The fundamental theme of this paper has been the proposition that the IMF is primarily a surveillance institution. All other institutional functions and responsibilities derive their legitimacy from surveillance, which gives the IMF its uniqueness among international agencies.
The essential unity of the institution's responsibilities lies in the relationship between surveillance and conditionality. Their respective effectiveness and mutually reinforcing nature are indispensable for the IMF to be able to fulfill its mandate. Conditionality not only presupposes but also contributes to the effectiveness of surveillance. As in many other areas of economics, surveillance and conditionality exhibit the characteristics of a razor's edge-type of relationship. Surveillance, when well conducted at the systemic and individual country levels, tends to avert the emergence of balance of payments needs; as such, it helps contain the frequency of the need for conditionality. Yet balance of payments needs will arise even under the best of circumstances. Conditionality, well implemented, will then help to keep potential balance of payments problems from actually materializing or to prevent actual balance of payments needs from becoming entrenched. Thus, appropriate surveillance provides the setting for efficient conditionality, and conditionality strengthens surveillance by adding to the instruments available to support observance of the code of conduct.
In its effort to fulfill its central responsibility, the IMF often encounters relationships that exhibit characteristics of both substitutability and complementarity, like linkages between adjustment and financing or between debt and growth. Difficult dilemmas are also bound to appear in countries seeking to establish market-based economies. Reform will typically include decisions to eliminate certain inviable economic activities as part of the process of paving the way for new and viable activities. Decisions calling for such "creative destruction" are rarely unambiguous, and they are particularly difficult to implement.
In essence, most of the activities of the IMF involve a search for balance between conflicting aims. The difficulty of the endeavor lies in the different views of members as to where the balance should lie. It is in this context that principles like universality, uniformity, neutrality, and flexibility, if properly combined, can play a critical role. A necessary condition for the effectiveness of the international order is that the common code of conduct must be most respected by those less subject than others, by reason of size or equivalent considerations, to its discipline. However difficult acceptance of this may be, it is nevertheless an important step toward taking away the thunder from the dictum that law without strength is powerless. In practice, such difficulty should not arise, because typically a code of conduct reflects the preferences of those less likely to be constrained by it. Viewed from this perspective, fairness would dictate that observance of the code should be most in evidence on the part of countries that are less within its practical reach. Such behavior would ensure that law, rather than strength, is given predominance.
Another consideration worth emphasizing is that a sound code of conduct allows room for bargaining but is not itself subject to bargain. In the same vein, rules of behavior must provide leeway for discretion, but the rules themselves are not subject to it. Discretion is an element of the implementation of the rule, not a feature of the rule itself. The need for balance between rules and discretion, like the need for balance between principle and practice, or between what is important and what is urgent, is a simple reflection of reality. Even though it is essential, such balance is typically hard to attain.
In the economic sphere, if only because of the uncertainties that surround the effects and the lags in the effects of economic policy, balance is a most elusive aim. This is so even in the absence of complications arising from the code of conduct. The search for balance has at times led policymakers at national and international levels to fine-tune economic policies, even though uncertainties or intertemporal considerations counselled against it. The risks of overburdening economic policy in this way can be diminished significantly by the adoption of a clear, well-defined code of conduct that would bring balance, nationally and internationally, more within a "rules-based" order. And if revealed preference is a relevant indicator, this belief is supported by a trend toward rules at the national policy level.65 It is paradoxical indeed that the period in which national economies have moved away from the concept of "fine-tuning" in economic policy toward the adoption of norms to be observed over time, coincides with the time when the international economy remains mainly dependent on discretion and subject to the principle of bargaining.
This paper has made a few proposals for bringing a greater measure of consistency between current national and regional experiences, which favor rules, and implementation of the international code of conduct on the part of the IMF, which is still based on discretion. In the primary area of surveillance, the proposals seek to expand its dimensions from a country- or world-specific perspective in two directions: first, by adding the regional dimension, already important in the European context, and second, by adding policy-oriented or problem-oriented cross-country analyses.
With regard to conditionality, the proposals focus on the scope of the policies which should be covered, as well as on the terms of the associated financial assistance. On the policy front, although the central focus remains the macroeconomic domain, increasing attention will need to be given to the microeconomic and structural spheres, as well as to the new area of measures for building up markets and market-based institutions. This, of course, will require close coordination with other international institutions. Such coordination, however, while averting duplication and conflicts, should not run counter to competition of ideas, which serves as an efficient principle of collaboration. With regard to the terms of financial assistance, there is room for accompanying the expanding arena of conditionality with access to concessional resources from official and multilateral development sources. Finally, with regard to the IMF, preservation of its uniqueness will certainly require a reassertion of surveillance as its primary responsibility. Most likely (though not necessarily), it will also require a resumption of its role of a cooperative institution in lieu of its becoming another international financial intermediary.
As the world moves into the next century, formidable challenges confront the international economy and those institutions like the IMF with a mandate for surveillance over international economic policy. At present, uppermost in the minds of those concerned with policymaking are the challenges to establish market-based economies in Central and Eastern Europe, as well as in the republics of the former Soviet Union, and to integrate those economies into the world system. Needless to say, challenging tasks also remain outstanding in other areas, such as economic and monetary union (e.g., the post-Maastricht era for a unified Europe), and international indebtedness, development, and growth (still confronted by many countries in the developing world).
In particular, there is an important institutional challenge directly related to the code of international financial conduct, which will be important for the IMF to confront. In concluding this paper, I will briefly sketch out this challenge to indicate areas where work will be needed to keep the institution abreast of developments in the world economy and its charter in line with the dictates of economic logic.
The central challenge confronting the IMF at its inception was to foster integration of war-ridden and distorted economies into a well-defined international economic system. To address this fundamental aim, the Articles of Agreement of the institution, emphasizing importance of freedom of payments and transfers for current international transactions, made that freedom standard (if not the standard) for convertibility.66 This approach and the resulting standard for the institution's jurisdiction on restrictiveness, which cover only current account transactions, have prevailed as features of the international system during the initial epoch of the Bretton Woods par value system and throughout the period of flexible exchange arrangements that has prevailed since then.
Focus on the current account and acceptance of controls and multiple exchange rates for capital transactions underscored the attention being given to the competitiveness of an economy (a relative price issue), as well as the need for a degree of national policy independence or insulation. Domestic interests underlying the international panorama distinguished between external and internal balance, foresaw potential conflicts between the two, and accordingly sought to assign policy instruments which exhibited comparative advantage--hence, exchange rate policy for the safeguard of competitiveness and domestic financial policy for purposes of internal balance.
Since the abandonment of the Bretton Woods par value system, however, the international economy has undergone numerous and important changes. Some of those changes have exhibited an essentially permanent nature and provided a basis for questioning the appropriateness of the scope of the international code of conduct and its implications for the focus of national economic policies. The abandonment of fixed exchange rates was expected to provide national economies with ample margin for domestic policy independence. Attention at the time was directed toward issues like an expected (though not realized) decline in the need for international reserves. The argument could just as well have applied to the obsolescence of restrictions, since, after all, exchange rate flexibility was there to ensure economic insulation. Yet despite the changes in the world economic environment, the code of conduct remained unchanged regarding exchange restrictions. Capital controls continued to be accepted within the rules of the game at a time when capital movements and external debt flows acquired growing importance--a curious illustration of events running ahead of the rules governing them. Thus, the insulation that exchange rate flexibility was supposed to provide turned out to be counteracted to a large extent by fast-rising capital movements and consequent mounting predominance of the capital account in countries' balance of payments. What had properly begun as a close relationship of trade and current account flows with exchange rate management and exchange matters at large, progressively developed into a similarly intimate connection between national monetary policies and international capital movements and exchange rates.67
The predominance of capital flows, which were not subject to the norms applicable to current transactions, has helped direct attention to the limited scope of national monetary and economic policy independence and to the relation between the exchange rate and inflation (an absolute price level issue). In the process, the intricate interconnection between external and internal balance came to the surface, and the more apparent than real nature of conflicts between the two (at least from an intertemporal standpoint) began to be acknowledged. Thus, although competitiveness remained important for an economy, the question at stake became whether or not competitiveness can be purchased at the expense of domestic price discipline. A consensus developed that domestic price discipline was contingent on the quality of monetary and fiscal policy; there could be little, if any, scope for exchange rate management to substitute for appropriate domestic financial policies. On the other hand, it would also be futile to try to purchase price discipline at the expense of competitiveness; here again, the establishment of a nominal exchange rate anchor could hardly compensate for misguided domestic financial management. In the international context, what must be underscored is that the dilemmas posed by conflicts between the external and internal stability of a currency are typically the consequence of the uneasy coexistence of appropriate and inappropriate economic policies, in general, and monetary management, in particular, among nations in the world economy. The growing freedom of capital movements and their increasing importance in international transactions only add urgency to the need for economic policy consistency across countries; in effect, capital flows have made national boundaries increasingly porous so that pursuit of national objectives to the neglect of international considerations has become more and more futile.
As this century closes, the time has come for updating the code of conduct so as to bring it into conformity with economic logic, which argues against restrictions regardless of the nature of the transaction, and with the current prospective world economic environment, where capital movements have established both a permanent and prominent presence. Now that there is a prospect for the world economic order to become fully global in geographical scope, extending the code of conduct to cover all international transactions would be most appropriate for the establishment of true universality.
| < PREVIOUS | PAMPHLET NO. 46 CONTENTS |
NEXT >
|