The International Monetary Fund is not directly responsible for the promotion of economic development. Its founding fathers made a clear distinction between the goals of balance of payments adjustment and economic development and argued that it was important to have separate institutions for pursuing these goals. They maintained that this separation would facilitate progress toward attainment of the Fund’s goals and would reduce the risks of both excessive centralization of power and costly errors of judgment. Thus, the Bretton Woods Conference of July 1944, at which the original Articles of Agreement of the Fund were drafted, also provided for the creation of a second institution, the International Bank for Reconstruction and Development (World Bank), which would tackle problems of economic development.
The drafters of the Fund’s Articles were, however, convinced that successful performance by the Fund would facilitate the economic development of its members. Article I includes, as a purpose of the Fund, promotion of the expansion and balanced growth of international trade. The Article indicates that this will contribute to the maintenance of high levels of employment and real income and to the development of the productive resources of all members.
The Fund’s original Articles of Agreement did not distinguish between developing and developed countries. They did not, unlike those of the General Agreement on Tariffs and Trade and the International Development Association (IDA), prescribe rights and duties that differ according to the member’s stage of economic development. Subject now to a few express exceptions, the principle of uniformity remains implicit in the Articles and has been carried over into the policies adopted by the Fund’s governing bodies.
Nevertheless, the Fund has adopted certain policies that, while preserving this formal equality, do have the indirect effect of focusing on certain identifiable groups of countries. Several of the Fund’s financial facilities are directed toward problems that are especially acute among developing countries, whereas none is focused on the special requirements of industrial countries. Similarly, the Fund’s technical assistance and training activities are geared primarily to the needs of developing countries.
The first part of this paper discusses the present role of the Fund in relation to the developing countries. It pays only limited attention to the benefits that these countries share on a roughly even basis with the industrial countries, since these benefits have already been covered in earlier papers. Instead, it places emphasis on the special benefits that accrue to or the special costs that are incurred by developing countries. The second part of the paper considers some of the proposals that have been made to increase the usefulness of the Fund to the developing countries. The proposals discussed are designed to increase the flow of financial resources to developing countries and to make these resources available on easier terms.
The Present Situation
The role of the Fund can be evaluated by examining the contribution the Fund makes in carrying out each of its major functions. For this purpose, it is useful to distinguish four functions: (1) the supervision of exchange rate policies and exchange practices; (2) the provision of financial resources in support of programs of balance of payments adjustment; (3) the regulation of international liquidity; and (4) the provision of advice on matters related to the first three functions.
The supervisory function
Members have a general obligation to collaborate with the Fund and with each other to promote orderly exchange arrangements and a stable system of exchange rates. They also have some more specific obligations, intended to further the same objectives. The Fund oversees the compliance of members with these obligations. It has formulated a set of principles to guide members’ exchange rate policies and exercises firm surveillance over these policies.
Developing countries can benefit, along with other countries, from the Fund’s exercise of surveillance. By promoting the convergence of economic policies and conditions in member countries, especially in the major trading countries, surveillance contributes to a more stable pattern of exchange rates. The benefits from this include a more appropriate level and composition of output in the tradables sector, as a result of the positive contribution that more predictable exchange rates make to sound investment and production decisions in that sector. They also include greater ease of debt management, and of reserves management, because of smaller movements in exchange rates between currencies in which exports and debts are denominated in the first case and imports and reserves are denominated in the second.
It has been argued that surveillance over exchange rate policies can be exercised more effectively over countries that seek access to Fund resources than over other countries and that it therefore tends to bear more heavily on the former group of countries. Since, in recent years, only developing countries have sought to use Fund resources, surveillance, it is claimed, has operated unfairly against the developing countries.
There may be some truth in this argument. Since 1978, only developing countries have borrowed from the Fund. The Fund has, naturally, made such access conditional on these countries’ adopting appropriate policies of balance of payments adjustment. Its ability to influence the policies of countries that have not approached the Fund for assistance has been more limited.
It is useful, however, to remember that, even if all the countries that are not using the Fund’s resources were to adopt the adjustment policies deemed appropriate for them by the international community, there would still be a need for stronger adjustment measures by many countries that are borrowing from the Fund, especially those where excessively expansionary policies have contributed to their external difficulties.
The second aspect of the Fund’s supervisory role concerns exchange practices. The Fund tries to promote a system for current account payments in which individuals and enterprises can freely exchange domestic currency for any foreign currency, in order to pay for imports or transfers, at rates of exchange that do not depend on the types of imports or transfers. Thus, members of the Fund are expected, among other things, to avoid restrictions on current payments and transfers, multiple currency practices, and discriminatory currency arrangements, unless they receive temporary authority from the Fund to do otherwise. The Fund supervises members’ compliance with these requirements.
In general, members of the Fund benefit from the mutual observance of the code on exchange practices. It permits firms producing exportables to sell in the most profitable markets and firms trading in importables to buy in the cheapest markets. Compared with the system of exchange practices of, say, the 1930s, this produces a better international division of labor; within countries, it results in a much more efficient allocation of resources between the tradables and nontradables sectors as well as within the tradables sector, and thus in a higher level of real income.
During the early years of the Fund’s operations, the great majority of developing countries maintained extensive restrictions on current account payments. However, as the world first recovered from the dislocations of the war and then moved through a period of unprecedented prosperity in the late 1950s and 1960s, an increasing number dismantled these restrictions. By the early 1970s, many developing countries had adopted the Fund’s code on exchange practices, and a large part of the remainder had reduced considerably the coverage and severity of their restrictions.
The situation has changed to a large extent in recent years, with the spread of restrictions on the use of foreign currencies to service external debts. This development has been confined mainly to the non-oil developing countries. As a result partly of deterioration in their terms of trade from about the mid-1970s, slower growth in the industrial countries, and higher interest rates, these countries have been faced with sharply rising debt servicing commitments, and a growing number have been unable to meet them. The number of countries with payments arrears rose from 15 in 1975 to 32 in 1981.
Members of the Fund are expected to obtain approval for restrictions on the use of foreign currency to service external debts. The Fund normally makes such approval conditional on the member’s formulating an adjustment program that is likely to be effective in bringing the member’s balance of payments to a stage where it can remove the restriction. Agreement with the Fund on a program is frequently helpful in debt renegotiations and in promoting renewed capital inflows.
The financial function
On behalf of its members, the Fund administers a pool of financial resources. These resources comprise the currencies of members, special drawing rights (SDRs), and gold. They are derived from quota subscriptions, net earnings by the Fund, and borrowings. The Fund uses them to provide financial assistance to members experiencing balance of payments difficulties, to enable these members either to finance their deficit, if this is deemed to be the appropriate response, or to eliminate or offset its causes through policies that are not detrimental to the prosperity of the member or the international community.
The Fund’s oldest lending policy, the credit tranche policy, is not designed to discriminate in favor of any particular group of member countries. Under this policy, the Fund makes financial resources available to members experiencing balance of payments difficulties of a general nature. Developing countries benefit both directly and indirectly from the policy. They benefit directly when they experience balance of payments difficulties and are enabled, by having access to resources under this policy, to seek a smoother and less costly path of balance of payments adjustment. They benefit indirectly when the policy is used by other countries, and they are protected from the consequences of unduly abrupt adjustment in these countries.
The Fund’s three other permanent lending facilities—the compensatory financing, buffer stock financing, and extended Fund facilities—while formally accessible to all members, have provided assistance mainly to developing countries. They do this by addressing balance of payments problems that could be experienced by any country but, in fact, are most prevalent and acute among the developing countries. The compensatory financing facility was introduced in 1963 to enable the Fund to provide assistance to exporters of primary products and was thus expected to be of special benefit to developing countries. Its coverage was widened in 1981 to include compensation for excesses in the costs of cereal imports, partly in response to a suggestion by the Food and Agriculture Organization and the World Food Council that the Fund consider extending such assistance to its low-income members. When the buffer stock financing facility was introduced, the Fund announced that it was intended essentially for “members in their capacity as exporters of primary products.” The Fund recognized the right of importing countries that contribute to buffer stock arrangements also to draw under the facility, but anticipated that such contributions could rarely be expected to have a significant effect on the balance of payments of these countries and that their need to draw would therefore be minimal. The extended Fund facility is aimed at countries with balance of payments problems that are attributable to structural weaknesses of a kind that are most common in developing countries, or whose balance of payments situation is too weak to permit them to mount an effective development program. While, in principle, this latter situation could obtain in an industrial country, in practice, it is limited to the poorest developing countries.
The four temporary financial facilities that have been established by the Fund—the 1974 and 1975 oil facilities, the supplementary financing facility, and the enlarged access policy—have also been of considerable benefit to the developing countries. Under the oil facilities, the Fund provided assistance to 55 member countries, 45 of which were developing countries. Both the supplementary financing facility and its successor, the enlarged access policy, have been used only by developing countries.
In fact, from the mid-1970s, most of the Fund’s loan commitments and disbursements have been to developing countries. During 1974–81, it made commitments (net of cancellations) under stand-by and extended arrangements, the supplementary financing facility, and the enlarged access policy of SDR 32 billion; of this, all but SDR 6 billion was to developing countries. The Fund also made disbursements of SDR 13 billion under its other facilities during 1974–81, of which SDR 9 billion, or more than two thirds, was to developing countries. Disbursements under these facilities during 1979–81, of SDR 3.2 billion, were wholly to developing countries.
A less favorable development from the viewpoint of developing countries has been the shift from concessional to more commercial terms, for at least a portion of the finance. It was originally envisaged that members would use Fund resources for only short periods and that over time use would be spread fairly evenly among the entire membership. In line with this concept of mutual assistance, subscriptions were provided to the Fund free of cost, and the Fund was able to make them available on concessional terms to borrowing countries. However, at a fairly early stage, remuneration became payable to members whose currency subscriptions were used by the Fund. With capital subscriptions not keeping pace with the demand for Fund resources, the Fund has had to borrow at market-related interest rates, and this, together with increases in the rate of remuneration, has necessitated raising the charges it levies on its loans. Nevertheless, average charges are still well below market interest rates.
While the Fund does not formally discriminate among its members in making its own financial resources available to them, it does, through its administered accounts—such as the oil facility subsidy account and the supplementary financing facility subsidy account—provide some resources exclusively to developing countries. It can do this because, although these accounts have been set up by decisions of the Fund’s Executive Board, their resources are separate from those of the Fund. Until recently, the Fund administered a Trust Fund that also provided assistance only to developing countries.
The Trust Fund, which was set up in 1976 and terminated in 1981, channeled profits from the sale of a portion of the Fund’s gold to developing countries. It received profits of US$4.6 billion, distributed more than one fourth of this sum directly to 104 developing countries, and, after meeting expenses, loaned the remainder to eligible developing countries. The loans are highly concessional—they are for ten years, have a grace period of five years, and bear interest at the rate of 0.5 percent per annum. They are being repaid into the Fund’s Special Disbursement Account.
The oil facility subsidy account assists eligible developing countries by subsidizing their interest payments on drawings made under the 1975 oil facility. The rate of subsidy has been 5 percentage points, reducing the effective cost to these countries of borrowing under the facility to about 2.7 percent per annum. The total subsidy paid through 1981 was SDR 50 million. The account will probably be terminated in 1983, when all drawings made under the 1975 oil facility will have been repaid.
The supplementary financing facility subsidy account reduces the cost to developing countries of borrowings made under the supplementary financing facility. It pays a subsidy of up to 3 percent of outstanding borrowings by 69 countries whose per capita incomes in 1979 did not exceed the level used to determine eligibility for access to funds from IDA. It also pays a subsidy of half that amount to a group of 14 higher-income developing countries.
The liquidity function
The supervisory and financial functions of the Fund were assigned to it in the original Articles of Agreement. Under the First Amendment of the Articles in July 1969, the Fund acquired an added function; henceforth, it was to regulate the supply of international liquidity so as to facilitate, among other things, avoidance in the world economy of stagnation and unemployment, on the one hand, and excess demand and inflation, on the other. To enable it to carry out this function, the Fund was given the authority to allocate (or cancel if necessary) agreed amounts of a new reserve asset, the SDR. Since then, the Fund has made allocations totaling SDR 21.4 billion, equivalent to a little under 4 percent of international reserve assets at the end of 1981, to participants in its Special Drawing Rights Department.
Appropriate allocations of SDRs contribute to the stable growth of the world economy, which is beneficial to both developing and industrial countries.
In addition, most developing countries receive a special financial benefit from allocations of SDRs. Participants in the Special Drawing Rights Department (currently, all Fund members) pay interest to the Fund on their cumulative allocations of SDRs. The rate of interest is the weighted average of interest rates on short-term domestic securities in the United States, the United Kingdom, the Federal Republic of Germany, France, and Japan. These are blue-chip securities, and the interest rate on them is well below the cost at which most developing countries can borrow in the international capital markets. By using SDRs allocated by the Fund in place of commercial borrowings to maintain reserves, developing countries benefit from this interest differential. The benefit is, of course, larger for the less creditworthy countries, and largest of all for the least creditworthy countries for which the availability rather than the cost of reserve assets is often the most important consideration.
The advisory function
Balance of payments difficulties may be caused by such factors as unexpected changes in the domestic or external environment or the adoption of overly ambitious economic and financial policies. However, they may also be caused by technical weaknesses in monetary, fiscal, and trade systems, by shortages of personnel skilled in the formulation and execution of policy, and by lack of reliable data on which to base policy decisions. Many countries, especially developing countries, have sought the assistance of the Fund in their efforts to overcome these latter difficulties. Since the Fund has built up considerable expertise in such areas and is able to tap additional expertise in member countries, it is well-placed to meet their requests. Such services are provided through technical assistance missions, field assignments, and studies and recommendations prepared at headquarters as well as through seminars and courses provided at headquarters and in member countries. The Fund also provides considerable technical assistance in the course of its regular consultation missions.
Technical assistance provided in the area of money and banking during the early years of the Fund was concerned mainly with the creation of new national currencies and of institutions to issue and regulate these. However, most members now have established currencies and central banks, and emphasis has switched to modernizing existing institutions and increasing the effectiveness of monetary policies. Assistance is provided by the staff of the Central Banking Department, who carry out research at and give advice from headquarters and undertake short missions to countries requesting assistance. However, most of the assistance is provided by a panel of outside experts, mainly staff from older central banks, universities, and the private sectors of member countries. About half of these outside experts now come from developing countries and are familiar with the environments and problems faced by the particular countries to which they are assigned. While the Fund selects and appoints the experts and pays their salaries, the experts work solely under the direction of their host institutions.
The Fund’s involvement in providing technical assistance on fiscal matters reflects the importance of this sector in coping with balance of payments difficulties. Frequently, fiscal systems are not sufficiently developed for governments to be able to determine expenditure priorities, to provide adequate resources to finance planned expenditures, and to ensure that their budgets are executed reasonably in line with forecasts. To help overcome these difficulties, the Fund’s Fiscal Affairs Department provides technical assistance on tax structures, introduction of new taxes, tax assessment and collection procedures, and investment incentive codes. It also provides assistance on budget preparation, expenditure control, government accounting systems, and other fiscal matters. A considerable amount of the assistance involves work in the field. For this purpose, the department makes its own staff available, especially for short-term projects. It also assigns outside experts, selected from a panel, generally for longer-term projects. These outside experts, unlike those assigned by the Central Banking Department, are solely responsible to and work under the direction of the Fiscal Affairs Department.
Most of the Fund’s technical assistance in statistics is provided under the Central Bank Bulletin project. This project aims at establishing or improving central bank bulletins in member countries by providing these countries with advice on the nature and generation of data for the bulletins. The data set comprises the national accounts, production, prices, money and banking, government finance, external trade, the balance of payments, and other series that facilitate analysis of the balance of payments situation and prospects and matters affecting them. The Bureau of Statistics is responsible for the project.
The Fund’s training program is similar to the technical assistance program and is directed mainly toward meeting the needs of developing country members. The program is organized and administered by the IMF Institute and includes courses on financial analysis and policy, balance of payments methodology, public finance, and government finance statistics. Participants are officials of member countries, mostly from finance ministries and central banks. Most of the courses are given in Washington, but the Institute has recently formed a separate division that sends staff on short-term teaching assignments to the larger developing countries or to new member countries.
Some Developing Country Proposals for Change
Many proposals have been made for changes in the Fund’s policies and practices so as to make the organization more effective in meeting the special needs of developing countries. This part of the paper outlines some of these proposals and presents some of the arguments that have been put forward in favor of and against their adoption. The proposals concern limits on the Fund’s financial assistance, the availability of a medium-term financial facility, conditionality, the Fund’s gold holdings, and SDR allocations. In terms of the classification of functions used in the first part of this paper, the proposals are intended to increase the usefulness to developing countries of the Fund’s financial and liquidity functions.
Limits on financial assistance
The maximum financial assistance that a member in balance of payments difficulties can obtain from the Fund under the latter’s various financial facilities is tied to the member’s quota in the Fund. Recent proposals for increasing potential access relative to quota have been based partly on the increase in current account deficits relative to world trade and the decrease in quotas relative to world trade that have occurred during the last decade as well as the growing difficulties many developing countries are experiencing in borrowing in international capital markets.
To a large extent, certain changes in Fund policies have already offset the relative increase in current account deficits and relative decline in quotas. Until the mid-1960s, the maximum assistance that a member could obtain from the Fund was normally limited to an amount equal to 100 percent of quota. Under the enlarged access policy, a member can now draw up to 150 percent of quota a year over a three-year period, with a ceiling on cumulative access, net of scheduled repurchases, of 600 percent of quota. In addition, a member can have drawings up to 125 percent of quota under the compensatory financing facility and 50 percent of quota under the buffer stock financing facility.
It has been argued that further easing of access would unduly mitigate against balance of payments adjustment. Indeed, it has been suggested that the Fund is already lending too much to deficit countries and that, rather than increasing its financing, it should be seeking to reduce the amounts it makes available. It has also been proposed that, as quotas are increased, access to resources relative to quotas should be reduced.
Establishment of a medium-term lending facility
The proposal that the Fund introduce a medium-term lending facility, with both disbursements and repayments spread over longer periods, is based partly on the greater importance of structural causes of balance of payments deficits as well as the sharp increase in the size of these deficits since the early 1970s. Measures to correct structural weaknesses are essentially supply-oriented and take a longer time to be effective than do demand-oriented measures. Because of this, and also because of the larger size of present deficits, members implementing programs of structural adjustment need a longer time to generate the external resources needed to complete repayments to the Fund.
It could be argued that the Fund already provides medium-term balance of payments assistance. Under the extended Fund facility, assistance is provided over a three-year period and repayments need not be completed for ten years. Resources may also be made available over a three-year period under a stand-by arrangement, but in this case they must be fully repaid within five years. The possibility of back-to-back arrangements offers scope for extending both the program and the repayment periods under stand-by as well as extended arrangements.
It has also been argued that creation of a longer-term facility runs the danger both of encouraging delays in adjustment and of moving the Fund outside its traditional area of competence into the field of development finance. For many situations, adjustment is more certain and less costly in terms of other goals when it is undertaken early and with a program designed to be implemented quickly rather than with measures spread over a protracted period. Also, some problems that have important implications for the balance of payments and can only be solved over a long period are essentially development problems. They call for assistance from bilateral aid donors and from international institutions such as the World Bank and regional development organizations, not for balance of payments assistance from the Fund.
Conditionality
Developing countries generally accept the need for the Fund to attach policy conditions to the use of its resources but have frequently expressed reservations about the nature and severity of this conditionality. Among their criticisms are the charges that the Fund’s approach is excessively monetarist, that it does not make allowance for the causes of payments difficulties, and that the Fund’s policy prescriptions impose a heavy burden on the poorest sections of the population.
The criticism that the Fund places excessive emphasis on monetary variables in assigning causes to balance of payments problems and in devising solutions to these problems is frequently associated with the argument that the Fund recommends policies that are unduly deflationary. Programs that are supported by the Fund under upper credit tranche or extended arrangements normally do include, as performance criteria, limits on the expansion of credit, the purpose of which is to contain the growth of aggregate demand. It can be argued that this is not inappropriate, since in many instances excess demand is an important factor contributing to the balance of payments difficulties that countries using the Fund’s resources are trying to overcome. Even when this is not so, it may still be important to ensure that excess demand does not emerge and undermine the member’s adjustment program. In this context, it is worth noting that the Fund’s guidelines on conditionality include the prescription that performance clauses be no stronger than is necessary to ensure the success of the member’s program.
Many agree with the view that the degree of conditionality should be lower when the causes of payments difficulties are beyond the control of the national authorities than when they can be attributed to inappropriate policies. However, balance of payments problems have to be solved whether their causes are within or beyond the control of the authorities. It can be argued that, for the purpose of formulating effective adjustment programs, the important causal distinction is between self-reversing and permanent factors. In the former, only minor changes or no policy changes at all may be required, even though the causes may reflect domestic policy actions. However, in the latter, quite strong measures might be called for, and a higher degree of conditionality could be appropriate, even if the causes are of external origin.
The argument that the Fund’s prescriptions impose a heavy burden on the poorest sections of the population is based to some extent on what has actually happened in some cases where countries have introduced programs of balance of payments adjustment. Unfortunately, adjustment often imposes short-term costs on the poor, as well as on other segments of the population. However, the argument that the Fund is responsible seems to imply that it is the Fund, rather than the borrowing country’s economic situation, that produces the need for adjustment. It also seems to imply that, when adjustment requires some reduction in domestic absorption, it is the Fund—and not the national authorities—that selects the measures that determine the distribution of this reduction. Supporters of the Fund’s approach to conditionality (including representatives of many of the countries that supply it with usable resources) argue that members with serious balance of payments problems do not adopt adjustment programs just because the Fund believes they should do so; rather, the authorities of these countries choose to do so to avoid the consequences of continued imbalance that would eventually include exhaustion of their international reserves and borrowing power. By providing these countries with additional resources during the adjustment period, the Fund contributes to the solution, not to the cause, of their payments problems.
With respect to the second assumption, the Fund’s guidelines on conditionality require that its performance criteria be restricted, as far as possible, to macroeconomic variables. The Fund must also be satisfied that the planned measures will be adequate to achieve the goals of members’ programs, but it is not responsible for the selection of these measures. The national authorities must make the difficult choices that determine the manner in which any reduction in absorption is distributed among the different sections of their populations.
Gold holdings
The Fund holds about 104 million ounces of gold. At mid-1982 prices, the value of this gold exceeds that of the Fund’s holdings of usable currencies. It has been recommended that the Fund use its gold to obtain additional resources by offering part of it as collateral against borrowings and by selling the remainder. The Fund could use the borrowings to increase lending and the sales receipts to increase subsidies (through administered accounts) to developing countries. Such use of the gold, it is claimed, would also further its demonetization and therefore strengthen the reserve asset role of the SDR.
The Articles specify various ways in which the Fund can use its gold holdings. Decisions on such use are, however, subject to high majorities and must, accordingly, reflect a broad consensus among the Fund’s membership.
Opponents of the use of gold as collateral for borrowings argue that borrowed resources are less satisfactory than additional subscriptions, which are costless to the Fund, as a way of increasing resources. They also argue that, in a second-best context in which agreement on adequate quota increases cannot be obtained, the Fund should use its gold holdings to maintain a strong overall financial position rather than make them available as collateral for specific borrowings. This latter issue is, of course, essentially an empirical one, whose resolution depends on the perceptions of those from whom the Fund may need to borrow.
With respect to sales of gold by the Fund, opponents concede that these, like quota increases, could provide a costless increase in the Fund’s loanable resources. However, they note that gold sales represent a change in the composition, not an increase in the level, of the Fund’s total assets and that sales to finance subsidies would accordingly reduce the Fund’s assets. Opponents of such tied sales argue that subsidies should be financed in a way that does not reduce the Fund’s assets, such as by donations from members or—as is now being done for the supplementary financing facility subsidy account—from repayments of Trust Fund loans.
SDR-aid link
The Fund’s Articles specify that allocations of SDRs be proportional to Fund quotas. This provision is based on the view that allocations should be neutral with respect to the liquidity needs of participants and that the best working guide to the pattern of liquidity needs is the distribution of Fund quotas.
Proposals to allocate a larger share of SDRs to developing countries were considered prior to the First Amendment of the Fund’s Articles, and more extensively by the Committee on Reform of the International Monetary System and Related Issues (Committee of Twenty) during the deliberations leading up to the Second Amendment. The subject has been discussed in a number of different forums since then. These discussions have focused on the effects of a link on the volume of aid, on balance of payments adjustment, on inflation, and on the acceptability of the SDR as a reserve asset.
The most frequently used argument in favor of the link is that it would contribute to a more equitable distribution of world income by increasing the volume of aid. This was a stronger argument prior to May 1981, when the rate of interest on the SDR was below the market rate of interest and there would have been a large grant element in the transfer of SDRs to developing countries. Nevertheless, developing countries would still receive an immediate benefit from such transfers because, as noted earlier, many have to pay a premium to acquire reserve assets in the international capital markets. Critics of the link caution against overestimating the magnitude of the effect on aid. They argue that donor countries might respond to its adoption by reducing other forms of aid.
The Independent Commission on International Development Issues (Brandt Commission) emphasized the contribution that the link could make to the balance of payments adjustment process. The Commission argued that it was in the international interest for countries to be provided with sufficient short-term resources to permit them to avoid measures that could be harmful to their own economies or to those of other countries. It maintained that new reserve assets should therefore be allocated to countries that are most likely to incur balance of payments deficits, face high domestic costs of adjustment, and are least likely to be able to find alternative sources of finance. The Commission claimed that many developing countries are in this category. Against this view, it has been argued that a link arrangement that provided unconditional resources to the developing countries might ease their adjustment problems only so long as the additional resources were not anticipated; once these countries included the link-related SDRs in their forecasts, they could plan for and incur correspondingly larger payments deficits. Opponents of the link also question whether it is appropriate to reward countries for getting into balance of payments difficulties and point out that the incentives provided by such an approach could aggravate imbalances. They argue that, if additional resources are required to enable deficit countries to adjust their balance of payments while avoiding recourse to restrictive measures, the need is for more conditional resources under the Fund’s lending facilities, not more unconditional resources in the form of SDR allocations.
A frequent objection to the link is that it might contribute to worldwide inflation, because it would give developing countries a greater incentive to seek large allocations and also because these countries have a higher propensity to use such allocations to pay for imports. On the first point, proponents of the link agree that the size of SDR allocations should be determined by the world’s need for additional liquidity. Nevertheless, the criteria for determining the world’s liquidity needs are not very precise, and acceptance of this principle cannot be expected to produce agreement on the appropriate size of allocations. A more effective safeguard against excessive allocations is the provision in the Articles of Agreement that decisions to allocate SDRs require an 85 percent majority of the Fund’s voting power; this clearly precludes the developing countries’ pushing through an allocation over the opposition of the industrial countries or even of the United States by itself or a small group of other major industrial countries. On the second point, it is generally conceded that introduction of the link would result in an effective transfer of newly created SDRs from countries wanting SDRs largely in order to hold them to countries seeking SDRs mostly in order to spend them. Developing countries respond to this argument by pointing out that the resulting higher propensity to spend out of total SDR allocations could be offset by a corresponding reduction in the size of the allocations.
Opponents of the link also claim that attempting to promote a development as well as a liquidity objective through the allocation of SDRs would unduly detract from the purely monetary role of the SDR and thereby reduce its acceptability as a reserve asset. However, supporters point out that, technically at least, there is nothing very complex about using two instruments—in this instance, the size and the pattern of the SDR allocation—to achieve two objectives. They also maintain that the acceptability of the SDR, an asset which has no counterpart liability, depends on the confidence of the larger and financially stronger countries (which tend to be net recipients of SDRs) that those with an obligation to pay interest charges on SDR allocations will continue to meet this obligation. They argue that developing countries will not have any financial incentive to default on their obligation if the present value of their future interest commitments on past allocations is less than their forecast of the present value of the grant element in future SDR allocations. They also note that the grant element in allocations is generally higher for developing countries than they are for industrial countries because of their lower credit rating and that these countries, therefore, have a greater interest in ensuring the continuation of allocations. Supporters of the link add that, in any case, the direction of the financial incentive is independent of the link—only the strength of the incentive is affected, this being tied to the sizes of their past and expected future allocations. Finally, they point out that default on the obligation to service SDRs would have major implications for a wide range of economic and financial relations and that the developing countries would not want to experience the effects of such a shock to the international monetary system.
Related Reading
Bird, Graham, “Developing Country Interests in Proposals for International Monetary Reform,” in Adjustment and Financing in the Developing World: The Role of the International Monetary Fund, ed. by Tony Killick (Washington, 1982), pp. 198–232.
Gold, Joseph, “Professor Verwey, the International Monetary Fund, and Developing Countries,” The Indian Journal of International Law (New Delhi), Vol. 21 (October-December 1981), pp. 497–512.
Hooke, A.W., “The Brandt Commission and International Monetary Issues,” Finance & Development, International Monetary Fund and World Bank (Washington), Vol. 18 (June 1981), pp. 22–24.
Independent Commission on International Development Issues (“Brandt Commission”), North-South: A Programme for Survival (Cambridge, Massachusetts, 1980).
Summary of Discussion
Participants commended the Fund on the role it had played in providing developing countries with financial assistance to cope with their balance of payments difficulties. Some believed, however, that the Fund should increase the amounts of conditional and unconditional assistance it made available, especially to low-income developing countries. Some also expressed concern about the way in which the Fund exercised surveillance over its members and questioned whether its treatment was as evenhanded as the principle of uniformity of treatment required.
In the World Economic Outlook report of April 1982, the Fund staff projected a current account deficit for the non-oil developing countries in 1982 of almost US$100 billion, or about the same as the actual deficit registered in 1981. The Outlook also indicated rather bleak medium-term prospects for the non-oil developing countries—under one of its scenarios, the ratio of their current account deficit to exports of goods and services would be as high in 1986 as in 1982. In view of this, it was suggested, the Fund should give priority in its lending activities to the non-oil developing countries.
The Fund staff agreed with this view. They noted that, while the Fund was required to meet the needs of all its members in an equitable manner, these needs varied from time to time, and in recent years the countries with the greatest needs had been the non-oil developing countries. Not only were their current account deficits large, but also most did not have the easy access to international capital markets enjoyed by the industrial countries. As a result, virtually all of the Fund’s lending during the last four years had been to the non-oil developing countries.
The amount that countries could draw from the Fund relative to quota had increased during the two preceding decades, from 100 percent for all drawings to 600 percent exclusive of drawings under the Fund’s “low-conditionality” facilities. It was pointed out, however, that quotas had declined sharply relative to world trade and even more steeply relative to current account deficits. In view of this, it was argued, there should be a further substantial increase in the ratio of maximum potential access to quota, especially for the low-income developing countries. This could be done either by increasing the present ratio for “high-conditionality” finance or by creating a new facility that would not be affected by this ratio.
The Fund staff pointed out that a policy that would formally provide preferential access to Fund resources to the low-income developing countries would violate the principle of uniform treatment of members. They also argued that the Fund should not try to meet all the external financing needs of low-income developing countries. The Fund is a short-term to medium-term lending institution; its loans had to be fully repaid within five years (e.g., under the credit tranche policies) to ten years (under the extended Fund facility). Were the Fund to meet all the external needs of low-income developing countries for, say, three years under the extended Fund facility, it would then be placing an intolerable burden on these countries by requiring them to repay the loan fully within ten years. One of the fundamental rules embodied in the Articles of Agreement was that the Fund’s resources were of a revolving nature and could not be used to compensate for a lack of long-term balance of payments resources or development assistance.
Most participants accepted the view that the direct purpose of the Fund was to promote a stable international monetary system and not to facilitate the transfer of resources from the industrial to the developing countries. Some questioned, however, whether the Fund could not, by introducing an SDR-aid link, promote resource transfer without impairing monetary stability. They argued that the link would not reduce the acceptability of the SDR as a reserve asset, would not aggravate inflation, and would increase aid. They noted that the United States could use its own currency to finance deficits and that other industrial countries and some developing countries could borrow at low spreads in the international capital markets. There was a third group of countries, however, that did not issue reserve currencies and that lacked creditworthiness. For these countries, most of which were in the low-income category, the burden of generating international reserves was very heavy and the benefits to them of introducing the link would be correspondingly very large.
Participants referred to the widely held criticism that the Fund’s influence over the exchange and related policies of members was greater for deficit countries that used its resources than it was for deficit countries that borrowed in commercial markets or for surplus countries. They inquired about the validity of this criticism and about what the Fund was doing to produce evenhanded treatment of all its members. The Fund staff pointed out that the Fund endeavored to exercise surveillance symmetrically over all members. They recognized that the need of countries seeking access to Fund resources to engage in negotiations about their economic and financial policies did give the Fund the opportunity to influence these policies. They also argued, however, that the Fund had influence over the policies of those members that had a high degree of financial autonomy and suggested that the absence of recourse by members to competitive exchange rate changes was probably due in large measure to the Fund’s surveillance.