Chapter

VI Role of the Fund

Author(s):
Naheed Kirmani, Shailendra Anjaria, and Arne Petersen
Published Date:
July 1985
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One of the underlying purposes of the Fund is to facilitate the balanced expansion of international trade with a view to promoting economic growth (Article I of the Fund’s Articles of Agreement). Accordingly, trade policy issues receive careful attention in the work of the Fund, both in its exercise of surveillance and in connection with the use of Fund resources. At the same time, due respect is paid to the existing institutional distinction between the Fund’s specific responsibilities and competence in the payments field under Article VIII and the GATT’s role and competence in the trade field.

Article IV Consultations

Fund surveillance in the context of its Article IV consultations encompasses all Fund members and enables the Fund to assess whether their policies are conducive to financial stability and economic growth, domestically as well as internationally. Since 1983, the coverage and analysis of trade policy matters in Article IV consultation reports have been expanded, parularly in consultations with major trading nations. The Fund staff has increased monitoring of trade policy developments and contacts with trade officials. In this context, the recent establishment in the GATT Secretariat of a special division that will systematically assemble available data on trade policy actions and developments on a country-by-country basis has facilitated the flow of information between the Fund staff and GATT officials.

Attempts to improve trade policy coverage of Article IV consultations have focused on the following areas, within the limits of available information and staff resources: the impact of protection on domestic adjustment; the effects of a member’s trade measures on its trading partners; the consequences of protectionism abroad for the consulting country; analysis of specific trade issues; and coverage of protectionist measures adopted in the framework of regional arrangements in the report for the individual member. In presenting and analyzing trade matters in Fund reports, the focus has been on the economic impact of the stance of trade policy rather than the legal status of individual measures under the GATT. The consistency of a measure with the provisions of the General Agreement can be interpreted only by the Contracting Parties, and there are sometimes divergent views among contracting parties on whether certain measures are legal or illegal and on the techniques for liberalizing trade with respect to the two categories of measures.

Efforts to increase attention to trade policy in Article IV consultations with the major trading nations are based on two main considerations. First, a small number of countries account for a substantial portion of world trade, and their actions have a proportionately greater impact on the trade of other countries and on the openness of the world trade system as a whole than do the other countries.132 Second, trade policy formulation is, in practice, a highly interactive process in which the sectoral trade measures of one major country tend to be emulated by other major trading countries. Article IV consultations serve as a useful vehicle for bringing to bear the international view on trade policy formulation in the major trading nations.

It is generally acknowledged that exchange and trade restrictions can be close substitutes for each other. When a restrictive measure involves a member’s exchange system, Fund jurisdiction under Article VIII of its Articles of Agreement may be directly relevant, and the provisions and procedures for evaluating the measures, including approval or nonapproval by the Fund, are well established. Assessments in the context of Article IV consultations of the openness of an economy and of the appropriateness of a country’s exchange rate policy, of course, take into account both exchange and trade restrictions.

Trade Policies in Programs Supported by Fund Resources

Fund members’ programs supported by the use of its resources typically are geared to the establishment of a viable balance of payments in the medium term and of conditions contributing to the achievement of sustainable, noninflationary growth. As mentioned above, promotion of open exchange and trade systems contributes to the objectives of the Fund and is accordingly reflected in the content and design of Fund-supported adjustment programs. A restrictive trade and payments system may be viewed both as a symptom of underlying balance of payments disequilibrium and as a factor hindering structural adjustment and efficient resource allocation.

A necessary condition for establishing an open exchange and trade system is the pursuit of an appropriate exchange rate policy. Exchange and trade systems are often so closely interlinked that liberalization of the trade system may not be feasible or effective unless it is preceded or accompanied by reduced reliance on restrictive exchange practices. In addition to jurisdictional considerations, this explains why Fund-supported programs give high and immediate priority to corrective measures in the exchange rate and exchange restrictions and multiple currency practices, relative to the importance attached to trade liberalization. From a broader perspective, domestic and external measures that promote balance of payments adjustment also help establish conditions favorable to trade liberalization, even if the adjustment program does not directly address the issue of trade liberalization. Typically, reversal of trade restrictions introduced to contain balance of payments problems is a priority objective in formulating the trade content of Fund-supported programs.

Fund-supported programs incorporate a standard performance criterion under which purchases are interrupted if a member imposes new—or intensifies existing—import restrictions for balance of payments purposes, in addition to similar provisions for exchange practices subject to Fund jurisdiction under Article VIII. The economic rationale for the former is the need to avoid “solving” balance of payments problems by introducing trade restrictions. From the viewpoint of the trade policy content of Fund-supported programs, as a minimum, a sort of “standstill” on trade restrictions for balance of payments purposes is provided.

The experience in Fund-supported programs with regard to policies on trade liberalization that goes beyond a “standstill” has varied considerably. In recent years, about one half of all programs and about two thirds of extended Fund facility programs have included trade liberalization as an objective of the authorities during the program period. The policy content ranged from substantial liberalization put into effect during the program period to expression of broad intentions to liberalize trade when feasible. About two fifths of all recent programs and about one half of extended Fund facility programs have included specific trade liberalization measures not covered by the Fund’s Article VIII. In appropriate cases, these specific measures were formulated as a quantified performance criterion under the program that interrupts purchases if not observed. In the vast majority of cases, however, the difficulties of formulating and assessing trade measures in quantitative terms precluded the specification of liberalization objectives in quantitative terms. Accordingly, monitoring relied on qualitative assessments, usually undertaken in the context of an overall review of performance.

Determination of the nature of specific liberalization measures to be included in a Fund-supported program depends on the objectives of the authorities. Fund-supported programs refrain from establishing the priorities for liberalization between different sectors. This approach is consistent with the Fund’s general policy of avoiding a detailed specification of a country’s objectives at the sectoral or microeconomic level. Whenever possible, the Fund staff relies on available studies of nominal and effective protection (particularly those prepared by the World Bank).

Members undertake a wide variety of trade policy actions in the context of Fund-supported programs. The overwhelming focus of specific trade liberalization measures has been on import restrictions, although trade measures affecting exports have also been included in some cases. Import liberalization may involve a relaxation or streamlining of an import-licensing or quota system, or rationalization of the import tariff structure (for example, by reducing the dispersion of tariffs, lowering the average rate of tariff protection, and reducing or eliminating import surcharges), or both. In several countries, reliance on quantitative import restrictions gave way to a more efficient tariff system. In Kenya, for example, the import-licensing system for manufactured products was liberalized gradually, beginning in 1981, while the overall protection level was roughly maintained by increasing tariffs. After a temporary increase in the restrictiveness of the licensing system at the end of 1982, the liberalization process was continued in 1983 and 1984, and tariffs were also reduced somewhat. In Panama, quantitative restrictions were eliminated in 1983 on nearly one half of the product categories that were subject to such restrictions and were replaced by approximately equivalent tariff protection.

In some countries, licensing procedures and quantitative restrictions were eliminated or liberalized outright, while tariff policy was maintained broadly unchanged. For example, in Hungary, where temporary measures (including discretionary licensing and a 20 percent import surcharge) had been put in place at the end of 1982, the restrictions were gradually phased out during 1983–84. Mauritius gradually eliminated all quantitative restrictions on imports during 1983–84. In Jamaica, the scope of the quota and licensing system was substantially reduced during 1982–84, so as to allow importation without license for some 75 percent of nonbauxite and non-oil imports. Trade measures introduced in India from 1982 and continued subsequently included increases in the value of automatic licenses (allowing free importation of automatically permissible items up to the value of the license); new provisions for imports of more heavily protected goods; enlarged coverage of imports under Open General License; and liberalization of capital goods imports to permit increased access to foreign technology. Measures were also introduced to simplify import procedures. In Pakistan, the licensing system was simplified in 1983 by replacing the positive restricted list with a negative list. Also, the proportion of domestic industry protected by bonus or equivalent restrictions was significantly reduced.

In some other countries, reduced reliance on licensing and quantitative restrictions was combined with rationalized import tariff systems and reductions in the average rate of tariffs. For example, Turkey’s exchange and trade system was substantially liberalized during 1980–85. Beginning in 1985, customs tariff rates will be rationalized and the average tariff rate will be reduced somewhat. During 1980–83, the Philippines implemented a program to gradually reduce tariffs and nontariff restrictions.133 Morocco undertook substantial trade liberalization during 1981–84. Korea began to liberalize its trade system in mid-1978. The process was accelerated in late 1983 and early 1984, when the authorities began to implement a five-year plan of import liberalization and comprehensive tariff reform, under which about 1,200 items would be freed from import restrictions during 1984–88, raising the import liberalization ratio to 95 percent by the end of the period. In 1984, 350 items were liberalized, and a list of 543 items scheduled for liberalization in 1985 and 1986 was announced. The tariff reform reduced the average rate of tariffs from 23 percent in 1983 to 21 percent in 1984 and aims to reduce the average further to 17 percent by 1988. At the same time, tariff rates, which were as high as 150 percent before the reform, will be concentrated in a 5–30 percent range by the end of 1988.

In export subsidies, the Fund’s approach is guided by considerations similar to those relating to the pace and extent of import liberalization. In many cases, an appropriate exchange rate policy will obviate the need for export subsidies. More broadly, since export subsidies are often made necessary by the existing system of import restrictions, a program of import liberalization undertaken in connection with a broad adjustment program involving the exchange rate policy should similarly make it possible to eliminate—or at least reduce—the scope of export subsidies. Fund members that reduced export subsidies in recent years include Brazil, Yugoslavia, Pakistan, and Turkey.

Fund-GATT Collaboration

Informal collaboration and contacts between the Fund and the GATT have been intensified in recent years. In addition, as discussed earlier, the focal point of Fund-GATT collaboration continues to be the effective implementation of the provisions relating to trade actions taken by common members for balance of payments purposes.134 Fund staff attend most of the GATT meetings held during the year, including those of the GATT Council and specialized GATT committees dealing with areas such as subsidies, textiles, trade and development, and agriculture. Senior Fund staff and GATT officials are also in regular contact on matters of mutual concern.

In addition to the specific and general areas of Fund-GATT collaboration outlined above, issues of special Fund concern, such as the exchange rate system, are brought up by contracting parties in relation to their implications for the trading system. At the November 1982 GATT Ministerial Meeting, the Contracting Parties requested the GATT Director-General to consult with the Fund’s Managing Director on the effects of exchange rate fluctuations on international trade. In response, in 1983 the Fund staff provided the GATT Contracting Parties with a study entitled “Exchange Rate Volatility and World Trade.”135

At their fortieth session in November 1984, the GATT Contracting Parties adopted a decision on exchange rate fluctuations and their effect on trade, noting that exchange market instability may increase protectionist pressures, but protective trade action cannot remedy problems of market uncertainty for traders and investors. They also recognized that adjusting to uncertainty could be more difficult for small traders, small trading countries, and developing countries. The decision concluded by declaring

[T]he CONTRACTING PARTIES therefore urge that their concern regarding the relationship between exchange market instability and international trade be taken into account in ongoing efforts within the International Monetary Fund to review the operation of the international monetary system with a view to possible improvements.136

Recently, at the initiative of the Director-General of the GATT, the Fund staff and the GATT Secretariat have been in contact to determine how information on services and on restrictions on service flows available in the Fund could best be made available to the GATT in connection with its work in the area of trade in services.

The close collaboration that has evolved over the years between the Fund and the GATT has worked well and is important in supporting the objectives of the two institutions.

For example, some 60 percent of world exports are accounted for by the top ten trading nations (nine OECD countries and Saudi Arabia). On a broader definition, 80 percent of world exports originate in the top 25 trading nations, including 10 developing countries.

In the wake of the balance of payments crisis of 1983, however, quantitative restrictions were again intensified as a temporary measure.

Article XV of the General Agreement, which provides the broad framework for this collaboration, states that “[t]he CONTRACTING PARTIES shall seek co-operation with the International Monetary Fund to the end that the CONTRACTING PARTIES and the Fund may pursue a co-ordinated policy with regard to exchange questions within the jurisdiction of the Fund and questions of quantitative restrictions and other trade measures within the jurisdiction of the CONTRACTING PARTIES.”

This paper was subsequently published as IMF Occasional Paper No. 28.

GATT, Exchange Rate Fluctuations and Their Effect on Trade, Document L/5761 (December 20, 1984).

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