The changing circumstances in the world economy, together with the variations in the international code of conduct, obviously influence the functions of the IMF, which is mandated to oversee the observance of that code. Ability and willingness to show an appropriate measure of adaptability are essential to foster cohesiveness among member countries, particularly when such cohesiveness weakens. On the other hand, respect for the code of conduct must be clearly maintained, and that endeavor often requires drawing a line at how far adaptability will be allowed to go. Thus, a measure of rigidity is also needed to ensure order in the system at large. These considerations apply to the three fundamental functions of the IMF.
The fundamental changes under way in the international economy and the modifications in the code of conduct, with their emphasis on national discretion, may have stimulated the emergence of competing settings for surveillance beyond those that already exist among the various established international institutions (IMF, GATT, OECD, BIS). In contrast to the Bretton Woods era, which was characterized by the predominance of a single large economy, present influence over the world economy is distributed among several poles.58 These changes inevitably affect the principles and the procedures of surveillance.
The central dimension of the implementation of IMF surveillance so far has been basically geographical, that is, country-specific. In its origins, surveillance (Article VIII and Article XIV consultations) was based almost exclusively on discussions between the IMF and each member; although it involved the membership in the Executive Board discussion of individual country's policies, the process was in essence bilateral. With expansion of the scope for discretion, national policy interactions in the international economy--through leakages, spillovers, or externalities--acquired growing importance, but they could not be exhaustively examined in a bilateral surveillance context. Thus, the IMF developed its World Economic Outlook review as the main vehicle for monitoring policy interactions and systemic developments. Still, the dimension of this initiative remained basically geographical, and it focused on a country-specific or country group-specific standpoint, even though its scope was multilateral.
A number of avenues suggest themselves to fill certain gaps in monitoring, which escape or transcend both the bilateral and multilateral dimensions. A need is developing for the conduct of regional surveillance, in view of the advances made toward economic integration in Europe and other areas. The need is created by the closer interdependence among the European economies, and by the constraints on national economic policy set by such pathbreaking events as the liberalization of capital flows among major members of the EMS and the drive toward a single market in Western Europe as a whole. These developments call for supplementing the current exercises of bilateral and multilateral surveillance with discussions on regional issues important from both a regional and a world standpoint. An example of relevant intra-regional issues is the need for developing a degree of flexibility toward domestic national economic policies in the European region, where exchange rate flexibility is largely given up by participation in the EMS. And an illustration of an issue of broader international interest is provided by trade, where policy is already formulated at the European Community level.
Another specific avenue that suggests itself to buttress surveillance in its bilateral, regional, and multilateral aspects calls for supplementing the country or country group-specific perspective with a policy-specific or problem-specific approach. This would entail a cross-country analysis of policy issues that are particularly relevant for the international economy as a whole and yet reflect mainly the national policy stance of its larger members. It might also extend to analysis of economic problems that affect in common particular groups of countries. Some progress has already been made in this regard by institutional studies of a general nature, covering subjects such as policy coordination and international debt issues.59
In order to move in these various directions, of course, procedures that are simple in character and offer a prospect of ready acceptance by the membership must be developed. Procedures that rely on the array of instruments already at the disposal of the institution can help in this regard. For example, the final statements of consultation missions, which aim at briefly distilling the essence of the relevant policy issues discussed, could serve as the basis for the preparation of a summary policy paper on issues involving several members, for discussion with appropriate officials representing those members. A brief report could then be prepared for the Executive Board's information or for discussion within the Board at large or, if necessary, within appropriately established Executive Board Committees.
Two important benefits would come from the introduction of procedures such as these. One would be to bring within the purview of the IMF membership as a whole issues of interest that are currently discussed within narrower forums, such as the Group of Five (France, Germany, Japan, the United Kingdom, and the United States, which began meeting in 1973 to discuss issues of common interest), the Group of Seven (composed of the Group of Five plus Canada and Italy), and the Group of Ten (consisting of the Group of Seven plus Belgium, the Netherlands, and Sweden). The procedures need not preclude these forums, but linking them to the IMF would strengthen the legitimacy of the surveillance process and of the institution itself. Another important advantage is that procedures involving the full membership strengthen the rule of law and promote observance of the code of conduct. This is because surveillance exercised within limited groups of large countries represents only an extension of the principle of hegemony of a single country passed on to the group. Broadening participation to the whole membership places the rule of law in the role of the hegemon, thus strengthening the legitimacy and the stability of the established order. Here, then, is another opportunity to avoid falling into the trap outlined in Pascal's quotation.
The evolution of the world economy and of the code of conduct, as well as the supplementary aims that accompany balance of payments objectives, have also influenced the exercise of IMF conditionality. The institution continues to focus on macroeconomic management, but growing emphasis has been placed on efficiency issues, microeconomic measures, and structural policies. Furthermore, with the reforms in previously centrally planned economies under way, it may be necessary for conditionality to break new ground, extending to reform policies and the build-up of market-supporting institutions.60
Policies regarding financial assistance will have to be adapted to meet new needs and circumstances. Rather than focusing exclusively on the amount of resources to be made available, the institution can exercise flexibility with regard to the terms of repurchase. It would be possible for both the amount and the maturity of IMF resources to be adjusted according to the specifics of the country in need, possibly with the proviso that the longer the maturity term, the more limited the access, and vice versa. The scope of such trade-offs between the scale and the maturity of IMF financial assistance would need to be limited by clear maxima so as to safeguard the monetary character of the institution. It has already been the general practice in the institution to differentiate in the scale of access to IMF resources, subject to a broad set of norms such as the degree of members' needs and strength of their adjustment efforts. This access policy, based on judgment within norms accepted by the membership, represents an instance of the pragmatic blend of the principles of flexibility and uniformity of treatment on which much of the institution's legitimacy ultimately depends. A similarly supple approach could be applied to the maturity of IMF resources and would permit substantial simplification of existing financial facilities in the IMF.61
Attention should also be given to the cost of using IMF resources. There is a strong case for setting a below-market cost for--and yield of--IMF resources, thus turning the institution back to its role of a cooperative lending institution, based on quotas, and away from being a financial intermediary, dependent on borrowing. Actually, for a long period of IMF history, levies on its financial assistance were generally unrelated to world market interest rates. Separate from normal budgetary concerns, the structure of IMF charges was designed to deter members from excessive or prolonged use of the institution's resources: the structure of charges rose with the amount and duration of use of IMF resources.62 The institutional aim was to encourage countries in balance of payments need to resort to the IMF for financial assistance in relatively limited amounts and for relatively short periods of time. An immediate corollary of this aim is that countries were expected to seek access to IMF resources at an early stage of their balance of payments problems.
In time, the rate of remuneration on creditor positions in the institution moved upward, and with quotas declining relative to the world economy and, most particularly, in comparison with members' balance of payments needs, the IMF began to supplement its general resources by borrowing from members at market-related interest rates. It became inevitable that charges for the use of its resources had to rise pari passu, as the level and complexity of the schedule of charges increased with the cost of resources to the institution and with the growing variety of its financial facilities.
Needless to say, the IMF can fulfill its role whether it decides to charge and pay market interest rates or deems it appropriate instead to conduct financial operations with members at rates below those prevailing in world capital markets. The closer the IMF's rates of charges and remuneration are to market interest rates, of course, the closer the resemblance between the institution and other traditional lenders. However, as long as members place visible importance on the IMF's role as the overseer of an international code of conduct, such close resemblance need not detract from the unique distinguishing character of the institution.
If, on the other hand, the cooperative aspect of the IMF is to be stressed, the case for below-market rates of charge and remuneration remains strong. In fact, many of the policies and procedures of the institution actually presuppose its cooperative nature and its primary surveillance role. This is, for example, clearly illustrated by the guidelines on conditionality, which, inter alia, encourage members to seek IMF assistance "at an early stage of their balance of payments difficulties or as a precaution against the emergence of such difficulties."63 Not only do below-market (concessional) rates of charge provide an incentive for members to resort to the IMF--indeed, this was a key rationale behind the original structure of charges--but in addition, by helping to keep external imbalances from being unduly neglected through early access to the IMF, they also contribute to an improved observance of the code of conduct, the essential aim of the surveillance responsibility of the institution.
In sum, the unique character of the IMF does not depend on whether or not its financial operations are conducted on market-related or concessional terms. Either alternative or a combination (e.g., differentiated market and concessional terms, as presently in effect) is compatible with the institution's purpose of lending resources to support the observance of a code of conduct. But the more IMF transactions are conducted at market prices on competitive terms, the more the IMF's fulfillment of its overseer role will depend on the respect accorded to the code of conduct by the members that lend to the institution, as opposed to those that borrow from it. Below-market rates of charge should enhance the likelihood of appropriate behavior on the part of users of IMF resources. And by helping to ensure smooth and predictable adjustment processes and thus protecting the liquidity and general quality of the IMF's portfolio, members lending to the institution are compensated for receiving below-market rates of remuneration. Whereas market-related rates of charge lower the incentive of borrowers to resort to IMF resources, IMF lenders, on the other hand, benefit from market rates of remuneration, and symmetry would require that they provide an appropriate incentive to borrowers. What better way is there for this than to demonstrate by example the benefits of observance of the code of conduct?
A distinct and pervasive theme in the paper has been the desirability of restoring or reinforcing the character of the IMF as a cooperative entity. An effort in this direction has implications for all the activities of the institution. A particularly important area relates to the central role played by quotas, which are and should remain the normal source of institutional resources and influence all aspects of activity in the IMF. Quotas are, or should be, the scale factor for members' rights and obligations, and they underpin the exercise of both surveillance and conditionality.
The linkage of quotas to surveillance and conditionality follows the same logic as the relationship between the latter two. If surveillance is effective, the need to exercise conditionality will be relatively limited. This means that under normal circumstances IMF resources are liquid, and the institution will never be "loaned up," as financial intermediaries typically are. Nevertheless, the quota base must be kept commensurate with the size of the world economy, since it is the relevant scale factor of potential need. Only in this context can symmetry across the membership be achieved.
Normally, therefore, the institution holds liquid assets, and its quota base is unencumbered, that is, largely unused. An unquestionably liquid quota base is a necessary condition for members to place an important portion of their reserves in the IMF. 64 Indeed, it may well be that these considerations provide the necessary ingredients for refocusing the IMF's role upon surveillance and for easing members' decisions on quotas, which, according to the Article of Agreement, must be adjusted at intervals of, at most, five years. These considerations would redirect the institution toward its original role of a cooperative entity and strengthen the perception that the liquid nature of its portfolio is indicative of a normal state of affairs. The logical corollary of viewing positions in the IMF equivalent to countries' international reserves would be to manage the IMF's portfolio as countries manage their reserves, and one of the fundamental principles of such management is the preservation of liquidity.
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