not only subject to a low level of conditionality (such as merely an obligation to collaborate with the Fund), but the facility also floats, allowing members to draw on it independently of, and in addition to, drawings under the regular tranche policies.
The Fund also established a special facility to help members finance international buffer stocks and subsequently expanded the compensatory financing facility to include variations in expatriate workers’ remittances and cereal import costs, renaming the facility the compensatory and contingency financing facility (CCFF).
Enlarged use of the Fund’s resources
The decade of the 1970s experienced the oil price shocks, worldwide recession, and persistent high levels of inflation. The quadrupling of international oil prices led the Fund to establish in 1974, and again in 1975, the so-called oil facilities to help countries meet the higher cost of their oil imports. Drawings under the facilities, which were financed by borrowings from members of the OPEC, were repayable over seven years (an extension over the three to five years that had normally been in force up to then), carried light conditionality, and were additional to the availability of normal tranche drawing.
The reasoning behind the extended repayment terms was that whereas the balance of payments deficits were spread among nearly all developing countries, many with relatively large economies and sizable populations, the balance of payments surpluses were concentrated among a few oil-producing countries, mostly undeveloped economies with sparse populations. In these circumstances, it was clear that the oil- producing countries would not be able to absorb quickly their new wealth through increased imports, while attempts by non-oil-producing countries to correct their external imbalances would mainly impact each other, and thus run the risk of causing a further general contraction in international trade and world economic growth. Accordingly, the facility was designed to finance the deficits rather than to promote adjustment. Drawings under the facility did not affect the amount that members could purchase under the credit tranche policies.
Nevertheless, despite the evident rationale behind the Fund’s approach to the worldwide oil-price difficulties of the 1970s some critics have maintained that the failure of the developing countries to adjust to the new circumstances sowed the seeds for the debt problems of the 1980s. Certainly, the payments problems experienced by many member countries in the late 1970s and early 1980s called for a different approach from that adopted for the oil facilities. For one thing, the balance of payments for a number of countries had not only worsened, but had been superimposed on long-standing imbalances. For another, the causes of the imbalances had become deep-seated and of a structural character that would take longer to correct and require larger resources than those available under the Fund’s normal financing facilities.
To meet these new conditions, a new facility, providing for extended arrangements over a three-year period, was introduced in 1974 to focus on structural adjustments and provide members with access to the Fund’s Financing in amounts larger and with longer repayment terms than had hitherto been available under the Fund’s regular tranche policies. In 1979, the extended facility was complemented by the supplementary financing facility, again established with borrowed funds, to provide further enlarged access to the Fund’s financing, up to 300 percent of a member’s quota in exceptional cases.
Within two years, the resources of the supplementary facility were exhausted and the facility was replaced by the EAP, involving similar high levels of conditionality and access to Fund resources, and financed by another round of borrowing.
Facilities for low-income countries
The mounting difficulties of developing countries, particularly the low-income countries, during the 1970s and 1980s made these countries increasingly restive against what they considered to be the Fund’s traditional approach to balance of payments problems, contending that the adjustment policies and the extent and duration of the financing available from the Fund did not take into account the special character of their problems. In response to these needs, the Fund introduced financing programs specifically for low-income countries. As noted above, the Fund had been authorized to sell at auction 25 million ounces of its gold holdings, which yielded a profit (over the former official price of SDR 35 an ounce) of $4.6 billion. Of this amount, $1.3 billion was distributed directly to 104 developing countries in proportion to their quotas, and the remainder, after meeting expenses, was placed in a Trust Fund. The resources of the Trust Fund, established in May 1976, were to be used exclusively for the specific purpose of providing loans to poorer developing countries. The conditions governing use of the Fund’s ordinary resources did not apply to the Trust Fund, which made loans, as distinct from providing financing through purchasing operations. The loans were subject to very light conditionality, carried a highly concessional rate of interest of 0.5 percent per annum, and had a maturity of 10 years. The Trust Fund made its final disbursement in March 1981, when its business was terminated and the interest payments and loan repayments were transferred to the Special Disbursement Account (i.e., an account within the main body of the Fund). These interest payments and loan repayments that began to accumulate in the Special Disbursement Account (SDA) provided the resources for the establishment of another, similar facility, the SAF.
The SAF, established in 1986 to replicate the aims of the preceding Trust Fund, provided assistance on concessional terms to low-income member countries facing protracted balance of payments problems. Conditionality under the new facility was tightened and, in view of the modest resources available in the facility, it was hoped that its loans would act as a catalyst in encouraging the provision of additional resources to members from other international organizations and member countries. Programs supported by the loans were to be explicitly directed toward the elimination of structural imbalances and rigidities. Annual programs were to be put forward within the context of a three-year policy framework paper, prepared in collaboration with the staffs of the Fund and the World Bank, setting out the objectives, the priorities, and the broad thrust of macroeconomic and structural adjustment policies, and referencing the likely requirements and sources of the external financing envisaged under the program. Loan disbursements were made in three annual installments, bore an interest rate of 0.5 percent per annum, and were repayable in five-and-one-half years to 10 years.
To supplement the funds available under the SAF, the ESAF was established as a trust fund in the following year, to operate concurrently with the SAF. Finance for the ESAF was to be derived in part from the SDA and in part from contributions in the form of loans and grants from aid agencies of member countries. Members eligible to use the ESAF and the terms of its loan were similar to those of the SAF. In 1996, the Fund and the World Bank jointly initiated a new facility for heavily indebted poor countries (HIPCs) that, linked to the ESAF, was aimed at bringing a country’s debt burden down to sustainable levels through a combination of internal economic policy reforms and the renegotiation of external debts in an orderly and comprehensive program through the Paris Club and other multinational groupings.
The combination of the EAP and the establishment of the SAF and ESAF brought a dramatic rise in the use of the Fund’s resources by low-income countries. Total loans and credits outstanding from the Fund rose to over SDR 37 billion by the end of 1984 and climbed again in the 1990s to a record SDR 56 billion ($75.4 billion) on April 30, 1998, reflecting in large part the extraordinary drawings made as a result of the Asian crisis (seeChart 2). By December 31, 1998, the Fund had programs in effect with 62 countries, and the total amount approved under its various facilities had reached $83.2 billion.
Chart 2.Outstanding Credits and Loans, April 30, 1998
The debt crisis
In August 1982, at the Fund-World Bank annual meetings in Toronto, Mexico announced it was unable to service its debts, thereby initiating a debt crisis that would persist for the next decade or so. The origins of the debt crisis sparked by the deep world recession of 1982-83 lay in the two oil shocks of the 1970s, the resurgence of inflation toward the end of the decade, the easy availability of credit from the commercial banks at low or even negative rates of real interest that had persisted since the early 1970s, and the failure of many developing countries to adjust to evolving economic conditions. By 1982, the aggregate debt of non-oil-developing countries amounted to about $600 billion, of which about half was from commercial sources and one-fifth was of a short-term character.
In response to the Mexican announcement, the Fund took the initiative and drew up an adjustment program in conjunction with the Mexican government that embraced spending and pricing policies, investment priorities, monetary policy, and flexible exchange rates over a three-year period, and approved SDR 3.6 billion of its resources in support of the program. Even with the Fund’s financial support, however, there was still a financing gap of about $7 billion, of which about $2 billion was to be sought from official institutions and the remainder from the commercial banks. The Managing Director took the initiative and instead of waiting for other potential creditors to come forward in their own time after the Fund had committed its resources, he insisted that they reach agreement on rescheduling existing loans, adjusting interest rates, and extending new loans to fill the financing gap before the Fund itself committed resources. In the end, financing of $5 billion was arranged with as many as 530 commercial banks. The Fund’s response to the Mexican crisis was to set the pattern for a number of similar “rescue” operations, such as for Argentina, Brazil, and the Philippines, in the years to follow.
The Fund, however, was beginning to feel the effects of the debt crisis on its own operations. More and more developing countries ran into debt-servicing difficulties and began to default on their obligations to the Fund. From 1985 onward, a growing number of members that had overdue obligations to the Fund of six months or more were declared ineligible to use the Fund’s resources. Ineligibility is the initial step in a procedure in which the Fund endeavors to enlist the member in a cooperative program, without further Fund financing, aimed at restoring the member to good standing. In the event that the member is judged not to be cooperating with the Fund, and not paying off, or even freezing, its arrears, a series of further steps can eventually lead to the compulsory withdrawal of the member from the organization. On April 30, 1992, overdue obligations had risen to a peak of SDR 3.5 billion, and eight members remained ineligible to use the Fund’s resources. By April 30, 1998, however, total overdue obligations had fallen to SDR 2.3 billion, and the number of members that were ineligible to use the Fund’s resources had declined to four.
In dealing with the problem of overdue obligations, the Fund adopted a three-prong strategy—prevention, deterrence, and intensified collaboration. Prevention consisted of designing adjustment programs that would analyze and take special account of risks attached to the program, thereby ensuring that any member using the Fund’s resources would be able to meet its obligation to the Fund. Deterrence comprised a procedure that would lead, successively, to a declaration of ineligibility, a declaration of noncooperation, suspension of the member’s voting rights and representation in the Fund, and, ultimately, the member’s compulsory withdrawal from the Fund. In a related move, the Fund proposed a third amendment to its Articles of Agreement, which became effective in November 1992, under which the Executive Board could, by a 70 percent voting majority, suspend the voting and related rights of those members in arrears in their repayments to the Fund. The third aspect gave ineligible members an opportunity to implement, in conjunction with consultants or major creditors, a Fund-monitored “shadow” program, allowing a member to accumulate “rights” to future drawings on the Fund under a successor program, once the member had paid off its arrears. The Fund also adopted guidelines providing for a proportion of the resources committed under a stand-by or extended arrangement to be set aside to finance operations involving a reduction in the stock of debt (through buybacks, debt conversion, and other debt-reducing mechanisms), as well as providing for additional access to its resources to be made available to a member to facilitate debt and debt-service reduction and to catalyze other financial resources. Of the 11 members eligible to participate in the “rights” program since its establishment in 1990, eight had cleared their arrears with the Fund by April 30, 1998, and had remained current.
To place its financing on a sound footing, the Fund also adopted a burden-sharing strategy, setting up two special contingency accounts, one to cover outstanding overdue charges and repurchases, and the other to safeguard purchases made by members under a successor arrangement after a “rights” accumulation program has been successfully completed. The reserve accounts were funded in accordance with a burden-sharing formula, which increased the charges on the use of the Fund’s resources and reduced the rate of remuneration on creditor positions in the Fund.
The Fund has provided its members, and particularly developing member countries, with a growing array of training and technical assistance, in accordance with the provisions of Article V, Section 2(b) of its Articles of Agreement. Indeed, in recent years the needs of many new developing member countries and of new members in Eastern Europe and the former Soviet Union have required a major expansion in the Fund’s technical assistance and training services. The IMF Institute, founded in 1964, provides courses in macroeconomics, fiscal affairs, statistics, and balance of payments at the Fund’s headquarters in Washington, D.C., for officials of member countries. The Institute also provides lecturers for overseas seminars and courses related to the work of the Fund. Several other technical assistance programs have increased their reach in recent years. The Fiscal Affairs Department specializes in taxation, theory and practice; the Monetary and Exchange Affairs Department focuses on central banking, commercial bank supervision, and other aspects dealing with instruments of monetary policy; and the Statistics Department assists in the establishment of statistical bulletins and the compilation of data over a wide range of economic and financial activity. Technical assistance is provided in a variety of forms, through technical assistance missions, resident advisors, or secondment of outside experts to key positions in institutions of member countries.
Beginning at the end of the 1980s, membership of the former communist countries in Eastern Europe and the Soviet Union, with their desperate need to reshape their economic systems, added a new dimension and urgency to the provision of Fund technical assistance. In addition to expanding its training in Washington, D.C., the Fund opened, in conjunction with five other international organizations, an institute in Vienna to present courses in macroeconomics and statistics to officials of the former Soviet Union and countries in Eastern Europe. In May 1998, the Fund inaugurated the IMF-Singapore Regional Training Institute, which was established in cooperation with the Singapore authorities to hold seminars and training courses for officials in the Asia and Pacific areas.
The Fund issues a variety of periodicals dealing with the work of the Fund and related matters. These include the World Economic Outlook and related studies (twice a year); International Capital Markets: Developments, Prospects, and Policy Issues; the IMF Survey (twice a month); Finance & Development (quarterly); International Financial Statistics (monthly); Staff Papers and the Direction of Trade (both quarterly); Government Financial Statistics and the Balance of Payments Yearbook, as well as the Annual Report of the Executive Board, the Annual Report on Exchange Restrictions and Exchange Arrangements, and Summary Proceedings of the Annual Meetings (all annuals). In addition, the Fund has an extensive publishing program, which includes pamphlets, Occasional Papers, working papers, books, country reports, as well as videos and press material (see the bibliography).
Representatives from 45 countries attended the International Monetary and Financial Conference of the United and Associated Nations at Bretton Woods in July 1944, and the Fund came into existence when 29 of those countries had completed ratification of the agreement and their representatives had attended a formal signing ceremony on December 27, 1945. All the other members, except one, that had attended the Bretton Woods Conference joined the Fund in the following years, although New Zealand did not do so until 1961 and Liberia not until 1962. The U.S.S.R., the one exception, had been an active participant at the conference and had been given a quota of $1.2 billion (then the third largest quota in the Fund, after the United States and the United Kingdom), but it did not take up the ratification procedure. It was not until the communist system collapsed and the Soviet Union broke up into 15 sovereign countries that all of its former members joined the Fund, completing the relevant membership procedures in the period from June 1992 to April 1993.
Three founding members withdrew from the Fund: Poland in 1950, alleging that the Fund had failed to fulfill the expectations of its founders; Czechoslovakia in 1955, in a dispute as to whether it was required to provide data to the Fund; and Cuba in 1964, after protracted negotiations on overdue payments to the Fund. Both Poland and Czechoslovakia rejoined in 1986 and 1990, respectively. Germany and Japan joined the Fund in 1952; mainland China’s request for the ouster of the Chinese National Government was rejected in 1950, but accepted 30 years later. Switzerland, after maintaining a long association with the Fund as a nonmember, became a member in 1992. By April 30, 1998, membership in the Fund had climbed to 182 members, and only Cuba, North Korea, and a few scattered ministates remained outside the Fund.
Structure of the Fund
The highest authority of the Fund is the Board of Governors, which consists of a Governor and an Alternate appointed by each member country. The Governors are usually ministers of finance, central bank governors, or officials of comparable rank. Under the Articles of Agreement, the Board of Governors has a number of specific powers, as well as all powers under the Articles not expressly conferred on the Executive Board or the Managing Director. The specific powers, which cover such matters as the admission of new members, the determination of quotas, and the allocation of SDRs, can be exercised only by the Board of Governors. All other powers can be, and have been, delegated by the Board of Governors to the Executive Board.
The Executive Board consists of 24 Executive Directors, in addition to the Managing Director, who is Chairman. Each Executive Director appoints an Alternate, who can participate in meetings but can vote only when the Executive Director is absent. Members having the five largest quotas in the Fund (the United States, Germany, Japan, France, and the United Kingdom) each appoint one member to serve until his or her successor is appointed. Of the remaining Executive Directors, 18 are elected for two-year terms, in elections that take place every even-numbered year at the time of the Annual Meetings. One (Saudi Arabia) is appointed under a provision in the Articles stipulating that if the members with the five largest quotas do not include the two members whose currencies have been most used in outstanding transactions of the Fund in the preceding two years, one or both of these members, as the case may be, can appoint a Director.
Of the 18 elected Directors, three countries (China, Russia, and Switzerland) have each chosen to elect their own Director, and have large enough quotas and sufficient votes to do so. The remaining 15 Directors are elected by groups of countries, with some Directors having over 20 countries in their constituencies. In order to cope with the business of so many countries, it has become the practice for an Executive Director representing a large constituency to appoint one or more Advisors to help in the day-to-day business and to take a seat at Executive Board meetings when the Executive Director and the Alternate are both absent.
The size and composition of the Executive Board have changed radically since the Board was first formed in 1946. Originally, it consisted of 12 members, but as the Fund’s membership increased, so too was the Board enlarged, although not proportionately to the growth in membership. Thus, whereas the 45 countries participating in the Bretton Woods Conference in 1944 were to be represented by 12 Executive Directors, by 1998 the number of members had quadrupled, but the number of Executive Directors had only doubled, to 24. There have also been important changes in the rankings of the five members with the largest quotas; Germany replaced China (Taiwan) in 1960 and Japan took the place of India in 1972. Within the group of members having the five largest quotas, Germany and Japan with equal quotas have moved up to second and third places, while France and the United Kingdom, also with equal quotas, have moved into fourth and fifth places.
The personalities on the Board have also undergone a marked change. At the Bretton Woods Conference, Lord Keynes and several other delegates had argued for an Executive Board composed of high-level officials who would meet only periodically to settle substantive policy matters. Although that proposal was overruled in favor of having the Board in “continuous session,” in the early years a number of the Directors were high-level officials and did not stay in Washington, D.C., to attend all Board meetings. Inevitably, the evangelical spirit and determination of the pioneers to make the organization a success have faded over the years. Executive Directors tend to be younger, from less senior positions in their home governments, and Board meetings have become more frequent, longer, and more demanding in time and effort.
The trend to less senior representation has, in part, been encouraged by the introduction of the Interim Committee, which succeeded the Committee of Twenty and, since 1976, has met at least twice a year to discuss and advise on major policy issues. The structure of the Interim Committee replicates that of the Executive Board, but its members are ministers of finance, central bank governors, or officials of comparable rank. Its terms of reference are (i) to supervise the management and adaptation of the international monetary system, including the operation of the adjustment process; (ii) to consider proposals by the Executive Board to amend the Articles of Agreement; and (iii) to deal with sudden disturbances that pose a threat to the international monetary system. The Committee is an advisory body and does not possess the authority to take decisions. It was called Interim because the second amendment to the Articles of Agreement provided for the establishment of a Council, as an organ of the Fund, that would have decision-making power. The Council, to be structured along the same lines as the Interim Committee, would require an 85 percent majority vote by the Board of Governors for it to come into existence. So far, there have been no signs that such a Council would be established in the near future, although the Managing Director at the time of the Fund-Bank Annual Meetings in 1998 suggested that it was time for the Council to come into existence.
Along with the Interim Committee, the Development Committee was also established, a joint committee made up of Governors of the World Bank, Governors of the Fund, ministers, or others of comparable rank. The Committee was set up to continue the work of the Committee of Twenty to study the question of, and to make recommendations on, the transfer of real resources to developing countries. The Interim Committee and the Development Committee normally meet twice a year (in May and September) and in the same place, with sessions of the Interim Committee being followed by those of the Development Committee, or vice versa.
The Articles of Agreement specify that the principal office of the Fund shall be located in the territory of the member having the largest quota. Accordingly, the headquarters of the Fund is located in the United States, in Washington, D.C., where its staff is stationed, apart from three small liaison offices outside the United States, one in Paris, another in Geneva, and a third in Tokyo. The organization consists of six area departments, seven functional and special services departments, and three departments, two bureaus, and four offices providing support and information services (seeChart 3).
Chart 3.Organization of the Fund
The Managing Director, selected by the Executive Board, is Chairman of the Board and chief of the operating staff. The Articles of Agreement specify that he or she shall not be a Governor or Executive Director. In June 1994, the number of Deputy Managing Directors was increased from one to three, the first major structural change in management since the Fund’s inception. The Managing Director and the staff owe their duty entirely to the Fund, and to no other authority. Unlike the United Nations, the Fund is not bound by a national quota system for recruiting staff members. The Fund’s Articles of Agreement states that “In appointing staff the Managing Director shall, subject to the paramount importance of securing the highest standards of efficiency and of technical competence, pay due regard to the importance of recruiting personnel on as wide a geographical basis as possible.” This language has enabled the Fund, in recruiting staff, to avoid purely political nominations from member countries.
On April 30, 1998, the number of full-time staff totaled 2,181, recruited from 122 countries. On that date there were also 480 “other authorized staff,” consisting of experts, consultants, and other nonregular resources.
The Fund has a system of weighted voting power. Each member has a basic allotment of 250 votes and, in addition, has one vote for each portion of its quota equivalent to SDR 100,000. This formula has not changed over the years (except SDRs have replaced U.S. dollars). Consequently, in 1944, at the Bretton Woods Conference, basic votes of the 44 prospective members amounted to 11.3 percent of total votes, whereas in 1998 the basic votes for the 182 members accounted for just over 2 percent of total votes. As quotas are based on a number of economic variables, the relative size of a member’s quota can be adjusted over time, reflecting changes in its economic position among members. Moreover, as the Fund’s overall membership has grown, each individual member has suffered a corresponding reduction in its proportionate voting strength.
Thus, when the eleventh general review of quotas has been completed and becomes effective, the U.S. voting strength (the largest in the Fund) will fall from 29.6 percent of the total under the 1944 Bretton Woods schedule to 17.5 percent, the United Kingdom from 14.25 percent to 5.1 percent, the Netherlands from 3.2 percent to 2.4 percent, and Panama from 0.27 percent to 0.097 percent. Major policy decisions taken by the Board of Governors, such as approval of a quota increase, provisions for general exchange arrangements, or establishment of the Council, require a high majority vote of 85 percent of the total. The United States alone, or the members of the European Union or the developing countries when voting together, can veto proposals subject to a high majority. The high majority requirement applies to 22 types of decisions, but they pertain to important structural and operational aspects of the Fund that rarely come up for decision. In addition to these issues, another 21 types of decisions require a voting majority of 70 percent. All other decisions, and these are by far the majority of those taken, require only a simple majority vote.
The Board of Governors meets once a year at the annual meeting, but apart from the votes that may be taken on those occasions, all votes are normally conducted by mail. The Executive Board rarely votes, but tries to reach a decision by a sense of the meeting. A consensus decision, however, usually reflects the voting power of Executive Directors for or against a proposed decision.
In retrospect, the last two decades of the twentieth century will be seen as a period of tremendous economic change and progress toward a truly international economy. It encompassed a revolution in the means of communication, the breakdown of major barriers to trade, the integration of capital markets and the flow of capital across borders on an unprecedented scale, and the emergence of developing countries in a new world economic order. The gains everywhere were impressive; the integration of Europe, the incorporation into the world economy of the former communist countries, the transformation of the “tiger economies” of Asia, the reinvigoration of economic growth in Latin America, the startling economic progress made by China, and even by India, and, finally, the emerging signs in Africa that many countries in that continent were on the threshold of belatedly setting out on the path to sustained economic development.
Problems, of course, abounded—famine, civil wars, ethnic violence, political dissension, and corruption in governments, all developments that were mostly beyond the control of the international financial institutions, such as the Fund, the World Bank, and other regional and multinational organizations. Other problems, however, that were well within their scope were only addressed half-heartedly, not the least of these being the relatively small amount of resources required to lift the tremendous weight of debt borne by the poorer developing countries, while in other parts of the world the almost reckless and uncurbed pursuit of short-term profits by investment firms, banks, and brokerage houses led eventually to the squandering of billions of dollars in wasted enterprises.
The warning signs emerged first with the economic and financial crises that overwhelmed Mexico in 1982 and 1994. Subsequently, the Fund attempted to apply the lessons of these experiences. It intensified its surveillance over members’ economic and financial policies, established standards for the timely and accurate dissemination of economic data, urged a strengthening of members’ financial and banking sectors, advocated greater transparency in government potentially strengthened its own resources by authorizing a substantial increase in members’ quotas and entering into new borrowing arrangements, and introduced changes in its lending policies to enable it to meet sudden demands on its resources.
These measures, however, proved to be too late in their effect to head off the profound crises that began in Thailand in June 1997 and that, by the end of 1998, had spread to half the world economy. At that point, no matter that the economic fundamentals did not justify the almost universal loss of investors’ confidence, capital movements into the new industrial economies and emerging developing countries were brought almost to a standstill, and the very stability of the international monetary system was under threat.
In tackling the Asian crisis, the Fund first concentrated on restoring confidence to the economies under stress by putting together for the three countries initially most affected by the economic crisis—Indonesia, Korea, and Thailand—a financing package from the international financial community amounting to total commitments of $117.7 billion and at the same time devised economic reform programs for these countries that concentrated on the strengthening of the structure of their economies. Indonesia proved to be the weak link in these operations, and from Indonesia the contagion spread to the Philippines, Hong Kong SAR, and Malaysia, and then to Latin America and Russia. For Russia, the Fund raised a massive financial assistance package, requiring activation of the GAB, only to have the reform program agreed upon with the authorities destroyed by internal political developments. At the end of 1998, the immediate challenge for the Fund was to strengthen its financial resources through the implementation of its quota increase, which after being stalled in the U.S. Congress for almost a year was finally enacted by the United States and other member countries following the 1998 Annual Meetings. Similarly, the NAB, which were approved by the Executive Board in January 1997, were also receiving approval from members. Beyond that, it was recognized by the Fund and by the leading industrial countries that there was an urgent need for the architecture of the international monetary system to be further strengthened.
Proposals broadly embraced by the Interim Committee at its meeting in April 1998 included the following: (1) Strengthening of the international and domestic financial systems through sound and stable macroeconomic policies; (2) Development of a supervisory and regulatory framework for bank and nonbank financial institutions, the strengthening of Fund surveillance, with a focus on financial sector issues and capital flows through new forms of collaboration, supported by a “tiered” response to countries that are seriously off course in their policies; (3) Establishment of greater availability and transparency of economic data and policies, including continued progress in the implementation of the Special and General Data Dissemination initiatives, further openness by the Fund in its policy recommendations, and the release by members of Public Information Notices on the conclusion of their Article IV consultations with the Fund; (4) Affirmation of the central role that the Fund plays in crisis management, particularly its role in catalyzing financial support from the international financial community and assembling adequate resources of its own through the quota increase approved by the Board of Governors in January 1998 and the NAB; (5) Development of more effective procedures to involve the private sector in forestalling and resolving financial crises.
The Committee stressed that in times of crisis it was important that all creditors, including short-term creditors, more fully bear the consequences of their actions. The private sector should be involved at an early stage in a crisis so as to achieve an equitable sharing of the burden and limit moral hazard (the so-called “bailing-in” provisions). It said excessive reliance on short-term credit should be discouraged, and that investors should be encouraged to make better use of the economic and financial information available so as to improve risk analysis. The Committee recommended that the Fund examine a number of measures that would provide for closer contacts with creditors, including the possibility of introducing provisions in bond contracts for bondholders to be represented, in case of nonpayment, in negotiations on bond contract restructuring. It was in favor of extending the Fund’s policy of providing financing to members in arrears on their debt payments to some private creditors under appropriate safeguards. It urged the adoption of strong bankruptcy systems. And it advised members to exercise caution with respect to public guarantees in order to reduce the risk of a private debt problem turning into a sovereign debt problem.
Turning to the role of capital movements, the Committee stated that the effects of the crisis in Asia had not negated the contribution that capital movements had made to economic progress in the region. “Rather, the crisis has underscored the importance of orderly and properly sequenced liberalization of capital movements, the need for appropriate macroeconomic and exchange rate policies, the critical role of sound financial sectors, and effective prudential and supervisory systems.” The Committee reiterated its earlier view that it was now time to add a new chapter to the Bretton Woods Agreement by making the liberalization of capital movements one of the purposes of the Fund and extending, as needed, the Fund’s jurisdiction for this purpose.
However, these measured proposals, put forward by the Interim Committee at a time when the crisis was deepening and spreading, did not subdue the increasing criticism of the Fund’s policies, and in the subsequent weeks an array of new proposals from all points of the spectrum were put forward by politicians, academicians, and private financiers covering a wide range of policy and institutional changes. These included proposals to abolish the Fund and rely on free-market forces, the creation of a new institution to provide insurance for international capital movements, and a U.S. government proposal to establish a new facility within the IMF that could be drawn on promptly by members to head off potential crises that may strike fundamentally healthy emerging economies impacted by a sudden and unjustified lack of confidence by investors.
Neither did the 1998 Annual Meetings of the International Monetary Fund and the World Bank, held in Washington, D.C., in October at a critical moment in the spreading crisis, lack proposals and criticisms. “Managed development,” the too close a link among banks, corporations, and the state, was identified as a major weakness in many countries. But by the end of the meetings, it was generally conceded that there would be no quick fix for the crisis. One suggestion was to convert the ministerial-level Interim Committee into a Council, with formal decision-making powers, thereby enabling ministers and Governors to have a direct involvement in strategic decisions. The consensus of the meeting, however, focused on the broader and more fundamental reforms encompassed in the five lines of approach advocated by the Interim Committee—transparency, sound financial systems, involvement of the private sector, orderly liberalization, and internationally accepted standards and codes of good practice.
On these matters, the three working groups of the Group of Twenty-Two had already submitted reports to the Fund and other international institutions outlining how they could see the system evolve. In his closing remarks to the meeting, Michel Camdessus, the Fund’s Managing Director, acknowledged that there had been a systemic failure and that it would take some time to accomplish all that needed to be done.