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Pressures to adjust balance of payments disequilibria: an analysis of the powers of the International Monetary Fund

  • Frieder Roessler

Abstract

In view of recent proposals to grant the International Monetary Fund new instruments to press countries to adjust balance of payments disequilibria, the question arises of the efficacy of such means of pressure. An analysis of the Fund's power shows, inter alia, that conditions attached to currency purchases by deficit countries can only influence the techniques of adjustment but not the length of the adjustment period, that it is normally not possible for the Fund to expose individual surplus countries to inflationary or expansionary pressures, that the scarce currency clause is unworkable in present monetary conditions, and that the Fund's system of charges and remunerations cannot be used to exert financial pressure on countries in imbalance. The general avoidance of sanctions by the Fund's Executive Directors suggests that it would only be useful to make additional pressures available to the Fund, as contemplated by the Committee of Twenty, if the authority to take decisions on sanctions were transferred to a separate judicial or quasi-judicial body.

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1 See on the subject generally: OECDThe Balance-of-Payments Adjustment Process: A Report by Working Party Nr.3” (Paris: 1966), p. 12.

2 Mundell, Robert A., “International Economics” (New York: 1968); and IMFThe Role of Exchange Rates in the Adjustment of International Payments” (Washington: 1970).

3 See IMFInternational Monetary Reform: Documents of the Committee of Twenty” (Washington: 1974), pp. 8ff, 11. (On the background to the reform discussions: Gold, Joseph, “‘Pressures’ and the Reform of the International Monetary System,” Journal of International Law and Politics, Vol. 7:423–58. Gold, in numerous publications, has spun a thread of Ariadne for those lost in the Fund's legal labyrinth. This article draws on his writings to a larger extent than footnotes can indicate).

5 Ibid., pp. 19, 20.

6 Cf. on this discussion: Horsefield, G. Keith, “The International Monetary Fund: 1945–1965: Twenty Years of International Monetary Cooperation”, Volume I (Washington: 1969), pp. 7277 (hereinafter referred to as “History”).

7 Gold in History II, supra note 6, p. 622.

8 Decision No. 284–4 of March 10, 1948.

9 IMF Annual Report 1962, p. 31.

10 Gold, Joseph, “The Stand-By Arrangements of the International Monetary Fund” (Washington: 1970), p. 13.

11 Ibid., pp. 13–21. These original definitions of gold tranche and credit tranche have been modified by Fund decisions and Charter amendments on buffer stock facilities (cf. idem pp. 16–21), compensatory financing (cf. IMF Press Release No. 75/65) and the oil facility (IMF Annual Report 1974, p. 122). In its January 7–8, 1976 meeting, the Interim Committee of the Board of Governors agreed that total access under the credit tranches should be increased from 100 to 145 percent of quota (IMF Press Release No. 76/1).

12 Decision No. 2603 (68/132) of September 20, 1968.

13 Decision No. 286–1 of Maich 15, 1948.

14 Gold, supra note 10, pp. 44ff and pp. 60ff.

15 IMF Annual Report, 1969.

16 Harrod, Roy, “The Life of John Maynard Keynes” (London: 1951), p. 548.

17 Gold in History II, supra note 6, p. 587.

18 GATT, Basic Instruments and Selected Documents, Third Supplement (Geneva: 1955), p. 175.

19 Cf. US Commentary on Joint Statement by Experts on the Establishment of an International Monetary Fund. Reprinted in History III supra note 6, pp. 136ff, 165.

20 Cf. History I, supra note 6, p. 51.

21 See Article V:2(a) of the “Preliminary Draft Outline of a Proposal for an International Stabilization Fund of the United and Associated Nations.” Reprinted in: History III, supra note 6, pp. 83ff, 89.

22 Cf. US Commentary, supra note 19, p. 165.

23 Ibid., p. 166.

24 Cf. Gold in History II, supra note 6, p. 544.

25 Horsefield in History II, supra note 6, p. 451.

26 Gold in History II, supra note 6, p. 542. Drawings under waivers are subject to different voting procedures than ordinary drawings (Article XII:5[b]). The question of the legal avenue would have to be answered only in a case where the adoption of one or the other voting procedure would lead to different results. There are, however, customarily no formal votes on individual drawings.

27 This is not to say that the Fund could not, under the present Articles, create a legal obligation regarding the currencies to be drawn. There are possibilities of achieving this but their scope is limited. One method would be the following: the use of the Fund's resources is governed by certain conditions that the Fund may waive “on terms which safeguard its interests” (Article V:4). The terms of a waiver are binding on the member taking the benefit of it and they could, of course, also include rules on the selection of currencies. The disadvantage of this technique would be its limitation to drawings under waivers. Another method would be for the Fund to use its right to examine whether a proposed purchase would be consistent with the Fund's Articles and policies (Article V:3[d]) to impose conditions as to the selection of currencies. The disadvantage of this technique is that it requires an understanding prior to the drawing, such as a standby arrangement, and, further, that it could not be used to direct gold tranche drawings to specific currencies since the Fund is not entitled to question the consistency of gold tranche purchases with Fund Articles and policies. No method to create legal obligations governing the selection of currencies is available under the present Articles that could be extended to all purchases. This, however, would be necessary to achieve a proper distribution of the Fund's currency holdings by relying solely on obligations rather than the members' willingness to cooperate. (Under standby arrangements, members are not obliged to follow the Fund's recommendations on the choice of currencies. The practice is to rely on a representation of intention by members. [Cf. Gold supra note 10, pp. 111–113]).

28 Decision No. 1371-(62/36) of July 20, 1962. This decision also deals with currencies to be used in repurchases and with conversion procedures.

29 Horsefield in History II, supra note 6, pp. 452ff. These procedures are likely to change in the future because the Interim Committee of the Board of Governors, in its meeting of January 7–8, 1976, recommended that the Fund's Articles be amended to ensure that the Fund's holdings of each currency are usable for transactions and that, in the period before the amendment becomes effective, interim arrangements to this effect be made (IMF Press Release No. 76/1).

30 See comment on this below.

31 GATT, supra note 18, p. 115.

32 Article XIV: 1 of the General Agreement.

33 Public Law 93–618, 93rd Congress, H.R. 10710.

34 Article XXIII.

35 Proposals for an International Clearing Union (April 1943). Reprinted in History III, supra note 6, pp. 19ff, 23.

36 Article V:9(a). For details see: Gold, Joseph, “The Reform of the Fund” (Washington: 1969), p. 23 and Annual Report 1975, pp. 56, 86.

37 Article V:8(a) and Annual Report 1975, p. 86.

38 Article V:8(c).

39 Annual Report 1975, p. 86.

40 Article V:8(d).

41 Article V:8(e).

42 Bernstein, E.M., “Scarce Currencies and the International Monetary Fund,” The Journal of Political Economy, Vol. 53, No. 1 (03 1945): 6.

43 Ibid., p. 1.

44 “Preliminary Draft Proposal for a United Nations Stabilization Fund and a Bank for Reconstruction and Development of the United and Associated Nations (April 1942). Reprinted in History III, supra note 6, pp. 37–82, 44.

45 Proposals for an International Clearing Union (April 1943). Reprinted in History III, supra note 6, pp. 19–36, 19.

46 Preliminary Draft Outline of a Proposal for an International Stabilization Fund of the United and Associated Nations (July 1943). Reprinted in History III, supra note 6, pp. 83–96, 96.

47 Gold, Joseph, “The Sanctions of the International Monetary Fund,” The American Journal of International Law, Vol. 66: 737–762, 756.

48 Gold in History II, supra note 6, p. 584, and supra note 47, p. 756.

49 Gold in History II, supra note 6, p. 584.

50 IMP, supra note 3, pp. 153ff.

1 Frieder Roessler is Dr. iur. (Freiburg i.Br.), M.A. (Fletcher School of Law and Diplomacy). The research for this paper was undertaken between assignments for the World Bank and the GATT Secretariat at the Graduate Institute of International Studies, Geneva. The views expressed are those of the author and should not be interpreted as representing those of any of these institutions. The helpful comments on an earlier draft of R. Blackhurst, Professor H. Hesse, and J. Tumlir are gratefully acknowledged.

Pressures to adjust balance of payments disequilibria: an analysis of the powers of the International Monetary Fund

  • Frieder Roessler

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