-As announced in a recent News Brief, the IMF is inviting public comment on its ongoing review of conditionality in IMF-supported programs. Please send comments on the following papers or the overview to conditionality@imf.org. All comments received by June 30, 2001, will be conveyed to the IMF's Executive Board as background information for a Board discussion in June and will also be taken into account in further work by IMF Staff on streamlining and focusing conditionality.

Conditionality in Fund-Supported Programs--Overview
February 20, 2001

Conditionality in Fund-Supported Programs--Policy Issues
February 16, 2001

Structural Conditionality in Fund-Supported Programs
February 16, 2001

Public Information Notice: IMF Executive Board Discusses Conditionality
March 21, 2001

See also:

Key Decisions of the Executive Board Concerning Conditionality March 21, 2001

Streamlining Structural Conditionality
(382 kb pdf file)

Transcript of a press briefing on IMF Conditionality by Masood Ahmed, March 21, 2001

The Role of the IMF in Governance Issues
Guidance Note

How Does the IMF Lend? -- A Factsheet

Pamphlet No. 45: Financial Organization and Operations of the IMF

Pamphlet No. 46: The Unique Nature of the Responsibilities of the IMF

Market Access for Developing Countries' Exports




Trade Policy Conditionality in
Fund-Supported Programs

Prepared by the Policy Development and Review Department
February 16, 2001

Contents


  1. Introduction

  2. The Role of Trade Policy in Fund-Supported Programs

  3. Extent and Focus of Trade Policy Conditions

  4. Monitoring and Implementation

  5. Conclusions

Text Tables
  1. Trade Restrictions by Economic Group, 1997-2000
  2. Exports and Gross Domestic Product, 1980-2000
  3. Initial Trade Restrictiveness Ratings and Number of Structural Conditions
  4. Relevance to Program Objectives of Trade Policy Measures
  5. Number of Trade Policy Measures
  6. Implementation of Trade Measures

Figures

  1. Unweighted Average Tariffs by Region, 1980-98
  2. Developing Countries: Frequency of Total Core
    Nontariff Measures, 1989-98

  3. Trade Policy Conditionality, 1987-99

Boxes

  1. The Roles of the Fund, the World Bank, and the WTO
    in Trade Policy

  2. Trade Restrictiveness Index

References





I. Introduction

1. Trade liberalization has been a key element of Fund-supported programs over the past twenty years.1 This stems from the purposes of the Fund and the importance of open trade regimes for sustainable growth, durable macroeconomic stabilization, and balance of payments viability. The Fund is mandated to facilitate the expansion and balanced growth of international trade and, by making its resources temporarily available, to give members the confidence to correct their balance of payments problems through appropriate macroeconomic and structural measures rather than resort to the kind of exchange and trade restrictions that plagued the inter-war period.2

2. This paper provides background to the review of structural conditionality. It examines the role of trade policy in Fund-supported programs and the extent, focus, and effectiveness of conditionality in this area of structural reform.3 The role of trade policy conditions was selected as a specific example because: (i) it represents a discrete policy area where there is substantial agreement on what constitutes "best practices" and where there is a significant time series of policy actions to review; and (ii) trade policy is an example of a policy area of common interest and shared responsibility between the Fund and other institutions, especially the World Bank and the World Trade Organization (WTO). The paper seeks to clarify the respective roles of these institutions in trade policy (Box 1) and also discusses how the Fund collaborates with these institutions in the context of the use of Fund resources.

3. The paper is organized as follows. To provide background for the review of trade policy conditionality, Section II discusses the role of trade policy in Fund-supported programs and the progress countries have made toward open trade regimes. Section III examines the extent and focus of trade policy conditionality. Section IV discusses monitoring and its effectiveness and how the Fund has collaborated with the World Bank and the WTO in this area. Section V summarizes the main findings.

Box 1. The Roles of the Fund, the World Bank, and the WTO in Trade Policy

The Fund, the World Bank, and the World Trade Organization (WTO) share common interests and complementary objectives in the area of trade. Through efforts in their respective areas of competence, they foster the progressive liberalization of trade in goods and services.

The Fund and the Bank approach trade issues from the perspective of economic efficiency and the appropriate design and sequencing of trade reforms within an overall policy framework. The Fund encourages market-oriented policies to improve the efficiency of resource use within an appropriate macroeconomic framework consistent with a viable external position. It focuses on broad-based reforms to remove the anti-export bias of the trade and exchange regimes and domestic policies. The Fund is mandated to facilitate the expansion and balanced growth of international trade and to make its general resources available to provide members with the opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity. Consequently, the Fund's financial assistance provides an incentive for the recipient country to liberalize its exchange and trade systems in its own interest and in the interest of other members.

The Bank, as a development institution, focuses on domestic growth in industry and other sectors and emphasizes trade liberalization for its contribution to growth. The Bank often takes the lead on trade reform in cases where there are complex and detailed reforms or industry- and sector-specific trade policies in which the Bank has recognized expertise, e.g., telecommunications, transportation, energy, and agriculture. The Fund takes the lead when the Bank's operations do not address trade policy, or when the Fund is providing technical assistance on the reform and administration of trade and other taxes. On occasion, differences in timing between Bank and Fund operations in support of stabilization and structural reform programs also lead to greater Bank or Fund involvement in trade reform.

The WTO is an institution that creates and enforces a rules-based system for the conduct of trade relations among its members. Through the "binding" of negotiated tariff concessions and the enforcement of agreed rules, the WTO improves the security and predictability of market access in world trade. The WTO enforces its rules through its dispute settlement mechanism, which allows sanctions (in the form of trade retaliation) for breaches of obligations established in WTO Agreements. WTO commitments and rules are limitations on the maximum amount of protection, not optimal levels from the point of view of economic efficiency. Thus, members can, and often do, go beyond their "bound" commitments. WTO rules also provide for numerous exceptions, allow long and variable transition periods, and afford some categories of members special treatment. Moreover, WTO rules and commitments do not address fully a number of important aspects of trade policy with significant structural and macroeconomic implications, such as export taxes, state trading monopolies, tariff dispersion, and import tariff exemptions. The WTO influences trade policies of its members through periodic multilateral trade negotiations, the dispute settlement mechanism, the accession process, and its periodic trade policy reviews of members' trade policies.

The Fund, the Bank, and the WTO are committed to achieving greater coherence in global economic policymaking. This commitment is carried out through arrangements for institutional consultations, attendance of each other's staff at relevant meetings, and exchange of documents and information. The staffs of the Fund, the Bank, and the WTO collaborate closely to ensure the consistency of trade policy and related advice at the country level. The staffs of the Fund and the WTO also seek to ensure that neither institution advocates measures to its members that would contradict their obligations in the other institution.

II. The Role of Trade Policy in Fund-Supported Programs

4. The overall objectives of Fund-supported programs are to achieve macroeconomic stability and a viable external position with a high degree of resource use. As is well known, trade liberalization plays a key role in achieving these objectives.4 5 More generally, trade liberalization both depends upon and contributes to a credible and consistent macroeconomic policy framework. Macroeconomic stability, an appropriate level of the real exchange rate, and efforts to strengthen the domestic tax system (e.g., diversifying the tax base through domestic tax reform, including introducing broad-based domestic consumption taxes) are essential to sustain market-opening measures.6 In turn, well-designed trade reform geared toward the medium-term objectives of moving to a trade regime characterized by the absence of quantitative restrictions and low, relatively uniform tariffs enhances the effectiveness of exchange rate policy and supports fiscal and external sustainability.

5. Trade liberalization has a particularly important role to play in attaining program objectives in countries facing protracted balance of payments problems of a structural nature.7 Fund facilities designed to address such problems--the Extended Fund Facility (EFF) and the Poverty Reduction and Growth Facility (PRGF)--emphasize structural reform, including the liberalization of restrictive trade and exchange regimes and complementary structural measures, to help alleviate external and domestic constraints on growth and achieve a viable external position.

6. As regards the sequencing of trade liberalization, in the first stage of liberalization, replacing distortionary quantitative restrictions with price-based measures permits the transmission of changes in international prices and exchange rates to the domestic economy; this also strengthens revenue performance by shifting rents from producers and importers to the budget. The next stage, involving the simplification of the tariff structure, the elimination of exemptions, and the reduction of the highest tariffs, is also normally revenue enhancing. Early action to develop and strengthen the domestic tax system is required to support the final stage of moving to low, relatively uniform tariffs, which improves the overall efficiency and competitiveness of the economy and reduces the dependence of the budget on trade taxes.

7. During the past two decades, most countries have made considerable progress toward more open trade regimes. Industrial countries have mainly liberalized in accordance with multilateral and regional commitments. Other countries, while also influenced by multilateral and regional initiatives, have more often liberalized unilaterally. Unilateral liberalization represented a major shift in the attitudes of developing and transition countries away from inward-looking policies of import substitution that earlier characterized their policymaking. The depth of unilateral trade reform has generally been proportional to the initial degree of restrictiveness, with the transition being most evident in Latin America and Central and Eastern Europe, followed by East Asia (Figures 1 and 2). Progress in the same direction, albeit to a lesser extent, has been made in the Middle East, sub-Saharan Africa, and South Asia.

8. Many of the trade reforms have been undertaken in the context of Fund-supported programs.8 The 1997 review of trade policy content of Fund-supported programs found that nearly three-quarters of the countries covered had restrictive trade regimes at the outset of their programs.9 Two-thirds of these countries targeted quantifiable reductions in trade restrictiveness and, for the most part, these objectives were achieved. Since that review, trade reform in these countries has continued, often in the context of subsequent Fund-supported programs, with almost three-quarters of them further reducing their trade restrictiveness ratings. For the remainder there was no backtracking, so that at present only about 18 percent of these countries have restrictive trade regimes. This movement toward openness since the 1997 study is also reflected for all Fund members, although progress has varied and, as a group, PRGF-eligible countries continue to have more restrictive regimes than others (Table 1).



Table 1. Trade Restrictions by Economic Group, 1997-2000


 

1997

1998

1999

2000
(est.)


Average tariff rates

(in percent)

Industrial countries

6.9

6.7

6.1

5.2

Developing countries (non-IDA/PRGF)

14.0

13.7

13.6

13.1

IDA/PRGF-eligible countries

18.5

17.1

17.0

16.2

 

Overall trade restrictiveness

(percentage in each group)

Industrial countries

       

Open

95.8

95.8

95.8

100.0

Moderate

0.0

4.2

4.2

0.0

Restrictive

4.2

0.0

0.0

0.0

Developing countries (non-IDA/PRGF)

       

Open

43.8

47.5

48.8

51.3

Moderate

37.5

36.3

33.8

32.5

Restrictive

18.8

16.3

17.5

16.3

IDA/PRGF-eligible countries

       

Open

37.5

44.4

47.2

52.8

Moderate

29.2

27.8

31.9

29.2

Restrictive

33.3

27.8

20.8

18.1


Source: Trade Policy Information Database.

Box 2. Trade Restrictiveness Index

The trade restrictiveness index (TRI) provides a quantitative measure of the restrictiveness of a country's trade regime.1 It combines the major elements of trade restrictiveness, namely the average level of tariff protection and the coverage of nontariff barriers (NTBs) in relation to trade and production in the economy. Five ranges are specified for the restrictiveness of import tariffs (the unweighted average statutory tariff rate, incorporating, where relevant, other duties and charges). The five categories of import tariffs reflect the distribution of average tariff levels of Fund members in 1997 when the TRI was developed. For NTBs three categories are specified: open, moderate, or restrictive. These categories measure restrictiveness based on the share of imports, the share of production, or the number of sectors subject to NTBs.

The five-point classification of tariffs and the three-point classification of NTBs are combined to derive a 15-cell matrix. Within the matrix, the cells are converted to a 10-point scale--the TRI, with "1" denoting the most open and "10" denoting the most restrictive trade regimes. NTBs carry a heavier weight than tariffs in the overall index since they generally result in larger economic distortions and are less transparent than tariffs, which are price-based measures. Countries are rated based on this index as having open trade regimes if they have a rating of 1-4, moderately restrictive regimes if the rating is 5-6, and restrictive regimes if the rating is 7-10.

The TRI is a broad-based measure that is not sufficiently sensitive to reflect modest changes in a country's trade regime. While it provides a useful gauge of overall trade restrictiveness for analytical purposes, it is not used for the purposes of defining structural conditions in Fund-supported programs.


1A description of the methodology used to construct the index and its limitations is contained in Annex I of EBS/97/163.

9. The trend toward openness, along with other factors such as decreases in transportation, communication, and computing costs, has contributed to the rapid expansion of trade and the further integration of countries into the global economy. Worldwide, the growth in export volumes outstripped real GDP growth during the last two decades, and especially during the 1990s when the growth in export volumes and real GDP of developing countries far exceeded that of the advanced countries (Table 2). Regions with the most open trade regimes (e.g., Asia and the Western Hemisphere) have registered the most impressive growth in trade volumes. Moreover, when adjustments are made to exclude countries experiencing conflict, trade performance in some other regions, such as sub-Saharan Africa, has been better than portrayed in Table 2.10

III. Extent and Focus of Trade Policy Conditions

10. This section examines the overall trends in structural conditions related to trade policy in Fund-supported programs during 1987-99 based on data from the database for monitoring Fund arrangements (MONA). Drawing upon a sample of 24 recent programs, it also tries to ascertain how trade policy conditions were related to the overall objectives of Fund-supported programs.

Trends in Trade Policy Conditions

11. During the period reviewed in the study of structural conditionality in Fund-supported programs (1987-99), data from MONA indicate that the number of structural conditions related to trade policy was relatively stable but that the share of trade-related conditions in total structural conditions declined significantly.11 The number of trade-related conditions averaged somewhat less than one measure per program year, with a slight rise during the second half of the 1990s related mainly to increased use of benchmarks and prior actions (Figure 3). Regarding variations across types of countries, the use of structural conditions in trade policy has been most prevalent in programs of transition countries and PRGF-eligible countries.

Table 2. Exports and Gross Domestic Product, 1980-2000


 

 

1980-2000

1980-1990

1990-2000


   

(average growth rate)

World

     
 

Volume of exports of goods

5.6

4.5

6.8

 

Real GDP growth

3.3

3.4

3.2

         

Advanced Economies

     
 

Volume of exports of goods

5.9

5.3

6.6

 

Real GDP growth

2.9

3.2

2.7

         

Developing Countries

     
 

Volume of exports of goods

5.7

3.2

8.3

 

Real GDP growth

4.8

4.1

5.5

         

Asia

     
 

Volume of exports of goods

9.0

6.8

11.2

 

Real GDP growth

7.2

6.8

7.5

         

Sub-Saharan Africa

     
 

Volume of exports of goods

2.4

3.1

1.7

 

Real GDP growth

2.3

2.4

2.3

         

Middle East and North Africa

     
 

Volume of exports of goods

2.1

0.6

3.6

 

Real GDP growth

3.0

2.5

3.5

         

Western Hemisphere

     
 

Volume of exports of goods

7.5

5.0

10.0

 

Real GDP growth

2.5

1.5

3.4


Source: World Economic Outlook (WEO).

 

  Figure 3. Trade Policy Conditionality, 1987-99
(average number of structural conditions per program year)
Source: IMF, Structural Conditionality in Fund-Supported Programs; structural conditions include prior actions, performance criteria, conditions for completion of review, and structural benchmarks.

Table 3. Initial Trade Restrictiveness Ratings and Number of Structural Conditions1


  Country
  Program
Type
 Program
Period

Initial
Overall
Rating

Initial
NTB
Rating

Initial
Tariff
Rating

Targeted
Overall
Rating

 Overall
Rating 2
  Survey
Results3

Number of
Structural
Conditions4

Other
Trade
Measures5


 

Côte d'Ivoire

PRGF

3/17/98-3/16/01

9

3

3

5

5

Critical

2

1

Mauritania

ESAF

1/25/95-7/13/98

9

3

3

3

3

Critical

6

1

Jordan

EFF

2/9/96-2/8/99

8

2

5

6

7

Critical

12

8

Tanzania

PRGF

3/31/00-3/30/03

7

2

4

6

6

Important

3

5

Albania

ESAF

5/13/98-5/12/01

6

2

3

3

2

Important

4

0

 

Bulgaria

EFF

9/25/98-9/24/01

6

2

3

2

2

Important

9

8

Mexico

SBA

7/6/99-11/30/00

6

2

3

5

6

Useful

0

2

Thailand

SBA

8/20/97-6/19/00

6

2

3

6

6

...

0

1

Brazil

SBA

12/2/98-12/1/01

5

2

2

5

5

...

0

2

Kyrgyz Republic

ESAF

7/20/94-3/31/98

5

2

2

2

2

Important

1

2

 

Russia

SBA

7/28/99-12/27/00

5

2

2

4

5

Important

1

2

Turkey

SBA

12/22/99-12/20/02

5

2

2

4

5

...

0

1

Ukraine

EFF

9/4/98-9/3/01

5

2

2

5

5

Important

9

24

Yemen

PRGF/EFF

10/29/97-10/28/00

5

2

2

5

5

Important

10

12

Bolivia6

PRGF

9/1/98-12/1/00

4

2

1

1

1

n.a.

0

0

 

Indonesia

EFF

8/25/98-2/3/00

4

2

1

1

4

Useful

1

18

Korea

SBA

12/4/97-12/3/00

4

2

1

4

4

Useful

0

9

Mali

ESAF

4/10/96-8/5/99

4

1

4

4

4

Useful

1

4

Cameroon

PRGF

8/20/97-12/20/00

3

1

3

3

3

Useful

2

3

Peru

EFF

7/1/96-6/24/99

3

1

3

2

2

Useful

0

2

 

Zambia

ESAF

3/25/99-3/24/02

2

1

2

2

2

...

0

1

Latvia

SBA

12/10/99-4/10/01

1

1

1

1

1

Important

2

2

Moldova

EFF

5/6/96-5/19/00

1

1

1

1

1

Critical

13

0

Mongolia

ESAF

7/30/97-7/29/00

1

1

1

1

1

...

0

2


                     

Source: IMF staff estimates.

                 

1Trade restrictiveness ratings are based on the Fund's trade restrictiveness index. The most restrictive overall rating is 10; the most restrictive rating for nontariff barriers (NTBs) is 3; the most restrictive rating for tariffs is 5.

2Ratings reflect either the status at the completion of the program, or the current implementation status of ongoing programs.

3For definition of these terms, see Appendix II concerning the 24 country sample in "Structual Conditionality in Fund-Supported Programs".

4Structural conditions are defined as comprising performance criteria, prior actions, conditions for completion of reviews, and structural benchmarks.

5Trade measures, other than those defined as conditions, included in letters of intent and accompanying matrices.

6Bolivia's program did not include any trade measures per se, but a reform of customs administration was expected to

increase revenues by 0.5 percent of GDP and to address a lack of transparency in customs procedures that impeded trade.

 

Trade Policy Conditions and Program Objectives

12. The importance of trade policy measures for the attainment of overall program objectives was examined using the sample of 24 programs included in the area department survey undertaken as part of the structural conditionality study.12 The sample included 4 countries with restrictive trade regimes (measured on the basis of TRI) at the outset of their programs, 10 with moderately restrictive regimes, and 10 with open trade regimes. The sample is well balanced in terms of the types of countries and programs, providing a good basis to examine trade policy conditionality (Table 3).

13. The relationship between trade policy conditions and program objectives is examined based on the views of country teams; the restrictiveness of trade regimes at the outset of programs and hence, the potential contribution of trade liberalization to improved economic performance; whether conditionality was focused on the most restrictive aspects of countries' trade regimes; and the incidence of trade policy conditionality across types of programs.

14. Key trade reform measures were considered by country teams to be critical for the achievement of the broad program objectives in four cases: three where an initially restrictive regime was being liberalized (Côte d'Ivoire, Jordan, and Mauritania) and one where an existing, recently liberalized regime needed to be sustained (Moldova). In eight other cases, trade reform was regarded as important for the attainment of program objectives--without such reform the attainment of program objectives would have been difficult but not impossible. For the remaining programs, the trade reform measures included in the program were not expected to affect significantly the broad program objectives (Table 4).

Table 4. Relevance to Program Objectives of Trade Policy Measures


   

Critical

Important

Useful

Not Specified
in Survey


Number of countries

   

4

8

6

6

Average restrictiveness rating

 

6.8

5.0

4.0

3.8

Average number of structural trade conditions

8.3

4.9

0.7

0


Sources: Staff estimates and survey of 24 countries.

15. The rankings based on the survey were broadly in line with the initial restrictiveness of countries' trade regimes, suggesting that there was a link between the perceived need for trade reform and trade policy conditionality. The data show that 9 of the 24 programs examined did not include any trade policy conditionality. Five of these were programs of countries with open trade regimes. The other four were capital account crisis cases with moderately restrictive trade regimes. Other countries with open trade regimes had one or two trade-related structural conditions, except for Moldova, which had 13 structural conditions related mainly to tariff measures, including seven prior actions to reverse tariff increases. This anomaly can be explained by the volatility in Moldova's tariff regime and the importance of maintaining an open trade regime for the success of the program. The seven other cases that contained more than 2 structural conditions were programs of countries that had restrictive or moderately restrictive trade regimes. Two of these cases were Jordan and Mauritania, where country teams considered key trade reforms critical for the attainment of program objectives; in the other cases the reforms were considered important.

16. The use of structural conditions was fairly evenly divided between tariff and NTBs and focused on the most restrictive aspects of countries' trade regimes. In the cases of Côte d'Ivoire, Jordan, and Tanzania, which had relatively high tariffs, conditionality focused on tariff reform. In Côte d'Ivoire, Mauritania, and Yemen, emphasis was placed on reducing extensive NTBs. In these cases and in general, tariff reforms tended to be broad based, aiming to reduce the level and dispersion of the tariff system and broaden its base by eliminating exemptions. In contrast, measures related to NTBs tended to be sector-specific. Removal of sector-specific NTBs was important because the sectors concerned represented a large part of the economy, its exports or its imports (e.g., coffee marketing in Côte d'Ivoire and fishing in Mauritania); the sector was an important determinant in the performance of other sectors (imports of refined petroleum in Cameroon and Côte d'Ivoire); or because the NTB raised important governance issues which had significant macroeconomic consequences (such as the abolishment of certain external trade monopolies in Yemen). The predominance of sector-specific NTBs also reflected the fact that most of the countries included in the sample had already dismantled broad-based licensing requirements and other discriminatory NTBs. Notably, nearly half of the NTB measures related to the reduction of barriers to exports.

17. The incidence of trade policy conditions varied by types of programs, reflecting the different orientations of Fund arrangements (Table 5). In total, the sample averaged one trade-related structural condition per program year. Programs of transition economies had the highest number of such conditions (1.6), followed by those of PRGF-eligible countries (1.1), and those of other countries (0.6). Extended arrangements had the largest number of structural conditions per program reflecting the relatively large number of conditions in the programs of Bulgaria, Jordan, Moldova, and Ukraine. PRGF arrangements had about half as many trade-related structural conditions per program as extended arrangements, with relatively high concentrations in the programs of Mauritania and Yemen. In contrast, among the eight stand-by arrangements there were three structural conditions related to trade policy—all benchmarks.

 

Table 5. Number of Trade Policy Measures


   

Performance criteria

Prior actions1

Structural benchmarks

Other trade policy measures

Total


Number of programs including trade measure

5

10

11

21

232

 

PRGF/ESAF

 

3

5

5

9

10

 

EFF

 

2

3

3

5

6

 

SBA

 

0

0

2

7

7

               

Total number of measures

6

31

39

110

186

               

Average number of measures per program year

0.1

0.4

0.6

1.7

2.8

 

Number of measures by program type

 

PRGF/ESAF (10)

4

14

11

31

60

 

EFF (6)

 

2

17

25

60

104

 

SBA (7)

 

0

0

3

19

22

 

Number of measures by type of country

 

PRGF-eligible (7)

4

13

7

27

51

 

Transition (8)

1

17

21

40

79

 

Other (8)

 

1

1

11

43

56

 

Number of measures by type of reform

 

Tariffs

 

3

16

19

48

86

 

Broad reform

1

7

14

24

46

 

Product specific reform

2

3

1

13

19

 

Surcharge

 

0

4

1

5

10

 

Other

 

0

2

3

6

11

 
Nontariff barriers

2

12

18

47

79

 

Quantitative restrictions

0

1

2

4

7

 

Bans

 

2

3

1

6

12

 

Licensing

 

0

2

4

3

9

 

State trading

0

2

4

11

17

 

Other

 

0

4

7

23

34

 
Export taxes  

1

3

2

15

21


Source: IMF staff estimates.
1Includes prior actions and measures that were conditions for the completion of a review.
2Of the 24 program included in the review, only 23 included trade measures.

 

18. Overall the use of structural conditions related to trade policy was moderate and did not contribute materially to the large expansion of structural conditions during the 1990s. The available evidence also suggests that structural conditions were mainly applied in cases where trade reform was likely to contribute significantly to the overall objectives of the program. As expected, there were only a few cases--primarily involving countries with restrictive trade regimes--where trade policy reform was considered critical to the success of the program.

IV. Monitoring and Implementation

19. This section examines the conditions applied to trade measures, specifically, the type of conditions, how they were applied (e.g., level of detail), and their relationship to implementation. It also discusses collaboration with the World Bank and WTO in the design and monitoring of trade policy reforms.

Conditions Applied to Trade Measures

20. Performance criteria were used sparingly for trade measures, constituting only 3.2 percent of total trade measures in the sample of 24 countries. Given the nature of trade policy reforms, much greater use was made of structural benchmarks and prior actions. As the structural conditionality study observed in a more general context, more than half of the trade measures mentioned in letters of intent and policy matrices were not covered explicitly by structural conditions, although many of these measures were monitored in the context of reviews.

21. A similar pattern in the use of the instruments of conditionality was evident in the 1994 and 1997 reviews of trade reform in Fund-supported programs.13 However, those reviews, which covered countries with predominantly restrictive trade regimes, found greater use was made of performance criteria. They also reported a substantial number of policy intentions related to trade reform that were not covered by structural conditions, as also noted in the present study.

22. In the 24-country sample, a total of six performance criteria applied to trade measures. Four of these were applied to measures whose implementation had been delayed, reversed, or contained in an earlier program. Performance criteria applied to a variety of trade policy measures, both across-the-board and sector-specific. An example of an economy-wide measure was the implementation of the WAEMU common external tariff adopted by Côte d'Ivoire. Implementation of this measure, which involved the harmonization of customs tariffs and indirect taxation, was considered important from both trade and fiscal perspectives. It was also important from a regional perspective, given Côte d'Ivoire's prominence in WAEMU. In the case of Mali, a performance criterion pertained to the reduction of tariffs on rice imports, which affected an important sector with macroeconomic implications. Performance criteria were also applied to measures which were expected to enhance transparency and build confidence, such as the publication of a list of remaining import bans in Yemen (a measure not initially subject to a structural condition but which had been delayed) and a reduction in the number of products subject to mixed duties (which tend to be more protectionist) in Ukraine.14 Indonesia's EFF-supported program included a performance criterion on the first step of a phased reduction in export taxes on logs, which carried over from the earlier stand-by arrangement. While there may have been good reasons for using performance criteria in each of these situations, the importance of the specific measures for the broad objectives of the program, as judged by country teams, ranged from critical to useful.

23. Trade policy was more commonly monitored using structural benchmarks and prior actions. Structural benchmarks were often used if individual trade measures were building blocks for a more comprehensive trade policy reform which was important for the program objectives. Prior actions were typically used for more substantive measures, such as the adoption of legislation, the first step in a major reform of tariffs or NTBs, or to deal with important policy reversals or measures that had not been implemented on schedule.

24. To some extent, the degree of detail in trade policy conditions was related to the type of trade reforms undertaken. In many cases, the trade policy reforms consisted of phased reductions in tariffs and/or NTBs monitored in a series of steps. Generally, programs of countries with more complex tariff regimes or with relatively high tariff rates included more steps monitored by structural conditions, usually structural benchmarks, although practices varied. In the case of Albania, which had an import tariff regime with a few bands and an average tariff rate of about 16 percent, the program included one structural benchmark for a three-year phased tariff reform involving successive reductions in the maximum tariff rate, which eliminated the top band. In contrast, in the case of Bulgaria, which had an import tariff regime with over 60 bands and an average tariff rate of nearly 20 percent, the program included four structural benchmarks related to a three-year tariff reform involving the phased reduction in tariff rates and the number of tariff bands. And in the case of Jordan, which had an average tariff rate above 25 percent, the program incorporated seven structural conditions related to tariff reform (one prior action and six structural benchmarks), including phased reductions in the maximum tariff rate and the number of tariff bands.

25. Phased trade reforms were also implemented in the programs of Indonesia and Korea, but these were monitored mainly using policy matrices. In Indonesia's program, 10 out of 19 measures related to the elimination of export restrictions (such as bans and taxes). Five of these measures pertained to the phased reduction of export taxes on logs, sawn timber, rattan, and minerals and their replacement with resource based taxes as appropriate. As noted above, a performance criterion applied to the first step of this reform, but structural conditions did not apply to the subsequent steps. The other measures included phased replacement of export bans with export taxes, which were to be phased out subsequently. In Korea's Fund-supported program, five out of nine trade measures involved phased reductions in the coverage (by number of items) of the so-called import diversification program, which banned the import of specific goods from Japan.

26. In some other cases (e.g., Moldova and Ukraine), extensive monitoring was partly related to frequent intervention in the trade regime, for example, the granting of exemptions to import tariffs, the introduction of bans or taxes on imports or exports of specific products; or resort to import surcharges.

27. Implementation rates for trade policy measures subject to structural conditions were generally very good (Table 6).15 16 Implementation rates of measures covered by performance criteria and prior actions were quite high, with 85-100 percent of such measures fully or partially implemented. Over 80 percent of structural benchmarks were also fully or partially implemented. In contrast, around half of the measures which were not subject to structural conditions were fully or partially implemented. While the implementation rate of trade measures was generally good, some of the programs with the largest number of structural conditions related to trade measures had below average implementation rates (Jordan and Ukraine). Moreover, as mentioned above, in some cases, the number or strength of structural conditions tended to increase when the implementation of measures was delayed.

Collaboration with the World Bank and the WTO

28. As noted above, the Fund, the Bank, and the WTO share common interests and complementary objectives in the area of trade. All three institutions share a common interest in trade liberalization; however, the Fund and the Bank are not party to the establishment of the rules-based trading system and do not have a mandate to enforce it. The use of Fund conditionality to liberalize trade supports the objectives of the WTO because the two organizations share the same view of liberalization being in the interest not only of the member concerned, but of all members. The staffs of the three organizations cooperate closely to ensure coherence in global economic policymaking and that Fund-Bank policy advice to a country is not contrary to its WTO obligations. In this regard, PDR (along with GEN) works closely with area departments to ensure that measures recommended by Fund staff do not contradict members' obligations under WTO Agreements. In all areas of cooperation, the three institutions are mindful of the need to avoid cross-conditionality.

 

Table 6. Implementation of Trade Measures


   

Total

 

Fully implemented

Partially implemented

Not Implemented

Implementation Date in Future

Unknown

   
 

 

 

(number of measures)

 

(percent of total)


By type of monitoring

186

 

61

6

16

8

9

 

Structural conditions

76

79

7

11

1

3

 

Performance criteria

6

 

100

0

0

0

0

 

Prior actions1

31

 

81

6

13

0

0

 

Structural benchmarks

39

 

74

8

10

3

5

 

Other

110

 

49

5

20

12

14

 

By type of measures

             
 

Tariffs

86

 

57

9

21

9

3

 

Broad reform

46

 

57

11

22

9

2

 

Product specific reform

19

 

63

0

21

16

0

 

Surcharge

10

 

70

0

20

0

10

 

Other

11

 

36

27

18

9

9

                 
 

Nontariff barriers

79

 

68

3

10

6

13

 

Quantitative restrictions

7

 

57

0

14

14

14

 

Bans

12

 

83

0

0

8

8

 

Licensing

9

 

100

0

0

0

0

 

State trading

17

 

76

0

0

12

12

 

Other

34

 

53

6

21

3

18

                 

 

Export taxes

21

 

52

5

19

10

14


Source: IMF staff estimates.
1Includes prior actions and measures that were conditions for the completion of a review.

 

29. During the 1990s, the Bank shifted its adjustment lending away from addressing economic distortions in trade and agricultural policy, and focused more on long-run structural and institutional reforms and private sector development.17 As a result, World Bank adjustment lending increasingly supported reforms in public sector management, in the financial and private sectors, and in the social sectors, and the reform agenda across the different sectors centered increasingly on institution building. This was reflected in a decline in the share of adjustment lending focused on reforms in trade policy and an increase in lending focused on fiscal and financial policy reforms.18

30. Against this background, while the survey of recent programs indicated continued close cooperation with the Bank in the formulation and design of trade policy advice, the Bank played a less direct role in trade reform than during the 1980s. In the 24-country sample, the Bank was involved in the trade reform effort in eight cases. Out of these, trade-related reforms were supported by World Bank loans in three cases. The World Bank's involvement was typically related to sector-specific assistance, for example, in forestry, agriculture, food security, and transportation. The World Bank also supported reforms that complemented trade policy and improved their effectiveness, particularly various aspects of private sector development and the strengthening of social safety nets.

31. The Fund and the Bank have also cooperated in sponsoring the Cross-Border Initiative (CBI), which aimed to provide a common policy framework to facilitate cross-border activity as well as market integration in Eastern and Southern African economies.19 In the sample, trade reform in Tanzania's program was designed and paced so as to move the country to a trade regime consistent with its regional commitments under the CBI.

32. In about one-third of the programs in the survey, trade measures were influenced by countries' WTO accession negotiations (in the sense of modifying the trade regime to be more in line with WTO rules) or agreements under the Uruguay Round. For example, Tanzania's program contained a trade measure to implement the WTO customs valuation methodology. Similarly, Yemen's program contained a measure amending the Customs Law to bring it in line with WTO rules on valuation and customs. None of these measures were subject to structural conditions.

V. Conclusions

33. Trade liberalization has constituted a key element of Fund-supported programs, reflecting the purposes of the Fund and the importance of open trade regimes for sustainable growth and external viability. During the past two decades, Fund members made substantial progress in moving toward open trade regimes, as more and more countries recognized the benefits of outward-oriented policies for economic development and raising living standards. This progress continued during 1997-99, a period marked by a major downturn for many emerging and developing countries, with very little backtracking. Many of the trade reforms were undertaken in the context of Fund-supported programs, frequently building on the progress made in successive medium-term arrangements.

34. A review of trade policy conditions found that the extent of such conditions has been relatively modest (about one measure per program year), compared with other areas of structural reform, and has not contributed materially to the overall expansion of structural conditionality. Available evidence suggests that, for the most part, trade policy conditions were related to the importance of trade reform for the attainment of program objectives. Trade policy conditions were found mainly in EFF/ESAF/PRGF arrangements. They were also concentrated in the arrangements with countries with initially restrictive or moderately restrictive trade regimes and where trade reform was considered critical or important by country teams for the attainment of program objectives.

35. Tariff reforms subject to structural conditions were generally broad-based, not sector specific. In contrast, conditions related to the elimination of NTBs tended to be sector-specific, reflecting the importance of the sector to the economy as well as the progress already made in dismantling broad-based licensing requirements. A significant proportion of these measures related to the lifting of various barriers to exports.

36. The type of structural conditions used generally reflected the nature of the trade reforms, which are often phased in over a period of years. Conditionality was applied mainly through use of structural benchmarks, prior actions, and reviews; performance criteria were used sparingly, in part reflecting the progress made in liberalizing trade regimes in the sample of country programs examined. Prior actions were sometimes used to initiate a phased trade reform; in other situations, measures whose implementation was delayed were turned into performance criteria or prior actions for completion of reviews. The programs reviewed also included many trade-related measures in matrices and statements of policy intentions in letters of intent that were not subject to structural conditions, although many were monitored in the context of reviews. Previous reviews of trade reform in Fund-supported programs show a similar pattern in program monitoring of trade measures.

37. Overall, the rate of implementation of trade measures was higher than the average for all structural conditions/measures and generally very good. The reason may be that trade measures are not as difficult to implement as more complex reforms such as privatization or closing firms and banks. There was considerable variety in the level of detail of program monitoring. To some extent, the degree of detail was explained by the complexity of the reforms undertaken and the period over which they were to be implemented, but practices were far from uniform, with a similar degree of liberalization achieved with a few or many conditions. In some cases, extensive monitoring was partly related to previous policy reversals or implementation delays.

38. Fund staff have collaborated closely with the World Bank and the WTO to ensure a coherent approach to policy making, with due recognition of countries' respective obligations in these institutions. Although the Bank's direct involvement in lending operations in support of trade liberalization declined during the 1990s, there was close collaboration on trade policy advice and reliance on the Bank's expertise in the design of sector-specific trade-related policies. Moreover, Bank support for private sector development and institution building complemented trade reforms.

39. While many countries have made substantial progress toward open trade regimes, there are others--particularly in the Middle East, Sub-Saharan Africa, and South Asia and some transition countries--with relatively high trade barriers or dependence on trade taxes. For these countries, further trade reform and complementary policies will be important to their attainment of external viability and successful integration into global trade and financial markets.

References

Bhagwati, Jagdish N., and T.N. Srinivasan, 1999, "Outward-Orientation and Development: Are Revisionists Right?" Available via Internet: http://www.columbia.edu/~jb38/Krueger.pdf

Ben-David, Dan, 1993, "Equalizing Exchange: Trade Liberalization and Income Convergence, Quarterly Journal of Economics; 108:653-79 (August).

Bredenkamp, Hugh, and Susan Schadler, eds., 1999, Economic Adjustment and Reform in Low-Income Countries: Studies by Staff of the International Monetary Fund (Washington: International Monetary Fund).

Dollar, David, 1992, "Outward-Oriented Developing Economies Really Do Grow More Rapidly: Evidence from 95 LDCs, 1976-1985," Economic Development and Cultural Change, Vol. 40 (April), pp. 523-44.

Ebrill, Liam, Janet Stotsky, and Reint Gropp, 1999, Revenue Implications of Trade Liberalization, IMF Occasional Paper No. 180 (Washington: International Monetary Fund).

Edwards, Sebastian, 1993, "Openness, Trade Liberalization, and Growth in Developing Countries," Journal of Economic Literature, Vol. 31 (September), pp. 1358-93.

----, 1998, "The Political Economy of Unilateral Trade Liberalization: The Case of Chile," NBER Working Paper 6510: (Cambridge, Massachusetts: National Bureau of Economic Research).

Frankel, Jeffrey A., and David Romer, 1999, "Does Trade Cause Growth?" American Economic Review, Vol. 89 (June), pp. 379-99.

Goldsbrough, David, and others, Reinvigorating Growth in Developing Countries: Lessons from Adjustment Policies in Eight Economies, 1996, IMF Occasional Paper No. 139 (Washington: International Monetary Fund).

International Monetary Fund, 1987, Monitoring of Structural Adjustment in Fund-Supported Adjustment Programs, (Washington, EBS/87/246, 11/20/87).

----, 1985, "Trade Policy Issues and Developments-Supplementary Material" (Washington, SM/85/60).

----, 1987, "Monitoring of Structural Adjustment in Fund-Supported Adjustment Programs," (Washington, EBS/87/246, 11/20/87).

----, 1991, "The World Trade System-Developments and Issues," (Washington, SM/91/196).

----, 1994, "Comprehensive Trade Paper - Trade Reforms in Fund-Supported Programs," (Washington, SM/94/192, Supplement 2).

----, 1997, "Trade Liberalization in Fund-Supported Programs," (Washington, EBS/97/163).

----, 1999, "The Cross-Border Initiative in Eastern and Southern Africa," (Washington, SM/99/177).

----, forthcoming, "Structural Conditionality in Fund-Supported Programs" (Washington).

Michalopoulos, Constantine, 1999, "Trade Policy and Market Access Issues for Developing Countries: Implications for the New Millennium Round," Policy Research Working Paper 2214, (Washington: World Bank).

Rodriguez, Francesco, and Dani Rodrik, 1999, "Trade Policy and Economic Growth: A Skeptic's Guide to the Cross-National Evidence," NBER Working Paper 7081 (Cambridge, Massachusetts: National Bureau of Economic Research).

Sachs, Jeffrey D., and Andrew Warner, 1995, "Economic Reform and the Process of Global Integration," Brookings Papers on Economic Activity, Vol. 1 (April), pp. 1-118.

World Bank, 2000a, Global Economic Prospects and the Developing Countries 2001 (Washington, 2001).

----, 2000b, Reinventing Adjustment Lending: Retrospect and Strategy, draft.


1 See "Monitoring of Structural Adjustment in Fund-Supported Adjustment Programs"
(EBS/87/246, November 20, 1987) for a review of structural conditionality during the period 1979-87 and "Structural Conditionality in Fund-Supported Programs," (forthcoming) for a review of structural conditionality during 1987-1999.
2 See Articles of Agreement, Article I, sections (ii), (iv), and (v).
3 The liberalization of trade in services, domestic regulatory reforms that affect trade, and contingent protection (antidumping and countervailing duties) are beyond the scope of this paper; as traditional trade barriers (border measures) decline, increased attention is being paid to these areas, which have important consequences for trade and investment performance.
4 The role of trade liberalization in supporting the objectives of Fund-supported programs has been extensively discussed elsewhere (see for example, "Trade Liberalization in Fund-Supported Programs," (EBS/97/163, 8/27/97).
5 There is a large body of cross country evidence that trade liberalization and trade openness increase the growth of income and output. See, for example, Sachs and Warner (1995), Dollar (1992), Edwards (1993, 1998), Ben-David (1993) and Frenkel and Romer (1999). Rodriguez and Rodrik (1999) challenge much of the cross-sectional evidence on technical grounds, but there is much less challenge to the findings of many individual country studies which show that well designed and implemented trade reforms have been a crucial element of long term sustainable growth (Bhagwati and Srinivasan, 1999).
6 For the importance of supporting policies for the effectiveness of trade reform, see Goldsbrough and others, Reinvigorating Growth in Developing Countries: Lessons from Adjustment Policies in Eight Economies, IMF Occasional Paper 139, (Washington, D.C., 1996) and Ebrill and others, Revenue Implications of Trade Liberalization, IMF Occasional Paper 180, (Washington, DC, 1999).
7 For the links between structural reform and growth and, in particular, the role of trade reform, see Economic Adjustment and Reform in Low-Income Countries: Studies by the Staff of the International Monetary Fund, (Washington, D.C., 1999).
8 See, for example, previous studies in EBS/97/163; "Comprehensive Trade Paper - Trade Reform in Fund-Supported Programs," (SM/94/192, Supplement 2, 7/20/94); and "The World Trade System - Developments and Issues," (SM/91/196, 9/18/91).
9 See Box 2, which describes how trade restrictiveness is defined using the Fund's trade restrictiveness index (TRI). At present, the Fund's Trade Policy Information Database includes TRI information for the period 1997-2000 for 178 of the Fund's 183 members.
10 For further details, see the World Bank's Global Economic Prospects and the Developing Countries 2001.
11 Four types of structural conditions-performance criteria, prior actions, conditions for the completion of reviews, and structural benchmarks-are considered. For purposes of analysis, data on prior actions and conditions for completion of reviews are combined into one category and referred to in the subsequent text, charts, and tables as prior actions. Adding up the various types of conditions is not without problems because of the different roles they play in program monitoring and the approval or continuation of Fund financing.
12 For details of this survey, including the criteria used by country teams to judge the importance of measures for program objectives, see Appendix II of "Structural Conditionality in Fund-Supported Programs."
13 EBS/97/163 and "Comprehensive Trade Paper - Trade Reform in Fund-Supported Programs," (SM/94/192, Supplement 2, 7/20/94).
14 This performance criterion was introduced when it became apparent that the same measure implemented as a prior action in the context of the previous program had been reversed.
15 Only 9 of the 24 countries included in the sample had completed their Fund-supported programs as of end-October 2000. Of the 24 programs, 3 went off track, with two of them replaced with new Fund-supported programs.
16 The paper on "Structural Conditionality in Fund-Supported Programs," (Table V.1) reports that the implementation record of trade measures was well above average of all structural measures covered in that study.
17 See "Reinventing Adjustment Lending: Retrospective and Strategy," draft, 2000, page iii.
18 The share of economic management conditions focused on reforms in trade policy declined from 53 percent in 1980-88 to 17 percent in 1998-00, while fiscal policy reforms increased from 10 percent to 54 percent. This is consistent with the findings of the Structural Conditionality in Fund-Supported Programs (Table IV.1) that the design of trade measures received less inputs from the World Bank than most other structural measures.
19 For further details, see "The Cross-Border Initiative in Eastern and Southern Africa," (SM/99/177, July 16, 1999). In addition to the Bank and the Fund, the co-sponsors of CBI were the European Union and the African Development Bank. The CBI has now been reconstituted as the Regional Integration Facilitation Forum (RIFF), which is henceforth to be largely country-led.
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