Chapter

CHAPTER 11 The Consultations Process

Author(s):
International Monetary Fund
Published Date:
February 1996
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Author(s)
Margaret G. de Vries

The five years specified by Article XIV as the period after which the Fund was to consult annually with members on exchange restrictions came to an end on March 1, 1952. The staff and the Executive Board spent some months prior to that date working out how to conduct the consultations. At that time, the climate for the initiation and acceptance of effective consultations was anything but propitious. Hence, although consultations commenced on schedule, many issues concerning their pattern and content remained to be resolved, and the initial procedures were viewed as experimental. In the course of the next few years discussions in the Board, especially during the annual reviews of the procedures for the consultations, focused on these issues. The basic procedures were, with some adaptations, retained. By 1955 the process was working smoothly.

In subsequent years few changes have been made in the procedures, but over time the scope of the consultations has been very much broadened and they have come to serve a growing number of purposes and to involve the effective international scrutiny of members’ policies. Significantly, both the Fund and its members decided in 1960 to institute similar annual consultations for members accepting the obligations of Article VIII, although such consultations are not required by the Articles.

Toward the end of 1965 the Fund re-examined its consultations procedures. A few minor alterations were made, but essentially the process was retained unchanged.

A CAUTIOUS BEGINNING

An uneasy environment

In 1952 the Fund’s reputation and its relations with many of its members were at a low ebb. The Fund had not yet developed close and frequent contacts with the senior officials of the member governments. While some contacts had been made with the less developed countries, these were not on a regular basis, and some of them had been characterized by friction. In particular, a few less developed countries resented the greater attention being paid to their restrictions than to those of the major powers. Furthermore, the use of the Fund’s resources had been minimized by, among other things, the decision of the Fund in April 1948 to limit the use of its resources by European recipients of Marshall Plan Aid (see Chapter 18).

Other elements contributing to disquietude among Fund members with the onset of consultations were uncertainty about the policies on restrictions that the Fund might evolve, and disagreement over the Fund’s authority in this field. Little if any progress had been made since 1945 toward the achievement of the objectives of currency convertibility and the elimination of exchange restrictions, and a number of members feared a push by the Fund for a more rapid relaxation of restrictions.

Disagreements in the Board in 1950 on the occasion of the Fund’s participation in the Torquay Session of the GATT had already foreshadowed the kind of struggle that could arise. Anticipating that the Fund’s own consultations were to commence in 1952 and were likely to take place with practically all of the Fund’s members, several Executive Directors sought to create precedents that would circumscribe the Fund’s activities vis-à-vis restrictions. It was argued that the Fund’s advice to the GATT could not be based on current economic conditions; rather, it should be limited to an appraisal of the circumstances at the time that the member imposed the restrictions. In other words, the Fund was merely to determine whether the initial restrictions had been justified and not to appraise whether such restrictions were currently necessary. Some Directors also contended that the Fund’s reports to the GATT should be limited to the facts of the situation, and that the Fund should not draw from these facts any conclusions about the need for restrictions. The very participation of the Fund in these GATT consultations was challenged by Australia, which went so far as to refuse to allow the GATT secretariat to send to the Fund certain documents necessary to the Fund’s preparations for the consultations.

The reports that the staff had prepared added to the difficulties among the Executive Directors. The staff had found that while further relaxation of dollar imports by Chile, India, and Pakistan did not then seem practicable, it would be feasible for Australia, Ceylon, New Zealand, Southern Rhodesia, and the United Kingdom to begin a progressive relaxation of their restrictions on imports from “hard” currency areas, although it was recommended that this should be undertaken with due caution.1 It became necessary to vote formally on the decisions before the Board, and in two series of votes the Directors decided that the Fund should both analyze current conditions and put forward conclusions.

Instituting procedures

Against this background, the Fund’s consultations were started in an experimental way. Certain procedures were proposed by the staff and accepted by the Board in January 1952 as a way to get going. Later these same procedures continued to be the crux of the Fund’s consultations process, but only after several troublesome issues had been ironed out. The decisions taken in January 1952 were as follows:

First, the consultations should begin on time, that is, on March 1, 1952, and not, for any reason, be delayed.

Second, the staff should hold discussions with representatives of the members concerned and then prepare recommendations for consideration by the Board.

Third, consultations should be far-reaching. They should cover not only the detailed characteristics of the restrictive system, but the factors necessitating the retention of restrictions as well. And “for appropriate situations” the consultations were to go further. They could include consideration of the ways and means of eliminating or adapting restrictions, the feasibility of substituting alternative measures, and possible technical and financial assistance from the Fund.

That these proposals, with their broad terms of reference, were accepted by the Board was most auspicious for the future development of consultations. But agreement was not reached without anxieties being expressed.

One Executive Director suggested postponing the consultations altogether, on the ground that the requirement for consultations might have been the result of a miscalculation at Bretton Woods of the postwar conditions of the world, which were far different from what had been envisaged at that time. This point was not, however, seriously debated, as the Board as a whole agreed that the consultations were clearly required under Article XIV. Another suggestion was that the procedure should explicitly recognize that the initiative for a consultation had to come from the member rather than from the Fund: some Directors were eager that the Fund should not give the impression that it was exercising the initiative. Had this approach been accepted, members might have avoided consulting the Fund. However, as discussed below, the question of initiative was among those resolved most readily.

Several Directors also expressed a caveat about the Fund’s power to communicate its views after a consultation had taken place. They pointed to the terms of Article XIV, Section 4: before the Fund could make formal “representations” to a member about removing restrictions, there would have to be a finding by the Board that “exceptional circumstances” existed. These remarks on “representations” disclosed the fears of a number of countries that the Fund might make representations to many members, in order to end the transitional period. Without coming to any agreement as to their form or content, the Executive Directors tentatively agreed that some conclusions could probably be reached that would be “appropriately notified to the members.”

RESOLVING THE ISSUES

Desirous as some Directors had been that vexing issues should be settled in advance, this did not prove possible. Various troublesome questions kept coming up during the next three to four years as the Fund consulted with individual countries, and to a greater extent as annual reviews of consultation procedures took place in the Board. How and by whom—the member or the Fund—should the consultation be initiated? Are annual consultations necessary and worthwhile, or should they be held less frequently? What should be the form and content of the Fund’s conclusions for each country’s consultation? If the Fund does not make representations, is the Fund in effect giving “approval” to the retention of restrictions? What particular restrictions can the Fund ask members to consult about? Precisely which restrictions does the Fund have authority to “approve”? To what extent can the Fund, in the process of consulting about exchange restrictions, probe into—and comment on—the domestic policies of its members?

Recurrent discussion, widening experience, and improving Fund-member relations were gradually to settle these questions, or at least to make them quiescent.

Who should initiate the consultation?

A formula was quickly found to answer the question whether the Fund or the member should take the initiative in setting up the consultation each year. It was readily recognized that consultations had to be a two-way action, involving cooperation between the Fund and the member, and that practical procedures were of greater importance than the formal rights of initiative.

Nowadays the Fund starts the process by sending letters each year to members announcing the beginning of another round of consultations. But in these letters the Fund recognizes the members’ right to initiate them. Simultaneously, the Fund proposes to individual members through their Executive Directors, or after conferring with them, a specific date for the consultations. Over the years, a convenient time of the year has come to be settled upon for most members, governed by such considerations as when the budget is prepared, when legislative sessions are held, and the season of the year. But the date has often been put forward or postponed because of special factors, such as changes in members’ governments (due, e.g., to elections), variations in members’ attitudes toward the Fund and its usefulness, and sudden crises in a member’s balance of payments situation giving rise to a need for the member to use the Fund’s resources. Proposals for an alteration in the consultation date have usually been made by the member. Sometimes changes in a member’s situation have prevented a consultation being held at all for that year.

How frequently should consultations be held?

Closely related to the foregoing was the question of how frequently consultations should be held. Were annual consultations useful? In the early years, some Executive Directors expressed the view that the consultations could not be expected to achieve any results until there was a change in basic economic conditions, that is, until the problems created by World War II had been overcome. They reiterated that so long as key currencies, especially sterling, remained inconvertible, there was little hope for the elimination of restrictions. Why then was it necessary to have elaborate machinery for annual consultations with the Fund, especially if no changes had taken place in a member’s restrictive system since the previous year’s consultation? Had not experience shown that the Fund could hardly expect to have a profound consultation with every member more than once every two years? Implicit in these queries was the assumption that the Fund could not help to overcome the fundamental difficulties restricting international commerce.

On the other hand, even in those early years, some Executive Directors—especially the U.S. Director—took exception to the idea that annual consultations were not profitable. These Directors did not wish to limit the frequency of consultations. In their view, if the Fund did not take a rather intensive look at the situation in each member country about once a year through the consultations, some other way would have to be devised to keep up with the developments in each country.

Because of the expressed skepticism about the usefulness of the consultations, and even more because of the considerable work and expense involved for both Fund and members, the staff and management made several suggestions in 1953 and 1954 for simplifying the procedures. Consultations would be advanced, wherever possible, by a preliminary exchange of correspondence—or, in some instances, conducted entirely by correspondence—and the number of formal discussions would be reduced. However, 1954 was also the year when several Directors, during consideration of the Fund’s annual budget, suggested that, while expenditures should be limited, more travel by senior staff to member countries should be allowed for. These conflicting views could not easily be reconciled.

Shortly thereafter, however, annual consultations began to be more generally accepted, with due regard to timing problems. It was evident that the regularity of the consultations was not only helping to keep the Board informed of developments, but was also enabling the Fund to avoid any air of crisis in arranging staff contacts with the authorities of its members. The Fund had become much more able than before to act quickly on exchange reforms, drawings, and stand-by arrangements; the consultations had, in fact, frequently led directly to action by the Fund on these matters.

Should the Fund “approve” restrictions?

Despite the initial concern of some members that the Board might make formal representations under Article XIV, Section 4, the Directors did not in fact do so. The closest they came to making representations was in the decision taken on the first consultation, with Belgium-Luxembourg in August 1952. In this decision, the Board expressed the opinion that the strong balance of payments and reserve position of Belgium-Luxembourg made relaxation of restrictions feasible. Accordingly, it requested Belgium-Luxembourg to reconsider the necessity for the level of restrictions maintained on dollar imports.

This decision had been reached by vote after extensive discussion, during which some Directors urged that the decision was tantamount to a representation and, more important, a dangerous precedent. This was the only time in the period covered by this history that a formal vote was taken on a decision after a consultation, although there have been a number of abstentions from decisions. After 1952 the question of making representations did not come up again.

Nonetheless, once it was clear that no representations were to be made, the related questions emerged: Would the Fund then “approve” a member’s restrictions, in whole or in part? If so, what language should be used? This problem of approval first came up during the Board’s discussion of the draft decision on the first consultation with Denmark, the seventh to be considered by the Board in 1952. The staff had recommended that the Fund “agree” to the temporary retention of Denmark’s transitional arrangements and that, if Denmark introduced new restrictions on payments or substantially adapted existing ones, the changes should be made in consultation with the Fund. A number of Directors, especially the Europeans, had difficulties over the implication of this recommendation. Did “agree” mean that the Board was authorizing the continuance of restrictions? Had the Fund any such authority? The Director appointed by the United States had difficulties of an opposite nature with the staff recommendation: How could the Fund question certain restrictions and yet “agree” to their retention?

The issue that had to be resolved can be simply stated: Should the conclusions following a consultation make explicit that the Fund had, in essence, decided not to make representations? If there were to be no representations, should the words “agree to” be used, with their implications of Fund approbation of continuing restrictions? The first question—that of representation—was laid to rest by a decision on August 15, 1952, on the basis of a proposal by Mr. Southard (United States). It was agreed that, except under special circumstances, two sentences would be used to open and close, respectively, all decisions taken in the 1952 Article XIV consultations:

  • The Government of [name of country] has consulted the Fund under Article XIV, Section 4, of the Fund Agreement concerning the further retention of its transitional arrangements.

  • In concluding the 1952 consultations, the Fund has no further comments to make on the transitional arrangements maintained by [name of country].

These innocuous sentences were a way of saying that, after considering the country’s restrictions, the Fund did not wish to make any representation.

The second question—of “agreeing” to a country’s restrictions—was not dealt with but was left in abeyance. Any conclusions embodied in an Article XIV decision had the status of advice and recommendation rather than of approval by the Fund. Thus, the question of whether the Fund was legally approving a country’s restrictions had been skirted. The decisions on Article XIV consultations for several countries taken before August 15, 1952 were correspondingly revised. And the two sentences continued to be used for all Article XIV consultation decisions until early in 1966.

WHAT RESTRICTIONS SHOULD BE REVIEWED

It had been generally understood—by the staff, the management, and the Executive Directors—that the “approval” jurisdiction of the Fund did not go beyond restrictions on current payments and transfers, multiple currency practices, and discriminatory currency arrangements. Nevertheless, difficult definitional and jurisdictional questions still remained. When the consultations began in 1952, a restriction on payments (i.e., an exchange restriction) had not yet been defined. Just what restrictions the Fund could discuss with its members remained uncertain. Similarly, whether the Board could comment to its members on what were mutually regarded as trade policies and practices, as distinct from exchange policies and practices, was undetermined.

Debates and definitions

Not only did various Directors hold opposing views on these questions, but so did members of the staff. For this reason, and because of the GATT’s jurisdiction over trade restrictions, it was only to be expected that the question of what types of restrictions should be covered by the consultations, and by the Executive Board’s decisions on them, would frequently plague the Board in the early years of consultations. Even before the Article XIV consultations had begun, such debates had occurred. The Australian Director had held the extreme view that since the Fund had no jurisdiction over quantitative restrictions on imports, a case could be made for limiting consultations to restrictions on current payments for transactions in invisibles only. On the occasion of considering one of the early Exchange Restrictions Reports, Mr. Melville (Australia) had objected to the proposed description of Australia’s restrictive system. Distinguishing between import licenses and exchange licenses, he wished the description to make it abundantly clear that Australia’s restrictions on imports were exercised only through import licenses and not through exchange licenses. Mr. Saad (Egypt), who had represented the Fund at the General Sessions of the GATT, argued in rebuttal that import licenses in the Australian system implemented both trade and exchange restrictions. He pointed out that many countries had mixed systems of trade and exchange restrictions, and any form of licensing technique might be used to enforce the two kinds of restrictions simultaneously.

With the support of Mr. Stamp (United Kingdom) and Mr. Savkar (India), whose countries had similar control systems, Mr. Melville requested an opinion from the General Counsel on what constitutes an exchange restriction. Mr. Saad, in his capacity as Governor of the Fund for Egypt, then requested a decision by the Executive Board giving a formal interpretation of the meaning in Article VIII, Section 2, of the phrase restrictions on the making of payments and transfers for current international transactions. The Board, in a sense-of-the-meeting decision, approved for inclusion in the Exchange Restrictions Report the staff’s description of Australia’s restrictive system, and referred Mr. Saad’s request to the Committee on Interpretation. However, neither the committee nor the Board was able to reach agreement on the question, and after the Board had discussed the question in executive session, general consideration of the matter was, at least temporarily, dropped.

The issue of jurisdiction, therefore, had not really been decided. And it recurred persistently in the Board’s consultations during the next several years. On various occasions the Directors for Australia and the United Kingdom pointed out that Fund decisions must be limited to restrictions on payments. Or that while the Fund, as a party to a GATT consultation, could comment on any restrictive measures affecting a country’s balance of payments, any recommendations in Article XIV consultations should be confined to restrictions on current payments and transfers. Mr. Bury (Australia) opposed “any attempt to bring trade matters into a Fund decision,” because it would “raise the fears of certain governments that the Fund was going beyond its proper sphere.” In the view of Sir Edmund Hall-Patch (United Kingdom), for the Fund to give advice in areas where its jurisdiction was not clear would tend to weaken its influence in areas where it was intended to have authority. The sensitivity of these Directors on such points was evidenced, for example, when Mr. Southard proposed, for the conclusions to the first consultation with Colombia, a reference to the adjustment of import prohibitions. And it was apparent again in 1954 and 1955, when during the first two consultations with Germany comments were made on import restrictions to protect agriculture. Subsequently, the issue has recurred from time to time but has not been so intensely debated as in those early years.

A closely related question was how far the Fund could go in suggesting specific ways of reducing restrictions. This problem had arisen during the first consultation with Burma. The staff’s draft decision contained the suggestion that “wherever possible, Burma should increase the proportion of imports under open general license.” Mr. Crick (United Kingdom) and Mr. Melville argued for the deletion of this reference, on the ground that the Fund should not comment on one particular type of licensing technique. In contrast, Mr. Southard and Mr. Perry (Canada) urged that on grounds of principle the Fund had not only the right but the duty to transmit technical advice, especially in the area of exchange controls.

Emergence of broad discussions

In the course of time jurisdictional disputes and fears of the Fund’s overstepping the mark subsided, allowing the economic realities to guide the Fund’s activities. These realities were that various forms of restrictions were interrelated both in their operation and in their effects on the domestic situation and on other Fund members, and that it was impossible to make sensible judgments regarding a particular restriction on payments without taking account of the totality of restrictive practices of a member. Practice began to demonstrate that jurisdiction was not being usurped. Without further debate, the staff’s discussions with members came gradually to cover all quantitative and other trade restrictions operated for the purpose of restricting exchange payments. Eventually, restrictions maintained for protective as well as for balance of payments reasons were also included in these discussions.

At the same time, however, the decisions on restrictions taken by the Board at the end of each consultation were made more precise. For a time, the working principle used for Board decisions was that only restrictions for balance of payments purposes could be maintained under Article XIV, whereas restrictions for other reasons would have to be approved under Article VIII. This principle had been enunciated as an ad hoc guide during the first consultation with Italy. It was made explicit in the decision on the 1952 consultation with Cuba: Cuba’s 2 per cent exchange tax on remittances abroad was not maintained for balance of payments purposes and consequently was maintained in accordance with the provisions of Article VIII.

Later, for the same reasons that staff discussions with the member encompassed the broad range of restrictions, Executive Board decisions also came to include statements of views regarding the general level of restrictions and the possibility of removing them, but did not “approve” or “disapprove” them. The language used over the years ranged from urging action to suggesting re-examination of the practices, depending upon the severity of the restrictions and their harmfulness to the international community.

COMMENTING ON TRADE POLICY

The authority of the Fund

The legal authority of the Fund to consider and comment on trade policies and practices—as distinct from the jurisdictional character of its authority with respect to exchange practices—was finally formulated in 1960. At that time the Legal Department, distinguishing between the Fund’s official authority to consider and comment on the trade policies and practices of its members and its power to approve exchange practices, worked out a legal position which met with little opposition. While members are not required to submit their trade policies and practices as such to the Fund for its approval, and the Fund cannot disapprove these policies and practices in the sense that if members persist in them they can be regarded as violating international obligations under the Fund’s Articles, these trade policies and practices can be evaluated in the light of the Fund’s purposes.

In defense of its reasoning, the legal staff cited various provisions of the Articles. Since Article I (ii) specified as a purpose of the Fund “to facilitate the expansion and balanced growth of international trade,” the Fund can consider and comment on the extent to which the policies and practices of its members conduce toward the realization of this purpose. Moreover, Article XII, Section 7 (b), provides that “the Fund may publish such … reports as it deems desirable for carrying out its purposes,” and the first sentence of Article XII, Section 8, declares that “the Fund shall at all times have the right to communicate its views informally to any member on any matter arising under this Agreement.” The broad scope of the Fund’s authority under these provisions, said the Legal Department, is established by the words “purposes” in Section 7 (b) and “any matter arising under this Agreement” in Section 8. All that needed to be added—and this was then made explicit—was that the authority to publish reports and communicate views embraces authority to consider the policies and positions of members in order to decide whether to publish reports or communicate views.

Finally, Article XIV, Section 2, expected members “to develop such commercial and financial arrangements with other members as will facilitate international payments and the maintenance of exchange stability.” Hence, the Fund could consider and comment on commercial and financial measures. Significantly, it was also the legal view that although this objective appeared in Article XIV, it was not confined to the period of transitional arrangements, but connoted a permanent objective.

Need for clarification

The reason why the Fund’s legal position as regards trade restrictions could be established in 1960 was in part that a greater area of common ground existed between members then than in the early 1950’s. But more compelling was the need, as members ceased to avail themselves of the transitional arrangements of Article XIV, to elucidate the Fund’s authority under Article VIII. Not only was there the question whether the Fund should hold regular consultations with members once they had assumed the obligations of Article VIII, but also the question whether the Fund could, once a member was under Article VIII, consider and comment on its policies other than its exchange policies. Specific answers to these questions had been postponed while consultations were being conducted under Article XIV. It became especially necessary to settle the longstanding question about trade restrictions when consultations with the GATT showed that it was possible for the Fund effectively to comment on the trade restrictions of GATT members. The difficulty was that half of the Fund’s members were not GATT members.

The immediate problem at hand was to work out a procedure for discussing with members under Article VIII their import restrictions for balance of payments reasons. The staff proposed a duality of treatment between the Fund’s members which were also GATT members and those which were not. GATT members would be asked merely to send information concerning their restrictions directly to the Fund as well as to the GATT; since such information was already being sent to the Fund by most GATT members, this provision merely ensured that other members of the Fund which were also GATT members would do likewise. As regards non-GATT members, the staff proposed that the Fund should seek to “reach agreement” with those members which imposed import restrictions for balance of payments reasons, “to obtain information on these restrictions, thus facilitating the preparation of studies designed to assist members in developing principles which further the purposes of the Fund.”

Agreement by the Board

In 1960, the Executive Directors reached, with relative ease, a working agreement on the very question—that is, the Fund’s authority on trade matters—which had, in years gone by, provoked almost open discord. But, although a modus operandi could now be articulated in written agreement, some of the old concerns, long dormant, were again expressed.

Once again the Australian Director—now Mr. Garland—referred briefly to his country’s well-known views about the Fund’s jurisdiction over import restrictions, discriminatory or nondiscriminatory, and whether for balance of payments reasons or not. But this time he conceded that import restrictions and trade discrimination fall within the Fund’s sphere of general interest and properly form the subject of general comment by the Fund. However, he was troubled about “reaching agreement” with non-GATT members; if such agreements were to vary, an unwanted differentiation between Fund members would occur.

In addition, a definition of an exchange restriction—which had been incorporated as a guiding principle in the proposed decision—caused much uneasiness among authorities of the United States. This guiding principle was that a restriction on payments and transfers for current transactions under Article VIII, Section 2, was one which involved a direct governmental limitation on the availability or use of exchange as such. It appeared to the U.S. authorities that by this definition the Fund’s role in the broad field of balance of payments restrictions was reduced. Concern about explicit limitations on the Fund’s “approval” jurisdiction had been abated by realization that the Fund, through its role with the GATT, could be effective in this field. However, would not non-GATT members escape a similar determination for their import restrictions? The United States, therefore, was hopeful that they would not really mind acquiescing in a Fund examination; such examination would not be for the purpose of a determination by the Fund but merely to collect and provide useful information, especially for the benefit of other Fund members which might be injured by such restrictions.

It was finally agreed that Fund members which are contracting parties to the GATT and which impose import restrictions for balance of payments reasons would continue to send information concerning such restrictions to the Fund. Such information would enable the Fund and the member to join in an examination of the balance of payments situation in order to assist the Fund in its collaboration with the GATT. It was also agreed that the Fund, by consent of its members which are not contracting parties to the GATT and which impose import restrictions for balance of payments reasons, would seek to obtain information relating to such restrictions.

BROADENING THE SCOPE OF CONSULTATIONS

The Fund’s consultations on restrictions under Article XIV became, relatively quickly, a vehicle for purposes additional to an examination of restrictions. A technique and language were soon developed for giving advice to members that was acceptable, or even desired, by them on policies that might not be strictly within the Fund’s jurisdiction. The Executive Board minutes or the staff report came to be used to record comments on policies not considered appropriate to Board decisions. Some topics that were at first considered taboo or suspect by some Directors even came, within a few years, to be stressed.

As an illustration, one of the most persistent and pervasive themes to emerge almost as soon as consultations began was the need for the Fund’s members to pursue what are called “sound” fiscal and monetary policies in order to overcome or to avoid inflation. In the early years the extent to which the Fund could appropriately comment and give advice on a member’s domestic policies had been seriously questioned by many Directors. In the years 1952–55, for example, several Directors queried the propriety of the Fund’s calling attention to the importance of fiscal and monetary policies that would maintain stability, although from the outset some other Directors had believed that the Fund might comment on purely domestic matters. Agreement was eased by the understanding that no general precedents were being set. Moreover, it was recognized that comments from the Fund might be helpful to the authorities of some countries in putting through politically unpopular policies.

Almost immediately the occasion of the consultations was used as an opportunity for the Fund and its members to work out exchange reforms. An early example of this is the agreement reached on a new exchange rate for Paraguay during the 1952 consultation with that member. Paraguay proposed a rate which corresponded quite closely to recommendations made by the Fund’s staff during the discussion preceding the consultation, and the Executive Directors agreed to the proposal.

THE PROCESS ESTABLISHED

By 1955 the pattern of consultations had become firmly established. Three distinct stages had evolved: (1) preliminary work by the staff, (2) discussions between representatives of the staff and of the member country, and (3) the consultation proper, i.e., the consideration by the Executive Board of the staff report on the discussions and the taking of a Board decision on the consultation if with an Article XIV member or with an Article VIII member that maintains exchange measures requiring the Fund’s approval. No decision is taken on consultations with other Article VIII members (see below).

Preliminary work by the staff

The work of the staff proceeds according to a tentative schedule based on past experience with the particular country. The team selected generally consists of three or four professionals and a secretary. The professionals include staff members from the Area Department handling the country concerned, and from the Exchange and Trade Relations Department, although the latter is not usually involved in an Article VIII consultation. Staff members from the Fiscal Affairs Department and the Research Department may be on the team if matters relevant to these departments are to be taken up, and from the Legal Department if complex legal issues are at stake.

As a first step, the staff writes a background study of the member’s economic situation and of its restrictive system. These background papers have become widely known as Part II of the Fund’s consultation reports. For a few members much of the material included is available in published form. For most, however, technical discussions and policy reviews between the members and the staff result in reports and surveys with a considerable amount of information not found elsewhere. These reports contain a detailed description and analysis of internal and external economic developments and of the restrictions still in force. Systematic reviews of trends in production, of wage and price developments, of credit and monetary flows, and of the budget and fiscal situation are nearly always included. The main focus on the external side is usually the current balance of payments position and the short-run outlook for the balance of payments; but details of the magnitude and composition of exports and imports, of capital movements, of foreign indebtedness, and of foreign aid, are often included.

Differences in the situations of countries lead to variations in treatment. For example, when an exchange reform has taken place or is in process, the exchange system both before and after reform is usually described fully. Similarly, the issuance of a new long-term development plan has frequently been the occasion for a more thorough description of the country’s development policies and their relation to its policies in the monetary, fiscal, and exchange fields.

As regards restrictions, the complete system—that is, all forms of restrictions, including those both within and outside the “approval” jurisdiction of the Fund—is described. Such broad coverage has been found necessary in order to relate the general level of restrictions to the balance of payments position of the country, and to the policies being used to equilibrate the balance of payments. Although the first consultations in 1952 required the use of general questionnaires to members in order to ascertain the complete nature of the restrictions actually being applied, these are no longer needed.

A preliminary version of the background paper is customarily sent to the member before discussions take place. Because of its comprehensiveness, Part II of the consultation report has proved a valuable source of information to all member governments interested in the member being consulted. At first, even Part II of a consultation report was only for the internal use of the Fund; now, however, these reports are supplied to the GATT and from time to time to some other international agencies, with the consent of the member country.

For some countries, where data have been scarce and available statistical series have not proved to be reliable indicators of significant economic trends, draft Part II reports have not been prepared in advance; sending questionnaires ahead of a staff mission has also not been found useful. In such instances the preparation of useful statistical tables has become a major concern of the mission, and has often necessitated extending the discussions or sending some staff members in advance of the policy discussions. Technical advice has also been given in the process of preparing such tables; such advice has sometimes resulted in the initiation of new statistical series or in arrangements for the Fund to give technical assistance to the member in the compilation of its statistics.

Preparations for discussions with the member include a draft agenda and a briefing paper. The latter, which is seen only by the staff concerned and the management, reviews the last consultation decision and any developments in the Fund’s policy which may be of particular concern for the country being consulted, and suggests the main lines of inquiry for the forthcoming discussions, the emphasis to be placed on various subjects, and the attitudes that the staff proposes to adopt on the principal policy questions. The proposed agenda for the meetings and the briefing paper are approved by the Director of the Area Department concerned; by the Director of the Exchange and Trade Relations Department; by the Managing Director or his Deputy; and, where issues of concern to them are involved, by the Fiscal, Legal, Research, and Treasurer’s Departments. The agenda is then forwarded to the member concerned.

Discussions with the member

The most important change in the consultation procedure since consultations were initiated in 1952 has been the shift in locale. Whereas in the beginning it was specified that as far as possible staff discussions with member governments should be held in Washington, such discussions today nearly always take place in the member country. The ostensible reasons for holding the discussions in Washington were the limited number of staff members available and, to some extent, the belief that the Fund should restrict expenditures in view of its low income and the budget deficits that prevailed during the early 1950’s. One consequence of meetings being held in Washington was that the members tended to designate their Executive Directors or staff from their embassies in Washington to represent them, or to request that the discussions be held at the time of the Annual Meetings so that the Governors themselves or their technical advisors could attend.

The greatest disadvantage of conducting the discussions in Washington was the limited number of members’ representatives who could be interviewed. Moreover, where the representatives were Executive Directors or embassy staff, they had frequently not been in very close or recent contact with the policymaking authorities of their governments, and it was rarely possible for the Washington people to be supported by technicians from their home countries.

Furthermore, although a larger number of the Fund’s staff members could attend discussions held in Washington, this advantage of acquainting more staff members with countries’ problems was offset by the lack of opportunity to become well acquainted with the country itself and with a number of its officials. Also, the concentration of discussions about the time of the Annual Meetings could not help but adversely affect the efficiency of the staff; 11 of the 22 discussions held in Washington in 1953 and 10 of the 14 in 1954 took place near the time of the Annual Meeting. Subsequent experience confirmed that holding the discussions abroad reduced the burden on the senior officials of the country as well. And it permitted the Fund’s staff to work closely with the country so as to produce a more authoritative report.

Consequently, although the practice of holding the staff discussions in Washington was at first closely followed, it died under the weight of its disadvantages and of a growing awareness of the usefulness of visits by Fund staff missions to member countries. While two thirds of the staff discussions with members in 1952 and 1953 were held in Washington, the proportion dropped sharply over the next three years, amounting to about one fourth in 1956. In all succeeding years, no more than two a year have been held in Washington and then, as a rule, because of unusual circumstances.

Thus, one of the features of the Fund’s consultations which has come to differentiate them from the annual review techniques of a number of other international organizations is that they rely more heavily on regular staff visits to the countries concerned, and on intensive discussions in the field with officials of the member countries.

Staff teams usually stay in the country for about two weeks, but there is a wide range, from as little as four or five working days to as much as five weeks.

The member’s team for the discussions includes representatives of the financial agencies of the government, e.g., the treasury, the central bank, and economic ministries; the Executive Director elected or appointed by the member often attends as an observer. These discussions have taken many forms, depending upon the problems facing the government, the working practices of the officials, the availability of statistical and other information, and the staff’s familiarity with the situation. Discussions in some countries are more formal than in others. Sometimes the Minister of Finance or the Governor of the central bank attends; but in any event, the staff usually interviews these persons and often has informal discussions with them on matters outside the consultation proper. Sometimes the staff is received by the Prime Minister or the Head of State. The staff team may also, with the knowledge and consent of the government, meet members of the parliamentary opposition, the press, the business community, and labor representatives, although this varies with the circumstances and traditions of the country.

Usually the discussions begin with a systematic review of the country’s economic situation. Then the discussions center on major policies—that is, policies to promote internal financial stability and equilibrium in the balance of payments and to facilitate economic growth. With regard to the restrictive system, the staff has usually sought to understand how the restrictions operate and their principal effects, and has given special emphasis to alternative measures for correcting balance of payments difficulties.

Generally, the staff prepares detailed minutes of the discussions which, after agreement with the government concerned, are used to prepare the report to the Executive Directors. This report, which includes an appraisal of the situation in the member country, has come to be known as Part I of the consultation report. Before being circulated to the Executive Directors, this report is reviewed by a committee of representatives from several departments in the Fund and is approved by the management. During the first few years of consultations, this committee discussed and approved both the preliminary papers and the final reports, but later the practice was developed of circulating to the committee for comment only the drafts of final reports. Although the opinions expressed by the staff in the reports are attributed to the staff team, the management and staff collectively are responsible for the appraisal and the recommended draft decision.

The length of the report varies considerably, depending upon the information available and the analytic techniques that can be used effectively; in general, the more sophisticated the arsenal of economic measures available to the authorities, the longer is the description of the actual policy measures selected by the authorities, and the reasons for such choice. Part I is usually much shorter than Part II. The report is normally completed within a few weeks after the return of the mission to Washington.

Consultation in the Board

After the report has been approved, it is circulated to the Board and scheduled for consideration after a period—usually about four weeks—which permits Executive Directors to be in contact with their governments. Most consultations take only one meeting, although some have required two or more.

The decision taken by the Board represents the official views of the Fund. The Board may confirm or disagree with the views of the staff, which may have been informally communicated earlier to the country’s representatives. This procedure has allowed the staff freedom while in the field to appraise or comment informally and unofficially on a country’s policies or economic situation, without the need to obtain prior approval by the Board for the views expressed.

The Board’s decisions have varied from country to country and from time to time. Most decisions give a capsule description of the economic situation and the current policies of the member; they sometimes indicate that excellent progress has been made, and at other times recommend that policies be changed. There is also usually a statement of the Fund’s views regarding the member’s monetary and fiscal policies as they relate to the country’s internal financial stability and to balance of payments position. Finally, the decisions regularly comment on the country’s exchange system, exchange restrictions, discrimination, and use of bilateral payments agreements. Changes in exchange systems and recent relaxations or eliminations of restrictions have often been welcomed; frequently further action has been suggested. The Fund’s views on the general level of and the possibility of removing quantitative restrictions and other devices which impede the free flow of trade and payments are also included.

The decision is transmitted to the member. There is no formal follow-up. But when the country subsequently encounters serious payments problems, or requests the use of the Fund’s resources, or undertakes exchange reform, further contacts take place. And in the next consultation, a review is undertaken of the progress made toward implementing the decision adopted in the previous one.

The length of time involved in the consultation process is one of the reasons, if not the principal one, why the number of consultations completed every year has been less than the number of Article XIV members, and also less than the number of Article VIII members (after they began to consult in April 1961). If a consultation has not been held with a member in the course of a given consultation year, a special effort is usually made to consult early in the following year. Details of the number of consultations held in relation to the number of members, from April 1, 1952 to March 31, 1966, are given in Table 7 at the end of this chapter.

Table 7.Fund Members by Article VIII or Article XIV Status, and Completed Consultations, April 1, 1952–March 31, 1966
Consultations

Year

(beginning

April 1)
Number of Members at Beginning of

Consultations Year
Number of

Completed Consultations1
Status

Not Yet

Notified
Article

VIII

Members
During Year
TotalArticle

XIV

Members 2
Article

XIV
Article

VIII
TotalCumulative

Total
19525174435 33535
195354747353570
19545594634 434104
19555610463737141
195658104836 436177
195760105037 537214
195865105538 438252
195968105842 442294
196068105844 644338
1961701214836 41147385
1962763215238 51452437
1963844235749 51261498
1964102122565402262560
196510212675361955615

CONSULTATIONS UNDER ARTICLE VIII

The success of consultations under Article XIV was clearly reflected in the institution in 1960 of similar consultations under Article VIII, although these are not required by the Articles. The staff suggested that such consultations should be held because they provided a method whereby the Fund could maintain contact with the officials of the countries concerned and provided also the machinery for collaboration on international monetary problems. Thoroughgoing annual reviews of economic policies were useful both to members and to the Fund. The Directors agreed on the usefulness of consultations. Some even went so far as to state that the removal of restrictions on payments created a new degree of interdependence among members and that consultations with the Fund were therefore just as important as when restrictions had been widespread. Mr. Southard stated that the U.S. Government, which had never been under Article XIV and hence not previously required to consult the Fund, was willing to consult annually with the Fund under Article VIII.

After some discussion, however, it was agreed that consultations under Article VIII would not end in formal decisions by the Board. That the Fund should not come to some conclusion about the affairs of the member concerned was in line with the philosophy that consultations under Article VIII were voluntary on the part of the member.

The Board thereupon took the following decision implementing consultations under Article VIII:

  • If members at any time maintain measures which are subject to Sections 2 and 3 of Article VIII, they shall consult with the Fund with respect to the further maintenance of such measures. Consultations with the Fund under Article VIII are not otherwise required or mandatory. However, the Fund is able to provide technical facilities and advice, and to this end, or as a means of exchanging views on monetary and financial developments, there is great merit in periodic discussions between the Fund and its members even though no questions arise involving action under Article VIII. Such discussions would be planned between the Fund and the member, including agreement on place and timing, and would ordinarily take place at intervals of about one year.2

Consultations under Article VIII represented a new procedure that had not been contemplated at Bretton Woods. Agreement to such consultations reflected the widely held belief that the Fund’s Article XIV consultations had been most helpful to members and that similar discussions with countries under Article VIII would be useful both to the Fund and to the members concerned.

In 1961–62—the first year of the new Article VIII regime—consultations under that Article were held with eleven members; these included the first consultations held with Canada, the United States, and El Salvador. The staff discussions, as in the case of Article XIV consultations, involved visits by staff missions to the capitals of the countries concerned.

In the next few years, the Article VIII consultations were found to be increasingly useful as, together with those under Article XIV, they enabled the Fund to inform itself of policy problems and attitudes throughout the world, to appreciate more fully the peculiar circumstances and needs of individual countries, and to anticipate their payments problems. It is the belief of the Fund also that these consultations serve to make members’ policies more responsive to the aims of the international community.

THE PROCESS REAFFIRMED

Between the time when the consultations started in 1952 and the end of 1965, the membership of the Fund rose from 51 to 103, and the burden of work on the staff and on the Executive Directors increased proportionately. Therefore, when the Fund reviewed its procedures late in 1965 and early in 1966, it sought ways of reducing this burden. The staff put forward proposals for abbreviating Part I of the reports, and the Board made some suggestions for shortening its consideration of the reports. It was decided that Part I of the reports should be shortened; but the basic structure of the procedures was kept intact. The opening and closing sentences of Article XIV consultations, as agreed in 1952, were dropped; instead, a simple factual statement was to be made:

  • This decision is taken by the Executive Directors in concluding the [year] consultations with [member], pursuant to Article XIV, Section 4, of the Articles of Agreement.

The staff now proposed that Article VIII consultations should put forward conclusions, but the Board decided against this.

Fund Press Release of December 13, 1950, reprinted in the Second Annual Report on Exchange Restrictions (1951), p. 159.

E.B. Decision No. 1034-(60/27), June 1, 1960; below, Vol. III, p. 261.

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