2A. Decision Making in the International Monetary Fund


The study of international law in general or of certain international organizations in particular is often and wrongly seen as totally divorced from the study of national laws. The reason for this impression is that international organizations are subjects of international law and are not governed by the laws of any particular country. However, the legal issues raised by the operation of international organizations are very similar to those raised by the operation of national governments and the solutions are often inspired by the examples of national laws, including those provided by national courts interpreting the constitution or a statute. Each international organization has its own legal system within which decisions are made by the decision-making organs. Therefore, it is necessary first to have a general idea of the legal system of the IMF before examining the IMF’s decision-making organs and their decision-making processes.

The IMF’s Legal System

Structure of the IMF’s Legal System

A comparison between an international organization and a national government is not artificial. Although an international organization’s basic instrument is not a national constitution but an international treaty (often referred to as the organization’s charter), this treaty is the equivalent of a constitution in that it is the basis of the organization’s legal system, both in its external relations and in its internal activities.

The IMF’s Charter

In the case of the IMF, the official name of the charter is the Articles of Agreement of the International Monetary Fund. Initially adopted at the 1944 Bretton Woods Conference, the IMF’s Articles entered into force on December 27, 1945 and were subsequently amended three times.

Since the IMF’s charter is an international agreement, its interpretation is governed by the rules on the interpretation of treaties. These rules are not necessarily the same as those governing the interpretation of the national laws in its member countries.

International Agreements
As an international organization, the IMF is a subject of international law. Within the limits of its charter, it may enter into international agreements with member states (e.g., for the opening of resident representatives’ offices), nonmember states (e.g., the 1991 Special Association Agreement between the U.S.S.R. and the IMF) and other international organizations. With respect to agreements with other international organizations, Article X (Relations with Other International Organizations) of the IMF’s Articles of Agreement provides:

The Fund shall cooperate within the terms of this Agreement with any general international organization and with public international organizations having specialized responsibilities in related fields. Any arrangements for such cooperation which would involve a modification of any provision of this Agreement may be effected only after amendment to this Agreement under Article XXVIII.

Pursuant to Article X, the IMF has entered into a number of agreements with other international organizations (e.g., the 1996 Agreement with the World Trade Organization). Of particular importance is the 1947 Agreement with the United Nations, which recognizes the IMF as “a specialized agency … in economic and related fields within the meaning of Article 57 of the Charter of the United Nations” (Article I, paragraph 2 of the Agreement). The expression “specialized agency” does not mean that the IMF is an agency of the UN Organization in the sense that it would be subordinate to that organization, but only that it is part of the UN system of international agencies within which it is assigned special responsibilities by its charter. The Agreement explicitly recognizes the independence of the IMF: “By reason of the nature of its international responsibilities and the terms of its Articles of Agreement, the Fund is, and is required to function as, an independent international organization.” (Article I, paragraph 2 of the Agreement.) The Agreement also clarifies the effect of sanctions imposed by the UN Security Council under Articles 41 and 42 of the UN Charter (peace-keeping measures) on the performance of members’ obligations under the IMF’s Articles (e.g., restrictions on financial operations and transactions with a member country). Article VI of the Agreement states that the IMF takes note of the obligation (under Article 48, paragraph 2 of the UN Charter) for its members that are also UN members to carry out those decisions of the Security Council and will, in the conduct of its activities, have due regard for those decisions of the Security Council. “Due regard” means that the IMF is not itself bound by those decisions.


Pursuant to its charter, an international organization may develop its own administrative law, which consists of all the regulations adopted by its rule-making organs. These organs may exercise either independent powers or subordinate powers. Obviously, all regulations must be consistent with the charter, but the distinction between independent powers and subordinate powers is essential when assessing the legality of particular decisions, since decisions of subordinate organs must be consistent with rules enacted by superior organs.

To the extent that an organization’s charter imposes obligations or confers rights on the member states, the organization’s regulations may affect the performance of these obligations or the exercise of those rights. For instance, the IMF has adopted a number of decisions of a regulatory nature concerning the obligations (e.g., in the area of exchange restrictions) and rights (e.g., policies on the use of IMF resources) of its members. Since these decisions are adopted for the performance of obligations or the exercise of rights under the Articles of Agreement, they need to be consistent with the relevant provisions of the Articles.

In the IMF, regulatory decisions may be adopted by different organs (see section entitled “The Decision-Making Organs” below): By-Laws and Resolutions are adopted by the Board of Governors; Rules and Regulations, by the Executive Board; General Administrative Orders, by the Managing Director.

Individual Decisions

Finally, pursuant to the charter and the regulations, individual decisions are made, for instance, the acceptance of new member states, the appointment or promotion of personnel, contracts with suppliers, etc. In the case of financial organizations like the IMF, these individual decisions include the granting of financial assistance to individual member countries. Individual decisions taken pursuant to a regulation are made sometimes by the same organ that adopted the regulation and sometimes by a subordinate organ. Here again, questions of legality will arise and their resolution may be somewhat complex.

From the standpoint of international law, the most interesting among the IMF’s individual decisions are those taken in assessing and enforcing its members’ compliance with their obligations under the Articles of Agreement. These obligations are varied and multiple. Some are of a financial nature (repayments to the IMF), while others relate to the provision of information, to financial, economic and exchange rate policies, to exchange restrictions, etc. Under Article XXVI, Section 2, the IMF has the power to impose certain sanctions for a breach of any of a member’s obligations under the Articles, which implies that the IMF also has the power to determine whether such a breach has occurred. [N.B. A special provision, Article XXIII, Section 2, governs the sanctions for breach of obligation in the Special Drawing Rights (SDR) Department.]

On the issue of sanctions under Article XXVI, Section 2, three remarks may be made. First, it is open to the IMF to act ex officio, that is, without a complaint by one of its members against another member, in the enforcement of obligations under the Articles. Under the IMF’s regulations, the Managing Director is required to report to the Executive Board every case in which it appears to him that a breach of obligation has occurred and he may (or sometimes must) make a complaint against the delinquent member. In this respect, the IMF’s procedures are fundamentally different from those of the World Trade Organization where dispute settlement procedures may only be initiated by one of the contracting parties. Second, when making a finding of breach of obligation and imposing sanctions, the IMF acts in a judicial capacity. Before a sanction is imposed on a member under Article XXVI, the member must be informed in reasonable time of the complaint against it and given an adequate opportunity for stating its case, both orally and in writing (Article XXVI, Section 2(d) and By-Laws 19 and 22). Third, the sanctions specified in Article XXVI (ineligibility to use the IMF’s general resources, suspension of voting rights, and compulsory withdrawal) apply only to violations of obligations under the Articles. Between the IMF and a member, other obligations may be created with the consent of the member, such as loans extended by the IMF as Trustee, which are not regarded as obligations under the Articles (see Article V, Section 2(b)). A violation of these obligations by the member would not give rise to the application of sanctions under Article XXVI.

Assessment of Legality of IMF Decisions

The legality of a decision may be assessed at two different stages: ex ante, in order to avoid the adoption of an illegal decision, or ex post, in order to rescind an illegal decision. In most legal systems, the ex ante assessment is usually the responsibility of the decision-making organ, but may involve the provision of legal advice by counsel. In contrast, the ex post assessment (where it exists) will normally take the form of an authoritative decision, usually by a judicial or quasi judicial organ. The IMF’s legal system follows this pattern for the first stage, but not for the second (with a limited exception).

Ex Ante Assessment

In the IMF, before a decision is adopted, the legal advisor may be asked to advise on the legality of the decision under consideration. This means in practice that the legal advisor may have to object to the adoption of a proposed decision or suggest changes to make it consistent with the charter or existing regulations. In other cases, the legal advisor will have to inform an organ that a decision under consideration is not within its competence but should be submitted as a proposal to another organ for its adoption.

The IMF has developed a practice that incorporates the provision of legal advice in the decision-making process. It consists in having the prior approval of the legal advisor before circulating a proposed decision for adoption by the Executive Board. The paper containing the proposed decision mentions this approval, which means that, in the opinion of the legal advisor, the proposed decision may legally be taken by the Executive Board.

Ex Post Assessment and Interpretations of the Articles

In national legal systems, it is usually possible to challenge the legality of an administrative decision in a court of law, but there is no provision in the IMF’s Articles for judicial review of a decision of an organ of the IMF. There is, however, a provision on issues of interpretation of the Articles. Under Article XXIX, “[a]ny question of interpretation of the provisions of this Agreement arising between any member and the Fund or between any members of the Fund shall be submitted to the Executive Board for its decision.” Therefore, it is for the IMF itself, through its Executive Board (with possible appeal to the Board of Governors), to resolve questions of interpretation of the Articles. These interpretations are regarded as authoritative in that they are binding on the members of the IMF. Any action inconsistent with the Articles as interpreted by the IMF would constitute a violation of the Articles. Pursuant to Article XXIX, the IMF has, therefore, the power to decide authoritatively whether or not a decision taken by one of its organs is consistent with the Articles of Agreement.

It may be noted that the procedure of Article XXIX leads to “declaratory” decisions, whose sole purpose is to resolve questions of interpretation. Therefore, this provision applies only to “formal” interpretations of the Articles, of which there have been only 10 in the history of the IMF. In the daily practice of the IMF, questions of interpretation are not resolved through formal interpretations but as part of the regular decision-making process. The reason is that the Articles of Agreement and the regulations adopted pursuant to them need to be given a meaning for their implementation. These ad hoc, implicit interpretations, which are not authoritative but underlie the operational decisions being taken, are made by the implementing organs.

This power of the IMF to be the sole judge of the legality of its actions is strengthened by its immunity from judicial process: the IMF cannot be sued in a national court by one of its member states, by a public or private entity, or by an individual, unless the IMF agrees to waive its immunity. In practice, the IMF does not waive its immunity from judicial process but may include, in certain contracts, an arbitration clause for disputes arising under the contract (e.g., procurement contracts).

The International Court of Justice has no jurisdiction over the IMF for matters under the IMF’s charter. Disputes arising under the 1947 UN Convention on the Privileges and Immunities of the Specialized Agencies may be referred to the International Court of Justice (Sections 24 and 32 of the Convention), but no case has arisen. Moreover, under the Agreement between the United Nations and the IMF, the IMF may “request advisory opinions of the International Court of Justice on any legal questions arising within the scope of the Fund’s activities other than questions relating to the relationship between the Fund and the United Nations or any specialized agency” (Article VIII of the Agreement), but the IMF has not used this possibility.

The absence of any mandatory form of judicial review of the IMF’s decisions allows the IMF to act promptly and efficiently, without the delays that may be occasioned by judicial procedures. The founders of the IMF probably thought that, as a technical agency dealing with economic and financial issues, the IMF did not need and perhaps could not be subject to judicial review of its activities. However, the IMF is not only a financial agency. In the exercise, for instance, of its jurisdiction over exchange restrictions, the IMF may find its members in breach of their obligations under the Articles and impose sanctions; a judicial review of such decisions could have been envisaged. It may have been thought that it would be difficult to find judges not only impartial but also competent enough to rule on these issues. In this regard, it may be noted that economists often deplore the lack of understanding of economic problems among judges and lawyers and feel that they are more competent to make the right decisions, a sentiment shared by doctors when faced with suits for professional malpractice.

Undoubtedly, experience has shown that the IMF can operate properly without any judicial review of its decisions, but the IMF has always recognized the importance of abiding by its charter and regulations. In the practice of the IMF, legal advice is regularly provided to the organs of the IMF; it is included in the records of its meetings and, before a decision is taken, the relevant organ may either request a legal opinion if it is a new type of decision, or, if there are precedents, ask whether established practices are being followed.

In other words, the absence of judicial review has not been seen by the IMF as an exemption from the rule of law. It only means that the IMF must, in all its actions, decide for itself and in good faith whether it is acting in accordance with its law. If the law is found to be inadequate, it should not be ignored but amended and the amendment must be made by the competent organ. Amendments of the charter require a proposal of the Board of Governors and approval by a majority of three-fifths of the member states having 85 percent of the total voting power (Article XXVIII).

Reality is not as idyllic, however, as this description might make it seem. First of all, the law is not always clear. Nor does it foresee all the cases that may arise. For instance, there is no provision in the IMF’s Articles on state succession (dissolution, secession, merger, annexation). When such issues arise, solutions have to be found, which are not literally in the text of the charter but may be derived from the legislative history (travaux préparatoires), precedents (if any), and general principles of international law. In a national system, it is the function of a court to rule on such issues when a dispute arises. In the IMF, the legal advisor will present his views orally or in writing and a debate may follow, which will eventually lead to a decision, or the legal advisor’s views may be accepted without a debate. This is part of the law-making process of the organization, similar to the jurisprudence of national courts but without a judicial procedure.

Secondly, and this is more troublesome, the absence of judicial review may be perceived—erroneously—as allowing the IMF to do whatever it wants. It is not so much the validity of the legal advice that is being challenged, but the need to abide by the rule of law. “Imaginative” legal constructions (similar to “creative” accounting) are solicited, or impatience about “legalistic” (in a derogatory sense) considerations is expressed, usually when a personal or political agenda is at stake. In other cases, a contrast is made between law and so-called policy considerations, as if the latter could take precedence over the former. This type of controversy is not unknown in national legal systems where the interference of courts (the “government of judges”) is sometimes resented by political organs. National courts themselves have usually recognized that there are decisions of a discretionary nature that are not subject to judicial review. Similarly, in an international organization, each organ is allowed a large degree of latitude in the exercise of its powers. Administrative discretion must be recognized and it would not be possible to impose legal constraints that would negate this power. However, any power is subject to limits. Even at the time of the French absolute monarchy, the king could not disregard the fundamental laws of the kingdom. It is, therefore, improper to complain about legalism in the IMF while advocating good governance and respect for the rule of law in its member countries.

In recent years, there is one area where the absence of judicial review was recognized as unacceptable. Most international organizations have established an administrative tribunal to adjudicate disputes between the organization and individual staff members (remuneration, pensions, dismissal, etc.). The IMF until recently had only a nonjudicial review of individual decisions concerning its staff. The Grievance Committee, consisting of staff members and an outside expert, has a purely advisory role, although its advice is always followed in practice. In 1992, the IMF established an Administrative Tribunal with jurisdiction over individual decisions and regulations that give rise to staff grievances. The Tribunal has the power to interpret all the rules of the IMF that are relevant to the disposition of each case. Nevertheless, the Statute of the Tribunal expressly states that the Tribunal will be bound by any interpretation of the Articles of Agreement that may be adopted by the IMF (Article III of the Tribunal’s Statute).

The Decision-Making Organs

The United Nations and the IMF have totally different structures. In the United Nations, each member of the organization is represented in the General Assembly, where the “one country—one vote” principle applies; the General Assembly elects a Secretary General who is the head of the Secretariat and exercises his authority on the Secretariat independently of the General Assembly.

In the IMF each member is assigned a quota, calculated on the basis of economic criteria, which determines both its subscription to the capital of the IMF and its voting rights in the organization. More specifically, each member has 250 “basic votes” plus one additional vote for each part of its quota equivalent to SDR 100,000 (Article XII, Section 5(a)). Each member appoints one Governor and one Alternate Governor and the Governors appointed by all members will constitute the first decision-making organ of the IMF: the Board of Governors. The members will also select (through appointment or election—see section entitled “The Executive Board” below) a limited number of Executive Directors, who will form an Executive Board, which is the second decision-making organ of the IMF, and the Executive Board will elect a Managing Director, who is the head of the staff and the chairman of the Executive Board. The Managing Director is, like the Secretary General of the United Nations, the “executive head” of the organization; he is a decision-making organ of the IMF, but he acts generally “under the direction of the Executive Board.” [N.B. In addition to the three existing organs, the Board of Governors could establish a Council; the decision would require an 85 percent majority of the total voting power (Article XII, Section 1). On the Council, which would be an intermediate organ between the Board of Governors and the Executive Board, see the Appendix below.]

Therefore, in contrast to the structure of a political organization like the United Nations, the IMF’s structure resembles that of a company, with its shareholders’ meetings, board of directors, and chairman of the board. A closer examination, however, shows that the structure of the IMF—which is also found in other financial institutions—is sui generis as it combines features of private companies with those of international agencies.

The Board of Governors

Composition and Powers

The Governors of the IMF are usually finance ministers or central bank governors of their respective countries. They are appointed by their governments, in accordance with national procedures, to participate in meetings of the Board of Governors and to vote on resolutions proposed for adoption by the Board of Governors. Resolutions may be adopted during meetings of the Board of Governors. They may also be adopted by mail, without a meeting.

The Board of Governors may establish committees (Article XII, Section 2(j)), such as the Interim Committee, but committees have no decision-making power; they do not vote and have only advisory functions. However, their real influence should not be underestimated. For instance, under its terms of reference, the Interim Committee was established to “advise and report to the Board of Governors,” but its main function now is to provide guidance through recommendations to the Executive Board and member countries. The fact that the members of the Interim Committee are high-ranking officials in their national governments (finance ministers or central bank governors) is not unrelated to this development. Moreover, since there is no vote in committees, the adoption of a recommendation by the Interim Committee requires a consensus within the Committee. Therefore, even though they are not legally binding, recommendations of the Interim Committee will be given the greatest attention by Executive Directors.

The Board of Governors is the fundamental organ of the IMF. Under Article XII, Section 2(a), “[a]ll powers under this Agreement not conferred directly on the Board of Governors, the Executive Board, or the Managing Director shall be vested in the Board of Governors.” Therefore, two types of powers can be found in the Articles: those that are explicitly vested in a particular organ (e.g., the Managing Director is the head of the staff under Article XII, Section 4(b)) and those that are not (i.e., all references to “the Fund” without attribution to a particular organ). The latter are vested in the Board of Governors.

Intellectually and politically, the system is clear and reflects the preeminence of the Board of Governors. Practically, it is not manageable. As most powers under the Articles are not attributed to a particular organ, most decisions would have to be submitted to the Board of Governors whose members have absorbing functions in their respective countries. Therefore, Article XII, Section 2(b) authorizes the Board of Governors to “delegate to the Executive Board authority to exercise any powers of the Board of Governors, except the powers conferred directly by this Agreement on the Board of Governors.”

Delegation to the Executive Board

By a resolution adopted at its first meeting in 1946 (amended in 1978), the Board of Governors made the delegation contemplated in Article XII, Section 2(b) and in the broadest possible terms. As presently formulated in Section 15 of the IMF’s By-Laws, this delegation reads as follows: “The Executive Board is authorized by the Board of Governors to exercise all the powers of the Board of Governors except those conferred directly by the Articles of Agreement on the Board of Governors.”

As a result of this delegation, the bulk of decisions to be taken was shifted from the Board of Governors to the Executive Board. When reading the Articles, all references to powers of the IMF without attribution must now be understood as powers exercised by the Executive Board. More specifically, the Executive Board now exercises two types of powers: those that are conferred by the Articles directly on the Executive Board (e.g., selection of the Managing Director) and those that have been delegated by the Board of Governors (powers of “the Fund” without attribution to an organ). The powers of the first category are exercised independently by the Executive Board; they are conferred by the Articles; their exercise cannot be challenged before the Board of Governors. The powers of the second category are exercised pursuant to a delegation of power, which means that the decisions made pursuant to the delegation are not made on behalf of the Board of Governors. Unlike the delegation of signatory authority, which allows the delegate to act on behalf of the delegator, a delegation of power results in an attribution of the decision-making power. This raises a number of questions: Can decisions made in the exercise of its delegated powers by the Executive Board be challenged before the Board of Governors? Does the Board of Governors retain the authority to exercise a power after it has been delegated or is it divested of that power? Can the Executive Board, when exercising a delegated power, amend or disregard a resolution of the Board of Governors in the area that has been delegated? Can the Executive Board subdelegate the powers conferred by the Board of Governors?

The Articles of Agreement do not contain explicit provisions on the effects of a delegation of powers by the Board of Governors to the Executive Board. Perhaps, however, an implicit reference can be found in Article XII, Section 2(g): “The Board of Governors, and the Executive Board to the extent authorized, may adopt such rules and regulations as may be necessary or appropriate to conduct the business of the Fund.” The literal meaning is that the rule-making power is vested in the Board of Governors, which may authorize the Executive Board to exercise all or part of it. The authority conferred on the Executive Board by a delegation seems additional to the authority of the Board of Governors to adopt rules and regulations, which may be understood to mean that a delegation does not divest the Board of Governors of its powers. Also, “to the extent authorized” may imply that, in the exercise of its delegated powers, the Executive Board should not contradict rules that may be made by the Board of Governors. However, this reading is far from certain.

Therefore, in 1946, when Section 15 of the By-Laws was adopted, the Board of Governors decided to clarify the effects of a delegation of powers to the Executive Board. A second sentence, which has now disappeared from Section 15, read as follows: “The Executive Directors [i.e., the former name of the Executive Board] shall not take any action pursuant to powers delegated by the Board of Governors which is inconsistent with any action taken by the Board of Governors.” This sentence was understood as meaning not only that the Executive Board could not use its delegated authority to contradict a regulation of the Board of Governors but also that, notwithstanding the delegation, the Board of Governors could still exercise the powers vested in it by the Articles as if they had not been delegated.

In 1978, after the Second Amendment of the IMF’s Articles, the second sentence of By-Law 15 was deleted because, it was said, the sentence expressed an “obvious principle” that did not need to be made explicit. There was no intention to change the effects of the delegation but only to prune a superfluous provision. As a result of this amendment, there is now no explicit provision in the IMF’s body of rules on the exercise by the Executive Board of authority delegated by the Board of Governors.

A possible explanation for the 1978 amendment of By-Law 15 is that another provision expressly recognizes the precedence of the Board of Governors’ By-Laws over the Executive Board’s Rules and Regulations. Rule A-l of the Rules and Regulations, in its last sentence, provides:

If any provision in the Rules and Regulations is found to be in conflict with any provision in the Articles or in the By-Laws, the Articles and By-Laws shall prevail and an appropriate amendment shall be made to these Rules and Regulations.

However, this provision applies only to a certain type of conflict, namely, between the By-Laws and the Rules and Regulations. It does not resolve possible conflicts between resolutions of the Board of Governors other than the By-Laws and decisions of the Executive Board other than the Rules and Regulations. Moreover, being adopted by the Executive Board, this Rule could also be amended by the Executive Board, while By-Law 15 could only be amended by the Board of Governors. Finally, Rule A-l is only a reflection of the general principle of hierarchy of norms in a legal system and does not address the specific issues raised by a delegation of powers, including the issue addressed in By-Law 15.

Therefore, the wisdom of the 1978 amendment may be questioned. The concept of delegation of power may be understood differently in different contexts. If powers are delegated, it may be understood that they have been transferred by the delegator to the delegate. Therefore, why would the delegate be precluded from exercising those powers to the full extent, including by amending earlier decisions of the delegator? Why could delegated powers still be exercised by the delegator? Under French administrative law, for example, there are two types of delegations: a delegation of power, which divests the delegator of his authority, and a delegation of signature, which does not, and under which the delegate acts on behalf of the delegator. The original text of By-Law 15 had the merit of clarifying that what the Board of Governors intended to achieve by a delegation was not a transfer of power but the attribution of a subordinate power.

The decision to delete the second sentence of By-Law 15 is even more difficult to understand in light of another provision that was adopted at the time of the Second Amendment. With the possible creation of a new, intermediary organ between the Board of Governors and the Executive Board, i.e., the Council, it was felt necessary, in the new provisions relating to the Council, to clarify the effects of a delegation of authority by the Board of Governors to the Council and the Executive Board, respectively.

The Council shall not take any action pursuant to powers delegated by the Board of Governors that is inconsistent with any action taken by the Board of Governors and the Executive Board shall not take any action pursuant to powers delegated by the Board of Governors that is inconsistent with any action taken by either the Board of Governors or the Council (Schedule D, paragraph 3(c)).

Had this provision become effective by the activation of Schedule D and the establishment of the Council, there would have been no need to retain the second sentence of By-Law 15, but this has not happened and the deletion of that sentence has created a vacuum in the IMF’s legal system.

The very fact that Schedule D tried to clarify the effects of a delegation of powers shows that the principle expressed in the second sentence of By-Law 15 was far from obvious.

What is the nature of the “obvious principle” invoked in 1978? Is it a rule of interpretation or a rule of substance? If it is a rule of interpretation, the delegation could contain an explicit power to amend existing regulations adopted by the Board of Governors. If it is a rule of substance, such a power cannot be granted. During the discussions that followed the amendment of By-Law 15, it was made clear that the Board of Governors could explicitly authorize the Executive Board to amend earlier decisions of the Board of Governors. Therefore, the second sentence of By-Law 15 was indeed not superfluous. Since not all delegations have the same effect, it had the advantage of expressing what was intended to be the general principle with respect to delegations of powers by the Board of Governors to the Executive Board.

Given the legislative history of the amendment of By-Law 15, it must be concluded that the principle remains the same as before. Consequently, a delegation of powers does not divest the Board of Governors of the powers delegated to the Executive Board, which means that it can review and amend or terminate a decision taken by the Executive Board in the exercise of its delegated authority (subject to rights that may have been created under the decision). It would also be possible for the Executive Board not to exercise a delegated power but to refer the matter to the Board of Governors by proposing a decision for its adoption, with the consequence that the decision once taken could only be amended by the Board of Governors.

Finally, it may be noted that, while the Articles explicitly authorize the Board of Governors to delegate its “nonreserved” powers to the Executive Board, there is no similar power for the Executive Board to delegate its own powers or to subdelegate those delegated by the Board of Governors. This means that the Executive Board must, as a collegial organ, fulfill its responsibility of “conducting the business of the Fund, and for this purpose [must] exercise all the powers delegated to it by the Board of Governors” (Article XII, Section 3(a)). This responsibility cannot be delegated to persons either outside or within the IMF. For instance, the Executive Board could not delegate to another organization its authority to adopt policies on the use of IMF resources or to implement those policies through individual decisions. Therefore, cross-conditionality (understood as subjecting the use of IMF resources to the rules or decisions of other organizations) would be an abdication of the IMF’s authority, inconsistent with the IMF’s Articles.

The Executive Board

Like the Board of Governors, the Executive Board is a collegial organ whose members are selected by the members of the IMF. It is “responsible for conducting the business of the Fund” (Article XII, Section 3(a)) and must “function in continuous session at the principal office of the Fund and … meet as often as the business of the Fund may require” (Article XII, Section 3(g)). Its powers are those that are conferred upon it directly by the Articles and those that have been delegated by the Board of Governors. The Executive Board may appoint committees (Article XII, Section 2(j)).

Two aspects deserve particular attention: the selection of its members and their status.

Selection of Members

The members of the Executive Board, called Executive Directors, are either appointed or elected. Five are appointed by the five members having the largest quotas (at present, the United States, Germany, Japan, France, and the United Kingdom)(Article XII, Section 3 (b)(i)). In addition, one or two Executive Directors may be appointed by members whose currencies have been used the most in the two years preceding an election if they are not already among those with the five largest quotas (Article XII, Section 3(c)).

In principle, 15 Executive Directors (minus one or two if additional appointments are made as explained above) are elected by the other members, but, before each election, the Board of Governors may increase or decrease the number of elected Executive Directors; the decision requires an 85 percent majority of the total voting power in the Board of Governors (Article XII, Section 3 (b) (ii) and third sentence). There are at present 19 elected Executive Directors, which brings the total number of Executive Directors to 24. Since there are fewer Executive Directors than there are members, most elected Executive Directors are selected by a group of countries who agree on voting for the same person; those members form his “constituency.” Some members have enough votes, however, to elect one Executive Director without the support of other members (at present, China and Russia). Elections take place every two years. In an election of Executive Directors, the votes of each member are cast by its Governor.

Each appointed or elected Executive Director appoints one Alternate Executive Director and may have temporary alternates.

Status of Members

Between appointed and elected Executive Directors, there is one major difference in status. An appointed Executive Director is appointed for an indefinite period; he serves until his successor is appointed, which may be at any time. Other Executive Directors, including those elected by a single country, are elected for two years and serve until their successors are elected; if an elected Executive Director resigns more than 90 days before the end of his term, the members of his constituency will elect a successor who will serve until the next election. Any elected Executive Director may be reelected without any limitation on the number of his terms. It may be noted that there is no constraint on the nationality of Executive Directors: there is no requirement that an Executive Director be a national of the member appointing him or of one of the countries electing him.

There is another difference between appointed and elected Executive Directors, but it relates to the rights of the members, not to the status of Executive Directors. Under the IMF’s Articles, a member not entitled to appoint an Executive Director is entitled to send a representative to attend any meeting of the Executive Board when a request made by, or a matter particularly affecting, that member is under consideration (Article XII, Section 3(j)). The procedure is determined by Section 19 of the By-Laws. It applies not only to members that have elected an Executive Director but also to those that have neither appointed nor elected an Executive Director (e.g., because their voting rights have been suspended).

From this provision it may be inferred that an elected Executive Director is not the representative of his constituents. A simple explanation could be that, because he is normally elected by a group of countries, each of his constituents may find it preferable to send one of its own officials to defend its interests before the Executive Board. From the same provision, it could also be inferred that an appointed Executive Director is a representative of the country appointing him to the Board, but this is not explicitly said and this omission is deliberate.

The status of appointed and elected Executive Directors and whether they are representatives of their constituents or officials of the IMF is one of the oldest issues in the legal history of the IMF.

A delegate of a country to the General Assembly of the United Nations is a representative of his country. He speaks and votes under instructions. The statements he makes and the votes he casts are statements made and votes cast on behalf of his country.

In contrast, the drafters of the Articles were very careful to dissociate the votes cast by a member from those cast by its Governor or Executive Director. In the text of the Articles, the distinction is subtle but rather clear to the attentive reader. For instance, under Article XII, Section 2(e), “[e]ach Governor shall be entitled to cast the number of votes allotted under Section 5 of this Article to the member appointing him.” A Governor does not cast the votes “of” the member appointing him but the same number of votes. This is not a longer formulation of the same idea but the expression of a conscious intention to dissociate two categories of votes: those of the country and those of the Governor. In other words, the votes cast by a Governor are not cast on behalf of the member appointing him but in his capacity as a member of the Board of Governors. Similarly, an appointed Executive Director will cast the number of votes allotted under Section 5 of Article XII to the member appointing him (Article XII, Section 3(i)(i)) and an elected Executive Director will cast the number of votes that counted toward his election (Article XII, Section 3(i)(iii)). There is not even a reference to the votes allotted to members electing the Executive Director in this last provision. Moreover, an elected Executive Director is not allowed to split his votes (Article XII, Section 3(i)(iv), second sentence), in order to avoid any temptation for the Executive Director to reflect the conflicting views of his constituents when casting his votes.

There are also a number of other reasons for concluding that Executive Directors are not representatives of their constituents, regardless of whether they are elected or appointed. For instance, in contrast with the UN charter and those of other organizations, the IMF’s Articles never use the term “representatives” when referring to Governors or Executive Directors. Moreover, there is no difference whatsoever between the status of appointed or elected Executive Directors other than with respect to their designation.

All Executive Directors of the IMF, whether elected or appointed, are remunerated by the organization itself and enjoy the same privileges and immunities as the Governors, the Managing Director, the members of the staff, and any other officials of the organization. These privileges and immunities, which are prescribed in the Articles of Agreement, are supplemented by those conferred by the United Nations Convention on the Privileges and Immunities of Specialized Agencies; the latter only apply in the countries that have acceded to the Convention and undertaken to apply its provisions to the IMF. In this respect, it may be noted that the UN Convention makes a distinction between “representatives of members at meetings convened by a specialized agency” (Article V) and “officials” of a specialized agency (Article VI). For purposes of the Convention, the UN Secretariat has been informed that Executive Directors of the IMF are not “representatives of members” but “officials of the Fund.”

Among their immunities under the IMF’s Articles, one is particularly relevant to the legal characterization of their status. Article IX, Section 8(i) provides that Executive Directors “shall be immune from legal process with respect to acts performed by them in their official capacity except when the Fund waives this immunity.” Accordingly, an Executive Director’s immunity can only be waived by the IMF; it cannot be waived by his constituents because this immunity has been conferred in the interest of the IMF, in order to avoid any undue pressures that would prevent or deter the Executive Director from discharging his obligations as an official of the IMF.

Certain obligations that must be performed individually by each Executive Director are prescribed in the Articles (e.g., Article XII, Section 3(e)) or in resolutions of the Board of Governors (e.g., Section 14(d) of the By-Laws).

Moreover, as members of the Executive Board, Executive Directors are collectively responsible for fulfilling the obligations imposed on that collegial organ. The general mandate of the Executive Board is set forth in Article XII, Section 3(a), which provides: “The Executive Board shall be responsible for conducting the business of the Fund, and for this purpose shall exercise all the powers delegated to it by the Board of Governors.” The use of the verb “shall” denotes the imposition of an obligation. When discharging that obligation, the Executive Board acts on behalf of the IMF, as the competent organ vested with certain powers. Therefore, its decisions must be guided by the purposes of the IMF (Article I, last sentence) and they must be consistent with the provisions of the Articles and the resolutions of the Board of Governors. As a member of the Executive Board, each Executive Director is subject to the same obligations. If an Executive Director disregarded these obligations to give effect to instructions received from his constituents or for any other reason, he would be in breach of his fiduciary duty to the IMF.

In the specific case of decisions on the use of the IMF’s general resources, the Executive Board has an obligation to adopt policies “that will assist members to solve their balance of payments problems in a manner consistent with the provisions of this Agreement and that will establish adequate safeguards for the temporary use of the general resources of the Fund” (Article V, Section 3(a)). Accordingly, it is incumbent upon each Executive Director, as a member of the Executive Board, to ensure the integrity of the IMF’s general resources. There again, a particular fiduciary duty is imposed in the interest of the IMF, and each Executive Director is accountable to the IMF for the discharge of that obligation. If an Executive Director were to follow instructions contrary to that provision, he would be in breach of his obligations to the IMF.

In addition to his responsibilities as an official of the IMF, an Executive Director may agree to communicate the views of one, several, or all of his constituents on a particular subject to the Executive Board or to other officials of the IMF. In so doing, he acts as a representative of these constituents and, as such, may agree to present their views even when they are contrary to his own. However, if the matter raised is put to a vote, the Executive Director must cast his votes as an official of the IMF and can only support the views of his constituents if they are consistent with his own obligations to the IMF.

Therefore, it must be concluded that, unlike representatives of member states to other international organizations, an Executive Director of the IMF is an official of the organization, legally accountable to the IMF for the discharge of his duties. The fact that he has been selected by certain member states does not create any obligation for him to defer to their views or to cast his votes in accordance with their instructions. His votes are valid even if they are inconsistent with any instructions he may have received from his constituents. Even when he has agreed to present their views to the IMF, he remains bound to cast his votes in accordance with his obligations to the IMF.

The Managing Director

The Managing Director is elected by the Executive Board who may terminate his appointment at any time. He is both the head of the staff (Article XII, Section 4(b)) and the chairman of the Executive Board, where he has no vote except to break a deadlock in case of an equal division of votes (Article XII, Section 4(a)). For the purposes of the 1947 UN Convention on the Privileges and Immunities of the Specialized Agencies, he is the “executive head” of the IMF.

The powers of the Managing Director are conferred on him by the Articles. In contrast to the Executive Board, the Managing Director does not exercise any delegated authority. However, there is sometimes a degree of confusion on this point, because the scope of the Managing Director’s power is not always precisely defined in the Articles, and it is left to the Executive Board to determine that scope. This determination is not made through interpretations of the Articles but rather through regulations and instructions. Interpretations once adopted are difficult to revise since a new interpretation of the same provision implies that the old one was erroneous. Amending regulations or instructions does not raise the same difficulties.

Some powers of the Managing Director are defined with great precision in the Articles. For instance, the Managing Director may make proposals for SDR allocations (Article XVIII, Section 4(a) and (b)). In such cases there is no room for a determination of the extent of his powers by the Executive Board (except through an interpretation of these provisions).

The major provisions of the Articles that deal with the Managing Director’s powers, however, are not so clear as to the scope of his powers, but they are very clear in emphasizing that he acts under the “direction” or “general control” of the Executive Board. For instance, the Managing Director “shall conduct, under the direction of the Executive Board, the ordinary business of the Fund” and, “[s]ubject to the general control of the Executive Board, he shall be responsible for the organization, appointment, and dismissal of the staff of the Fund” (Article XII, Section 4(b)). These provisions show that the Executive Board and the Managing Director exercise separate but closely related powers, with respect both to the conduct of the business of the IMF and to the management of the staff. In practice, it will be for the Executive Board to determine the precise scope of the Managing Director’s powers. For example, the Executive Board has decided that its approval will be required for stand-by arrangements and other requests for the use of IMF resources (other than reserve tranche purchases), but the conduct of the negotiations with the requesting member is left to the Managing Director. There is a similar distinction with respect to the enforcement of members’ obligations under the Articles; if it appears to the Managing Director that a member is not fulfilling obligations under the Articles, he must report the matter to the Executive Board (Rules K-1 and S-1), but it is for the Executive Board to decide whether a breach of obligation has actually been committed. With respect to the management of the staff, the Executive Board has adopted general rules (N-Rules) and policies and, within that framework, the Managing Director may adopt staff regulations (General Administrative Orders) and make individual decisions (appointments, etc.). However, there is no delegation of authority by the Executive Board to the Managing Director, but only an exercise by the Executive Board of its “direction” and “general control” under Article XII, Section 4(b).

The Managing Director is assisted by three Deputy Managing Directors (previously, one; cf. Rule C-5(b), which has not been amended to reflect this change), appointed by him with the approval of the Executive Board. A Deputy Managing Director may chair a meeting of the Executive Board if the Managing Director is absent. When the Managing Director is traveling, one of the Deputy Managing Directors becomes Acting Managing Director.

For the signing of contracts and instructions for transfers of funds, the Managing Director has been authorized by the Executive Board to delegate “signatory authority” to specified members of the staff. This delegation is not a transfer of power in the sense that it would divest the Managing Director of his authority. It is merely an allocation of functions to be performed on behalf of the Managing Director.

The Decision-Making Process

In order for an administrative decision to be valid, three conditions must be met: the decision must be made by a competent organ, in accordance with the required procedure, and consistently with the substantive requirements governing the contents of the decision.

Competence of the Decision-Making Organ

Each of the IMF’s three decision-making organs has its respective competence, although, as explained above, the exercise of delegated authority or of authority under the control of another organ may sometimes blur the distinctions between different organs.

Between the Board of Governors and the Executive Board, the allocation of powers does not raise particular difficulties. Since all the powers that are not explicitly conferred by the Articles on the Board of Governors have been delegated to the Executive Board and are now exercised together with those conferred directly on the Executive Board by the Articles, any power either of the IMF or of the Executive Board under the Articles is exercised by the Executive Board. This combination of powers has made the Executive Board the central decision-making organ of the IMF.

Between the Executive Board and the Managing Director, the distinction is not so clear, since most of the Managing Director’s powers are exercised under the “direction” or “general control” of the Executive Board. There is now a rather extensive body of decisions and practices on the basis of which the delineation of powers can be made, but this body is in constant evolution. For instance, until a few years ago, a technical assistance mission to a member country had to be approved by the Executive Board; now it is only required for technical assistance to nonmembers or international agencies (Rule N-16(d)).

Procedural Requirements

There are different procedural rules for different types of decisions. Some are prescribed by the Articles, such as the requirement of a quorum for decisions of the Board of Governors (Article XII, Section 2(d)) and of the Executive Board (Article XII, Section 3(h)). Other rules are established by internal regulations. For instance, individual decisions concerning the appointment of staff members are made by the Managing Director or on his behalf, but appointments to senior staff positions (division chief or above) must be notified in advance to the Executive Board (Rule N-12).

Perhaps, however, the most complex and original procedural requirements are those that govern the adoption of decisions by the Executive Board. Three aspects should be examined: the procedures for adoption, the majorities, and the formulation of the decisions.

Procedures for Adoption of Decisions

When a collegial organ is asked to adopt a decision, for instance, a parliament voting on a bill of law, usually a draft of the proposed decision is circulated and each member may vote for or against the proposal or abstain. Formal voting is not a universal practice, however. For instance, the speaker of the British Parliament may ascertain the sense of the meeting without a formal vote.

In the Executive Board, formal votes are possible but they are rather exceptional. Unless an Executive Director requests a formal vote, the Chairman will “ascertain the sense of the meeting” (Rule C-10). This practice avoids having to count the votes when the outcome is rather clear. Since votes are not counted, the record does not reflect individual positions of Executive Directors on the proposal, but it is always possible for an Executive Director to ask that his particular position (for, against, or abstention) be included in the record.

Another original procedure developed by the IMF is the approval of proposed decisions on a lapse-of-time basis. It is used mainly for decisions that are expected to be approved without difficulty, particularly after a prior discussion of the substance of the decision but without a formal text, or when technical changes to the proposed text have to be made. For instance, the Managing Director will circulate the text of the proposed decision with a specified period at the expiration of which, unless an Executive Director requests a meeting of the Executive Board, the decision will be deemed to be approved. It is possible that, without requesting a meeting of the Executive Board, one or several Executive Directors wish, during the specified period, to express their objections to the proposed decision or their abstentions; those objections or abstentions will be recorded. However, the Managing Director may then decide to withdraw his proposal and, for example, call a meeting of the Executive Board for a discussion of the proposal. In that case, the lapse-of-time procedure has not been completed and the proposal is not deemed to have been voted upon.


The general principle in the IMF is that, except as otherwise specifically provided, all decisions of the Board of Governors or of the Executive Board are made by a majority of the votes cast (Article XII, Section 5(c)).

“Unless otherwise specifically provided” is understood to refer to those provisions of the Articles that require special majorities for certain decisions. There are two types of special majorities and both are calculated in terms of the total voting power within the IMF: 70 percent and 85 percent. For instance, a change in the rate of charge requires a 70 percent majority of the total voting power (Article V, Section 8(d)), while the adoption of a new repurchase period requires an 85 percent majority also of the total voting power (Article V, Section 7(c) and (d)). When a majority of the total voting power is required, an abstention has the same effect as a vote against the proposal.

With the Second Amendment of the Articles, the number of special majorities increased considerably. This change made it more difficult to adopt certain types of decisions, as the equivalent of a special majority is effectively a means for a minority to veto a proposed decision if it can muster more than 15 or 30 percent of the voting power in the form of negative votes or abstentions.

Special majorities are an exception to the general principle in Article XII, Section 5(c) that decisions are adopted by a majority of the votes cast. Absent a specific provision of the Articles requiring a special majority, the general principle applies. Therefore, it is not within the power of the Board of Governors or of the Executive Board to add special majorities to those specified in the Articles, as such a decision would be contrary to Article XII, Section 5(c).

When a proposed decision contains one or several provisions whose adoption requires a special majority, the adoption of the decision will require the same majority. When different provisions require different majorities, the highest majority applies. If the decision is later amended, only the majority required for the provisions being amended will be needed. Therefore, if none of the provisions being amended requires a special majority, a majority of the votes cast will suffice even though the decision was initially adopted by a higher majority. A decision or provision adopted by a special majority may be terminated by a majority of the votes cast, but the extension of a decision initially adopted for a specified period will require the same majority as the initial adoption.

Formulation of Decisions

There are different types of formulations for different types of decisions, but the fundamental distinction is between regulations, which are of general application, and individual decisions.

It is in the area of regulations, and particularly policies on the use of the IMF’s resources, that the practice of the IMF deserves attention. Many decisions follow the traditional assertive pattern of regulations. For instance, the N-Rules on the conduct of the staff prohibit certain activities or require the prior authorization of the Managing Director. The rules governing the rate of charge or the repurchase periods are expressed in general terms because of the principle of uniform treatment of members (see “2. Uniformity of Treatment of Members” under section entitled “Consistency with the Articles” below). Other general decisions, however, use a rather tentative formulation: “normally” or “generally” the IMF (i.e., the Executive Board) or the Managing Director will act in a certain way, which implies that they could also, in certain cases, act differently. These decisions are often referred to as “guidelines,” but there is no clear distinction between guidelines and other decisions. The same decision may be very precise on certain aspects and imprecise on other aspects.

Perhaps the most original type of formulation is the chairman’s summing up of an Executive Board discussion. A summing up is almost a literary genre combining a recapitulation of the issues discussed and the views expressed during the discussion, Sometimes the views are purely personal to some Executive Directors: a few said this, most said that, some said otherwise, etc. The present practice is to refer to views without attribution, but there are examples in the past of summings up with attribution of views to identified Executive Directors. If the discussion was not intended to reach a decision or if no decision was reached, the summing up will reflect only opinions. However, in cases where a decision was reached but no formal text was proposed for approval, the summing up will, in its relevant part, be regarded as a record of the decision taken. In those cases, a precise formulation of the summing up is essential as evidence that a decision has been taken and of the precise contents of the decision. Even greater caution is needed when there are both a formal decision and a summing up on the same issue. If the summing up reflects views expressed at the meeting in which the decision was adopted, it may be useful as a clarification of the decision, but inconsistencies between the formal decision and the summing up would create major difficulties of interpretation. If the summing up reflects views expressed at a subsequent meeting and these views are regarded as a new decision, this subsequent (informal) decision would supersede the earlier (formal) decision. The same could be said when there are inconsistencies on the same issue between two successive summings up.

Initially developed for the conclusion of Article IV consultations, to reflect the collective or individual views of Executive Directors on a member’s policies, summings up have become an essential part of the IMF’s decision-making process, both to take stock of the views of Executive Directors on policy issues and as a consensus-building exercise toward the adoption of Executive Board decisions. They are also beginning to be used in connection with the adoption of stand-by and extended arrangements, but, in those cases, they cannot constitute decisions affecting the member’s rights because these rights are governed exclusively by the terms of the arrangement (Article XXX(b)).

Substantive Requirements

Without trying to present an exhaustive list of all the substantive rules that govern the decisions of organs of the IMF, it is possible to identify three general principles that must be observed:

  • all decisions must be consistent with the Articles;

  • all decisions of a subordinate organ must be consistent with the decisions of a superior organ (consistency with higher norms); and

  • all individual decisions of an organ must be consistent with the regulations made by that organ.

Consistency with the Articles
The rules of the Articles are binding on all the organs of the IMF. This principle is explicitly recognized in the By-Laws and the Rules and Regulations (Rule A-1 quoted above; see section entitled “The Board of Governors” above). The introductory provision of the By-Laws reads as follows:

These By-Laws are adopted under the authority of, and are intended to be complementary to, the Articles of Agreement of the International Monetary Fund; and they shall be construed accordingly. In the event of a conflict between anything in these By-Laws and any provision or requirement of the Articles of Agreement, the Articles of Agreement shall prevail.

The Articles contain different types of rules. Some apply to all the decisions of the IMF, while others apply only to certain types of decisions. Since this examination of the IMF’s decision-making process is not intended to be exhaustive, only the general rules, which are either explicit or implicit in the Articles, will be examined.

1. Purposes

International organizations are by essence functional entities. Unlike independent states, whose sovereignty is only limited by international treaties and other rules of international law, their powers are defined by the treaties that establish them. States are supposed to meet the needs of a given population in a given territory, but organizations are created only to achieve a certain degree of international cooperation in a certain area. Each power conferred on an international organization and each aspect of its mandate are established to achieve a particular objective, which itself will be instrumental in attaining the organization’s global objectives.

In the case of the IMF, these global objectives are set forth in Article I (Purposes) of its charter.

The purposes of the International Monetary Fund are:

  1. To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems.

  2. To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy.

  3. To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation.

  4. To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade.

  5. To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.

  6. In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members.

The Fund shall be guided in all its policies and decisions by the purposes set forth in this Article.

From the last sentence of Article I, it is clear that the purposes enumerated in that Article do not by themselves confer any power on the organization but impose a duty on the organization to exercise its powers for the achievement of those purposes. In particular, those purposes will guide the IMF in the exercise of its power to interpret its own charter. For instance, the reference in paragraph (iv) of Article I to “the establishment of a multilateral system of payments in respect of current payments” has guided the IMF in its application of Article VIII, Section 2(a) to bilateral payments agreements.

The last sentence of Article I, by requiring the IMF to be guided by its own purposes, implies unambiguously that the IMF may not be guided by extraneous objectives. In particular, it is not within the mandate of the IMF to use its powers and resources to carry out the mandate of other organizations or to enforce obligations under other international agreements or under private contracts.

Probably the most important consequence of Article I is in the area of what is known as “Fund conditionality,” that is, the formulation by the IMF of the conditions for the use of its resources. Under Article V, Section 3(a), the IMF must “adopt policies on the use of its general resources … that will assist members to solve their balance of payments problems in a manner consistent with the provisions of this Agreement and that will establish adequate safeguards for the temporary use of the general resources of the Fund.” In a decision of March 17,1948, the IMF has interpreted the terms “consistent with the provisions of this Agreement” as meaning “consistent with both the provisions of the Fund Agreement other than Article I and with the purposes of the Fund contained in Article I.”

A more direct reference to the requirement that the IMF’s general resources (i.e., those held in the General Resources Account) be used in accordance with its purposes is found in Article V, Section 5, which allows the IMF to limit or suspend the use of its general resources by a member that is using them in a manner contrary to the purposes of the IMF.

The same requirement applies to resources held by the IMF in the General Department outside the General Resources Account: the resources held in the Special Disbursement Account may be used to assist developing members in operations and transactions that “are consistent with the purposes of the Fund” (Article V, Section 12(f)). The same condition also applies to the use of resources held in accounts administered by the IMF under Article V, Section 2(b), such as the ESAF Trust.

Notwithstanding the common objective of consistency with the IMF’s purposes, there are important differences between the use of the IMF’s general resources and the use of its other resources.

One of the main differences in the Articles between the IMF’s policies on the use of its general resources and its policies on the use of other resources (i.e., in the Special Disbursement Account or in an administered account) is that only the former must safeguard the resources being used. This means that the IMF must ensure the revolving character of its general resources, which, inter alia, excludes financial assistance through donations of general resources to members. In contrast, grants of other resources (in practice, to developing members) are permitted. This distinction is reflected in Article I, paragraph (v) where the reference to “adequate safeguards” applies only to the IMF’s general resources.

The broad definition of its purposes in Article I gives the IMF a large degree of latitude in the formulation of its policies on the use of its resources and, over the years, has allowed the IMF to adapt its policies and expand the scope of its conditionality in light of experience. This expansion has raised questions of interpretation of Article I. Two examples may be mentioned.

First, while there are references in Article I to “trade” and “current payments,” there is no reference to capital movements. Their liberalization is not mentioned among the IMF’s purposes. The reason is that Article VI, Section 3 explicitly authorizes members to impose controls to regulate international capital movements. Article VI, Section 1(a) even allows the IMF to request the imposition of such controls to prevent the use of its general resources to meet a large or sustained outflow of capital.

Second, one of the IMF’s purposes is “to facilitate the expansion and balanced growth of international trade” (Article I, paragraph (ii)). The expansion of international trade may be achieved by removing restrictions on current payments as explicitly contemplated in Article I, paragraph (iv), but “to facilitate” does not mean “to liberalize.” This language was intended to avoid any confusion between trade liberalization and exchange liberalization. At the end of the Bretton Woods Conference, the participants recommended the creation of a separate agency for trade liberalization; this was the origin first of the 1947 GATT and, much later (1994), of the World Trade Organization. Again, at the time of the Second Amendment, when the IMF received the mandate of overseeing “the international monetary system in order to ensure its effective operation” (Article IV, Section 3(a)), the purpose of the international monetary system was defined as being “to provide a framework that facilitates the exchange of goods, services, and capital among countries” (Article IV, Section 1, emphasis added). There was no reference to trade liberalization, which was regarded as outside the IMF’s mandate.

Although trade liberalization as such is not a purpose of the IMF, it is incidental to the IMF’s purposes with respect to balance of payments assistance. The main reason is that there is a close relationship between one of the purposes of the IMF, which is “the elimination of foreign exchange restrictions which hamper the growth of world trade” (Article I, paragraph (iv)), and trade liberalization. In practice, restrictions on imports have the same economic effect as restrictions on current payments. If the IMF were to insist on the removal of the latter but accepted the imposition of the former, there would be no real correction in the exchange rate and other policies that are the cause of the member’s problem. There would be no facilitation of international trade through exchange liberalization. The expected benefit of exchange liberalization on international trade would not be achieved. In this respect, another purpose of the IMF must be mentioned, which is to make its general resources available to its members to help them “to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity” (Article I, paragraph (v)). Therefore, in its stand-by and extended arrangements, the IMF includes a standard condition that the member will not impose or intensify trade restrictions for balance of payments reasons.

The same concern inspired the 1974 Voluntary Declaration on Trade and Other Current Account Measures, the adoption of which was proposed by the IMF to its members (but never entered into force for lack of sufficient subscriptions by members). Members were invited to subscribe to the Declaration on a voluntary basis. By subscribing to the Declaration, a member would represent that it would not “on its own discretionary authority introduce or intensify trade or other current account measures for balance of payments purposes that are subject to the jurisdiction of the GATT, or recommend them to its legislature, without a prior finding by the Fund that there [was] a balance of payments justification” for such measures. Trade liberalization as such was not regarded as being within the IMF’s mandate.

In some cases, trade liberalization under IMF-supported programs goes beyond the nonimposition of trade restrictions to include the removal of existing restrictions, particularly when these restrictions are extensive and may undermine the viability of the member’s program, thus compromising the repayment of IMF resources, by generating artificially high domestic prices or hampering export-led growth and the earning of foreign exchange.

These policies on the use of IMF resources have blurred the distinction between the IMF’s mandate and the objectives of trade liberalization agreements. It remains, however, that trade liberalization as such is outside the purposes of the IMF. If it was really a purpose of the IMF, it should not be achieved simply through the use of IMF conditionality, which applies only to members using the IMF’s resources. It should be achieved through the formulation of obligations applying to all members. Such obligations are established, for instance, under the GATT, but they do not appear in the IMF’s Articles.

2. Uniformity of Treatment of Members

Sometimes a general principle may be inferred from particular provisions that do not specifically mention but imply its existence. Perhaps the best example in the IMF is the principle of uniform treatment of all members, which is regarded as a general principle of the law of the IMF (subject, as will be explained, to one major exception). Under Article V, Section 3(b) a member is entitled to use the IMF’s general resources (i.e., those that are held in the General Resources Account) if it meets the conditions specified in the Articles and the IMF’s policies. This provision does not prevent the IMF from establishing different policies for different types of balance of payments problems, but any member facing such a problem, whether it is a developed or developing country, whether it is in Asia, Africa, or anywhere in the world, whether it is large or small, rich or poor, will be entitled to use the IMF’s resources. Therefore, the scope of an IMF policy on the use of its resources can only be defined in terms of the nature of the member’s balance of payments problem.

Similarly, the provisions on the rate of charge allow the IMF to impose different rates for different policies but without any discrimination among members using the IMF’s resources under a particular policy. The same principle applies to repurchase periods.

There is one exception to the principle of uniform treatment. At the time of the Second Amendment, it was agreed that, if the IMF decided to sell some of its gold, the capital gain would in principle be used to assist its poorest members in their balance of payments problems. A Special Disbursement Account (SDA), separate from the General Resources Account, was established to receive the proceeds of such capital gains. Under Article V, Section 12(f)(ii), “balance of payments assistance may be made available on special terms to developing members in difficult circumstances, and for this purpose the Fund shall take into account the level of per capita income.” The resources held in that account have been used for long-term loans, with a 0.5 percent interest rate, to developing countries with low per capita incomes. The Structural Adjustment Facility (SAF), and later the Enhanced Structural Adjustment Facility (ESAF), which uses both SDA resources and loans and donations from member countries pooled in an account administered by the IMF as Trustee, were established to finance and extend such loans. The ESAF-HIPC (Heavily Indebted Poor Countries) Trust is based on the same principles, but, in addition to loans, the Trust may be used for grants to ESAF eligible members qualifying for a reduction of their external debt.

3. Nonretroactivity

Another example of a principle that is implicit in the Articles is the rule against retroactivity. The IMF may not make retroactive decisions to the detriment of its member countries or staff. For instance, the IMF may not increase the rate of charge retroactively, but could reduce it retroactively since this would be to the benefit of the debtors. However, when the rate of charge is based on a predetermined formula (whose adoption requires the same majority as the rate itself), a retroactive adjustment in the rate of charge is possible with effect from the date when the formula was established as the calculation of the rate is only an implementation of the preexisting formula.

Another distinction is between retroactivity and immediate effect of a regulation. An increase in the rate of periodic charges could apply to outstanding purchases in the General Resources Account. An increase in the rate of interest on loans could apply to outstanding loans under the SAF or ESAF. This immediate application would not be considered retroactive provided it was limited to charges and interest accruing after the decision.

With respect to repurchases, a shortening of the repurchase period would only apply to future purchases (Article V, Section 7(f)). Except for the rate of interest, ESAF loans are governed by the rules in force at the time of the loan (ESAF Trust Instrument, Section II, paragraph 5).

In the area of staff remuneration and benefits, nonretroactivity is not the only protection against new regulations. Regulations that amend the fundamental terms of employment to the detriment of the staff are considered illegal by international administrative tribunals.

4. Implied Powers

A question that is often raised is whether the organs of the IMF can only exercise the powers explicitly conferred upon them by the Articles or whether they could also exercise certain “implied” powers. For example, it is sometimes claimed that an international organization should be able to exercise whatever powers are necessary or useful, in its judgment, to achieve its purposes. This type of statement is often supported by references to the powers of federal governments and in particular to decisions of the U.S. Supreme Court, which has recognized the existence of implied powers under the federal constitution. The main problem with this approach is that, under the U.S. Constitution, the federal government is not the sole judge of its implied powers. It is for the courts eventually to recognize or deny the existence of such powers. In an organization like the IMF, where there is no judicial review of the organization’s decisions, greater restraint in the interpretation of the charter is necessary.

Moreover, a comparison between a federal government and an international organization is not appropriate. International organizations are governed by international law, which has its own rules on the interpretation of treaties. An assertion of authority by an international organization would be an infringement on the sovereignty of its members if it exceeded the authority they have agreed to confer upon it.

The International Court of Justice, in a 1949 advisory opinion, recognized the possibility of implied powers of international organizations and defined them as “those powers which, though not expressly provided in the Charter, are conferred upon it [the organization] by necessary implication as being essential to the performance of its duties” (Reparations for Injuries case). In that opinion, the Court recognized the capacity of the United Nations to bring claims for reparations due in respect of damages to its agents.

The same approach and the same criterion (“essential” power) were adopted by the International Court of Justice in the Effect of Awards case (1954), when the Court of Justice recognized the power of the UN General Assembly to establish an administrative tribunal to adjudicate disputes between the organization and members of its staff.

The question of implied powers was extensively discussed in the IMF in 1989, in connection with a proposal to impose sanctions on members in breach of their financial obligations under the Articles. It was felt that the sanctions permitted by the Articles were inadequate and that, for example, members in arrears to the IMF should be deprived of their voting rights for as long as they remained in arrears. Eventually it was concluded that the IMF had no implied power to impose sanctions and that, in order to allow the IMF to suspend the voting rights of a delinquent member, an amendment of the Articles would be needed. The Third Amendment of the Articles was eventually adopted for that purpose.

The discussions on the existence of implied powers are often confusing because the necessary distinctions are not made. First, an implied power is not a particular application of an existing power but a separate power. For instance, if an organization has full legal capacity, it may acquire and dispose of real property; this is only an exercise of an express power. Sometimes, however, the extent of an organization’s capacity seems unclear: does it include the right to establish a trust? to claim damages for injury? Although the doctrine of implied powers has sometimes been invoked in such cases, these decisions may be based on a broad understanding of the organization’s capacity tinder international law. Second, the invocation of implied powers should not lead to a circumvention of the charter. When a specific power was contemplated during the preparation of the charter but was eventually not included, the assertion of the same power as an implied power of the organization would be a circumvention of the charter. Similarly, when the exercise of an express power is subject to certain conditions, the existence of a similar (or broader) but unfettered power may not be implied. This is particularly true when the exercise of an express power requires a special majority, since, by definition, provisions on special majorities do not apply to implied powers as they are not mentioned in the charter. These questions were addressed in 1994 when it was proposed to redistribute SDRs among all participants through cancellation and reallocation of all existing SDRs. Such a redistribution would have been a circumvention of the rules on SDR allocations and cancellations and, therefore, contrary to the Articles. Third, the proper domain of implied powers is the exercise of quasi-govern mental powers that exceed the normal capacity of the organization. The cases submitted to the International Court of Justice fall into that category: establishment of a subsidiary organ to adjudicate disputes with the staff, “diplomatic” protection of the staff against injuries. Fourth, the doctrine of implied powers may not be invoked to abridge the rights of members of the organization under the charter or to impose additional obligations upon them.

Consistency with Higher Norms

Under the IMF’s charter, regulations may be adopted by the decision-making organs in the exercise of their respective powers. While some of these powers are exercised independently, others are exercised in a subordinate capacity. In the latter case, when a regulation has been adopted by a higher organ, a subordinate organ may not act inconsistently with that regulation. For instance, the By-Laws of the Board of Governors may not be contradicted by the Rules and Regulations of the Executive Board (Rule A-l) and the General Administrative Orders of the Managing Director must be consistent with the personnel policies approved by the Executive Board (Rule N-13).

When a power is delegated, as between the Board of Governors and the Executive Board, the issue is more complex. As explained above, the principle (no longer reflected in By-Law 15 but implicit) is that a delegation of power does not affect the hierarchy of norms. Therefore, the Executive Board must, in the exercise of its delegated authority, comply with the decisions of the Board of Governors. By an explicit decision, the Board of Governors could authorize the Executive Board to act otherwise, but this has not happened.

The real difficulty in practice is to determine the meaning of the higher norm. It may be safer to go back to the organ that has adopted it for a clarification, but this is not indispensable. It is within the powers of the organ implementing a rule to construe the meaning of that rule. There is no implementation without de facto interpretation. Therefore, the subordinate organ will have the responsibility of deciding how to act, but there is a risk of misinterpretation. The organ that has adopted the rule may step in and clarify the rule through a new decision. If the matter is within the jurisdiction of the Administrative Tribunal, the decision of the subordinate organ may be found illegal and rescinded.

Consistency of Individual Decisions with Regulations Made by the Same Organ

This is one of the most intriguing issues of the law of the IMF and it arises only because two of the rule-making organs of the IMF, the Executive Board and the Managing Director, are also responsible for the implementation of their own rules through individual decisions.

For instance, if the Executive Board has decided that certain conditions would have to be met under a policy on the use of its resources, could it exempt one member from those conditions? If the Managing Director has decided that staff members could not take a leave of absence without pay for more than a specified period, could he allow a staff member to take a longer leave of absence? Is there a general principle that a rulemaking organ is bound by its own rules when implementing them?

The issue arises only when the rule is formulated to exclude any flexibility. If words like “normally” or “generally” are inserted, special cases may be envisaged. In this respect, guidelines are often preferred to rigid rules because they allow a degree of flexibility for unforeseen cases.

When the rule does not allow any flexibility, two approaches may be envisaged. Under the first approach, just like God suspending its own physical laws to work miracles, a rule-making organ would always remain free to make exceptions to its own rules. What may be accepted in theology as an act of faith, however, is not necessarily accepted as a legal principle for the conduct of human societies. A system based on rules that are not applied in practice has more the appearance than the substance of a legal system. If a rule of law is enacted but not applied by its maker, how credible is it? There is at least one episode, not a glorious one, in the history of the IMF, where the Executive Board was advised that it could make exceptions to its own rules provided they were not disclosed. Advocating secrecy to hide an impropriety is understandable, but how can secrecy be a condition for the validity of a decision? Does it mean that the decision becomes illegal if it is revealed? If a decision must remain secret to be valid, there is something deeply wrong with such an approach, not to mention the fact that decisions of an international organ cannot be kept secret very long. With the present emphasis on good governance, transparency, and respect for the rule of law, the “secret exception” theory is even less defensible.

Under the second approach, the rule-making organ is bound by its own rules when implementing them. Patere legem quam ipse fecisti: obey the law that you have made. The justification for this rule is not only transparency and good governance but also pure logic. Rule making and rule implementation are two separate functions, which could be performed by two separate organs. Therefore, when implementing its own rules, an organ is in the same subordinate position vis-á-vis the rule it has made as if it had been made by a separate organ. This has been the view taken by the French Conseil d’Etat and administrative courts of other countries. It is the principle followed in the IMF. Obviously, if the organ is dissatisfied with its own rules, it can always amend them, but, as long as they are in force, it should apply them, not disregard them.


This presentation of decision making in the IMF did not propose to be an exhaustive description of the law of the IMF, but an illustration of the many analogies that exist between the principles of administrative law within the IMF and those of national legal systems. There are indeed differences either because the IMF is an international organization or because it has a particular structure, but the issues are often the same and the solutions adopted by the IMF are largely inspired by the experience of national laws, probably because the need for rational solutions is common to all legal systems, national or international.

Appendix: The Council

The provisions allowing the Board of Governors to establish the Council (Article XII, Section 1) and defining both the composition and powers of the Council (Schedule D) were adopted at the time of the Second Amendment. The Commentary on the Proposed Amendment (included in the Report of the Executive Directors to the Board of Governors) contains a detailed analysis of these provisions. This analysis remains for the most part relevant, except for the effect of a possible suspension of voting rights pursuant to the Third Amendment.

The general objective of the provisions on the Council is rather clear: the Board of Governors is authorized (but not required) to establish this new organ, which, like the Interim Committee, would be composed of a limited number of high-ranking officials (Governors, Ministers) but with decision-making powers. The Council would be an intermediate organ, between the Board of Governors and the Executive Board.

Its structure would mirror that of the Executive Board (the number of Councillors would be equal to the number of Executive Directors and the constituencies would be the same), but the meetings of the Council would be chaired by a Councillor, not by the Managing Director, and, in contrast with Executive Directors, each Councillor could split his votes to reflect the different views of his constituents. The fact that the same person can vote yes and no on the same proposal is hardly compatible with the exercise of a fiduciary duty to the IMF. Therefore, at least in this respect, there would be a major difference between an Executive Director and a Councillor. Yet, their privileges and immunities would be the same.

The powers of the Council would fall into two categories: those that are directly conferred by Schedule D (in paragraphs 2 and 5(a) and (c)) and those that may be delegated by the Board of Governors (Schedule D, paragraph 3(a)). Since there is no provision authorizing the Council to delegate the powers of the first category or to subdelegate the powers of the second category, all the powers conferred on the Council must be exercised by it. As this would create a heavy burden for ministers and other high-ranking officials who are members of the Council, they may appoint Alternates to attend meetings on their behalf; they may also adopt procedures for votes without a meeting.

Making provision in an organization’s charter for the possible creation of an additional organ raises at least one major difficulty. On the one hand, if that organ is to play any specific role in the organization, it must be vested with specific powers. On the other hand, if it is vested with such powers but never comes to life, those powers will remain ineffective. Therefore, as could be expected, most of the powers conferred on the Council are a duplication of the powers of other organs. Under Schedule D, paragraph 5(a), a number of powers conferred on the Executive Board by the Articles may also be exercised by the Council. Under Schedule D, paragraph 3(a), all the powers that may be delegated by the Board of Governors to the Executive Board may also be delegated to the Council.

This overlap of powers between the Council and the Executive Board could give rise to some tactical maneuvering: since the voting structure is not the same in the two organs, submitting a proposal to one or the other could lead to different results. Moreover, an overlap of powers may result—at least in theory—in conflicting decisions. To the extent that the Executive Board exercises powers delegated by the Board of Governors, Schedule D, paragraph 3(c) provides that the actions of the Executive Board may not contradict those of the Council or the Board of Governors. However, a conflict could also be envisaged in the exercise of the overlapping powers conferred directly by the Articles on the Executive Board and the Council (Schedule D, paragraph 5(a)). This issue remains unresolved in Schedule D, perhaps because it was expected not to arise in practice.

Although most of the powers that would or could be conferred on the Council replicate those of the Executive Board—and leaving aside the Council’s advisory role in considering proposals for amendments of the Articles—the Council would exercise a specific power that the Articles do not confer on any organ of the IMF and which, therefore, would not be exercised until the Council is established. Under Schedule D, paragraph 2(a), “[t]he Council shall supervise the management and adaptation of the international monetary system, including the continuing operation of the adjustment process and developments in global liquidity, and in this connection shall review developments in the transfer of real resources to developing countries.”

Since this important function is an exclusive power of the Council, it would seem that the nonestablishment of the Council has created a major gap in the fulfillment by the IMF of its mandate to oversee the international monetary system and ensure its effective operation as prescribed by Article IV, Section 3(a). However, when in 1974 the Board of Governors adopted the resolution establishing the Interim Committee, it asserted for itself “functions” that were later incorporated almost literally in Schedule D, paragraph 2 as powers of the Council and those terms of the resolution remained unchanged after the Second Amendment. Paragraph 3 of Resolution No. 29-8 (adopted October 2, 1974) establishing the Interim Committee defines the terms of reference of the Committee as follows:

3. Terms of Reference

The Committee shall advise and report to the Board of Governors with respect to the functions of the Board of Governors in:

  1. supervising the management and adaptation of the international monetary system, including the continuing operation of the adjustment process, and in this connection reviewing developments in global liquidity and the transfer of real resources to developing countries;

  2. considering proposals by the Executive Directors to amend the Articles of Agreement; and

  3. dealing with sudden disturbances that might threaten the system.

In addition, the Committee shall advise and report to the Board of Governors on any other matters on which the Board of Governors may seek the advice of the Committee.

In performing its duties, the Committee shall take account of the work of other bodies having specialized responsibilities in related fields.

Clearly, if the Interim Committee’s terms of reference before the Second Amendment were to advise and report to the Board of Governors with respect to its functions “in supervising the management and adaptation of the international system,” the necessary implication was that the Board of Governors could exercise those functions. However, once the Second Amendment became effective, it became a specific power of the Council to “supervise the management and adaptation of the international monetary system.” An intriguing question, therefore, is whether, as a result of the Second Amendment, the Board of Governors lost those functions, which would remain in abeyance until the establishment of the Council. On the one hand, since there is no provision in the Articles with respect to those powers except in Schedule D, which defines the powers of the Council, the inescapable conclusion seems to be that only the establishment of the Council, as contemplated in Schedule D, would revive the powers formerly asserted by the Board of Governors. On the other hand, if this had been intended, the 1974 resolution establishing the Interim Committee should have been amended to reflect this capitis diminutio of the Board of Governors. There is here at least an apparent inconsistency, which Sir Joseph Gold explained as follows:

An important implication of the resolution is that the functions of the Board of Governors include the matters on which the Interim Committee is to give advice. The Articles did not declare that supervision of the management and adaptation of the international monetary system was a function of the Board of Governors, and the Articles do not say so even after the Second Amendment. The present Articles do make this function explicit for the Council, but the Second Amendment had not yet been drafted when the terms of reference of the Interim Committee were formulated. The implication of the resolution and the explicit terms of reference of the Council reflect the Fund’s understanding that all matters relating to supervision of the management and adaptation of the international monetary system are within the purview of the Fund. (Legal and Institutional Aspects of the International Monetary System, Selected Essays, Vol. II (I.M.F., 1982), pp. 32-33.)

According to that analysis, there is no inconsistency between the continued application of the 1974 resolution and the Second Amendment, because the assertion in the resolution that the Board of Governors had functions “in supervising the management and adaptation of the international monetary system” did not mean that the Board of Governors’ functions included the supervision of the management and adaptation of the international monetary system. The practical advantage of this rather convoluted explanation is that it allows the Interim Committee to continue its work even after the Second Amendment, but the consequence is that only the establishment of the Council will allow the IMF, through that organ, to supervise the management and adaptation of the international monetary system. How significant such a change would be in the role of the IMF remains to be ascertained.

2B. The Design of the International Monetary Fund’s Jurisdiction over Capital Movements


In his presentation on the possible extension of the IMF’s jurisdiction over capital movements, Mr. Gianviti focused on the threshold question: What would be the rationale for such an extension?1 I would like to discuss briefly what may be described as the subsequent issue. If the IMF decides to take this important step, what form would this jurisdiction take? Stated differently, what would be the scope of members’ obligations under the amended Articles2 regarding the liberalization of capital movements?

Over the past two years, there has been an intensive discussion both within the IMF and among its members regarding this issue. Since the establishment of jurisdiction will require an amendment of the Articles, any decisions on the design of jurisdiction will ultimately rest with the governments and legislatures of the IMF’s members. Until now, however, the papers prepared by the IMF’s staff have provided the basis for discussion among the IMF’s membership and, at this early stage, I think it would be useful to outline some of the key issues that have been raised in these papers. It’s important to emphasize, however, that there is not yet a consensus within the IMF regarding the need for an amendment.


Although an extension of the IMF’s jurisdiction to capital movements would take the IMF into a new area, the IMF has not been without a road map of the type of approach that should be followed in designing this jurisdiction. Two considerations have been of particular importance in this regard.

First, it has been clear from the outset that the IMF should avoid reinventing the wheel. The staff has done a study on the existing bilateral, regional, and, in the case of the Organization for Economic Cooperation and Development (OECD), multilateral treaties that liberalize capital movements, and it is clear that IMF membership wishes to draw upon the considerable thinking and experience developed under these agreements.

The second consideration, however, serves as a counterweight to the first. It is also evident that the design of the obligations would need to take into account the core functions and structure of the IMF. Many members have made it fairly clear that they do not want an expansion of IMF jurisdiction to transform the IMF or to distract it from its existing activities. On the contrary, members view this expansion as a means of enhancing the IMF’s ability to fulfill one of its central objectives—overseeing the international monetary system, an objective that the IMF is viewed as being otherwise uniquely qualified to perform, given its universal membership and financial resources.

For this reason, work in this area has been very much a comparative exercise that has helped to sharpen the understanding of what the IMF is best equipped to do and has clarified where it would be more appropriate for the IMF to leave the matter with other agreements and institutions.

While the preservation of the existing objectives and functions of the IMF has been critical in considering the design of any expanded jurisdiction, the structure of the organization has also been important. For example, one of the first questions that has arisen is whether the amended Articles specify the nature of the obligations or, alternatively, would the amendment simply confer upon an organ of the IMF (i.e., the Executive Board or the Board of Governors) the authority to establish such obligations after the amendment entered into force.

In terms of speed and flexibility, this latter approach clearly has advantages; the amendment could go into force and the substance of the obligations could be specified at a later date. Moreover, these substantive issues could be modified without having to revert to the membership for a new amendment. Looking at international practice, there is precedent for this approach. For example, while the OECD Convention sets forth the objective of liberalization of capital movements, it delegates to the principal organ, the Council, the authority to specify the obligations from time to time. These obligations have been set forth in the Capital Code, a decision of the Council that is periodically revised.

However, it is evident to both the staff and the Executive Board of the IMF that such an approach would not be feasible in the IMF. In the OECD, the technique of conferral of authority is workable because the decisions of the Council generally require unanimity. Unanimity is facilitated by a relatively small membership, which also serves to ensure that each member is directly represented at the organ. Accordingly, there is no effective surrender of sovereignty when the amendment is adopted. In these circumstances, an amendment that confers authority to an organ to determine the substance of the obligation is not really a “blank check” since the member has the assurance that it will be in a position to veto any obligations established by the relevant organ.

However, in the case of treaties of universal membership, such as the Articles of Agreement, a conferral of authority to an organ would, in fact, constitute a surrender of sovereignty. Decisions of the Executive Board and the Board of Governors do not generally require unanimity. Moreover, in the Executive Board, there is no direct representation of individual members. Rather, most Directors represent constituencies of a group of members. Since they cast the votes of these constituencies in a block, the different positions of members are not reflected.

For this reason, it is recognized by both the staff and the membership that there could be no “blank check” in the case of the IMF. Accordingly, if the Articles are to be amended, the IMF’s membership would need to know what these obligations are before they ratify the amendment.

Scope of the Amendment

Having recognized that the obligations would need to be defined before an amendment could be enacted, the discussion has turned to two issues. The first is the type of capital movements that would be covered under the IMF jurisdiction. The second is an analysis of the nature of the liberalization obligations that would apply to these movements.

On the first set of issues, the scope of capital movements to be covered, considerable progress has been made, but a number of difficult questions still remain. An initial question in this area was whether the scope of coverage would parallel the IMF’s existing jurisdiction over current international payments and transfers. Some understanding of the IMF’s existing jurisdiction is necessary. Under the existing Articles, members may not impose restrictions on the making of payments and transfers for current international transactions. As a general rule, however, they may impose restrictions on the underlying transaction itself. For example, a member will breach its obligation if it limits the ability of a resident to pay a nonresident for an import. It will also be breaching its obligations if it limits the ability of the nonresident to repatriate the proceeds of that payment. The member is, however, free to restrict the making of the import in the first place, i.e., is free to restrict the making of the underlying transaction. Moreover, if this is restricted, the member may also restrict the associated payment and transfer; not surprisingly, members are permitted to restrict payments arising from illegal transactions.

The consequence of the above principle is that a member wishing to restrict the availability of foreign exchange for balance of payments reasons will not be prevented from doing so if it imposes the restriction on the underlying transaction, e.g., restrictions on an import license. Given the fact that the General Agreement on Tariffs and Trade (GATT), the General Agreement on Trade in Service (GATS) and, more recently, the World Trade Organization (WTO) exercise jurisdiction over current transactions, this limitation has not been viewed as problematic. On the contrary, it is viewed as an appropriate delineation in the international architecture.

In the context of the proposed amendment, the question has arisen as to whether the IMF should adopt the same approach in the area of capital; i.e., should the IMF’s jurisdiction be limited to payments and transfers relating to capital transaction. After examining the issue carefully, the staff and, it would appear, the majority of the IMF membership have realized that jurisdiction limited to capital payments and transfers would not be meaningful. Why was this the case? First, upon an examination of the structure of exchange controls that countries impose on capital movements, the staff realized that controls are most often imposed on the underlying transaction rather than the associated payments and transfer. For example, if the authorities wish to husband foreign exchange, they may prohibit their residents from purchasing securities abroad or from establishing deposits with nonresident banks. Similarly, if they wish to restrict a nonresident from borrowing in their domestic market, they will generally prohibit the nonresident from issuing, listing, or selling securities. They normally will not permit the issuance and then prohibit the transfer of the proceeds.

The degree to which controls are imposed on underlying transactions rather than payments and transfers is even greater with inflows, the liberalization of which is considered an important element of the IMF’s potential jurisdiction over capital. If the authorities wish to prohibit the nonresident’s acquisition of domestic securities, they will generally impose the restriction on the purchase rather than on the inward transfer of funds.

An extended jurisdiction that only embraced payments and transfers would not cover any of these restrictions. As noted above, while this problem also exists, to a lesser extent, in the IMF’s existing jurisdiction over current payment and transfers, it is mitigated by the WTO, which has relatively universal membership. In contrast, in the area of capital there is no universally applied set of rules that covers underlying transactions. Moreover, an examination of the multilateral, regional, and bilateral agreements that serve to liberalize capital movements further confirmed the view that, in the area of capital, meaningful obligations would need to cover both the underlying transaction and the associated payment and transfer. For example, under its charter, the OECD is charged with liberalizing “capital movements.” To that end, the OECD’s Capital Code covers both underlying transactions and payments and transfers.

Having recognized that the IMF’s jurisdiction would need to cover payments and transfers and underlying transactions, the discussion has turned to the question of whether all underlying transactions should be covered. This has become perhaps the most contentious issue, with the debate focusing primarily on whether the IMF’s jurisdiction should cover inward direct investment. There clearly are powerful, but competing, considerations in this regard. On the one hand, inward direct investment is recognized as providing a particularly effective means of promoting sustainable economic growth. These transactions give rise to important long-term benefits, including the transfer of technology and managerial skills, as well as the development of export markets.

On the other hand, there are concerns that the particular features of inward direct investment do not qualify this type of transaction for inclusion in the IMF’s jurisdiction. What are these concerns? The first is a general sensitivity regarding national sovereignty. Notwithstanding the economic benefits, governments are generally of the view that a country’s economic, political, military, or cultural independence may be threatened by foreign ownership or control of enterprises in specific sectors. Reserving ownership of certain assets to nationals may also be intended to promote employment, often at the cost of economic efficiency. Second, even if one accepts the view that a multilateral framework should be established to liberalize inward direct investment, is the IMF the right organization to do the job? Given the fact that restrictions on these transactions are normally imposed for reasons other than macroeconomic and balance of payments management, was this really within the IMF’s mandate? On an operational level, this would clearly not fall within the IMF’s regular dialogue with its members. A number of members believe that the liberalization of inward direct investment should be left to another multilateral body and have noted that efforts were being made to establish one. Hence, the discussion regarding the establishment of the Multilateral Agreement on Investment.

Another difficult issue in this area has been definition. If restrictions on inward direct investment are to be specifically excluded from the scope of the amendment, how would they be defined? One possibility, favored by those members most concerned with maintaining sovereignty, is to allow each member to determine what constitutes restrictions on inward direct investment. Clearly, there is a concern within the IMF that this approach would give rise to major loopholes and confusion, with potentially over 180 different definitions. Another alternative is for the amendment to give to an organ of the IMF the authority to define which restrictions would be excluded. This, however, gives rise to the same “blank check” problem discussed above. Specifically, if this approach is followed, there could be a fear that once the amendment enters into force, the IMF could progressively expand its jurisdiction by establishing an increasingly narrow definition of what constitutes a restriction on inward direct investment.

A third alternative, proposed by the IMF’s staff and designed to avoid the problems of the alternatives discussed above, is to the extent possible, to define restrictions on inward direct investment in the amendment itself on the basis of objective criteria. Such an approach is not without its own difficulties. For example, while restrictions on the acquisition of effective influence over the management of an enterprise is one of the generally accepted concepts, how would one define “effective influence”? As a certain percentage of an equity interest? What about loans? Clearly, with the benefits of certainty comes the potential for rigidity and arbitrariness.

Separate from the determination of the scope of transactions to be covered under the amendment is the issue of the type of obligations that would apply to these transactions. Stated differently, what type of governmental measures would constitute “restrictions” on capital movements?

For purposes of payment and transfers associated with capital transactions, it is clear that the IMF could draw upon the approach applied under its existing jurisdiction; namely, if the transaction between a resident and nonresident is permitted, the authorities must not interfere with the making of the associated payment or transfer. Moreover, limitations on the ability to purchase foreign exchange for these purposes would constitute a restriction.

But what would be the nature of the obligation that would apply to the underlying transactions? If the authorities prohibited the issuance of commercial paper in its domestic market, would that constitute a restriction, even if the prohibition applied equally to resident and nonresident issuances? One could take the approach that such a measure should constitute a restriction since, although it applies equally to residents and nonresidents, it does have adverse impact on cross-border capital movements.

The approach preferred by the staff and the IMF’s membership relies on a relative standard. Specifically, a measure would constitute a restriction if it treats international transactions (e.g., a transaction between a resident and a nonresident) less favorably than transactions between residents. Thus, using the above example, an outright prohibition on the issuance of commercial paper that applies equally to all transactions would not be restrictive. However, if the authorities opened the market for issuance of commercial paper by residents, they would also be required to liberalize issuances by nonresidents. This concept of nondiscrimination is consistent with the approach followed by the OECD and is also similar to the standard of national treatment applied in regional and bilateral investment agreements.


In addition to discussing issues relating to the scope of the obligations under the amendment, the IMF’s Executive Board has spent considerable time analyzing the question of safeguards, i.e., the degree of latitude that should be given to members in the performance of these obligations. There is a general recognition that restrictions on capital movements may, in some cases, be a necessary means of preserving balance of payments viability and macroeconomic stability. The key question has been how to design such safeguards in a manner that serves to minimize the disruption caused by capital movements but, at the same time, to maximize their considerable benefits.

In the discussion of the design of safeguards, the IMF has been able to draw upon existing principles, but only up to a point. Two issues have been of considerable importance. First, the Articles contain transitional provisions that allow members to maintain and adapt to changing circumstances on restrictions on current international payments and transfers that existed when they became members of the IMF. It has been recognized that such transitional arrangements would also exist under the amendment.

The second feature that has played an important role in the IMF’s existing jurisdiction—and can be expected to play an even larger role in the IMF’s jurisdiction over capital movements—is the IMF’s approval policies. Under the IMF’s Articles, members may impose new restrictions with prior approval by the Executive Board, and the Articles give the Executive Board discretion to develop different approval criteria for different types of restrictions (referred to as different approval “policies”). The principal approval policy provides for approval in circumstances where the IMF determines that the measure is temporary, imposed for balance of payments reasons, and nondiscriminatory.

From the outset of the discussion of a possible amendment, it has been recognized that, in the area of capital movements, the IMF’s approval policies would need to be expanded to take into consideration the particular problems that can occur as a result of volatile capital movements. With respect to outflows, it is generally recognized that no country—irrespective of its stage of development—can be considered immune from the balance of payments implications that can arise from sudden and massive surges in capital outflows. Although the IMF recognizes that policy adjustment provides the best basis for reversing these flows, the IMF has also recognized that exchange controls may need to be relied upon as a temporary measure while the necessary adjustment takes hold. Moreover, given the fact that these flows have had the greatest short-term impact on a member’s balance of payments, such restrictions, in some circumstances, may be necessary to ensure the viability of an adjustment program that the IMF supports with its financial resources.

Because of the volatility and magnitude of capital flows, it is generally recognized that the IMF will need to develop what may be described as an emergency approval policy. Under the IMF’s existing Articles, approval is required before a restriction is introduced. Given the fact that controls on capital movements may need to be imposed rapidly in order for them to be effective, consideration has been given to the formulation of a policy that would enable the IMF to grant automatic approval for a limited time period (perhaps 30 days) upon a notification of the member, with such approval being retroactive if the notification of the member was sent within 10 days of the adoption of the restriction. At the end of the 30-day period the IMF would be in a position to evaluate the merits of continued approval on the basis of its existing criteria.

It is also realized that the IMF will need to develop special approval policies for capital inflows. Although inflows are normally helpful rather than problematic, recent experience demonstrates that large surges in capital inflows can create difficulties in macroeconomic management and may have an adverse effect on the exchange rate. Although it is widely recognized that controls on inflows should not be used to sustain inconsistent macroeconomic policies, the IMF has realized that, in the short term, they may be appropriate and that accordingly temporary approval should be forthcoming in appropriately circumscribed circumstances.

The Effects of IMF Approval

An issue that has not yet been fully discussed within the IMF but that is critically important is the effect of IMF approval of restrictions that will fall under the IMF’s expanded jurisdiction. When the IMF approves a restriction, the measure becomes consistent with the members’ obligations. What other consequences, if any, flow from IMF approval? Two issues are particularly important.

The first is the effect of IMF approval on the members’ obligations under other agreements. When the IMF approves a restriction under the Articles, this restriction may still violate the members’ obligations under another agreement. For example, under the Maastricht Treaty, members of the European Union (EU) may not impose capital controls vis-à-vis each other once the third stage of the Economic and Monetary Union (EMU) has been reached, regardless of the IMF’s approval.

It is assumed that, in the above circumstance, the membership would not intend the amendment (which would provide for approval of capital restrictions) to amend automatically the earlier treaty that provides for stricter obligations. To clarify that this is the case and to avoid the application of certain provisions of the Vienna Convention regarding the superseding effect of later treaties on the same subject matter, it is generally agreed that the amendment will provide that it is not intended to modify the obligations under existing agreements.3

The second issue relates to the effect of approval on a member’s relations with its private creditors. To the extent that the government imposes exchange controls and these controls give rise to a resident defaulting on its external debt, would approval by the IMF preclude the creditor from enforcing its contractual claims during the period of the approval?

This is not, of course, a new issue. Restrictions on debt service (interest and certain amortization payments) are considered restrictions on current payments and, therefore, are subject to existing IMF jurisdiction. Moreover, there has been considerable discussion in the past (and, in particular, during the debt crisis in the 1980s) regarding the relevance of Article VIII, Section 2(b) of the existing Articles. This provision, which is anything but transparent, provides for the unenforceability of exchange contracts that “involve the currency of any member and which are contrary to the exchange control regulations of that member maintained or imposed consistently with this Agreement ….” Does this provision serve to shield countries from creditor litigation in the event of payments arrears arising from exchange controls that have been approved by the IMF? There has been no uniform interpretation of the provision by IMF members and, as a result, it has proven to be relatively ineffective.

The discussion of Article VIII, Section 2(b) has resumed with new intensity, in part because the possible expansion of the IMF’s jurisdiction gives the IMF the opportunity to clarify what Article VIII, Section 2(b) means. However, this issue has attracted much attention because, in light of the recent financial turmoil, it is being considered as a possible instrument in the resolution of international financial crises. For example, would a temporary stay on creditor litigation following a default by a debtor provide a useful means of ensuring that private creditors bear some of the burden in a balance of payments crisis and thus limit the amount of financial assistance that must be provided by the IMF and the official community?

Other features of the IMF’s financial assistance are relevant to any discussion of the amendment. When the IMF was originally conceived, its financial powers were seen as a means of buttressing its jurisdiction. Specifically, when confronted with a balance of payments crisis, the IMF’s resources helped the member weather the crisis without resorting to restrictions on current payments, which would be contrary to its obligations. If similar obligations are imposed on capital, it would seem logical that there would be symmetrical financial support and that, accordingly, the existing constraint contained in the Articles regarding the IMF’s ability to finance large or sustained capital outflows would be removed. But given the size of capital flows, would the IMF be able to provide the necessary financing? If not, should the amended Articles continue to impose constraints and, if so, should they be modified?

A number of other issues relating to the design of the amendment have not yet been discussed but are of considerable importance, including the treatment of restrictions imposed by subnational entities and regional groupings. Once the IMF makes the determination that an expansion of its jurisdiction is desirable, these and other issues will need to be resolved. Given the importance and complexity of this subject, it is clear that the IMF membership would like to know where it is going before it embarks on this historic venture.

2C. International Monetary Fund Initiatives to Promote Statistical and Fiscal Transparency


This paper reviews the recent initiatives by the IMF to promote statistical and fiscal transparency, namely the Special Data Dissemination Standard, the General Data Dissemination System, and the Code of Good Practices on Fiscal Transparency—Declaration on Principles.

Standards on Provision of Data to the Public

In the aftermath of the Mexican crises of 1994–95, the Interim Committee of the Board of Governors of the IMF requested the Executive Board “to work toward the establishment of standards to guide members in the provision of data to the public.”1 The standards would consist of two tiers, a more demanding standard and another that would apply generally. Underlying this request was a consensus that improvements in the provision of data to the public by members would give greater transparency to economic policies and particularly contribute to the smooth functioning of international capital markets, in part by assisting in the correct pricing of market risks.

The provision of data to the public by members must be distinguished from the provision of data by members to the IMF. The latter is an obligation under the IMF’s Articles of Agreement. In particular, members are obliged under Article IV, Section 3(b) to provide data necessary for IMF surveillance and under Article VIII, Section 5(a) to furnish the IMF with such information as the IMF deems necessary for its activities. In contrast, the Articles do not set standards for the provision by members of data to the public.

Special Data Dissemination Standard

Following a period of IMF staff consultations with statistical agencies in member countries, international statistical organizations, user groups, and institutions, the IMF established in March 1996 the Special Data Dissemination Standard (SDDS).2 As its title suggests, the SDDS sets forth standards on the modalities of the dissemination or distribution of specified data, not standards on the data themselves.

Before surveying the elements of the SDDS, it would be useful to explain the legal basis for the IMF’s involvement. Article V, Section 2(b) states: “If requested, the Fund may decide to perform … technical services … that are consistent with the purposes of the Fund.” As a technical service to its members, the IMF developed the standards and the IMF staff maintains a roster of subscribers, works with subscribers on their submissions for comprehensiveness and comparability, and maintains the Data Dissemination Bulletin Board (DSBB), an Internet site where member submissions are electronically posted.3 Responsibility for the accuracy of a subscribing member’s posted information (the so-called metadata) rests with that subscriber. The IMF makes no warranties, express or implied, regarding the published metadata, the data referred to in the metadata, the continued observance of the practices described in the metadata, or the performance of the DSBB site.

Subscription to the SDDS is voluntary. As of February 1999, 47 members have subscribed to the SDDS. The metadata of subscribers are posted on the bulletin board, and about a third of them have hyperlinks to country databases. During a period of transition, designated to terminate at the end of 1998, subscribers may not have fully observed the standards. After the transition period, existing and new subscribers would have to be in full observance.4 Nonobservance of the standards by a subscriber could result in an IMF decision, by a majority of the votes cast, to remove a subscriber’s metadata from the DSBB.

Dimensions of the SDDS

The SDDS has four “dimensions” or groupings of standards. The first dimension is “coverage, periodicity, and timeliness.” The scope of the coverage standard extends to data on the real, fiscal, financial, and external sectors. Periodicity refers to the frequency of compilation. Timeliness refers to the lapse of time between a reference date and the dissemination of data. All the standards in this dimension need not be observed by a subscriber, which may exercise at most two “flexibility options.” A flexibility option may be exercised with respect to the timeliness of the national accounts or the balance of payments, which are prescribed to be produced with quarterly periodicity and a timeliness of a one quarter lag. The second flexibility option may be exercised to retain a less frequent periodicity or longer timeliness lags than prescribed for other covered data categories, other than international reserves. For example, the standard for the periodicity of consumer prices is monthly. A subscriber that produces its consumer price index only quarterly, because of historically low inflation, need not change its production cycle. It could just exercise one of its flexibility options with respect to this practice.

The second dimension is “access by the public.” To support equal access, the SDDS prescribes two standards. The first is the advance dissemination of release calendars (that is, advance announcement of the date when data would be released). In effect, statistical institutions would commit to releasing data on publicly known cycles. Recognizing that many members do not have such a system or, if they do, the system does not relate to all data categories covered by the SDDS, a flexibility option is provided for the distribution of the release dates for up to two data categories. The second standard is the simultaneous release of data to interested parties. It is left to subscribers to determine the medium that achieves this in their particular circumstances.

The third and fourth dimensions are “integrity” and “quality.” These are difficult qualities to assess and the IMF adopted certain verifiable proxies as standards. To assist users in assessing the integrity of country data, the SDDS prescribes (i) dissemination of the terms and conditions under which official statistics are produced; (ii) identification of internal government access to data before release; (iii) identification of ministerial commentary on the occasion of statistical release; and (iv) provision of information about the revision and advance notice of major changes in methodology. Item (ii), in particular, promotes the transparency of any governmental review process of the work of official statistical producers, which ideally should be independent entities.

To assist users in assessing quality, the SDDS prescribes (i) dissemination of documentation on methodology and sources used in preparing statistics, and (ii) dissemination of component detail, reconciliations with related data, and statistical frameworks that support statistical crosschecks and provide assurance of reasonableness.

General Data Dissemination System

The General Data Dissemination System (GDDS) was established by the Executive Board in December 1997 and is primarily aimed at members that do not subscribe to the SDDS.5 With the main focus being improving data quality, it provides (i) a framework for evaluating the need for data improvements and prioritizing such improvements, and (ii) guidance on data dissemination. The GDDS shares the SDDS’s emphasis on sound practices with respect to the four dimensions but is broader in scope because it includes in its coverage sociodemographic data. The implementation of the GDDS is envisaged to be phased over six to seven years. The first phase is being implemented through globally regional seminars, and work with individual countries on possible participation in the GDDS will commence by the end of 1999.

Participation in the GDDS is also voluntary and could be initiated by three steps: a commitment to use the GDDS as a framework for statistical development; designation of a country coordinator; and preparation of descriptions of current statistical production and dissemination practices and plans for short- and long-term improvements in these practices. These descriptions and plans could be disseminated in the future by the IMF via the Internet.

Code of Good Practices on Fiscal Transparency—Declaration on Principles

The Interim Committee’s September 1996 declaration on the Partnership for Sustainable Global Growth attached importance to promoting good governance in all its aspects, including improving the efficiency and accountability of the public sector. Subsequently, in its September 1997 communiqué, the Interim Committee stressed the importance of openness and accountability of economic policymaking, and of transparency, to achieving policy credibility and confidence building in a globalized environment, and considered the possibility that the IMF would develop a code of good practices in this area.

In April 1998, the IMF adopted the Code of Good Practices on Fiscal Transparency—Declaration on Principles.6 Underlying the Code is a belief that fiscal transparency would lead to better informed public debate about fiscal policy, make governments more accountable for their respective fiscal policy, and thereby strengthen credibility and mobilize support for sound macroeconomic policies. The Code, which is distilled from the IMF’s knowledge of good practices in member countries, is not binding on members and observance of its principles will not be subject to formal IMF monitoring. It is envisaged that the Code will periodically be reviewed, in light of experience.

Before summarizing the main aspects of the Code, it is worth noting that it relates only to the transparency aspect of fiscal policy. It does not address the efficiency of government activity or the soundness of public finances. The Code therefore does not advocate institutional changes that are specifically directed toward these latter two values.

The Code is based on four general principles. The first refers to the “clarity of fiscal roles and responsibilities.” Under this principle, the Code provides that the government sector should be clearly distinguished from the rest of the economy, and policy and management roles within the government should be well defined. The legal and administrative framework for fiscal management should be clear. Government expenditures and taxes should have clear legal bases. Tax laws and regulations should be easily accessible.

The second general principle relates to the “availability of information.” The Code provides that the public should be provided with full information on the past, current, and projected fiscal activity of government and a public commitment should be made to timely publication of fiscal information.

The third general principle is concerned with the “openness of budget preparation, execution, and reporting.” In this context, the Code provides that budget documentation should specify fiscal policy objectives, the macroeconomic framework, the policy basis for the budget, and identifiable major fiscal risks. Budget estimates should be classified and presented in a way that facilitates policy analysis and promotes accountability. Procedures for the execution and monitoring of approved expenditures should be clearly specified. Fiscal reporting should be timely, comprehensive, and reliable and should identify deviations from the budget.

The fourth general principle pertains to “independent assurances of integrity.” The Code emphasizes that fiscal information should be subject to public and independent scrutiny. Government accounts should be subject to audit by a national audit body, or equivalent organization. In addition, fiscal statistics should be prepared by an entity with institutional independence.

In adopting the Code, the IMF acknowledges the diversity in fiscal management systems across member countries and in cultural, constitutional, and legal environments. Thus, it is expected that many countries may not be able to move quickly to implement the Code. To assist IMF members in adopting elements of the Code, the IMF has published a Manual on Fiscal Transparency.7


Underlying the SDDS, the GDDS, and the Code of Good Practices on Fiscal Transparency is the common objective of increasing transparency in governmental operations, thereby promoting efficiency and accountability in the public sector and better informed decision making on the part of the public at large, particularly in an environment of increasing globalization. Of these initiatives, the SDDS is the most demanding in terms of specific commitments to be voluntarily undertaken and in terms of sanctions that could be imposed in case of nonobservance. While adherence to all these initiatives is voluntary, the involvement of the IMF underscores the importance of the principles and values they embody and serves to encourage members to make progress in meeting them.



I am grateful to the organizers of this seminar for giving the OECD Secretariat an opportunity to explain the approach, procedures, and practice toward capital control liberalization under the OECD Capital Movements Code.1 I can certainly not pretend to have answers to all the questions raised about the kind of jurisdiction over capital movements the IMF should be aiming at. Nor do I have a doctrinaire position on the role of capital controls and liberalization in non-OECD economies. My objective is to tell you how OECD members have approached capital control liberalization in their own countries and what kind of multilateral disciplines they have considered best fit their needs—in brief, what sort of answers to the questions raised today the OECD members have come up with in the OECD context.

Objective and Approach of the OECD Capital Movements Code

The OECD is charged with promoting sustainable economic growth and efficiency in member countries, and the liberalization of trade in goods and services and movement of capital between member countries is recognized as indispensable to the attainment of this goal. Accordingly, in the Convention that established the OECD in 1961, the member countries agreed to “pursue their efforts to reduce or abolish obstacles to the exchange of goods and services and current payments and maintain and extend the liberalization of capital movements.”

With regard to capital movements, this solemn undertaking found concrete expression in the OECD Code of Liberalization of Capital Movements adopted in December 1961.2 In adhering to the Code, OECD members have undertaken to remove restrictions on specified lists of capital movements between residents of different member countries. OECD members have thereby waived their right under the IMF’s Articles of the Agreement to maintain capital controls (while the Code does not alter OECD members’ obligations as members of the IMF). The OECD Code is to date the only multilateral instrument promoting comprehensive capital movements liberalization as its primary purpose.

The Code’s approach to capital account liberalization cannot be described as doctrinaire. Liberalization need be neither immediate nor unconditional. Through an OECD Committee mechanism of peer pressure, the Code engages member countries in a process of progressive liberalization, allowing reasonable scope for members in different circumstances to move toward the ultimate objective of complete freedom of capital movements in different ways and at varying speeds, according to the economic circumstances they face.

OECD member countries’ experience since the adoption of the Code has confirmed that the Organization’s objective of free movement of capital is well founded.3 Where accompanying economic policies and supporting institutional frameworks are in place, international capital mobility has proved to bring essential macroeconomic benefits and efficiency gains: it offers a better allocation of world savings to productive uses; it ensures liquidity against domestic income fluctuations; it reduces investment risks by allowing portfolio diversification; and it provides signals from international markets that are salutary for the discipline of macroeconomic policies. Liberalization of capital movements is also an integral part of regulatory reforms to improve corporate and public governance and transparency of rules.

Two new OECD members, Mexico and Korea, were recently affected by major currency crises. Currency crises are not new phenomena, however. Other OECD countries—in Europe and elsewhere—experienced in the past severe currency crises, notably in the 1970s with the collapse of the Bretton Woods system and the first oil shock, and in the early 1980s and in 1992 within the European Monetary System. But despite the possibility of episodical serious financial instability, it has been recognized that the adoption of corrective policy measures that pass the test of free financial markets represented a long-run investment, which offered a far better guarantee for economic stability in the future than recourse to capital controls.

Obligations and Safeguards of the Code

In adhering to the Code, OECD member countries undertake in particular the following obligations:

  • to notify the Organization of any existing measures affecting capital movements;

  • to apply any measures without discrimination among OECD members;4

  • to liberalize all the operations specified on the liberalization lists of the Code, except with respect to items against which reservations are lodged; and

  • not to introduce any new restrictions that would not be covered by reservations. This provision embodies the “standstill” principle. The adjustment of countries’ reservations over time acts with a “ratchet” effect to capture higher degrees of liberalization as they are achieved.

The Capital Movements Code covers all capital movements, ranging from direct investment to derivatives and currency trading.5 The definition of a capital movement under the Code includes not only a capital transfer or a payment but also the underlying transaction since many capital operations, in particular capital inflows, are regulated at the level of the underlying transaction. Regarding inward direct investment, the Code’s liberalization obligation extends to regulations affecting the establishment of nonresident investments where foreign direct investment restrictions continue to apply.

Liberalization means that residents should be allowed to transact freely with nonresidents in any operations and instruments available abroad. This means for instance that residents should be free to buy on foreign markets commercial paper issued by nonresidents, even if domestically no market for commercial paper exists or is permitted; or that residents should be free to issue securities abroad without prior approval from their national authorities, even if an approval is required for issues on domestic markets.6

Liberalization also means that members are required to apply national treatment to nonresidents wishing to engage in operations with residents on their territory. For instance, nonresidents shall not be subject to more burdensome requirements for access to local capital markets than those applicable to residents. On the other hand, members are not required to extend preferential treatment to nonresidents on their territory. This implies for instance that nonresidents may be prevented from issuing commercial paper on the domestic market if residents are not permitted to do so. In other words, the Code does not inhibit the normal exercise of regulatory powers of governments provided that they are carried out in a nondiscriminatory manner.

The Capital Movements Code protects the liquidation of a foreign investment and the free cross-border transfer of profits and proceeds of liquidation in relation to a foreign investment, but it does not include provisions on expropriation, as host-country regimes on expropriation are not considered to interfere directly with the ability of nonresidents to make an investment. More generally, the primary purpose of the Capital Movements Code is to ensure the freedom of capital movements between residents of different member countries and does not address the treatment by a host country of foreign-controlled enterprises once established on its territory.7 The test of discrimination under the Capital Movements Code is therefore primarily based on residence criteria consistent with a balance of payments approach, rather than nationality criteria.8

The Code contains a number of safeguards. In particular:

  • When a new item is added on the liberalization list of the Code or an obligation relating to an item is extended or begins to apply to a member, a member may lodge reservations.

  • There may arise a case whereby a member needs to reimpose restrictions on operations for which standstill applies. These cases are covered by the derogation procedure of Article 7 of the Code. A derogation, however, may apply only if a member can demonstrate that its invocation of the derogation clause is justified by serious balance of payments difficulties or “a serious economic or financial disturbance.” Derogations are expected to be maintained for a limited period only.9

  • The Code also contains a so-called “List B” of operations with respect to which a member country can reintroduce restrictions, and lodge reservations accordingly, at any time. List B currently covers only short-term financial operations and nonresident acquisitions of real estate. The faculty for member countries to reintroduce reservations under List B has proved to be in practice an effective way to facilitate liberalization in sensitive areas and to avoid “precautionary” reservations (i.e., maintained for the sole reason of leaving open the opportunity to reimpose restrictions without breaching the standstill provisions of the Code).

  • The net external position of financial institutions dealing in foreign exchange can be regulated for prudential purposes. However, the Code does not contain any general carveout for prudential measures. Invocation of prudential considerations for the justification of a particular measure is judged on a case-by-case basis through Committee review mechanisms.

  • Article 5 on “controls and formalities” allows members to impose measures to verify the authenticity of the operation concerned, such as anti-money-laundering measures for instance, or to prevent evasion on laws and regulations, such as tax control measures for instance. These controls and formalities must be kept as simple as possible. Pursuant to Article 5, members are thus permitted to require certain operations to be effected through an authorized intermediary, such as a resident broker for instance, acting on the account of its client, provided that this requirement is not used as a disguised means of restricting the making of the operation concerned. Capital transfers and payments may also be required to be executed through the banking system.

Enforcement Procedures under the Code

The OECD Code has the status of an OECD Decision, which is legally binding. Accordingly, the members are expected to take whatever steps are necessary to ensure that the obligations accepted are honored. The strength of the Code lies also in the determination of the member countries to make active use of it as an instrument of international cooperation.

While the Code does not explicitly refer to the possibility of countermeasures against a member that would breach its obligations, it does not exclude that countermeasures may be taken under certain conditions, in accordance with international law. But in practice, there have never been such cases of countermeasures. Peer pressure, political persuasion, and compromise solutions were felt by the drafters of the Code more suitable to resolve disputes in the field of capital controls, which usually apply for general public policy purposes, in a nondiscriminatory manner and on a crossindustry basis. This approach to dispute settlement has generally proven effective. The Code provides a framework of notification, examination,10 and consultation within a specialized Committee,11 which culminates in recommendations and decisions by the OECD Council, through which observance of its prescriptions can be effectively monitored and achieved and disputes can be settled.

Experience shows that this framework exerts effective pressure on member countries to accelerate capital control liberalization and avoid backsliding. Often, national policymakers working to pursue liberalization in their own country found that an internationally recognized forum such as the OECD constituted a valuable source of support for their reforms. The role of the Code goes also beyond that of exerting a pressure on particular countries for unilateral liberalization. Individual countries are better off if they act collectively to remove capital export barriers within the framework of multilaterally agreed rules and procedures that provide some assurance that others will follow the movement.

Evolution of the Capital Movements Code

The scope of the Code was progressively broadened as OECD economies developed and the stance of policies changed. In 1961, the liberalization obligations of the Code were essentially limited to the free disposal of blocked funds owned by nonresidents and free transfers in connection with making and liquidating inward direct investments. The Code was revised in 1964 to include basic underlying transactions, such as direct investment, certain long-term securities and credit operations, and personal capital movements, and in 1984 to cover the right of establishment of direct investors. But it is only in 1989 that the Code was amended to cover all other capital movements, including short-term capital movements, such as money-market transactions, operations in forward markets, swaps, options, and other derivative instruments.

This evolution reflects the gradual process of liberalization and its sequencing in most OECD countries.12

During the 1960s and 1970s, the majority of OECD countries was prepared to liberalize only operations that were most closely related to business and trade activities and were perceived, for this reason, to be relatively stable. Only later, starting from the middle of the 1980s, other operations of a more financial character and of shorter maturities, which were considered more volatile, began to be liberalized. In this process, investments in equities were usually liberalized before debt-creating capital flows,13 and operations in long-term bonds before those in short-term debt securities. (Interestingly, it seems that a number of emerging market economies affected by the recent crisis in Asia followed a pattern that in several respects was the opposite of the sequencing of liberalization in OECD countries.)

In fact, the issue of “hot money,” including the danger of excessive short-term and speculative capital inflows, which is widely debated today in the aftermath of recent currency crises, is not new to OECD member countries. Already in 1964, they discussed the issue extensively in the context of the first reform of the Code. At that time, they took an explicit decision not to extend the scope of the Code to short-term operations on the grounds that their liberalization would make their balances of payments vulnerable to shifts in market participants’ sentiments and compromise the independence of their economic policies, in particular, undermine exchange rate objectives set out within the framework of the Bretton Woods system of fixed but adjustable exchange rates.

After a period of turbulence in the 1970s, the 1980s brought a new era in policy attitudes, heralded by the abolition of exchange controls by the United Kingdom in 1979 and by Japan in 1980. Other countries have since followed suit. By the early 1990s, no OECD member countries maintained capital controls of any significance.

Many factors explain this new approach toward capital movements liberalization in the OECD area. Factors common to most OECD member countries, i.e., irrespective of differences in their level of economic and financial development, include the following:

  • Over the last ten years, the priority objectives ascribed to monetary policies in OECD countries converged toward achieving long-term price stability and, to this end, building up credibility-enhancing mechanisms. Capital controls, which had in the past aimed at preserving the ability of monetary policy to exploit a possible trade-off between inflation and unemployment, did not fit into this new policy paradigm and risked distracting the authorities from the essential task of maintaining sound and credible economic policies.

  • It was also increasingly recognized that a “too” large share of short-term assets in total capital inflows often reflected a legitimate reluctance of traditionally risk-averse foreign institutional investors, such as pension funds, to take long-term, less liquid commitments, especially with respect to countries where property rights remained uncertain owing to accounting and bankruptcy law deficiencies or where the stock market was not functioning properly. Attention was also paid to the fact that foreign investors’ focus on short-term investment could simply reflect a lack of opportunities for longer-term, direct investment owing to restrictions aimed at protecting national ownership. Rather than imposing restrictions on allegedly speculative short-term investments, member countries sought therefore to remedy these underlying problems.

  • Against a background of rapid domestic deregulation and internationalization of markets, national authorities were increasingly concerned to strengthen the competitiveness of their enterprises and financial centers by allowing them to engage in the full range of cross-border capital operations.

  • Evidence also mounted that, in increasingly market-based economies with growing financial innovation, capital controls were costly to administer and were rapidly losing effectiveness. The mixed experience of Germany and Switzerland in the 1970s with restrictions on capital inflows and episodes of large capital flight in a number of European countries in the 1980s despite tight controls already showed that restrictions can rapidly reach their limits.14

It is against this background that the conviction grew among OECD member countries that the time had come to consider a significant strengthening of the obligations and broadening of the scope of the Code to include all cross-border operations including those most sensitive to changes in interest rates and market sentiment, and that the 1989 amendment to the Code was adopted.

Adherence of New Members to the Capital Movements Code

While the accession processes of the five new members (Czech Republic, Hungary, Korea, Mexico, and Poland) that joined OECD in recent years involved OECD Committee reviews in many areas, an essential condition of their accession to OECD membership was their acceptance of the obligations of the OECD Codes.15 Although each application to OECD membership is judged on its own merits, all candidate countries are expected to meet inter alia the following standards under the Capital Movements Code:

  • no restrictions on payments and transfers in connection with permitted international transactions;

  • an open and transparent regime for foreign direct investment;

  • liberalization of other long-term capital transactions; and

  • indication of a timetable for future further liberalization.

The capacity of a candidate country to meet minimum OECD capital account liberalization standards is considered to be in the interest of the country itself. Liberalization is seen as an integral part of regulatory reform, especially necessary in countries where capital controls could contribute to excessive government interference with normal corporate governance practices, opacity of rules, or even corruption. In addition, access to direct corporate finance from abroad brings some of the disciplines of organized international stock markets over corporate governance. Liberalized capital outflows force domestic enterprises to compete more actively for scarce capital and financial institutions to improve the functioning of their local capital markets, and greater financial integration helps domestic financial institutions to familiarize themselves further with modern financial techniques and regulatory disciplines.

The willingness of a candidate country to deliver a timetable for future liberalization of capital movements is also viewed as a positive signal that the country will strive to implement the necessary macroeconomic policies in support of liberalization and maintain the momentum for further regulatory reform more generally.

The OECD membership conditions cannot be held responsible for the recent currency crises and banking instability experienced in some of the emerging market economies, which recently joined the OECD. In particular, the OECD did not request the candidate countries to liberalize short-term cross-border capital operations, including interbank lending with respect to which excessive reliance has been identified as one cause of the problems faced in Asia. Moreover, tighter nondiscriminatory banking regulations would have been fully consistent with the Code, the lack of which appears very much at the root of financial sector difficulties in some of them. As a matter of fact, the competent OECD Committees at the time of accession drew the new members’ attention to the need to modernize the banking system and, in particular, to upgrade and strengthen the prudential supervisory framework.

Half-way measures and delays in implementing in full the recommendations made by the OECD member countries in the context of accession actually did not help the new members and may have contributed to retarding much needed improvements in corporate and public governance practices, and in the predictability and transparency of rules. As a matter of fact, following their recent currency crises, Korea and Mexico took further capital control liberalization measures. None of the new members had recourse to new capital controls, though such measures would have been possible if the derogation clauses of the Code had been invoked.

So that the implementation of their accession commitments can be closely monitored and further recommendations can be made by the OECD Council as appropriate, the new members agreed that full reviews of their positions under the Code should be held two years following their accession.16

Looking Ahead


The Multilateral Agreement on Investment (MAI), under negotiation at the OECD since 1995,17 is to be a comprehensive and high-standard multilateral framework for foreign investment, combining for the first time the three principles of foreign investment rule making: protection, liberalization, and dispute settlement. It is to be open to nonmember countries.

Its objective is to provide a “level playing field” for foreign investors, with nondiscriminatory rules on both market access and legal security. It aims at reducing barriers and distortions to foreign investment, thereby promoting a more efficient allocation of economic resources, and achieving higher economic growth, more jobs, and increased living standards.

The negotiations are taking place in the OECD for three principal reasons:

  • OECD member countries have a major stake in the outcome since they account for 60 percent of global inflows of foreign direct investment and 85 percent of outflows.

  • Negotiators turned to the OECD because the option of negotiating a high standards investment agreement was simply not available in another multilateral forum.

  • Negotiators have been able to build on existing OECD agreements relating to investment, including the Codes of Liberalization (1961) and the Declaration on International Investment and Multinational Enterprises (1976), under which OECD member countries have already accepted some basic principles in respect of foreign investment.

While further work is needed on key issues, including exceptions, extraterritoriality, and labor and environment, the main elements of the MAI are ready.

  • The MAI will apply to a wide range of assets, including those arising from portfolio investments.

  • The core national treatment and most favored nation treatment principles will apply to all phases of an investment, including the cross-border establishment of a new enterprise and the activities of already established enterprises under foreign control. Specific disciplines will apply to performance requirements imposed on investors, privatization, monopolies and concessions, and the movement of key personnel.

  • The MAI provides for free cross-border transfer of funds, and prompt, adequate, and effective compensation in the event of expropriation.

  • The MAI provides for binding dispute settlement procedures between states, and between investors and states.

The MAI is designed to be compatible with other international agreements, including the Articles of Agreement of the IMF. In regard to the IMF, two features of the MAI should be noted.

  • There is a consensus that the MAI should include an article similar to that in the OECD Codes, recognizing the overriding nature of obligations of the IMF. There is broad support for a safeguard clause in the MAI, which would allow temporary dispensation from the MAI obligations on free transfer of funds and national treatment for cross-border capital transactions, where justified by serious difficulties for the balance of payments or macroeconomic management. The need for an exception to national treatment in relation to capital inflows recognizes that restrictions on capital inflows by nonresidents may in exceptional circumstances be reintroduced and that these capital controls, although imposed on a residence basis, may disproportionately affect foreigners and thereby amount to de facto discrimination in the meaning of the MAI.

  • The text developed so far defers to the IMF to assess the consistency of any new restrictions with the MAI safeguard clause. Measures invoked under the safeguard clause that are approved by the IMF in the exercise of its jurisdiction will be accepted as consistent with the MAI safeguard clause; for those measures falling outside the IMF’s jurisdiction, IMF’s assessments shall be requested; and should a dispute arise on the way measures taken under the MAI safeguard are actually applied, the IMF’s assessment shall also be requested by the panel. Any IMF assessments shall be accepted.

At the OECD meeting at the ministerial level held on April 27–28, 1998, ministers took into account the positive results produced by the Negotiating Group, as well as the remaining difficulties and the concerns that have been expressed, and decided on a period of assessment and further consultation between the negotiating parties and with interested parts of their societies. They noted that the next meeting of the Negotiating Group will be held in October 1998 and directed the negotiators to continue their work with the aim of reaching a successful and timely conclusion of the MAI and seeking broad participation in it. In the same spirit, they supported the current work program on investment in the WTO and once the work program has been completed will seek the support of all their partners for the next steps toward the creation of investment rules in the WTO. Finally, ministers welcomed the full participation of observers from Argentina, Brazil, Chile, China, Estonia, Hong Kong SAR, Latvia, Lithuania, and the Slovak Republic with a view to their becoming founding members of the MAI, and expressed their commitment to pursue an active dialogue with nonmembers, including on their development interests, particularly with those nonmembers willing and able to meet the obligations of the agreement.

The Capital Movements Code does not contain many of the specific disciplines of the MAI on national treatment of established foreign-controlled enterprises, expropriation, performance requirement, and movement of key personnel; its approach for settlement of disputes is also different. On the other hand, unlike the MAI, the Capital Movements Code imposes on a member country liberalization disciplines with respect to capital outflows initiated by national residents and the liquidation of assets they may hold abroad.

These distinct features of the two instruments reflect their differences in approach. The MAI is about discrimination by a contracting party against investors from another contracting party and its assets on nationality grounds; many of its provisions relevant to the post-establishment phase are mostly directed to the treatment of established foreign-controlled enterprises. On the other hand, the primary purpose of the Capital Movements Code is to remove controls on the free movement of capital between residents of different member countries, inward direct investment being only one category of a wide range of capital operations.

Capital Movements Code

There is every reason to expect that the Capital Movements Code will continue to play an important role in the future life of the OECD, while adapting—as in the past—to the changing institutional and policy landscape affecting liberalization. The respective roles of the OECD and the IMF (which regardless of the scope of its formal jurisdiction already shares the goal of liberalization) will continue to be complementary and mutually reinforcing. The same may be said of the respective roles of the Codes of Liberalization and the MAI.

First, the Code plays a unique operational role in promoting liberalization in the OECD area, through peer monitoring, regular policy reviews, and direct dialogue among OECD governments. Member countries will continue to make use of these procedures, which have proven well-adapted in the OECD membership context of advanced economies and represent one of the comparative advantages of the OECD. Policy reviews can take a variety of forms. There is broad support to continue horizontal reviews of the 29 member countries under the Codes such as those recently conducted by the Committee on Capital Movements and Invisible Transactions (CMIT) in the fields of foreign investment in real estate and the admission of foreign securities on domestic capital markets.

Second, the Code provides a well-tested and objective yardstick for admission of new members and has been instrumental to successful OECD accession negotiations. OECD member countries consider it very important that the Code continue to play this role. In the context of OECD outreach activities, the Code is being used as a concrete basis for dialogue and assistance to nonmembers; it has been studied by a number of nonmembers as a reference tool for domestic reform of foreign exchange legislation.

Third, the Code constitutes the institutional expression of OECD leadership in the development of “best international practice” for cross-border capital movements. Already in the past, the Code played a precursor role—when, through the adoption of the Code, OECD member countries waived their right to maintain capital controls under Article VI of the IMF Agreement and, more recently in 1989, when the Code was enlarged to all capital transactions. Key to its continued policy relevance is that it is an evolving agreement that can be changed by OECD Council decisions to incorporate further innovative disciplines in the light of direct experience sharing among members.


See herein François Gianviti, The International Monetary Fund and the Liberalization of Capital Movements, Chapter 1B.


International Monetary Fund, Articles of Agreement (April 1993).


This does not mean, from a policy perspective, that members may not wish to amend their treaties so as to harmonize them with the amended Articles.


Communiqué of the Interim Committee at its Forty-Fourth Meeting, Washington D.C., April 26, 1995.


See “Scope and Operational Characteristics of the Special Data Dissemination Standard,” Selected Decisions and Selected Documents of the International Monetary Fund 483–94 (23rd issue, 1998).


This website may be accessed through the IMF homepage: www.imf.org.


On December 21, 1998, a temporary flexibility option was made available to all subscribers through the end of 1999 to smooth the transition to full observance.


A description of the GDDS may be found by accessing the IMF’s homepage at www.imf.org.


Available at http://www.imf.org/external/np/fad/trans/code.htm; 37 International Legal Materials [I.L.M.] 942–46 (1998).


The author is grateful to Robert Ley and Rinaldo Pecchioli for their comments on this paper.


On the same date, the OECD also adopted the Code of Liberalization of Current Invisible Operations. This Code covers current payments and transfers in connection with business, industry, foreign trade, personal income, and travel and tourism, as well as cross-border trade in transport services, financial services, and films. The legal status and procedures of this Code are the same as those followed by the Capital Movements Code.


For a detailed analysis of the experience of OECD member countries with capital account liberalization, see Liberalization of Capital Movements and Financial Services in the OECD Area, (OECD, 1990) and Exchange Control Policy (OECD, CCEET Series, 1993).


Unless the measures fall under the exception clause of Article 10 allowing for preferential treatment among member countries that are part special customs or monetary systems. In practice, capital controls liberalization in OECD countries has always been undertaken on an erga omnes basis. Where preferential treatment within special customs or monetary systems exists, it primarily applies to foreign direct investment in certain sectors and ownership of real estate and selective recognition arrangements in respect of certain securities market regulations, as far as capital movements are concerned.


The sole exception concerns consumer and mortgage credits extended by nonresidents to resident individuals.


Surveillance over the admission of securities issued by residents of a member country (home country) on the market of another member country (host country) should be considered the primary responsibility of this other member country. Not only can a prior approval requirement on the part of the home country interfere with the normal exercise of OECD member countries’ jurisdiction over the operation of their own capital markets but, more important, it can distort foreign investors’ market assessment and encourage unchecked investments as it creates the perception that issues of domestic corporate securities, once approved by the home country authorities, are protected by some form of government guarantee. This being said, it is worth noting that nothing in the Code prevents the supervisory authorities of the country of residence of the issuer from taking the initiative to provide the host country’s authorities with information, including a negative opinion, on the operation concerned. Also the Code would not prevent the supervisory authorities of the country where the securities are to be publicly offered from requiring to enter into cooperation arrangements with their counterparts in the country of the issuer as a condition to allow the public offer of the securities in question on its territory.


Deviations from national treatment of foreign-controlled enterprises after they have been established are covered by the OECD National Treatment instrument (which, unlike the Code, is not legally binding). However, there might be cases where preferential treatment for national investors would put established foreign investors at a significant competitive disadvantage and thereby de facto discourage the entry of nonresident investment. In these cases, Article 16 of the Code may be at the disposal of the country that considers itself prejudiced by such arrangements. Article 16 provides for the possibility that “internal arrangements,” i.e., domestic measures not directed at nonresidents as such, which are likely to restrict the possibility of effecting transactions or transfers, could frustrate the measures of liberalization taken or maintained by a member country. Under Article 16, a member country that would consider itself prejudiced by domestic measures may refer to the Organization to determine whether these measures can be assimilated to internal arrangements frustrating liberalization and to make suitable suggestions for the removal or modifications of such arrangements.


Restrictions on inward direct investment and ownership of real estate are often imposed using nationality conditions. These restrictions fall, however, within the scope of the Capital Movements Code to the extent that restrictions on nationality grounds may disproportionately affect nonresidents and thereby amount to de facto discrimination in the meaning of the Code.


Specifically for no more than 18 months in the case of an invocation of Article 7 for balance of payments reasons.


Along with the general notification obligations, Articles 12 and 13 require that the Organization regularly examine reservations or derogations lodged by each member country or reservations of all member countries by operation areas. These examinations serve to heighten awareness of the need for liberalization and provide a practical mechanism through which to promote it. In this process, the performance of each member country is judged by its peers. Examinations do not involve negotiations in the sense of an exchange of concessions. Since liberalization is considered to be in a country’s own interest, it is not appropriate that it should agree to liberalize only if other members do likewise. In the course of an examination, the nature and purpose of remaining restrictions are clarified and discussed, and the member countries concerned are encouraged to modify their reservations to reflect current policies and practices. Efforts are also made to identify operations that could be freed from restrictions, particularly where this could be done without compromising the objectives of the authorities concerned. This process leads to formal recommendations to members to withdraw or limit their reservations to the Code.


Responsibility for this process lies with the Committee on Capital Movements and Invisible Transactions, known as the “CMIT.” Unique among the standing Committees of the Organization, the CMIT is composed of “independent experts” appointed in their individual capacity by the OECD Council on the nomination of the member countries. Representatives of the International Monetary Fund regularly attend. A representative of the Commission of the European Communities also attends meetings of the CMIT and participates in its work.


Exceptions include Canada, Germany, Switzerland, and the United States, which traditionally maintained almost no forms of capital controls; the United Kingdom in 1979, Australia, and New Zealand in the early 1980s, which opted for a “big bang” approach.


Equity investment, as opposed to debt-creating instruments, imposes no obligations on the debtor to make fixed interest payments and to reimburse the principal at a determined date; a foreign investor may be unable or unwilling to liquidate his shares unless he can find a counterpart willing to buy them at the desired price. From a balance of payments perspective, these features make equity investment a more attractive candidate for an early liberalization than other types of investment. Equity investment is also less directly sensitive to changes in monetary policies domestically and abroad than interest-bearing investment.


Over the past decade, the only OECD countries that tightened capital controls somewhat were Ireland, Portugal, and Spain during the Exchange Rate Mechanism turmoil of Autumn 1992. It is worth noting that these countries in fact subsequently removed all remaining controls in a matter of a few weeks.


For a detailed analysis of the terms and conditions of adherence to the OECD Codes of recent new members, see Robert Ley and Pierre Poret, The New OECD Members and Liberalization, The OECD Observer, No. 205, April/May 1997.


The first of such reviews concerned Mexico and has resulted in further steps by Mexico in accordance with the Council’s recommendations. The reviews of other new members are under way.


At the time of this book’s publication, negotiations were no longer taking place.