It is clear that the motivation of the architects of the new order after World War II was to lay down a broad code of international economic conduct that would minimize the scope for conflict arising out of the economic sphere. If this interpretation is correct, then it follows that, as far as the IMF is concerned, assuring the observance of the code of conduct must represent its central responsibility. Universal consensus that this IMF surveillance is the key priority is of the utmost importance for the institution's ability to fulfill such a crucial responsibility. Experience and observation suggest it is by no means clear that consensus among the membership always exists, however, and therefore the most stimulating, yet very difficult, challenge facing the institution is precisely how to attain and maintain such a consensus. In this endeavor, the IMF confronts a challenge similar to that underlying Pascal's quotation at the outset of the paper. This is because, like Pascal's justice, there is (so far) little strength behind the IMF's exercise of international surveillance, and hence it is often perceived as helpless. Pascal has often been paraphrased in statements that a law without force is impotent. And international laws typically carry limited force. As a result, this lack of force is frequently replaced by the sheer weight of the strongest (from an economic and other standpoints) members of the community. The challenge for the IMF, in order to escape Pascal's critique, is to develop the means of replacing members' strength with the rule of law.
A necessary ingredient in the effort to build consensus for the international equivalent of the rule of law is a common vision of the scope of surveillance. To this end, a clear commitment to the mandate given to the IMF by the Articles of Agreement seems required at all times, most particularly to those aspects that apply when the world economy and the degree of cohesion in the membership exhibit a measure of vulnerability. In this context, it should be noted that although surveillance was always at the core of the IMF's activities, the term, as such, did not appear in the international economic vocabulary until after the abandonment of the par value system. This is because until then the term would have been redundant, since the regime was to a significant extent self-enforcing. Since then, however, the rules and parameters of international behavior have become less transparent, and consequently a need has developed for the function of surveillance to become explicit as the vehicle to monitor the exercise of discretion.
The fundamental consideration to bear in mind when examining the concept and scope of surveillance is its international character. This can be seen from a two-dimensional perspective, encompassing on the one hand the obligations undertaken by members when they subscribe to the code of conduct, and on the other the obligation of the institution to oversee their observance.22
Although no hard and fast borders can be drawn on the domain of economic policy, the international character of surveillance does imply that its central focus is on external variables. It is with regard to these external variables that members have undertaken specific obligations. Within the Bretton Woods system, the basic premise was that rates of exchange among national currencies were a matter of legitimate "international concern" and, as such, "subject to international scrutiny."23 Since the abandonment of par values, the notion that exchange rates remained a subject of international interest was carried over into the amended Articles of Agreement, which call for the IMF to "exercise firm surveillance over the exchange rate policies of members."24
Broadly speaking, the focus of concern to the international community and, correspondingly, the focus of obligation on the part of members, centers on the point and the terms of intersection of their national economies with each other--that is, the balance of payments, the exchange rate, and the exchange system. This interpretation highlights the notion that balance of payments equilibrium is fundamental to a country's international obligations.
From an institutional standpoint, an appropriate definition of balance of payments equilibrium would be a sustainable external payments position at a realistic exchange rate in a setting free of exchange and trade restrictions.25 Though such a definition is straightforward from a conceptual standpoint, providing operational content to such a definition can be a complex endeavor. This difficulty is suggested when terms like "sustainable" and "realistic" are used to qualify the external payments position or the exchange rate. Yet a measure of operational content can be derived from the meaning of the code of conduct itself--that is, from the commitment to avoid restrictions on current payments and discriminatory currency practices, as well as from the agreement to promote a stable system of exchange rates and avoid manipulating them to prevent balance of payments adjustment or gain from unfair competitive advantage. Such specific operational content has been spelled out in the Executive Board document and decision on surveillance over exchange rate policies, which focuses on intervention and external funding (e.g., borrowing and lending) policies and on the restrictions or incentives applicable to current and capital transactions.26
In essence, the exercise of surveillance entails assessing the ability and willingness of countries to maintain their international affairs in an orderly manner. This requires evaluating the soundness of the balance of payments or, to put it differently, of the country's skill in keeping within the budget constraint it faces vis-à-vis the rest of the world. The endeavor calls for a judgment not only about the economy's overall external payments position but also about the appropriateness of the structure of those payments--whether the global external constraint (the balance of payments) is being respected (the adequacy of the global payments position) and whether it is being respected on a durable basis (the adequacy of the underlying structure of external payments). Such a judgment requires in-depth analysis of the current account balance, capital flows, and international reserve management. In turn, it requires the formulation of views on the exchange rate and the exchange system, that is, on members' compliance with the commitments laid out in the code of conduct. Thus, although the focus of surveillance is on external economic variables, because of the nature of the required assessments, its scope must extend beyond those variables.
The comprehensiveness in the scope of surveillance--even if the function itself is confined to the area of external variables--and the interdependence of national economic policies pose another difficult challenge to the exercise of this institutional responsibility. There is no definite frontier to distinguish the external from the internal dimensions of an economy. In order to assess the viability or appropriateness of an external payments position, an evaluation of the stance and mix of domestic policies is unavoidable. Accordingly, the obligations undertaken by members must encompass the field of domestic economic policy by virtue of the inseparability of economic linkages.27
The challenge is to identify the domestic policy areas that influence primarily the economy's external position, so as to provide the basis for a general consensus among the membership that they are of legitimate international concern and properly belong within the scope of surveillance. Such consensus is necessary, of course, because the code of conduct does not provide for surveillance in areas where the actions of a member do not affect the interests of other members.28 Because of the pervasive nature of economic linkages, judgment is required in drawing a line between domestic policies that have a clear bearing on the external sector and those that do not. This is a difficult judgment to make in itself, but one that is even more difficult when the boundary it seeks to outline is not immutable over time. Over time, however, a consensus has developed in the membership about important areas for international policy surveillance. The focus of the discussion that follows will seek to trace the evolution and current status of that consensus.29
The interdependence between the balance of payments, the exchange rate, and the exchange system, on the one hand, and the stance of domestic macroeconomic policy or aggregate demand management, on the other, was well established relatively early in the experience of the IMF. Accordingly, member countries have long endorsed the need for the IMF, in its exercise of surveillance, to appraise the appropriateness of domestic fiscal and monetary policies. In fact, during the period of the Bretton Woods order, a conventional but important distinction was drawn on what could be termed stabilization (which fell within the purview of the IMF) and development (which represented the domain of the World Bank). Broad classifications along economic policy lines were based on this distinction, and it could often be heard that in dealing with stabilization problems, the IMF focused on macroeconomic, or aggregate demand, management; in contrast, the World Bank, interested mainly in development issues, tended to concentrate on microeconomic, or aggregate supply and production, management. There were, of course, overlapping areas between these two institutional domains, which reflected the virtual impossibility of drawing firm borders between them. In fact, microeconomics and supply responses affected the process of stabilization just as much as macroeconomics and aggregate demand influenced the process of development.30
Broadly speaking, however, the distinction of institutional responsibilities generally reflected the evolution of the international economy during the Bretton Woods period. A strong case can be made that the rules prevailing with the par value system helped identify the extent to which domestic policies conflicted with members' international commitments, thus also helping identify the boundaries of institutional responsibility. The shift from policy rules to policy discretion that followed the Bretton Woods order affected the links between the domestic and external economic policy domains and brought to the forefront the question of the appropriate boundaries for institutional action. In this process, the existing understandings concerning institutional policy assignments and responsibilities were inevitably influenced.
New distinctions were introduced to supplement or replace the old ones. In the IMF, the emphasis moved from stabilization toward adjustment, which encompassed the features of stabilization but went beyond it by reaching into the structure of the economy. In the World Bank, although development retained its importance, attention moved toward so-called structural adjustment. While containing some of the aspects of development, structural adjustment reached back into the broad policy environment in the economy and thus seemed to include some elements that were prerequisites for development. In fact, it very much appeared as if the process of economic evolution encompassed a number of successive and progressively complex phases: stabilization, adjustment, structural adjustment, development, and growth. Institutionally, the specific roles coalesced toward stabilization-cum-adjustment for the IMF and development-cum-structural reform for the Bank. An overlapping interest in structural adjustment and growth developed as both of them, it could be claimed, had a bearing on the balance of payments and investment flows. The areas of common interest came even more to the front with the development of external debt strategy, in which structural adjustment, reform, and growth acquired particular importance.31
At present, events in the international economy have paved the way for a new subject of interest, which may be called the economics of reform. This includes the efforts of a number of Central and Eastern European countries as well as the former Soviet republics to move their economies from central planning to a market-based system of economic organization. The subject raises a question regarding the role of surveillance in the context of reform, particularly since the international community most assuredly has an interest in the effectiveness of the process under way.
In sum, even if there is consensus that economic surveillance should properly focus on external variables, its practical implementation requires paying attention to domestic policies. Therefore, surveillance is unlikely ever to become a straightforward exercise. Its complexity derives from the close interdependence of economic policies, both nationally and internationally, and it calls for increasingly fine judgments in drawing the boundaries between the national and international domains.
There are three essential principles in the operating method of the IMF that, like its functions, provide an important basis for the institution's uniqueness. There is, first,the principle of universality, according to which IMF membership is all-encompassing and does not normally establish distinctions among countries or groups of countries. 32 Also fundamental is the principle of uniformity of treatment, according to which the IMF is expected to act without discrimination: treatment of members must remain equal and comparable, allowing for no preferences in favor of any country or group of countries. Judgment is required in this area, as well, because uniformity cannot be interpreted to mean the provision of equal treatment regardless of circumstances; on the contrary, uniformity must allow room for taking account of unequal circumstances.33 The third basic principle, political neutrality, aims at keeping the attention of the IMF focused on international issues. It calls for a permanent effort to maintain an appropriate balance between the interests of individual members and those of the membership as a whole. Key to the IMF's observance of this principle is a continuous focus on external economic variables or on the point and terms of intersection of national economic policies and national economies.
The actual application of these principles is tempered in practice by the exercise of discretion. Such latitude is allowed for in a fourth principle of operation of the IMF, flexibility in its relations with members. An appropriate mix of flexibility--sensitivity to a member's circumstances--with universality, uniformity, and neutrality--the common aspects of membership--is required for a sustained balance between national and international interests.
A singular characteristic of the IMF has been its ability to avert a conflict of its basic operational principles--of universality of membership and uniformity of treatment--with the diversity that prevails among countries. The solution to this potential conflict has been to acknowledge that, from an economic standpoint, member countries are not equal and, correspondingly, to provide them with different weights in the institution. This economic inequality, the sharpest and single most important difference among member countries, underlies the different quotas (subscriptions) and voting powers that countries have in the institution.34
The quota share is related broadly to the economic and financial position of members in the international economy, and it provides the basis for determining and measuring the rights and obligations of membership. In other words, the rights and obligations of members are scaled by their respective economic and financial size. The original intent was to keep rights in line with obligations and both of them commensurate with the economy of the member. In this manner, some potential difficulties that could arise from the operational principles were resolved. For example, implementing the principle of universality was clearly eased by the differentiation in country weights. Though this differentiation can (and does) give rise to delicate issues in the process of determining concrete shares, it also facilitates the membership's willingness to accept new members. Furthermore, the universal acknowledgment of diversity among countries also serves as a basic guidepost for exercising uniform treatment by helping to provide a measure of equality in unequal situations.
From the standpoint of surveillance, a number of inferences can be drawn from the diversity recognized within the membership. A clear responsibility of all members, regardless of their individual weights in the institution, is to observe the commitments they undertake in subscribing to the code of conduct. This is equivalent to keeping their own economies in good order and in line with the prescriptions of the Articles of Agreement. Yet the very acceptance of differences among economies carries as a corollary the acknowledgment that the scope and influence of national economic policies also vary.
For countries with economies relatively small in size, the international environment in which they operate may be considered exogenous. The essence of their commitment is to keep balance in their own economies and respect the code of conduct. Surveillance in these cases appraises the appropriateness of domestic economic policies--that is, it assesses the individual country's observance of the rules of the game in the context of the existing external environment.
For countries with relatively large economies, the international setting cannot be considered as a given, immovable ambient. On the contrary, the external environment reflects to a significant extent the national economic policy decisions those countries make. The nature of their international commitment, therefore, must include concern for the consequences of their actions in relation to the system at large. Beyond assessing the appropriateness of national policies in isolation, the exercise of surveillance must encompass consideration of the extent to which those policies contribute to a stable international setting.
There is, then, a fundamental rationale for the establishment of differentiation in the exercise of surveillance. Indeed, such differentiation is necessary to ensure both symmetry and uniformity of treatment among members. This is yet another prime example that realistic acknowledgment of inequality can be the best means for dispensing equality.
Much progress has been made in the IMF toward developing policies and procedures that take account of the systemic and nonsystemic dimensions of members' domestic economic policies. From the outset, it was well recognized that the fundamental aim of surveillance was to assist in attaining proper balance in country economic policy formulation between national and international considerations. It was generally accepted that each country would be the best judge of its own national interests; but as far as international interests were concerned, the IMF, as representative of the whole membership, would be the best forum to judge the extent to which they were being protected.
The practice of regular, periodic (virtually, annual) consultations with each member to appraise economic policies was developed early in the life of the institution. During the Bretton Woods period, observance of the rules broadly ensured the stability of the system as a whole. Accordingly, no particular emphasis had to be given explicitly to systemic considerations--except, of course, for such global issues as the adequacy of international liquidity. At that time, bilateral consultations between the IMF and each country constituted the central instrument of surveillance.
The move to the current regime, by which members can opt for the exchange arrangements of their choice, provided less assurance that such bilateral consultations, focusing only on individual member policies, would be sufficient to ensure stability to the global economic environment. The effects of national policies on the international economy, as well as the consequences of interdependence among those national policies, began to receive increasing attention. As a result, the scope of bilateral discussions with large countries was broadened to explicitly include international aspects in the annual consultations. The institution also started to devote greater efforts to global assessments of the international economy by conducting World Economic Outlook discussions, which are undertaken regularly in the Executive Board. Country-specific analyses provide critical input for these discussions, but their focus is global, centered on interdependence and aimed at appraising how appropriate the mix of national policies--particularly those of the larger members--is for the stability of the system at large. These discussions supplement the bilateral aspect of surveillance by adding a multilateral dimension in order to discern global trends and their causes. They are the main instrument of multilateral surveillance but not the only one. Additional global overseeing by the institution takes the form of examinations of specific aspects of the international scene and their linkages to country policies (e.g., issues relating to capital flows, international policy coordination, foreign indebtedness, and international liquidity).35
At present, an additional challenge confronting surveillance is posed by the growing importance of regional country groupings. The clearest illustration of this is provided by the European Community, where economic integration is proceeding with clear implications for the design and implementation of national economic policies in the participating countries. In this Western European context, neither the bilateral country consultations nor the broad World Economic Outlook discussions fully capture the essence of the regional interrelationships.
In sum, surveillance involves policy discussions between the IMF and individual members as the basis for the formulation of an international community view and assessment of specific country policies. In addition, it encompasses regular examinations of the state of and prospects for the world economy at large, or of particular aspects of the international economic scene. The end-purpose of these various activities is to promote consistency of national policies and aims, to highlight interdependencies, and to point toward a well-balanced and fair assignment of policy responsibilities among members.
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