Chapter 25. Conditionality: A Disputed Issue Arises
- International Monetary Fund
- Published Date:
- February 1996
CONDITIONALITY BECAME A FAMILIAR TERM in the international financial lexicon after 1975. It refers to the conditions that the Fund attaches to use of its resources and came under mounting and intense criticism in the second half of the 1970s. When Fund officials undertook to defend the Fund’s policies, discussions about conditionality, even within the Fund, aroused deep-seated emotions.
The same degree of conditionality did not apply to all uses of the Fund’s resources. By the middle of 1974 policy governing use of these resources was no longer as monolithic as it had been in earlier years. The Fund had developed a number of “windows,” called facilities, from which a member might request drawings. There was a compensatory financing facility, a buffer stock financing facility, an oil facility, and an extended facility. A supplementary financing facility, which had a different character, was yet to come. Different conditions applied to each facility. The compensatory financing facility and the oil facility, for instance, were subject to what some Executive Directors and staff regarded as mild or modest conditionality, and others regarded as “virtually no conditionality.” Drawings within the gold tranche (that is, drawings which raised the Fund’s holdings of a member’s currency to not more than its quota) were made legally automatic when the First Amendment was approved in 1969. After 1968, drawings or stand-by arrangements in the first credit tranche (that is, drawings, except for those explicitly excluded, which raised the Fund’s holdings of a member’s currency above 100 percent but not above 125 percent of its quota) were subject to what Fund officials regarded as only moderate conditionality. More stringent conditions applied to other stand-by arrangements, that is, those under which members used the Fund’s resources in amounts which went beyond the gold (reserve) tranche and the first credit tranche into the upper credit tranches.
This chapter explains the Fund’s conditions and describes criticisms of those conditions. Chapter 26 explains how the Fund answered these criticisms.
EVOLUTION OF CONDITIONALLY PRIOR TO THE 1970s
The conditions governing use of the Fund’s resources have a long history. They were intensively debated even before the Fund was established. John Maynard Keynes and Harry Dexter White held contrasting views on the attitude the Fund should have toward members’ requests to draw. Mr. White was convinced that the Fund must have the power to question any request in order to prevent unjustified drawings, which in the circumstances of 1945 meant drawings in U.S. dollars, and to require that repayment should take place at a set time. Mr. Keynes sought to ensure that members would have the right to draw automatically and that repayment should follow when the balance of payments deficit for which the drawing was made was reversed. This difference of view found expression in the original Articles. The provisions governing use of resources were general and permissive, yet gave the Fund power to interpret these provisions and to declare a member ineligible to use its resources.1
In 1946 the Executive Directors discussed the provisions of the Articles extensively and in 1948 took decisions interpreting them.2 The issue between “automaticity” and “conditionality,” however, continued to divide the Executive Board for several years. Officials of Canada and the United Kingdom pressed for automaticity, while U.S. officials staunchly insisted that the Fund had to devise some form of placing conditions on drawings.3 In the meantime, for a number of reasons, the Fund did not evolve a general policy on use of its resources until 1952. In fact, after April 1948, the “ERP decision” placed a virtual freeze on drawings.4
By 1952 Fund officials wished to develop a general policy on use of resources. World trade and payments were still shackled by exchange controls, restrictions, and inconvertible currencies, and Fund officials developed the idea that use of the Fund’s resources could be tied to members taking measures that would improve their balance of payments positions sufficiently to enable them to relax their payments restrictions and exchange controls and to move closer to convertibility of their currencies. Members might be more willing to lift restrictions if assured that they could have recourse to the Fund if lifting restrictions should result in unmanageable current account deficits.
The Rooth Plan for use of the Fund’s resources—named after Ivar Rooth, the second Managing Director—became the basis for the landmark decision of February 1952. Members could count on “receiving the overwhelming benefit of any doubt” for drawings in the gold tranche, thereby instituting automaticity for these drawings. In the absence of such automaticity, members who had put part of their gold reserves in the Fund were worse off than nonmembers who had no restriction on use of their gold reserves. Drawings beyond the gold tranche were not to remain outstanding beyond the period reasonably related to the payments problem for which the drawing was originally made. The Fund’s determination of whether to grant a member’s request to draw was to depend on whether the payments problem was temporary and whether the member’s policies were adequate to overcome the problem within such a period. Thus, drawings from the Fund were explicitly related to a member’s policies. To preserve the revolving character of the Fund, repurchases, for which previously there was no time limit, were normally to be made after three years and within five years at the maximum. In addition, by suggesting that members might not want to draw immediately but could ensure themselves that they might be able to draw within a subsequent 6 to 12 months, the 1952 decision contained the germ of the stand-by arrangement. With this decision, the Fund for the first time had a general policy on use of its resources.5
In the following six to seven years, the Fund gained experience with the new policy. To implement it, a general framework was used and no fixed model or preset techniques were imposed on members to eliminate restrictions. Rather, Fund staff talked to members about their domestic inflation and balance of payments problems and discussed with them how they would get rid of restrictions and move toward the Fund’s objectives. Gradations of conditionality were also worked out. Liberal treatment was applied to requests for drawings in the first credit tranche while more rigorous expectations for corrective policies were applied to requests for drawings in the upper credit tranches. By the mid-1950s Fund officials felt comfortable with the policy.
Conditionality Incorporated into Stand-By Arrangements
The stand-by arrangement at first lent a degree of automaticity to use of the Fund’s resources: having initially qualified for use of the Fund’s resources, a member would be assured of use of those resources for a time without having to meet further conditions. Since the decision of 1952 tied the use of the Fund’s resources to the attainment of the Fund’s objectives, particularly to eliminating restrictions, and since stand-by arrangements were increasingly used, the argument over automaticity and conditionality eroded.
Along with greater use of stand-by arrangements, there was greater use also of stabilization programs primarily to help the management and staff determine whether they could recommend the stand-by arrangement to the Executive Board. The Fund gradually developed methodology and criteria for judging the monetary, fiscal, and exchange rate policies that constituted acceptable stabilization programs. By the end of the 1960s the programs went into considerable detail by covering not only the total supply of money but also the sources of expansion of money and quasi-money, as well as the structure of interest rates and interest rate policies. Often they also covered the management of cash balances and of domestic public debt, and other monetary activities.6
As time passed, the stand-by arrangement became the principal vehicle by which members drew on the Fund’s resources. Drawings without stand-by arrangements became unusual.7 Furthermore, the question arose as to how the Managing Director and the staff could review, or monitor, performance to ensure that the member would actually achieve its objectives under the agreed program and be in a position to repurchase from the Fund within three to five years. The idea of monitoring the performance of members was reinforced by a growing conviction in the 1950s and early 1960s on the part of the Managing Director and staff and of the Executive Directors from industrial and relatively more developed members that countries, especially developing countries, ought to have “monetary discipline.” Per Jacobsson, Managing Director, had made his reputation as an advocate of strong anti-inflationary policies in Western Europe as far back as World War I, and he in particular urged developing countries to pursue strict monetary discipline and fiscal restraint. He urged such policies especially on Latin American members whose rates of inflation were much higher than those in Europe.8
Just as monetary data and targets were helpful for deciding a member’s initial eligibility for a stand-by arrangement, so were they helpful for monitoring a member’s performance. Initially the use of monetary data and targets did not reflect belief in monetarist doctrines. The staff analyzed balance of payments developments and the effectiveness of measures to reduce payments deficits, especially of exchange devaluation, in terms of the elasticity-absorption approach being developed in the Fund at the time, as described in Chapter 5. Monetary data and targets supplemented this analysis by providing simple aggregate measures easily available from members’ statistics for determining the direction in which an economy was moving. In the late 1960s, however, monetarism was increasingly advanced as an economic doctrine, and more of the Fund staff and more Executive Directors came to believe in a causal connection between monetary targets and the achievement of balance of payments goals. The ascendancy of monetarism as a doctrine and the refinement of economic models lent credibility to the Fund’s technique, based on monetary statistics, of identifying a member’s eligibility for a stand-by arrangement and of monitoring its performance.
The policies and targets included in stabilization programs were eventually integrated with the clauses and performance criteria of stand-by arrangements. Protective clauses were written into stand-by arrangements to permit interruption of a member’s automatic right to draw if it failed to observe established performance criteria. In this way conditionality was explicitly written into stabilization programs and into stand-by arrangements.
Conditionality Incorporated into the Articles
The concepts of conditional and unconditional liquidity were refined in the course of extensive discussions of international liquidity in the 1960s, and the distinction between them was incorporated into the Articles of Agreement in 1969 when the First Amendment became effective.9 Unconditional liquidity was to take the form of SDR allocations. The rest of the Fund’s resources—except for purchases in the gold tranche which the Articles of Agreement made legally automatic—were to be used only on a conditional basis. Several amendments emphasized that the use of the Fund’s resources had to be temporary, that the Fund’s policies had to ensure that the use of resources was temporary, and that the member’s policies should assist it to solve its balance of payments problem.10
These amendments were not intended to introduce new policies nor to make the rules governing the use of the Fund’s resources more restrictive. The Fund’s policies had already been going in the direction taken by the amendments. But conditionality as a feature of the Articles was put beyond controversy. The provisions of the amended Articles were included at the insistence of officials of the ec countries. It is noteworthy that these officials had earlier supported automaticity in the use of the Fund’s resources. By the 1960s, however, the currencies of the Fund’s European members were being heavily used in drawings. As a consequence, when the Articles were amended in 1969, European officials reversed their position and became the staunchest advocates of conditionality.11
In 1968 the Executive Board reviewed the terms of stand-by arrangements. This review was prompted by the concern of several Executive Directors elected by developing members that the terms of the stand-by arrangement for the United Kingdom in 1967 were considerably more lenient than those customarily approved for developing members. These Executive Directors particularly objected to the absence of phasing in the stand-by arrangements approved for the United Kingdom. The outcome of the review guaranteed for all members uniform treatment taking the form of a substantial liberalization of stand-by arrangements that did not go beyond the first credit tranche. For such arrangements, there was to be no phasing of the amounts that might be drawn and no clauses requiring the observance of performance criteria.12 Because of this liberalization, most stand-by arrangements requested by developing members for several years after 1968 were concentrated in the first credit tranche.
Policies Applied After 1968
The stabilization programs and the performance clauses and criteria worked out and agreed after 1968 between officials of member governments and the Fund continued to evolve. These programs were developed on a case-by-case basis by the Managing Director and staff and approved by the Executive Board. The fiscal criteria specified in the performance clauses of stand-by arrangements were changed. Performance clauses that set limits on the size of the budget deficit or that called for new revenue measures or the tightening of specific expenditures were, for the most part, dropped. After 1968 fiscal performance criteria of this type were used only with the three industrial members, France, Italy, and the United Kingdom, which had stand-by arrangements from 1969 to 1978. Instead, the fiscal performance criterion usually took the form of a subceiling on the expansion of domestic bank credit to the government for financing a budget deficit, which was additional to the ceiling on total bank credit expansion. The staff preferred use of this subceiling to outright limitations on expenditures or on the size of the deficit partly for technical reasons. Monetary data were available more promptly than fiscal data and could be interpreted with greater precision. In addition, credit ceilings were less likely to convey the impression that the Fund was judging the member’s social and economic priorities reflected in its public sector operations.13
The change in form of the fiscal performance criteria did not mean that the Fund paid less attention to a member’s fiscal performance. On the contrary, fiscal performance clauses in the form of ceilings on domestic bank credit expansion to the government were included in nearly all the financial programs in the upper credit tranches agreed after 1968. Between 1973 and 1978, only six programs in the upper credit tranches did not include a fiscal performance clause. This represented something of a shift in the Fund’s past policy. Traditionally, inclusion of a fiscal performance clause was regarded as unnecessary when past fiscal performance had been good and when there was confidence that adequate fiscal adjustment had been made or would be made during the period of the program. For programs with members whose nongovernment sector had little or no access to bank credit, the Fund took the view that developments in the financial accounts of the public sector could be monitored adequately through a single performance clause on overall bank credit.
After 1973, however, a consensus grew among Fund officials that the problems of rapidly accelerating inflation, of much higher costs for energy, and of much larger balance of payments deficits could be resolved only if the budgetary deficits of most members were reduced. Consequently, reliance on fiscal performance clauses in stand-by arrangements was intensified.
Since 1968 exchange rate policy also had become a more important part of the Fund’s conditionality, and “balance of payments tests” to judge the appropriateness of exchange rate policy were increasingly used in financial programs. Three such tests were devised. One applied where a unitary fluctuating rate existed. The test took the form of limiting sales of exchange in the exchange market, or, more often, of requiring authorities to maintain a minimum level of reserves so as to force the member to take action to correct its deficit. If the member could not use more reserves to finance deficits, it was obliged either to devalue its exchange rate or to restrict domestic credit expansion. A second test was for cases in which the exchange rate was periodically adjusted (a flexible rate). Exchange depreciation was to keep pace roughly with movements in domestic prices relative to foreign prices so as to maintain the country’s competitive position, or where the currency was greatly overvalued, with domestic prices alone. A third applied where two or more rates prevailed, usually one fixed rate and another free market rate (a dual system). The test here combined features of the other two tests described above: agreed amounts of reserves had to be accumulated by specified dates and limits were set on sales of foreign exchange in the free market. Some staff, especially in the Western Hemisphere Department, believed that these policies provided exchange rate flexibility and enabled members to simplify their exchange systems and meet their targets for building reserves, and facilitated an understanding between the Fund and members on how and when to alter exchange rates. Gradually, however, these balance of payments tests were given up. The main requirement then usually imposed on members was that they could not introduce or tighten restrictions on imports.
Another development in financial programs after 1968 was the greater inclusion as performance criteria of policy statements regarding the management of external debt as well as limits on external debt. Although fewer than one fourth of the programs adopted between 1958 and 1967 contained declarations of policy on external debt, almost two out of every three programs agreed from 1967 to 1970 and over 80 percent of the programs agreed from 1971 to 1973 contained such declarations. By 1973 more than three quarters of the programs agreed set quantitative limits to foreign indebtedness, and in most stand-by arrangements these limits were specified as performance criteria. From 1974 to 1978, use of performance criteria relating to external indebtedness became the norm for stand-by arrangements in the upper credit tranches. Special attention was usually given to external debt with short-term maturities. Frequently one, or in some instances two, subceilings on short-term debt were specified within the overall debt ceiling. Debt limits most commonly covered only borrowing by the public sector, but as time went on, some stand-by arrangements also contained limits on new external borrowing incurred by the private sector.
Initially, limitations on external debt were incorporated into stand-by arrangements in order to reinforce limits placed on domestic credit expansion. Since foreign borrowing could be substituted for domestic borrowing, the staff believed that it was imperative to limit foreign borrowing; otherwise domestic credit ceilings could be evaded. By the 1960s, limitations on external debt were used more commonly as part of balance of payments management. After 1971, when a staff survey showed that extensive recourse to short-term and medium-term borrowing was a major factor in the emergence of debt servicing difficulties for several members, some of the staff came to believe that effective procedures were needed for keeping track of the contracting of external debt. They also believed that where servicing of external debt obligations comprised a substantial claim on the country’s foreign exchange or budgetary resources, financial programs worked out with the Fund ought to include performance criteria governing the appropriate management of external debt.
These elements formed a major part of the Fund’s policy on conditionality as it had developed by the second half of the 1970s. By 1978 additional performance criteria or conditions were occasionally used. For example, in some programs the elimination of subsidies for basic food items was included. Not only was this considered helpful in cutting budgetary expenditures but, by permitting high prices for foodgrains, it was considered a price incentive to farmers to increase production. More commonly, a member was expected to adopt such measures as exchange rate depreciation, liberalization of trade and payments, enactment of revenue measures, or adjustment of the prices charged by public enterprises before its request for a stand-by arrangement was presented to the Executive Board. The staff believed that prior actions of this type, especially when the member had long delayed instituting policies for balance of payments adjustment, were essential to enable the Managing Director to recommend the member’s request for a stand-by arrangement to the Executive Board.
In brief, by the 1970s the Fund’s conditions had become specific and quantitative. Furthermore, since officials and technicians of many members that requested stand-by arrangements, especially in Africa, the Caribbean, and in the Indian and Pacific Oceans, were inexperienced in developing financial programs, the Fund staff in effect wrote many of the programs. Accordingly, to an ever greater extent, it appeared as though the Fund—and particularly the Fund staff—were “imposing” conditions.
ENVIRONMENT IN WHICH CRITICISM OF CONDITIONALITY AROSE
After 1973 when members, especially non-oil developing members, began in greater numbers to request stand-by arrangements in the upper credit tranches, these conditions were subjected to mounting criticism. In fact, by 1978 attacks on the Fund’s conditionality had become vitriolic. World economic circumstances and the political environment after 1973 were especially conducive to interest in, and criticisms of, the Fund’s conditionality. The unprecedentedly large and widespread balance of payments deficits had somehow to be financed. While most industrial and relatively more developed members and even several non-oil developing members with good credit standing and good banking contacts could obtain financing of these deficits from commercial banks or through the Eurocurrency market, these sources of funds were closed to many non-oil developing members. Once the Fund’s oil facility expired early in 1976, official sources of balance of payments and of development financing also became more scarce.
In addition, except for Italy and the United Kingdom, which had stand-by arrangements in the early part of 1977, it was developing members that were most affected by and concerned with the Fund’s conditionality. Many developing members, especially the smaller newly independent nations, were sensitive in all their relations, but especially in their relations with creditors. They did not want to be pressured into accepting stringent conditions. Moreover, as developing countries became economically and politically more powerful in the 1970s and pressed after 1973 for a new international economic order and for larger receipts of the world’s real resources, it was inevitable that they would turn to the Fund as a sizable source of financial resources and that they would request a re-examination of the terms on which the Fund’s resources were available to them.
In this context, the Fund’s conditionality was bound to be subjected to attack. For the first time, the Fund was being judged as “a lending institution” primarily for developing countries, a role not originally intended for it. Without an agreed code of conduct for international monetary behavior, and with the severe needs of many non-oil developing members for balance of payments financing, the Fund was in a position where its regulatory functions were minimal and its financial functions at a maximum. Consequently, although the Fund had meanwhile developed other functions, such as technical assistance, the initial concept of the Fund as an institution to monitor members’ exchange rates and restrictions with a revolving pool of resources to assist it in keeping exchange rates stable and international payments free from restrictions tended to be overlooked. Instead, attention turned to the Fund as a source of financing for countries having a difficult time raising money elsewhere. The terms or conditions on which the money was available became subject to intense scrutiny.
Strong criticism of the Fund’s conditionality was expressed by the Governors of several non-oil developing members at the Thirty-First Annual Meeting, in Manila in October 1976. This criticism coincided with the Managing Director’s call for greater emphasis on adjustment of balance of payments deficits and less emphasis on the financing of deficits. Speaking on behalf of the Governors of several African members, Marie-Christiane Gbokou urged the Fund to review the conditions attached to use of the extended facility.14 Most other Governors went further and asked for a review of the conditions governing use of all the Fund’s facilities.15
At the Thirty-Second Annual Meeting, held in Washington in October 1977, when the supplementary financing facility was being proposed as a way for the Fund to obtain resources to help finance stand-by arrangements in the upper credit tranches, the Governors of African, Asian, and Latin American members again voiced complaints about the Fund’s “strict conditionality.” Governors for African members, for example, noting especially the little use that had been made of the extended facility in the three years since it had been established, urged the Fund to be more flexible. Noting that developing members were not making much use of the Fund’s regular resources under either stand-by or extended arrangements, they argued that less strict conditions were needed if developing countries were to make greater use of the Fund’s resources.16 Emphasizing that the Brazilian authorities did not oppose, indeed supported, the principle of conditionality for use of the Fund’s resources, Mario Henrique Simonsen also urged that the criteria governing conditionality be reviewed. The Brazilian authorities, he stated, wanted to see the conditions to be applied in stand-by arrangements become “more predictable and more uniform.”17
By the time of the 1978 Annual Meeting, held in Washington in September, even more Governors spoke against conditionality as it was applied in practice. The Group of Twenty-Four expressed concern, for instance, “at the multiplicity of performance criteria.”18 Several Governors for developing members urged the Fund to loosen the conditions governing use of its resources. “The stiffness of conditionality attaching to Fund drawings,” stated H.M. Patel, “and the widespread feeling among developing countries that they are discriminated against in this respect are matters which merit serious attention.”19
By 1978 strong criticism of the Fund’s conditionality was being voiced in public and in private by officials of developing members and by some economists and staff of other international institutions.20 They complained that conditions applied by the Fund were too strict or unduly severe, implying that the conditions went beyond those needed for the Fund to ensure repurchase within the specified time. “Too strict” meant that the conditions involved making major changes in a member’s basic policies within too short a time. “Unduly severe” meant that the Fund’s conditions were excessively deflationary. These conditions were said to provoke unacceptable unemployment and to reduce to intolerable levels the real income and consumption of important sectors of the economy of a country requesting a stand-by arrangement. Critics cited budget cuts in essential social programs, such as subsidies on basic food items for the urban poor. These criticisms increased after riots in the streets of Cairo in January 1977 following cuts made by the Egyptian Government in the budget for food subsidies were widely reported in the press.
In other instances, too, when authorities of member governments found themselves unable to cope with the political pressure that arose following agreement with the Fund, governments fell and cabinet ministers resigned. The Fund was subsequently criticized for paying insufficient attention to the political difficulties members faced in initiating the required policy reforms. A few political scientists went further and contended that, since only dictatorial regimes could carry out the drastic deflationary programs requested by the Fund, the Fund was inevitably forced to support “repressive regimes in Third World countries.” Whether or not they accepted these arguments, many officials commented that the fundamental policy changes that the Fund required for stand-by arrangements in the upper credit tranches were unduly severe in relation to the limited amounts of money that the Fund could make available to the member.
The Fund’s conditions were also criticized on the grounds that they were too monetarist. By placing so much importance on limits on total domestic credit expansion as well as on bank credit expansion to the public sector, the Fund’s conditions, it was said, reflected monetarist explanations of inflation and of balance of payments deficits, explanations which were debated and criticized by economists themselves and were not generally accepted.
A related criticism of the Fund’s conditionality was that the methodology and techniques used by the staff in determining credit ceilings were too standardized and did not take adequate account of the differing economic and social situations of members. Officials of many developing members complained that the models used by the staff had been planned initially for the economies of industrial members and were inapplicable to developing members. The policy recommendations made by the Fund were said to be based on “faith in the working of the price mechanism as an allocation of resources.” Critics complained that, while changes in relative prices might quickly generate more efficient production in market-oriented industrial economies with sufficient resource mobility, they had slower and far less predictable effects in developing economies, which had market deficiencies, narrow production bases, and shortages of essential factors of production. Indeed, some developing countries were not market oriented but rather centrally planned economies.
Critics argued, too, that policies based on the price mechanism were regressive. Adjustment of the exchange rate and of prices charged by public utilities and enterprises, as well as reduction in budget subsidies, depressed real wages or the standard of living of the poorest groups in developing members, accentuating unequal distribution of income and conflicting with the promotion of social equity. Here, the staff of the Fund was faulted even by the staff of its sister organization, the World Bank. In the late 1970s, the World Bank began to emphasize a “basic needs approach” to economic development. With the slogan of helping “the poorest of the poor,” World Bank loans were increasingly directed to projects for supplying food and other necessities for subsistence and for making the distribution of income in the poorest developing members less unequal.21 The financial policies for balance of payments adjustment advocated by the Fund were said by some staff of the World Bank to counter the aims of their own programs.
The emphasis given to depreciation of the exchange rate was also of concern. Rather than easing the task of coping with balance of payments deficits, exchange rate devaluation was said to make it more difficult. Depreciation had an immediate impact on domestic inflation, while the supply responses necessary to achieve the desired expansion of exports and substitution of imports took a long time to materialize. Critics stated that balance of payments deficits of developing members should be reduced by a series of direct measures aimed at increasing domestic production rather than by exchange rate changes. They contended, too, that exchange rate devaluation was a general policy instrument and consequently did not permit selectivity in the control of imports, particularly in distinguishing imports for essential consumption and investment from those for luxury consumption.
With its emphasis on restraint of current demand in dealing with balance of payments problems, conditionality was criticized for compromising economic growth. Insufficient attention was paid, so critics said, to working out longer-run structural changes in a member’s economy, such as developing new export industries or making existing industries more efficient.
Even the style of operation of the Fund staff was criticized. The staff was said to be in effect running the countries that had stand-by arrangements with the Fund. These feelings were accentuated by press reports describing in detail the political difficulties of members in reaching and observing understandings with Fund staff. These press reports often suggested that economic policies were strongly influenced, if not dictated, by Fund staff, thus touching on sensitive issues of national pride and sovereignty. Some officials of developing members felt that stand-by arrangements were paternalistic. Use of Fund resources, it was said, had become such a traumatic experience that members with access to other funds hesitated to subject themselves to the Fund’s conditions. Along these lines the Fund’s policies were said to be inconsistent. Policies applied to various members were said to be different because of the size of the member, with larger members receiving less strict treatment than smaller members, and because of differing attitudes of individuals on the Fund staff.
Many of these criticisms were summed up by Ronnie de Mel at the 1978 Annual Meeting:
It is not in dispute that Fund resources in the upper credit tranches should be conditional. Nor the fact that Fund conditionality could improve the effectiveness of Fund credit. But we also feel that Fund conditionality, as it has been applied so far, should be reappraised with a view to making it more flexible. The types of performance criteria have multiplied in recent years. They relate to prices, interest rates, exchange rates, subsidies, protectionism, and foreign borrowing. Naturally, these have given the impression that stabilization programs are increasingly fashioned in such a way as to give the Fund controlling power over the functioning of the economy of the country concerned. Performance criteria should be limited to those having a direct bearing on the balance of payments. Above all, the stabilization programs should not worsen income distribution, should not be contrary to the satisfaction of basic human needs, and should not undermine the basic features of the economic organization desired by the member country. Above all, conditionality should take greater account of political and social realities in the countries concerned, a criterion that has already been enshrined in the Articles.22
Multiplier Effects of the Fund’s Conditions
Attacks on the Fund’s conditionality became especially acute in 1977 when officials of private commercial banks began to make a stand-by arrangement with the Fund a prerequisite for their lending to a country. A close tie between the willingness of commercial banks to lend to a country and the country’s having a stand-by arrangement with the Fund became almost standard after commercial banks encountered repayment problems with Zaïre in 1976 and 1977. When it seemed likely that Zaïre could not repay its debt to commercial banks, commercial bank officials worked out an ingenious solution. Rather than have Zaïre declare a legal default, a “standstill operation” would be mounted in which commercial banks would not lend to the country, but at the same time the country would not be repaying past debt. This solution meant that a country which was not “in good standing” with banks was nonetheless not formally declared in default, but it raised the question of how commercial bank officials could judge which countries were creditworthy. Commercial bank officials were beginning to be more familiar with Fund parlance and policy, and the test which they devised to judge the creditworthiness of a country was whether it could meet the conditions needed for a stand-by arrangement with the Fund in the upper credit tranches. This test induced private commercial banks to have prospective borrowing countries obtain the stamp of approval of the Fund by obtaining a stand-by arrangement in the upper credit tranches. Once a stand-by arrangement with the Fund was used to attest to a country’s creditworthiness, the conditions for a stand-by arrangement were more intensely debated. To make their requests more acceptable to outside lenders, officials of developing members understandably pressed for “more flexible,” meaning “more lenient,” conditions for stand-by arrangements.
A response by officials of industrial and relatively more developed members to such criticisms was to be expected. These members drew infrequently on the Fund and conceived of themselves as putting up the bulk of the Fund’s resources for the developing members to draw. As the Fund’s policies came under more strident attack, response by Fund officials also became essential. This response is discussed in the next chapter.
The debates of 1943–44 on the right to draw and the resulting Articles are described in History, 1945–65, Vol. I, pp. 67–77 and 101–103, and Vol. II, pp. 381–84.
These decisions—E.B. Decision No. 284–4, March 10, 1948, and E.B. Decision No. 287–3, March 17, 1948—were reproduced in History, 1945–65, Vol. III, pp. 227 and 228.
The debates in the Executive Board concerning automaticity versus conditionality in the Fund’s first few years have been described in History, 1945–65, Vol. I, pp. 151–52, 189, 223, 242, 24–6, 276, 280–82, 330, and 599, and Vol. II, pp. 390–97 and 522. Frank A. Southard, Jr., Executive Director for the United States in these years, has also briefly described some of these debates in his The Evolution of the International Monetary Fund, Essays in International Finance, No. 135, Princeton University (Princeton, New Jersey, 1979), pp. 16–20.
On April 5, 1948, the Fund took a decision limiting use of the Fund’s resources during the period of the European Recovery Program (erp), better known as the “Marshall Plan.” See History, 1945–65, Vol. I, pp. 219–20.
The 1952 decision on use of the Fund’s resources and the preceding discussions in the Executive Board have been described in History, 1945–65, Vol. I, pp. 276–82 and 321–26, and Vol. II, pp. 399–103. The decision itself was reproduced in Vol. III, pp. 228–30. The decision is also described in Southard (cited in fn. 3 above), pp. 17–18.
The origin and evolution of stabilization programs until 1971 can be found in History, 194565, Vol. II, pp. 492–510, and History, 1966–71, Vol. I, pp. 363–66.
See History, 1966–71, Vol. I, pp. 320–22 and 338.
Mr. Jacobsson’s economic views have been described by his daughter, Erin E. Jacobsson, in A Life for Sound Money: Per Jacobsson, His Biography (Oxford: Clarendon Press, 1979).
See History, 1966–71, Vol. I, p. 23.
These amendments are described in History, 1966–71, Vol. I, pp. 255–59.
Further discussion of the evolution of the Fund’s policy on drawings and of conditionality can be found in History, 1945–65, Vol. II, pp. 390–410 and 522–41, in Joseph Gold, Conditionality, IMF Pamphlet Series, No. 31 (Washington: International Monetary Fund, 1979), pp. 1–13, and in Manuel Guitián, Fund Conditionality: Evolution of Principles and Practices, IMF Pamphlet Series, No. 38 (Washington: International Monetary Fund, 1981).
The review of policies on use of resources in 1968 has been described in History, 1966–71, Vol. I, pp. 343–48.
The use of fiscal performance clauses in stand-by arrangements in the 1970s was described in W.A. Beveridge and Margaret R. Kelly, “Fiscal Content of Financial Programs Supported by Stand-By Arrangements in the Upper Credit Tranches, 1969–78,” Staff Papers, International Monetary Fund (Washington), Vol. 27 (June 1980), pp. 205–49.
Statement by the Governor of the Fund for the Central African Republic, Summary Proceedings, 1976, p. 125.
Statements by the Governor of the World Bank for Malaysia, the Governor of the Fund for Guinea, the Governor of the World Bank for Nepal, the Governor of the World Bank for Pakistan, the Governor of the World Bank for Bangladesh, and the Governor of the Fund and the World Bank for Sri Lanka, Summary Proceedings, 1976, pp. 136, 145, 163, 168, 199, and 203.
Statements by the Governor of the World Bank for Algeria, the Governor of the World Bank for Egypt, and the Governor of the Fund for Mauritius, Summary Proceedings, 1977, pp. 118, 149, and 177.
Statement by the Governor of the Fund and the World Bank for Brazil, Summary Proceedings, 1977, p. 91.
Communiqué of Group of Twenty-Four, September 22, 1978, par. 12; Vol. III below, p. 656.
Statement by the Governor of the Fund and the World Bank for India, Summary Proceedings, 1978, p. 73.
See, for example, the report, The Balance of Payments Adjustment Process in Developing Countries: Report to the Group of Twenty-Four, undp/Unctad Project INT/75/015 (New York, January 1979).
For a short description of the basic needs strategy see Paul Streeten, “From Growth to Basic Needs/” Finance & Development (Washington), Vol. 16 (September 1979), pp. 28–31.
Statement by the Governor of the Fund and the World Bank for Sri Lanka, Summary Proceedings, 1978, p. 157.