Concept and Characteristics of an Imbalance

For the general purpose of this paper, it is only necessary to outline a concept of economic imbalance from the most abstract perspective possible, thereby avoiding the complications that arise in the actual implementation of policy. To this end, the issue of adjustment is addressed here by focusing on the notion of an actual or potential adjustment need. A convenient dimension of this starting point is that, by definition, it does not depend on the specific features of an economy.

Conceptually, a need for adjustment can be said to exist whenever total claims or demands on resources exceed the aggregate amount of resources that is available domestically and from abroad. Global imbalances of the sort that correspond to this broad definition arise periodically in most economies. In the effort to cope with them, policymakers often attempt to ascertain the specific causes of these imbalances. Frequently, the attempts are aimed at establishing whether the causes of the imbalances are external or internal in origin, or whether they are exogenous or endogenous in nature. From the viewpoint of the formulation of economic policy decisions, it may be useful to determine whether the origin of a disequilibrium lies in developments within the country’s economy or in events that took place elsewhere in the world. Similarly, the strategy adopted to avert or correct an imbalance may be influenced by whether the imbalance has been created by domestic policies—that is, by whether it is endogenous—or by whether it is independent of those policies—that is, by whether it is exogenous.

Investigation of these aspects of the source of an imbalance is useful. For the design of an adjustment effort, however, the critical issue revolves around a different aspect of the imbalance: the determination of whether its causes are transitory or permanent. The answer given to this question largely determines whether or not adjustment is required. Imbalances or deficits that are due to transient factors can be expected to be self-correcting, and perhaps also reversible. From this perspective, the origin and the nature of the imbalances are of secondary importance. Temporary imbalances, ceteris paribus, need not call for any, or at most call for relatively minor, policy modifications. If, in addition, they are reversible, such imbalances require only temporary financing; borrowing abroad or use of international reserves or a combination of both would be appropriate responses to them.

When the imbalances are caused by permanent factors, however, there is no alternative to adjustment. Continued reliance on financing will not eliminate the disequilibrium; at best, it can only serve to postpone adjustment. In this context, it is worth stressing that resort to restrictions on the freedom to engage in economic transactions, including transactions involving foreign exchange, only serves to suppress the imbalance. This course of action usually gives economic agents incentives to seek ways to circumvent the restrictions, thereby giving rise to problems of efficiency and, probably, of equity as well. It is true that an imbalance can sometimes be temporarily repressed in an economy by the use of restrictions and controls. Basically, such a strategy amounts to an attempt to close the economy from the rest of the world, thereby forfeiting the potential benefits that arise from international transactions. But additionally, during the period when the controls are effective, the pressures that then cannot be released elsewhere turn inward and aggravate the original imbalance. As a result, further increases in the restrictiveness of the system are likely to be required. Clearly, such a setting cannot but be inimical to economic efficiency.

By assisting members in need of adjustment, the Fund seeks to remove the imbalances, that is, to restore a sustainable relationship between the aggregate demand for and the supply of resources. Uniformity of treatment requires that, for a given degree of need, the adjustment effort sought by the Fund be broadly equivalent among members. Flexibility of treatment is ensured by tailoring the objectives and instruments of the adjustment program to the circumstances, priorities, and characteristics of the country.

As with the search for both uniformity and flexibility, the Fund in its programs to redress economic imbalances aims at achieving a reasonable balance between adjustment and financing, both of which can and should be mutually supporting. Adjustment and financing can be described as the two sides of the seesaw that a Fund program always contains. This reflects the awareness that, in the presence of an imbalance, adjustment without financing is disruptive and costly, on the one hand, and that financing without adjustment is untenable, on the other. In seeking to define a sustainable path of adjustment, Fund programs actually look for the optimal amount of financing. In one sense, an important aspect of the concept of sustainability is its very close relationship with the availability of financing. This particular relationship has been given operational meaning in the linkage made in Fund arrangements between performance under the program (the adjustment aspect) and drawings on the resources of the Fund (the financing aspect).

Avoidance and Resolution of Imbalances

The economic programs supported by the Fund with its resources always contain measures to avert or to correct an external imbalance. As argued earlier, this objective entails the maintenance or restoration of a sustainable relationship between the demand for resources and the supply that is actually available to the economy. Therefore, whatever strategy is chosen, the program must contain measures that act either on the demand for resources, the supply of resources, or both.

At the risk of oversimplification, the various economic policy measures required to effect an adjustment can be classified according to where they appear to have their most direct and strongest impact. Some measures typically influence the level and the composition of aggregate demand. Others aim at affecting the rate and the structure of production, that is, the level and composition of aggregate supply. In reality, a caveat is required, however; groupings such as those just outlined are not clear cut because all economic variables tend to be interdependent and, therefore, do not lend themselves to unambiguous classification.

Policies and measures of domestic demand management can be distinguished according to their fiscal and monetary nature. Again at the risk of oversimplification, this particular distinction can be explained as follows. There is a very close relationship between the level and the rate of growth of demand and those of expenditure in any economy. Consequently, one method of managing domestic demand can be through adequate monitoring of expenditure that, in many instances, calls for strict control of one major component of total expenditure: government or public sector spending. Fund experience with a large variety of members over a long period indicates that this source of expenditure is often behind unsustainable expansions in aggregate demand.

Excessive total expenditure in an economy can be brought under control directly by curtailing public sector spending—one of its main components—or indirectly by raising additional fiscal revenues. The indirect revenue route will not reduce public sector spending, but it will tend to dampen private expenditure so that the overall level or rate of growth of demand is lowered. These policy options can be grouped under the general label of the “fiscal aspect” of demand management. In brief, this particular aspect of demand management seeks to limit the size of a fiscal or public sector deficit to the amount of noninflationary financing available in the economy.

A second method of controlling aggregate demand is based on the relationship that exists between total spending and domestic borrowing. Excess expenditure in an economy in general, and in the public sector in particular, can of course be sustained whenever borrowing can be undertaken. In itself, there is nothing wrong with borrowing; actually, borrowing is the process that allows the transfer of resources among economic agents over space and time. However, as in all other economic areas, balance must also be observed in the process of borrowing. The very presence of an excessive level of expenditure financed by borrowing implies—as it were, by definition—that the demand for borrowed resources surpasses the supply of available resources. In the domestic economic sphere, these relationships between expenditure levels and domestic borrowing possibilities are what can be termed “the monetary aspect” of demand management. Briefly, this aspect simply postulates that the level of domestic spending can be checked by the establishment of domestic credit policies that ensure broad balance between the demand for and the supply of domestic financial resources in general, and for credit and money in particular.

There are also policies and measures that belong in the area of supply management. In general, it can be argued that aggregate supply issues allow for less direct treatment and resolution than those relating to aggregate demand. This is because supply responses to policy action are unlikely to be as rapid as those that can be elicited from the demand side. Realization of supply potential requires efficiency in resource allocation, which, in turn, depends on the prevalence of appropriate economic incentives. Supply is also contingent on the amount of available resources, and in this context, the whole area of external debt management is of particular importance. While foreign borrowing can serve to circumvent demand management and domestic credit policies (e.g., by financing excessive expenditure on domestic goods and services without necessarily adding to their supply), it can also be instrumental in increasing the supply of resources available to an economy (e.g., by allowing for more imports of goods and services). The critical point in the supply context is the scope that the availability of foreign savings (i.e., foreign borrowing) can provide to domestic economic management by supplementing domestic savings and thereby allowing for the attainment of investment levels and real growth rates that otherwise would be unattainable. This line of reasoning makes clear how important it is to ensure that borrowing from abroad be undertaken in amounts and on terms that are sustainable. Or, to put it differently, it also makes clear how critical it is to ensure that the foreign savings be invested productively so that the economy can service its external debt in an orderly manner, that is, without experiencing foreign debt servicing difficulties.

In the supply context, the broad area of economic incentives and prices, including the exchange rate and interest rates, can hardly be overemphasized. Attention needs to be drawn to the role that prices in general play in any economy in conveying information on the relative scarcity of resources and the degree of preference for existing commodities. The issue at stake here is not the particular method of formation of prices but their critical importance for any system of economic organization. A relative price structure based on the scarcity value of resources and also representative of the structure of demand can maximize the efficiency of resource allocation and thereby the level of output that is to be distributed in the economy.

In this area, emphasis can be placed on the following variables: the exchange rate, which is of direct interest to the Fund not only from a general economic perspective but also from a jurisdictional standpoint; interest rates, which can be crucial for the attainment of balance of payments, development, and growth objectives; and the prices of goods and services of particular importance to the economy, because these also can have significant impacts in the financial, allocational, and distributional spheres.

In a very summary fashion, an overvalued currency not only constrains domestic output unduly by placing export production at a disadvantage, but it also typically influences aggregate demand in the wrong direction by subsidizing imports. In these circumstances, the economy is forced to resort more and more to either foreign borrowing (usually on increasingly hard terms), or use of its foreign reserves (which are, of course, exhaustible), or both. These events are often accompanied simultaneously or eventually, as the case may be, by the introduction or intensification of exchange and trade restrictions, that is, by effectively closing the economy. Experience shows, however, that restrictions lead to the proliferation of unofficial markets, which make it difficult to close the economy completely. Thus, restrictions cannot remove indefinitely the need to correct the imbalance by means of appropriate adjustment measures.

As with the exchange rate, an inadequate domestic interest rate contributes to balance of payments pressures by encouraging both capital outflows and domestic spending. But even more important, over the longer term, such interest rates discourage savings and impair the efficiency of investments. Thus, they tend to reduce the economy’s potential for development and growth and, consequently, to weaken the balance of payments. Also, setting economically low prices for key commodities and services typically reduces efficiency and leads to financial imbalances. Frequently, the subsidies that the pricing policies seek to create do not benefit the sectors for which they are intended. All these arguments stress the importance of promoting efficiency in any economic setting, an objective that generally calls for strengthening, rather than weakening, price incentives.

Evolution of Fund Practices

The general practices that have evolved to guide the use of Fund resources have come to encompass all the aspects of economic policies that affect the demand and supply sides of an economy. The broad aim of these practices is the attainment and maintenance of a reasonable balance between these two sides in the context of a liberal system of multilateral payments to enable members to derive the benefits that flow from the voluntary interaction of their economies on the basis of a mutually agreed code of conduct. This general and all-encompassing objective is viewed as the most likely to provide for price level and balance of payments stability together with high and sustainable rates of economic development and growth.

In the search for the appropriate blend between adjustment and financing, the Fund has established a variety of instruments and facilities to make its resources available to members with actual or potential balance of payments needs. The use of those resources has been made subject to different degrees of conditionality; these differences are intended to reflect the different characteristics of the balance of payments problems of members. In general, it must be pointed out that, to a larger or a lesser degree, all uses of Fund resources are conditional; from this perspective, the provision of Fund financial assistance, in all its manifestations, is always aimed at supporting members’ adjustment efforts. But the existence of varying degrees of conditionality allows for a classification of existing Fund facilities under two major headings: on the one side, facilities with a bias toward financing; and on the other, facilities with a bias toward adjustment.

The facilities with a bias toward financing either do not require members to undertake a specific policy program or require only a broad description of such a program for members to have access to the resources of the facility. Those that do not necessarily require an explicit policy program include the compensatory financing facility, the buffer stock financing facility, and the temporary 1974 oil facility. A general description of a policy program is required to make members eligible to draw ordinary resources from the Fund in an amount equivalent to the first credit tranche (i.e., drawings that would raise the Fund’s holdings of a member’s currency from 100 percent to 125 percent of its quota). Such a description of a program of policy action was also required of members requesting loans from the already lapsed 1975 oil facility and the Trust Fund.

Access to resources in the higher credit tranches and to resources from the extended Fund facility, the supplementary financing facility, and its successor, the enlarged access policy, are biased in favor of adjustment. Such a bias is illustrated, on the one hand, by the requirement that the measures and policies included in programs supported by these types of Fund resources be quantified—in what are called performance criteria—to allow for a measurement of performance and, on the other, by the phasing of financial assistance in installments that are made available only when the agreed criteria have been observed. In reality, the implementation of these practices is more flexible than is generally thought. The performance criteria, in effect, play the role of precautionary signals that ensure that the situation is reviewed whenever the performance of the economy is not on track. While in the interim the member is not entitled to make drawings from the Fund, the technique of linking performance to disbursements allows for a determination of whether the deviation that occurred was unimportant—in which case a waiver is granted for the lack of observance of the performance criterion and the member can proceed to draw on the Fund—or whether adaptations of policies are required—in which case the performance criteria are modified by mutual agreement and the member’s drawing rights are thereby restored.

This classification of financial assistance under the various Fund facilities overemphasizes the contrast that actually exists among them. While it is indeed accurate to say that the degree of conditionality is higher under one group of facilities than under the other, attention must also be drawn to the differences that exist in the magnitude of the assistance that each group of facilities can make available. Leaving aside the facilities that have lapsed (e.g., the oil facilities), at present, the combined drawings under the compensatory and the buffer stock financing facilities cannot exceed the equivalent of 175 percent of quota. In contrast, potential drawings under the more conditional facilities (i.e., under credit tranche policies and the extended Fund facility) can amount to an average of 150 percent of quota a year over a period of three years, for a total of 450 percent of quota, subject to an absolute maximum of 600 percent of quota. Therefore, while the policy conditions may be stricter in stand-by and extended arrangements, the financial support that those arrangements can offer to members that have entered into them is substantially larger than the assistance that can be provided to members that have resort only to the less conditional facilities. From this perspective, perhaps the best classification of the facilities is somewhat paradoxical: on the one hand, there are facilities with a bias toward financing but which can only provide relatively limited financial assistance; and, on the other hand, there are facilities with a bias toward adjustment but which offer assistance from the Fund on a substantial scale.

Some Issues in the Context of Adjustment

Two different kinds of issues can arise in the context of adjustment programs supported by the Fund. First, there are issues of a general nature that address important aspects of the adjustment process. Second, there are issues related to the complexities that arise in the context of the Fund’s approach to adjustment as a result of the diverse institutional settings and characteristics of its members.

Two general issues are particularly controversial: the appropriate speed of adjustment and the proper measurement of the efficiency of adjustment. The speed of adjustment is an issue that has not yet been, and perhaps cannot be, conclusively resolved. It is frequently described as a choice between a “shock” approach and a “gradual” approach to the adjustment process. This choice, however, is not unconstrained. Its limits are determined by the relationship mentioned earlier between adjustment and financing. There is a constraint on the choice of approach that is imposed by the linkage between the size of the imbalance, on the one hand, and the availability of finance, on the other. This relationship serves to gauge the adjustment need as well as the extent of the adjustment effort. The issue has not yet been resolved because, even in those instances where financing is available, it is not always obvious that a gradual process of adjustment is preferable to a rapid one.⁴

The issue of the measurement of the efficiency of the adjustment effort or, in other words, the assessment of economic performance, is also a complex one. In the normal process of learning by doing, it is important to be in a position to ascertain which are the proper methods and standards for evaluating economic performance. Here only three possible standards of measurement are discussed. The first could be called a positive or factual standard in that it relates the results of policies to the situation that prevailed in the economy prior to their introduction: that is, it measures what is relative to what was. The second is a normative standard that compares actual policy results with policy targets: this entails a comparison of what is with what ought to be. The third is a conjectural standard that compares actual policy results vis-à-vis the events that would have occurred in the absence of—or in the presence of a different set of—policies: this standard compares what is with what would or could have been. All three standards can be useful, but their usefulness is not independent of the judgments—in particular, the value judgments—of the observer.

Issues also arise as a result of the diversity of the Fund’s membership, including differences in systems of economic organization. Many of the Fund’s policies and practices have been derived from an analytical framework in which an important degree of decentralized economic decision making was the norm rather than the exception. But this does not mean that the basic rationale of those policies and practices does not apply in environments where decision making is more centralized. To begin with, the basic problem addressed by Fund policies is common to all members’ economies, regardless of their particular economic setting; specifically, external imbalances and the inevitability of adjustment are independent of the degree of centralization of decision making that prevails in an economy. Also, the benefits to be derived from efficiency in resource allocation and from the existence of economic interaction among member countries are independent of the pattern of economic organization. Last but not least, the Fund objective of ensuring that the adjustment process leads to an environment where both stability and development can be attained is valid for all types of economies.

The concept of “balance of payments need” is important for understanding the circumstances under which a member may have access to Fund assistance. Any actual use of Fund resources requires the member to demonstrate that it has a balance of payments need for those resources. Formally, such a requirement entails an obligation of the member to represent that it has a need to draw on the resources of the Fund “because of its balance of payments or its reserve position or developments in its reserves” (Article V, Section 3(b)(ii)). From an operational standpoint, “balance of payments need” is more of a term of art than a precisely measurable concept. As its formal description makes clear, the establishment of the existence of such a need involves judgments that encompass factors such as the size of and developments in a country’s international reserves as well as its balance of payments position. Balance of payments needs (which in the context of a member’s request for the use of conditional Fund resources can be either actual or prospective) emerge or are expected to emerge as a result of external or internal developments, including inappropriate domestic policies. Indeed, one of the purposes of the financial assistance provided by the Fund is to eliminate or avert the balance of payments need by removing its causes or by helping the economy to adjust to them.

In a centrally planned economy, the balance of payments need may be implicit in the decisions made on expenditure in general, or on investment in particular. From this standpoint, it can be argued that the balance of payments need is a planned outcome, an objective being deliberately sought, rather than a result of actions that require modification or correction. For purposes of Fund financing, the notion of balance of payments need corresponds more to the idea of a consequence of, say, certain past or prospective policy actions than to the idea of an objective embodied in those actions. It is for this reason that an adjustment effort supported by the Fund typically calls for new policy measures or for modifications to existing policies in order to eliminate the causes of the external imbalance. In other words, a country that is ready to engage in an adjustment effort and, on this basis, requests assistance from the Fund in fact undertakes to eliminate or to avert its balance of payments need over a foreseeable period of time. Thus, in the context of a centrally planned economy, a conflict may arise whenever the policy strategy in the global plan involves both a planned balance of payments deficit and Fund assistance to support an adjustment effort, because this effort would in most circumstances entail a modification of certain policies included in the plan.

A second area of interest is the appropriate framing of the adjustment program where an actual or potential balance of payments need has arisen. In economies where decision making is centralized, there is probably more scope for the use of direct measures of adjustment than in economies where decisions are decentralized. Thus, although the requirements of an adjustment effort can be the same for both types of economies, the instruments of adjustment may differ.⁵

Some of the performance criteria typically included in Fund programs, such as those covering external debt management and exchange and trade restrictions, apply to all economies, regardless of their lines of organization. But certain others, such as limits on the total amount of domestic credit or on the expansion of bank credit to the public sector, may be less useful for a centralized economy, where limits on global public sector expenditure might provide a more direct route to demand management.

In general, in a centrally planned economy there are normally direct means to control aggregate demand and, at least in principle, such control can be exercised more effectively than in a decentralized economy. The offset to this particular advantage of a centralized system appears to be in the supply of goods and services. In such a system, economic decisions—and particularly, pricing decisions—are administrative, and the attainment of supply potential is by no means assured. Achievement of supply potential revolves around the whole area of relative prices, exchange rates, and interest rates that were discussed earlier. The relevance of pricing in the process of economic calculation for purposes of achieving efficiency in production and of providing information on the structure of demand in all types of economies has been recognized and subject to extensive treatment in the economic literature.⁶

In general, it is useful to view an arrangement with the Fund as an instrument for facilitating and reinforcing the process of domestic economic policymaking. From this standpoint, it is in the interest of both the member and the Fund that adjustment programs be formulated in terms of the most appropriate instruments and that there be a sufficient flow of information not only to design the program but also to follow its implementation and assess its results.

Concluding Remarks

In concluding this paper, I would like to emphasize the importance of safeguarding the universal character of the Fund. This particular dimension requires that all countries that are able and willing to abide by the prescriptions of the Articles of Agreement can join its ranks, regardless of any differences that may exist in their economic features or systems of economic organization. This universality of accession has been strengthened by the Fund’s practice of avoiding distinctions among groups of member countries, a practice that is in line with the Articles of Agreement, which prescribe rights and obligations that apply equally to all members.

As pointed out earlier, this should not be interpreted as meaning that the Fund is impervious to country differences. The diversity that exists among member countries in terms of the stage of their economic development, the degree of openness of their economies, or the extent of centralization in economic decision making is generally recognized, particularly in those areas where such diversity either has or can have important implications for policies of balance of payments adjustment. The need to strike a balance between uniformity and flexibility calls for a careful exercise of judgment. While it is true that uniformity, properly conceived, requires a degree of flexibility, such a conception does not go as far as to allow for unfettered flexibility because this would run counter to the proper functioning of a cooperative entity like the Fund.

In the area of adjustment and use of Fund resources, there is ample scope for such an exercise of judgment. Priorities differ between centralized and decentralized economies. Indeed, the differences go a long way toward explaining the reasons for the existence of the two types of economic system. But it must also be acknowledged that there are important areas of similarity, such as, as has already been noted, the existence from time to time of imbalances and the need to adjust those of a persistent nature. These are common realities to all economies. On a different but related plane, the achievement of economic efficiency is also a common objective among members. Different priorities may lead to different solutions to the problem of inefficiency, but the differences that may exist do not extend to the acceptance of resource waste.

As far as adjustment policies in Fund programs are concerned, this paper has addressed only very sketchily a few of the issues that arise in the context of economies differentiated on the basis of the degree of centralization. Some of the complexities that surround a basic concept such as a balance of payments need have been indicated. Even more difficult issues arise with respect to restrictions and exchange rates. All of these encompass obviously difficult questions. But they should not deflect attention from the basic objective to which adjustment efforts and Fund financial assistance are aimed: the attainment of a viable balance of payments position in a context of price and exchange rate stability so as to foster the process of development and growth.

If there is general agreement with the desirability of this objective, then it follows that all members have an interest in averting emerging imbalances or correcting those that already prevail in the most efficient fashion. This interest is common to the member experiencing the imbalance and to the rest of the membership if only because of the increasingly close interdependence that links the economies of members. The presence of an institution like the Fund attests to this interdependence and to the existence of interests that are common to the whole membership. But general interest in the adjustment of imbalances does not mean that such an adjustment has to be effected in a single and predetermined fashion. The only constraints that bind the strategies for adjustment are those specified in the Articles of Agreement, to which all members are signatories and which all members have, therefore, undertaken to observe.

In the particular context of the centralized economies, and subject to institutional constraints or to those constraints imposed by the code of conduct laid out in the Articles of Agreement, this means that the design of an adjustment effort should be based on those instruments that appear most appropriate in the context of their organizational setting. It is typical in these economies that the share of the government in the system as a whole is larger than is the case in less centralized economies. As a result, it is likely that the degree of government influence over the main macroeconomic variables (such as demand, expenditure, consumption, and investment) is substantial so that whenever these economies move onto an unsustainable path, equilibrium can be restored in a relatively rapid and direct manner. To the extent that this is the case, performance criteria dealing directly with these variables could conceivably be used in lieu of the more conventional but indirect instruments such as credit ceilings typically used in arrangements between the Fund and members with market-oriented economies.

In principle, to the extent that detailed planning techniques are used and detailed objectives are sought in centralized economies, adjustment would be best framed in the context of the overall plan; that is, the adjustment effort should be an integral part of the plan. This is not to say that, in the process of negotiating an arrangement, the Fund would need to enter into all aspects of the plan. Once again, judgment is called for, but it can be surmised that the Fund’s interest would normally be limited to those areas that have a bearing on its jurisdictional responsibilities (e.g., exchange practices) or on the major objectives of the adjustment (e.g., the balance of payments). The goal of keeping Fund involvement in the process of policy formulation broadly uniform and comparable among members is complex, but it can be attained. In fact, this is explicitly recognized in the guidelines on conditionality, in particular, in the guideline quoted at the outset of this paper which calls for due regard to be paid to the social and political priorities of members. This thought is also behind the prescription included in another of the guidelines that states that the number and content of performance criteria may vary depending on the diversity of problems and institutional arrangements of members, subject to the requirement that the number of performance criteria must be limited to those necessary to evaluate the implementation of the program. In general, it can be said that the rules that the Fund follows in applying its conditionality practices are broad enough to encompass all types of economies.

This paper has also pointed out the critical importance that must be attached to the provision of information on a timely basis. This is not only essential to improve the understanding of how a centralized economy actually operates but it is also the only reasonable grounds on which to formulate adjustment objectives. Information is also likely to be crucial in the area of supply potential and resource allocation. The supply side is of particular importance to centrally planned economies to ensure that the objectives on production that have been built into the plan do not depart excessively from the long-run interests of the community. In other words, the structure of production that has been built into the plan cannot be made completely separate from the structure of demand, even if aggregate demand is subject to an important degree of control. The role that information plays in this area can hardly be overstressed. This information is conveyed in some economies via market prices; in other economies, via shadow prices, queues, and unsalable inventories. But, in the final analysis, the particular channel through which information is made available is immaterial. What counts is that the information be accurate and put to good use.

Summary of Discussion

Participants regarded the adjustment programs supported by the Fund with its resources as being generally helpful to countries seeking to strengthen their balance of payments. Some suggested that this assistance probably played a more important role in market-oriented economies, since these economies were more likely to experience external imbalances than were centrally planned economies. It was also argued that the activities of the international commercial banks could be inimical to smooth adjustment, that the Fund’s conditionality practices should take into account the origin of a member’s payments difficulties, and that the Fund might sometimes be exceeding its terms of reference when it asked countries to undertake difficult adjustment programs.

The ways in which the Fund’s 146 members organized their economies covered a wide spectrum, from market economies where decisions with respect to the level, composition, and mode of production were mostly decentralized to a number of nonmarket economies where most of those decisions were highly centralized. Participants noted that, while the view that payments imbalances could not arise in nonmarket economies was clearly refuted by experience, it was nevertheless true that such imbalances were less likely to occur in nonmarket than in market economies, if only because decisions about production in the former were subject to central control.

The Fund staff argued that external imbalances were independent of the method used for making decisions about production. An imbalance arose whenever there was an excess of aggregate demand over aggregate supply, and this could occur in both market and nonmarket economies. There might, however, be differences in the speed with which imbalances became apparent and in the form in which imbalances appeared in the two types of economy. In the market economies, any global disequilibrium quickly manifested itself in the form of accelerating prices and imports. In the nonmarket economies, an imbalance might not become obvious for some time, but it eventually would become apparent as shortages increased and restrictions intensified.

Disturbances that gave rise to external imbalances could be distinguished according to whether they were within or outside the control of the authorities. Some participants observed that the large rise in the current account deficit of the non-oil developing countries since the early 1970s could be attributed to two factors: the increases in the oil import bill and the rising interest payments on the external debts of these countries. They argued that, as both factors causing the deficits were of external origin, it was unfair to expect the non-oil developing countries to adopt strong adjustment programs to correct them.

The Fund staff suggested that the important distinction for determining whether or not a payments imbalance gave rise to a need for policy action depended on whether its causes were temporary or permanent. A temporary cause, such as a drought that reduced output of a major export crop below its trend level, required financing rather than adjustment. In contrast, a permanent cause, regardless of its origin, called for adjustment. If a country suffered a permanent decline in its terms of trade, which gave rise to an unsustainable current account deficit, the country would have to undertake an adjustment effort. This applied whether the deterioration in the terms of trade was due to ill-conceived domestic policies or, for example, to technological changes abroad. If the country did not respond to the disturbance by making appropriate policy changes, adjustment would be imposed on it when its international reserves were exhausted and its borrowing power had disappeared. In this case, the compression of imports would be sudden and substantial and could be expected to produce considerable economic dislocation and welfare loss. Alternatively, the authorities could design the path along which adjustment would take place, and thus implement an adjustment program to protect the economy from abrupt and unnecessary hardships.

Concern was expressed about one side effect that was perceived when a stand-by or an extended arrangement between the Fund and a member country ran into difficulties and when the latter’s right to request further drawings was interrupted. It was noted that, when this occurred, the commercial banks also tended to reduce their lending to that country, thereby imposing an additional burden on the country at the very time that its need for additional support had increased.

The Fund staff suggested that foreign commercial banks and other sources of international capital tended to restrain their lending when doubts arose about a country’s creditworthiness, which at times might be related to the existence of an arrangement that was not on track. These institutions would be less likely to reduce their lending if there were a better understanding of the meaning of a country’s temporary interruption of the right to draw under an arrangement with the Fund. They pointed out that, when a member sought an arrangement with the Fund, it accompanied its request with a letter of intent that included a quantitative description of the adjustment path that the member’s authorities expected the economy to follow. Drawings were related to the movement of the economy along the indicated path. When the economy deviated from that path, the most appropriate course of action was to review the situation to determine whether or not any policy changes were needed. If they were, then the Fund could discuss with the member the form these changes should take so that when agreement on the policy modifications was reached the member’s right to request drawings would be restored. Should policy changes not be required—and this was frequently the case—the Fund normally granted a waiver to restore the member’s drawing rights immediately. Were financial institutions to appreciate more fully that loss by a country of its right to draw was not, in itself, necessarily a cause for particular concern, they would be less inclined to reduce their lending to the country.

It was also noted that, while the commercial banks might react to the interruption of Fund lending to a country by reducing their own lending, the reverse relationship did not hold, that is, the Fund did not stop supporting a country when the commercial banks stopped lending to it. In many cases, it was often at this stage that the Fund commenced lending, because it was only then that many countries turned to the Fund for assistance.

In this context, it was also pointed out that an arrangement with the Fund frequently increased the flow of commercial bank lending to a country, or at least prevented or reduced a fall in such lending when the country’s balance of payments difficulties had become especially severe. Banks welcomed an agreement between the Fund and a member because it gave the banks an assurance that the member had undertaken a commitment to follow policies that could be expected to strengthen its balance of payments.

Participants observed that the amount of financial assistance provided by the Fund was often small relative to the size of a country’s payments deficit. They suggested that, in such a case, the Fund might be exceeding its terms of reference by asking the country to implement a strong adjustment program. The Fund staff pointed out that a country’s payments imbalance could not be measured by the absolute size of its current account deficit but rather by the excess of this deficit over that which the country could finance on terms and conditions that were consistent with its capacity to repay. Nevertheless, it was true that the unsustainable portion of a member’s current account deficit was sometimes large in relation to the financial assistance the member could obtain from the Fund. This did not mean, however, that the Fund was exceeding its authority by expecting the member to adopt an adjustment program that was sufficiently strong to solve its balance of payments problem. In fact, it was precisely the availability of relatively limited financial assistance that called for a strong adjustment effort; the lesser the financing, the sterner the adjustment.

It was also noted that Fund members were well aware, through their Executive Directors and from other sources, of the amount of assistance they could obtain from the Fund and the kinds of policy conditions that the Fund was likely to attach to this assistance. With this information, if they did not believe that, on balance, it was advantageous for them to borrow from the Fund, then—being sovereign countries—they did not need to do so. When members sought Fund support, they did so because they believed they would benefit from it. The benefits they expected included assistance from the Fund in formulating and monitoring adjustment programs, financial resources from the Fund, and additional assistance from the international financial community as a result of the agreement with the Fund.