The report for the evaluation of IMF Involvement in International Trade Policy Issues was sent to the Executive Board for discussion in May 2009. The Executive Board discussed in FY2009 the report Governance of the IMF and the Management Implementation Plan for the evaluation of Structural Conditionality in IMF-Supported Programs. Both of these discussions were detailed in the FY2008 IEO Annual Report. This report outlines some of the Board’s subsequent discussions on the topic of IMF governance.

The report for the evaluation of IMF Involvement in International Trade Policy Issues was sent to the Executive Board for discussion in May 2009. The Executive Board discussed in FY2009 the report Governance of the IMF and the Management Implementation Plan for the evaluation of Structural Conditionality in IMF-Supported Programs. Both of these discussions were detailed in the FY2008 IEO Annual Report. This report outlines some of the Board’s subsequent discussions on the topic of IMF governance.

IMF Involvement in International Trade Policy Issues

The evaluation covered 1996–2007, the years since the establishment of the World Trade Organization (WTO) and during which IMF involvement in trade policy has continued to evolve, and asked what the role of the IMF in trade policy has been and how well it has been carried out. It examined these questions in the context of surveillance and conditionality on use of Fund resources (UFR).

The evaluation found that there was a substantial swing in IMF involvement in trade policy during the evaluation period, which went too far on each side. The interventionist approach of the late 1990s, when the IMF played an uneven but at times aggressive role in trade policies through conditionality, gave way to substantial reluctance to state strong positions even on trade policies with macroeconomic import. Several factors undoubtedly affected this swing: the establishment of the WTO, the general retreat from structural issues, the prioritization of financial issues, and, possibly, complacency stemming from a long period of high world trade growth.

Regarding mandate, the evaluation found that the IMF, with near-global membership, well-entrenched procedures for frequent surveillance, and a mandate to promote macroeconomic growth and stability in a globalized economy, has a key role to play in calling attention to and rallying support for ways to address systemic and macroeconomic implications of trade policy developments. But the evaluation also found that this is not the role the IMF has played of late. Rather, country authorities see the IMF as increasingly sidelined on trade policy issues, and staff has pared back on expressing views beyond general endorsements of liberalism and multilateralism. This has left a worrisome gap. The WTO is first and foremost a negotiating forum, with no mandate and limited capability for taking views on how trade policy developments affect global, regional, or national macroeconomic vulnerabilities. Without a strong IMF presence on these issues, the global debate misses a critical player.

The evaluation found that cooperation with other organizations on trade policy issues worked, though some potential synergies were or could be lost. The IMF-WTO Cooperation Agreement covers the basics for good interactions. The basis for coherence between the actions of the two organizations with fundamentally different institutional roles in trade policy issues is less complete, and the scope for tensions (for example, between multilateral and unilateral approaches to liberalization and between market-based and trade policy responses to balance of payments pressures) was evident during the evaluation period. But the evaluation found that informal contacts between the two institutions and the IMF’s diminishing role in trade conditionality kept flare-ups at bay. Still, other potential tensions, especially with respect to possible charges of exchange rate manipulation for trade purposes, lie below the surface. As for other institutions pursuing approaches to trade policy more similar to the IMF’s, work with the World Bank was on occasion strong, but that with the Organization for Economic Cooperation and Development (OECD) and regional development banks not frequent.

In charting a course for the IMF on trade policy issues, the evaluation concluded that the Executive Board’s guidance to staff was appropriately general but too vague. As trade policy encompasses a wide range of issues, not all of which are relevant from a macroeconomic perspective in every country or region, the Board appropriately broadened the range of issues staff might address and asked for selectivity. But on some issues—preferential trade agreements (PTAs) and trade in services stood out—the objectives and approach for IMF involvement were not made clear, nor were the criteria for macro-criticality that were to guide staff decisions on when to become involved in trade policy issues. Without clarity on these considerations, staff are unlikely to be effective in looking out for trade-policy-related threats to growth and stability in the global economy.

The evaluation also found that nowhere was the overshoot in IMF involvement in trade policy issues clearer than in the area of conditionality. While conditions on trade policy in IMF lending arrangements since the early 1980s probably contributed to a beneficial reduction in very high and distorting trade barriers, at times in the evaluation period trade conditionality exceeded a reasonable definition of macro-critical, went beyond staff’s technical competence, and fell prey to political interference from large shareholders of the IMF. The subsequent virtual cessation of conditionality on trade policy was appropriate.

The evaluation found that surveillance of trade policies had a mixed record. On some important trade issues, bilateral surveillance provided excellent analysis and a strong voice for changing policies that harmed global welfare. Messages from Article IV reports were at times tough on both advanced countries (particularly on agricultural subsidies and contingent protection) and developing countries (where high tariff and nontariff barriers were part of a complex web of features that raised business costs, fiscal revenue reforms needed to accompany trade liberalization, and preference erosion created uncertainties). Still, the record of IMF involvement was uneven, and in recent years some important trade policy issues—from the perspective of spillovers and macroeconomic stability—were not addressed forcefully.

Two such issues stood out for not receiving the attention their macroeconomic and systemic importance merited. Much of the global action on trade policy in recent years has occurred through PTAs, an area in which IMF surveillance—bilateral, regional, and multilateral—did not fully engage. When views were expressed on PTAs in staff reports they differed considerably across countries (some favorable, some cautionary, and some quite bland) with no apparent reason for the differences. And a fair amount of analytical and empirical work on PTAs undertaken by IMF staff frequently did not find voice in the IMF’s advice. In many countries, missions’ reluctance to engage on PTA issues meant that trade policy was effectively taken off the table of IMF surveillance discussions.

Even more serious from the perspective of the IMF’s core mandate is the meager attention given to trade in financial services. Although the Global Financial Stability Report and its predecessor, the International Capital Markets Report, on occasion addressed the risks and benefits of liberalizing trade in financial services, bilateral surveillance was not as thorough, tending indiscriminately to urge greater openness to foreign financial service providers with little or no direct assessment of risks. More explicit guidance on objectives of and approaches to surveillance of trade in financial services, as well as better tools for tracking openness to or restrictions on trade in financial services, would have promoted more thorough work in this area.

The evaluation attempted to assess the effectiveness of IMF advice on trade policies but did not obtain strong conclusions. Trade policy conditionality was typically implemented (frequently with delays) but was also often partially reversed later. Because trade policy advice in surveillance tended to be less precisely specified than conditionality and to have a medium-term focus, assessing its effectiveness would have required a counterfactual. Results from interviews and surveys present a mixed bag but broadly did not refute the notion that IMF advice is effective at least at the level of keeping trade policy issues on the table.

The evaluation made six main recommendations:

  • (1) Board guidance: The Board should commit to periodic reevaluation of guidance on objectives of, approaches to, and modalities of staff work on trade policies.

  • (2) Trade policy in UFR: Having scaled back conditionality on trade policy, the IMF must engage on issues with borrowing countries through a strong advisory role.

  • (3) Surveillance over trade policies: The main role of the IMF in trade policy issues in the future will likely be through surveillance. Four immediate initiatives are needed.

    • (i) The Board should establish guidance on the role and approach of the IMF in PTAs.

    • (ii) The Board should establish guidance on the role and approach of the IMF in trade in financial services.

    • (iii) Trade policy—particularly involving PTAs—should be addressed periodically in multilateral and regional surveillance. Much of the value added that the IMF can bring to assessing trade policy developments comes from its ability to place them in a global context—an approach well-suited to the World Economic Outlook format.

    • (iv) The IMF should recommit to evenhandedness in its trade policy advice.

  • (4) Outreach: To be effective, IMF staff in conjunction with the Board must consider ways to: (i) improve outreach to officials inside and outside the ministries that are the IMF’s traditional interlocutors and (ii) present trade policy issues in a persuasive, rigorous, and appealing manner.

  • (5) Data, expertise, and organization: Three orders of business are crucial for effective engagement in trade policy issues with the IMF’s limited resources. (i) A minimum level of trade policy expertise is needed to give the work on trade policies sufficient momentum. (ii) A division needs to be established as the locus of inter-institutional cooperation on trade policy issues and a repository of trade expertise on which other staff can draw. (iii) Fund staff need data on and measures of trade protection. The abandonment of the old Trade Restrictiveness Index was reasonable, but a replacement should be considered.

  • (6) Inter-institutional cooperation: Management and a small number of senior staff need to commit to regular and formal meetings—say once a year—with counterparts in the OECD, WTO, and World Bank.

Governance of the IMF

Since the IEO released its evaluation on Governance of the IMF in May 2008, the Fund’s Executive Directors and Management, the Committee on IMF Governance Reform (also known as the Eminent Persons Group) appointed by Management, and a working group of the Group of Twenty (G-20) have issued proposals for IMF reform that cover its governance. The IEO evaluation has made an important contribution to this rapidly developing debate.

On May 27, 2008, after Executive Board discussions, the Board and the Managing Director issued a joint statement that referred to the evaluation as “a very useful contribution to their efforts to help strengthen the Fund’s governance.” On September 14, 2008, the Managing Director announced the establishment of a Committee on IMF Governance Reform chaired by Trevor Manuel, Minister of Finance of South Africa, charged with proposing reforms and advising the IMF on how to fulfill its global mandate more effectively. Other members of the Committee were Michel Camdessus, former Managing Director of the IMF and Honorary Governor, Banque de France; Kenneth Dam, Professor of Law, the University of Chicago; Mohamed El-Erian, Chief Executive Officer, Pacific Investment Management Company; Sri Mulyani Indrawati, Minister of Finance and Coordinating Minister of the Economy, Republic of Indonesia; Guillermo Ortíz, Governor, Bank of Mexico; Robert Rubin, Council on Foreign Relations; Amartya Sen, Lamont University Professor, Harvard University; and Zhou Xiaochuan, Governor, People’s Bank of China. On March 26, 2009, the Group issued its report with proposals for governance reform, which endorsed many of the IEO’s recommendations.

Meanwhile, IMF Executive Directors have been debating the best means to follow up on the IEO evaluation. A Working Group of Executive Directors prepared a work plan for following up on the IEO recommendations. Responding to this plan, the Executive Board emphasized the need for “adequate flexibility with respect to the timing of its implementation, to take into account the Fund’s overall work priorities,” as well as the work on governance being undertaken in the Committee on IMF Governance Reform and the views of civil society and external audiences. Directors and Management established a Joint Steering Committee to facilitate and monitor cooperation among these groups. A number of Directors reiterated that further work on quota and voice reform should be an integral part of the Fund’s overall governance reform.

At their meeting in London in April, G-20 leaders committed to reform the mandates, scope, and governance of the international financial institutions “to reflect changes in the world economy and the new challenges of globalization, and that emerging and developing economies, including the poorest, must have greater voice and representation. This must be accompanied by action to increase the credibility and accountability of the institutions through better strategic oversight and decision making.”