A central idea underlying the establishment of the IMF was the belief that the promotion of international monetary cooperation would be the best means to further a number of other economic objectives that were seen as essential for the welfare of the members of the institution. These objectives were explicitly listed in Article I of the IMF's Articles of Agreement, and they include: the expansion and balanced growth of international trade in a setting of stable and orderly exchange arrangements within a multilateral system of payments free of exchange restrictions. In such a setting, the IMF would promote the free exchange and growing flows of international trade that in turn would help achieve high levels of employment and real income, as well as develop the productive resources of all members. To these ends, the charter of the institution also envisaged the provision of financial resources to members in balance of payments difficulties6 as a means of helping in their correction and thus reducing the scale and duration of external imbalances. The fundamental purpose of the institution would be to foster, and monitor the observance of, a code of conduct in international exchange and financial affairs on the part of member countries. In subscribing to the Articles of Agreement, members undertake the commitment of conforming to the set of norms of behavior they contain. 7
The promotion of international economic cooperation is a permanent feature and the "raison d'etre" of the IMF as an institution. But the nature of its practical implementation has changed and will likely continue to change over time. The variations are often linked to developments in the international economic environment, but they also reflect the degree of international cohesion that countries are willing to support and are capable of maintaining.
At the inception of the IMF in the wake of World War II, the international environment was favorable to the notion of economic cooperation as a means of preventing a repetition of the turbulence of past decades. This was reflected in the letter and spirit of the original Articles of Agreement, which centered on the commitment of member countries to a system of par values--that is, to a regime of fixed exchange rates among their respective currencies. Within such a regime, the Articles contained a detailed code of conduct that called for currency convertibility and freedom from exchange restrictions. The essential characteristic of what may be called the Bretton Woods order 8 was that exchange rate relationships, rather than being within the domain of domestic economic policy, were to be governed by a set of internationally agreed rules. Thus, member governments eschewed the use of the exchange rate as either an instrument or an outcome of economic policy and entrusted the IMF with the responsibility of ensuring their observance of the exchange rate rules. 9
The aspect I want to underscore in this type of internationally agreed arrangement is its basically self-enforcing nature. As has often been noted, international exchange rate rules can be seen as a substitute for coordination of national economic policies. In a manner of speaking, "rules-based" systems render domestic policymaking, and with it international policy coordination, endogenous. This is because, when policies become incompatible with the requirements of the system, the rules signal the need for and direction of the required policy adaptation in a typically unambiguous fashion.
There is, therefore, a standpoint from which it can be argued that "rules-based" regimes make policy coordination unnecessary: policy consistency is brought about by each country abiding by the agreed rules. In a deeper sense, however, such regimes are really characterized by a significant measure of actual (though ex ante) policy coordination. It is not coordination based on continuous bargaining among countries; rather, it is coordination based on their a priori willingness to adhere to mutually agreed norms of behavior and to constrain their domestic policies to the discipline imposed by those norms.10 Thus, the general philosophy underlying the Bretton Woods order was based on the widespread acceptance of an agreed set of rules, within which members were left free to determine their own policies. As such, the system could be described as an arrangement based on the recognition of national policy independence subject to the code of conduct.
But within the code of conduct, the Bretton Woods regime provided scope for national discretion on a variety of fronts. An important margin of flexibility could be exercised at the point of individual members' adherence to the rules of the system. The Articles of Agreement contained a provision for transitional arrangements that allowed countries to join the IMF even though their exchange systems did not yet conform to its prescriptions. In effect, the institution's aim was to promote sustained adherence to its basic charter, and in many instances this required time for domestic policy action to set the conditions that would permit an economy to establish a par value and liberalize its exchange system on a durable basis. Countries were also allowed to introduce restrictions for balance of payments reasons, provided that their use was deemed necessary and transitory. And par values could be changed to correct a fundamental disequilibrium in the balance of payments--hence, the description of the Bretton Woods par value system as a regime based on fixed, but adjustable, exchange rates.11
Thus, although Bretton Woods was a rules-based system, it provided scope for discretion on many fronts. There was a distinct and fundamental characteristic in this margin for discretion: it was international in nature. That is, the exercise of such discretion was subject to international scrutiny at the IMF. In effect, leeway had been provided for national flexibility in basically all areas covered by the code of conduct--the possibility of maintaining exchange restrictions in effect at the time of accession to the institution, the possibility of temporarily resorting to such practices later on, and the possibility of adjusting par values. All these options were considered matters of legitimate international concern, however. Consequently, though the options were available, members were expected not to undertake such actions unilaterally. The structure of the system was that rules were to be nationally agreed, but discretion was to be internationally supervised.
Much has been written about the reasons for the demise of the Bretton Woods regime of exchange arrangements, and there is no need to reiterate them here.12 In the early 1970s, the international economy moved from the Bretton Woods par value regime to a system of flexible exchange rate arrangements, which were introduced into the charter of the IMF by the second amendment of its Articles of Agreement adopted in April 1978. The practical implementation of international cooperation underwent changes as the abandonment of the Bretton Woods rules created a vacuum that required filling to ensure that the new system to be established took account of the international dimension. After a brief attempt to revive the rules (the Smithsonian agreement of December 1971), the efforts moved toward setting an institutional framework that would prove responsive to the conditions in the international economy as well as to the growing interest of member countries in pursuing domestic policy objectives on their own.
The Articles of Agreement, as amended in 1978, provide that members can adopt the exchange arrangements of their choice. This provision is supplemented by a prescription that firm surveillance over exchange rate policies will be exercised by the IMF under specific principles adopted for the guidance of all members. 13 In contrast to the Bretton Woods order, under which exchange rates had been subject to agreed rules, the exchange rates of a member became a variable clearly within the domain of its domestic economic policies, either to be used as a policy instrument or to be the result of those policies, or both. As a consequence, the fulcrum of the international system shifted from rules toward national discretion. And, correspondingly, the responsibilities of the IMF changed from those of a guardian of member countries' observance of exchange rate rules to those of an overseer of individual country exchange rate policy. The center of gravity had moved toward a discretion-based regime.
Yet, the fundamental aim of the institution--promoting international cooperation--remained unchanged, as did the nature of its responsibilities--appraising country economic policies from an international standpoint. In fact, the actual fulfillment of those responsibilities increased in complexity. To a large extent, this was because during the Bretton Woods regime there was an unambiguous anchor for purposes of economic policy assessment: the par value or the fixed exchange rate. From an international perspective, national economic policies that threatened the viability of the currency's par value would not be consistent with the country's external commitments and therefore would call for correction. While it was clear that a measure of judgment would be involved in formulating any such assessment, the scope for such judgment was constrained by the anchor. As such, the par value regime represented the simplest and most transparent indicator system for international economic policy surveillance.
In a setting where exchange arrangements are left to the choiceof countries, policy assessments need to rely on judgment to a larger extent. Not only should consistency between national policies and international commitments be established, but primary responsibility for policy adjustment among members should also be assigned, a task that can be controversial, if not contentious. This is because country interests differ. Views vary widely about the nature of the transmission mechanism from policy instruments to policy aims, and preferences differ with regard to the importance to be attached to different economic objectives.14
Clearly, in such an environment, the absence of a commonly agreed point of reference compounds the difficulties typically involved in any international policy surveillance. The amended Articles of Agreement acknowledge this difficulty when they prescribe that the IMF "shall adopt specific principles for the guidance of all members" with respect to exchange rate policies (Article IV, Section 3(b)). Those principles have been laid out in a 1977 document and decision of the IMF's Executive Board. 15 Apart from describing general norms for the overseeing of exchange rate policies, it contains guidance for members' conduct of such policies and outlines procedures for the institution's exercise of surveillance.16
The surveillance principles seek to draw a road map that lays down the constraints that apply to national discretion. In contrast with the Bretton Woods regime, under which nations agreed with the constraint and the international community administered discretion, the current system puts into effect exactly the opposite framework: members have underwritten the predominance of discretion, while the international community is left with the task of administering the constraints to which this discretion is to be made subject.
The activities developed by the IMF over time to further its aim of international cooperation can be classified into three broad categories of functions. First, a regulatory or jurisdictional function monitors members' exchange arrangements and their compliance with the prescriptions of the Articles of Agreement. The function encompasses the administration of the provision of transitional arrangements. It also includes the exercise of jurisdiction over members' imposition of exchange restrictions or introduction of discriminatory practices. Typically, the IMF's authority is exercised to approve deviations from the rules whenever they are needed and when a member intends to implement policies that provide an assurance that the departures from its obligations will be temporary.
This specific jurisdictional responsibility points to the need for the institution to probe beyond the area of exchange restrictions, strictly speaking, and to enter into the domain of members' economic policies. This is clearly required for the IMF to assess the need for deviations from the code of conduct and the temporary nature of these deviations. The IMF also has a mandate to foster exchange stability, which transcends the narrow area of restrictions as well. In addition, the institution has a policy advisory function which, coupled with the jurisdictional function, is embodied in its exercise of surveillance. This is an essential function for the promotion of international cooperation, and is conducted mainly through regular consultations with member countries.17
Finally, the IMF has a financial function to fulfill, which consists of providing resources to members on a temporary basis. The exercise of this function involves the administration of conditionality, a term that encompasses the understandings reached between the IMF and a member requesting financial resources from the institution about the policies the member will pursue in order to render temporary the need for such institutional support.18 Conditionality ensures that IMF resources will be made available for buttressing efforts by members to resolve their balance of payments problems in ways that do not contravene the code of conduct or endanger the liquidity of those resources and thus impair other members' potential access to IMF support.
There is a well-defined common thread that binds together all the activities of the IM F: the promotion and safeguarding of an international code of economic conduct. Although differences can be found among the functions of the institution, all its activities are addressed to the same ultimate objective--that is, the observance of the norms of behavior agreed by the membership. The nature of those norms may vary and has, in fact, varied over time with respect to the weight they lend to rules versus discretion, but the fundamental responsibility of the IMF remains invariably focused on promoting their observance and ensuring their protection. The IMF is primarily a surveillance institution, and its other activities derive their legitimacy from the surveillance mandate laid out in the Articles of Agreement.
In addition to being the common thread running through all IMF activities, surveillance, or, more generally, the overseeing of an international financial code of conduct, is the responsibility that invests the institution with its unique character. This is not to suggest that international economic surveillance is not carried out anywhere else.19 But the uniqueness of IMF surveillance lies in its well-defined scope (exchange transactions) and the universal character of its membership. Typically, other forums where surveillance is conducted in some modality are either more limited in membership (the Organization for Economic Cooperation and Development (OECD),20 European Community, Bank for International Settlements (BIS), and various groups of developed and developing countries, including summits21) or they focus on different subjects. (For example, trade is supervised by the General Agreement on Tariffs and Trade (GATT) and the OECD, investment and export credits by the OECD, and banking sector issues by the BIS.) Thus, in these other forums either the mandate itself is relatively narrow, or, where the mandate is broad, as with trade, the universe over which it extends is relatively limited.
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